Earnings Call Transcript - ENIC Q2 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to Enel Chile's First Half 2020 Results Conference Call. My name is Olivia, and I will be your operator for today. During this conference call, we may make statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect only our current expectations, are not guarantees of future performance, and involve risks and uncertainties. Actual results may differ materially from those anticipated in forward-looking statements as a result of various factors. These factors are described in Enel Chile's press release reporting its first half 2020 results, the presentation accompanying this conference call, and Enel Chile's annual report on Form 20-F, including under Risk Factors. You may access our first half 2020 results press release and presentation on our website, www.enel.cl, and our 20-F on the SEC's website, www.sec.gov. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of their date. Enel Chile undertakes no obligation to update these forward-looking statements or to disclose any development as a result of which these forward-looking statements become inaccurate, except as required by law. I would now like to turn the presentation over to Mrs. Isabela Klemes, Head of Investor Relations for Enel Chile. Please proceed.

Isabela Klemes, Head of Investor Relations

Thank you very much, Olivia. Good morning, ladies and gentlemen, and welcome to Enel Chile's Second Quarter 2020 Results Presentation. I hope you are all well and safe in your homes and are following all the required safety measures that the prevailing circumstances request. I am Isabela Klemes, Head of Investor Relations. Our presentation will be hosted by Paolo Pallotti, our CEO; and Giuseppe Turchiarelli, our CFO. In occasion of these events, we are still adopting appropriate prevention measures. We are all connected from our homes. Paolo will open with the main highlights and will give us an update on the global situation that we are facing and how the company is responding to it. Then Giuseppe will walk you through our financial results, our operational performance, and will give more details on our 2020 EBITDA guidance update. The usual Q&A section will follow. Please note that questions will be received only via chat available in our webcast at www.enel.cl, at the Investor Relations section. As always, our IR team will continue to be available to provide you with any detailed information you may need with respect to the figures included in this presentation. Thank you all for your presence. And now let me hand over the call to Paolo.

Paolo Pallotti, CEO

Thank you, Isabela, and good morning, ladies and gentlemen. Let's start by mentioning the highlights of the period on Slide 2. Today, the world is facing extraordinarily challenging times. Since the beginning of the health crisis, Enel Chile has realized the severity of the situation and implemented all necessary measures to continue offering a stable and safe energy supply service, safeguarding at all times, the safety and health of our employees, clients, and external providers. All our generation and network facilities are fully operational. Thanks to our commitment to digitization, we have developed a solid platform that has turned out to be key in meeting our customer needs in the current scenario, while they are struggling with the difficulties in accessing traditional service channels. We have been promoting remote working methodologies for several years by evolving our systems towards the cloud. Today, a significant number of employees are working remotely in an efficient and effective way. As part of our commitment to the energy transition and the sustainable development of the country, on May 27, Enel Generación Chile announced its decision to anticipate the closure of Bocamina 1 by December 31, 2020 and Bocamina 2 by May 31, 2022. The decision implies closing much earlier than committed in the National Decarbonization Plan and will make Enel Chile the first utility to stop generating from coal in Chile. In line with the previous announcement, Enel Chile is progressing in the development of renewable projects included in our strategic plan. This initiative seeks to add a total of 2,000 megawatts of renewable capacity by 2022, half of which is already under construction. This project reaffirms our position as the first renewable operator in Chile. Lastly, we have a safe liquidity position to continue executing our strategy and to face this global challenge. Let's move to Page 3. First of all, I would like to thank all our people for their positive and strong commitment, highlighting with their actions the resilience of our company. I want to expand my thanks to our contractors that have been deeply supporting our activities. Since the beginning of this global crisis, we have taken all the necessary measures to guarantee the safety of our people, contractors, and clients as well as ensuring the continuity of the service. As mentioned in the previous quarter, we have created a committee to analyze the situation on a day-by-day basis and coordinate all required actions we may need to take. Therefore, 100% of our plants and networks are fully operational. A large number of our people will continue to work remotely once the quarantine measures are revoked. For the ones that need to be in our facilities, the process will be gradual, taking all the necessary safety measures. As of June 15, we have gradually restarted manual readings and billing distribution with all the corresponding preventive health measures, including personal protection gear to safeguard the health of our customers, employees, and the community. Up to this date, following the regulation in place, we temporarily bill our clients using the average consumption of the last 6 months. To ease the impact of the total differences between the billing of estimated electricity usage and the actual reading, we voluntarily decided to apply payment solutions to all our regulated clients to whom manual readings were suspended. For instance, if a client consumes more than what has been billed by the company, we will automatically split the difference into 5 months payment installments without interest rates, readjustments, or any additional charges. In addition to helping our clients cope with this crisis, we have voluntarily extended the benefits on deferred payments that we have offered to the most vulnerable clients until the end of the emergency period. Now on Page 4. In these difficult times for Chile and for the world, we have reaffirmed our commitment to our communities, putting into action a voluntary campaign to respond to the challenge of COVID-19 and support the most vulnerable communities, especially those most affected and closer to our activities. Under this program, we have donated 2 electric ambulances to the Red Cross with their respective charging points. The e-ambulances are the first of their kind in Latam and will represent an important cost reduction for the institution when compared to diesel technology. Thanks to collaborative work with Universidad Católica and the UC CHRISTUS Health Network, we have implemented an electric bus that was adopted as a mobile laboratory to support the detection of COVID-19 cases and enhance logistics for testing. We will continue with several other projects with our local communities as we clearly understand the importance of our role in the country. Together, we will overcome this challenging situation. Now on Page 5. Since the outbreak of COVID-19, volatility has spiked to levels last seen only during the global financial crisis, and the uncertainty regarding the debt and duration of the economic crisis due to the pandemic is still present. Oil and gas prices are falling sharply, significantly declining compared to 2019 figures. Emerging market currencies are under stress, and although the Chilean Peso is considered one of the most resilient in Latam, we have observed a depreciation of around 80% year-to-date against the U.S. dollar. The index, Imacec, which measures the economic activity of the country, contracted by 15.3% in May '20 versus last year's data. Social distancing measures have impacted a larger number of workers and economic activities, especially in the main cities, bringing the unemployment rate to 11.2% in May. On the government side, the Chilean Central Bank decided to maintain the interest policy rate at 0.5% to continue supporting market liquidity and commercial lending. In addition to this measure, it is also carrying out the U.S. dollar swap to align arrangements to reduce the volatility of the Chilean Peso, particularly considering the recent approval of a law which allows a 10% voluntary withdrawal of the Chilean pension funds by their contributors. Now on Slide 6. The country's lockdown has impacted electricity demand in many economic sectors related to industrial activity and commerce. Several companies have reduced their operations to minimal levels, and to some extent, have shut down operations, resulting in a significant decrease in demand. As we can see on this slide, both our generation and distribution businesses have faced a notable decrease, particularly concentrated since March 2020, as a result of the lockdown measures. The demand reductions in both generation and distribution businesses are mainly explained by the contraction of the regulated consumption. We can see this effect not only in Enel Distribution concession area but also in other regions of the country. This reduction is primarily driven by the commercial and industrial sectors since many stores, malls, and small industries are closed. From the Free Market perspective, at least in our generation business, we still see an increase in demand compared to last year, primarily driven by the resilience of our Free Market clients such as mining companies and the new Power Purchase Agreements (PPA) secured by our company, especially in the first half of this year. On Page 7, let's turn our attention to distribution collection. Our digitalization efforts have ensured that our business continues to operate while prioritizing the safety of our clients and staff. We have concentrated on enhancing our digital channels to improve client experiences. As of June, 360,000 clients have downloaded our distribution client app, which is a 74% increase compared to last year. We have also expanded the number of payment options available to our clients. Consequently, 88% of payments in June were made through digital channels. By June 2020, we have established over 35,000 agreements with clients to adjust payment terms and lessen the impact on our collections, with 10,000 of these agreements targeting the most vulnerable clients since March 2020. This has allowed us to maintain an average collection level of 97% in the first half of 2020, compared to our historical average of about 99%. Now, let’s discuss hydrology on Slide 8. The first graph shows that until June, we experienced a significant rainfall deficit, making the first half of this year the driest on record in the country. To evaluate our company’s performance, we are presenting the cumulative drawdowns for our major river basins: Maule, Laja Bio-Bio, and Rapel. As illustrated on the right side of this slide, we have noticed a recovery in rainfall since mid-June, nearly reaching normal levels up to now. Additionally, snow accumulation in the mountains has improved, with recent rains accompanied by cold conditions at low altitudes. The total snow levels are higher than those recorded last year. Given these conditions, we anticipate that hydraulic generation for the second half of 2020 will reach approximately 7 terawatt-hours. Therefore, in terms of hydro generation, 2020 is expected to be similar to previous years, achieving around 10 to 11 terawatt-hours. I want to emphasize that generation using LNG natural gas is currently a key component of Enel Chile's strategy to manage the drought, as you will see in the upcoming slides. To conclude this section, let me update you on the regulation framework evolution. We are on Slide 9. On the contingency front, we included the decision made by the executive or by Parliament. The Senate and the Congress have recently approved a new law known as Basic Services Billing that aims to benefit the most vulnerable clients of the basic services industries. This law includes benefits to vulnerable clients already voluntarily offered by our company, as well as the obligation not to cut off the domestic clients that are not paying their bills during the emergency period. This law has been opposed by the executive, which applied a retort for unconstitutionality. The Senate is expected to vote on this matter today, while the Lower House has already rejected the presidential veto. If the Senate votes in line with the Lower House, the law will be effective. The other ministry decision is referred to the modification of the peak hours regulation during the winter period. After the decision to suspend the April and May peak hour tariffs, a new regulation, pending executive decree, may suspend the peak hour tariffs during August and September. These changes will have only a minor impact on generation but a more significant one on distribution, especially for the August and September period. To address the economic effects of the crisis since the lockdown, the Chilean government has proposed more than $30 billion in measures to boost the economy. For structural measures, the Ministry of Energy has recently illustrated the next steps regarding the new distribution law, known until now as Ley Larga. According to the Ministry of Communication, it enforces a 3-step approach dealing with market opening and defining the figures of traders, improving quality of service, and enhancing distributed generation. On the first point, the government will present a bill with the required measures to gradually open the market, creating figures for energy-generating companies and defining rules for commercialization activities. On the second and third topics, the government is expected to propose new measures to add the concept of incentive regulation that should reward high-quality distribution companies and introduce new elements for distributed generation. On the new distribution regulatory cycle, the government recently published the bidding process to hire external consultants to carry out the regulatory studies on the new reference model companies. We will share more details of the current framework in the next quarter as we expect that the first advisory report will be released by September 2020. Finally, the government is expected to rule on the flexibility of the represented system, creating mechanisms to guarantee the continuity of the capitalization process and the renewable expansion in the country. On the hydrogen development, a global internal team has been created to focus on this new technology to evaluate all the business opportunities arising from the European Commission's New Green Deal, the agreement signed between the Chilean government and the European Union. Now let's go through our strategies, starting with our decarbonization progress. We are on Page 11. On Slide 6, the CNE authorized us to proceed with the final decommissioning, disconnection, and termination of Bocamina I operation on December 31, 2020. More recently, on July 24, the CNE also authorized the early disconnection of Bocamina 2 by the end of May 2022. Let me remind you that the decommissioning of the two units of Bocamina will be finalized without using the energy strategic reserve. With this achievement, we will become the first utility to phase out its coal fleet by 2022. We are working on a redeployment plan for all the workers of these units and the conversion of this facility from an economic perspective, with the aim of contributing to the development of this area where the EU has guided. Within our decision about the phaseout of Bocamina, we confirm our commitment to the local community in the perspective of a just transition. Recently, we have financed the construction of a new school for the recipient community. In addition, local groups or seasonal fishermen will have access during the next months, until the planned phaseout, to a special fund for projects aimed at improving their fishing activities or potentially entering into new businesses. Furthermore, all the resettlement processes for over 1,300 families have been aligned with international standards. Our decarbonization strategy and just transition policy will improve the visibility of our sustainable model and our ESG profile. At the same time, we will reduce our exposure to commodity volatility and environmental risk, bringing better margins and allowing us to access new financing instruments to reduce coal reliance. In addition, we believe that in the medium-term, Enel Chile will benefit from a potential increase in its liquidity and value considering this derisking strategy. Let's now see more details on our decarbonization strategy on Page 12. To cope with our decarbonization strategy and align with our customer needs, we have 1 gigawatt of renewable capacity under construction and another 1 gigawatt ready to start construction by 2021. Additionally, we have approximately 4 gigawatts of renewable capacity in different phases of development, representing an optionality for the future to continue derisking our generation portfolio from commodities and hydrology. On Page 13, let me give you an update on the status of our renewable projects that are under construction. During June 2020, we started the construction of the Renaico II wind power plant. With a total investment of USD 177 million, Renaico II will include 32 wind turbines of 4.5 megawatts each, totaling an installed capacity of 144 megawatts. The environmental permits have been issued already, and the wind turbines will be shipped to Chile in the coming months. Parts of the project will be operational this year, with the remaining part in 2021. The Cerro Pabellón expansion will bring the total net capacity to 69 megawatts. Considering the COVID situation, we have reviewed the project timeline and devoted special attention to define a safe number of people in our facility and properly adjust our construction camp, limiting the number of people according to standards. Cerro Pabellón will be operational next year. On Page 14, regarding solar projects, the Campos del Sol project has already received its environmental licenses. We are now working on some specific cases with the Ecological Institute of Chile to manage some findings encountered on-site when we started civil works. The main EPC and BoP contracts have already been signed, and specifically for Campos Del Sol and Azabache, we have received the photovoltaic modules, indicating that our suppliers are operating and committed to their contract timelines. As our solar projects are in the construction stage, part of these projects will be online by 2020 and the remaining part by 2021. Before we move on, let me provide some insights on the Los Cóndores project. We are on Page 15. Yesterday, Enel Generación released a material fact indicating the conclusion of a full reassessment of the Los Cóndores project. So far, we have completed 10.5 kilometers of project tunnel out of the planned 14. The remaining 3.5 kilometers will be excavated with a new tunnel-boring machine. We have completed the assembly of electromechanical equipment in the current powerhouse already. I would like to highlight that during the construction of the vertical tunnel that connects the upper and lower tunnel sections already built, we encountered a very challenging geological condition that forced us to change structurally the construction pattern. To guarantee technical efficiency and safety of our employees and contractors, we adopted a different but more affordable construction solution that requires more time and additional budget. Therefore, with these changes in the project, we expect to finish the civil works construction of the Los Cóndores power plant by the end of 2023, followed by the commissioning and commercial operation of the International project. Now let me guide you through our main industrial KPIs over the period for our generation business. We are on Page 16. The total net production for the first half decreased by 14%, amounting to 9 terawatt-hours, driven by a 0.8 terawatt-hours decrease in our hydropower plants, reflecting the hydrology performance, and a 0.6 terawatt-hours decrease in thermal production, mainly in our coal-fired plants due to the closure of the Tarapacá power plant by December 1, 2019, and the impact of lower system marginal costs. In terms of our energy balance, we remain a spot buyer in the market with a purchase of 2.2 terawatt-hours in the first half of 2020, a variance of 0.8 terawatt-hours versus the first half of 2019, also as a result of low hydrologic and marginal costs. The lower system marginal cost is explained by the availability of Argentine natural gas, the new transmission line fully operational since June 2019, the addition of new renewable capacity, and the reduction in the country's demand. As previously mentioned, our physical energy sales decreased by 6% or 0.7 terawatt-hours, mainly influenced by a 1.1 terawatt-hours decrease in consumption from the distribution company, associated mainly with the termination of regulated PPAs secured by SAIDI in the 2006 auction and lower demand in the second quarter, partially offset by a 0.6 terawatt-hours increase in Free Market sales as part of our strategy to capture new clients, including those recently migrated to the Free Market. Now moving to Slide 17 to explain the most relevant operating KPIs of our network business that are fundamental to our anchor electrification. The energy distributed in the first half of 2020 decreased by 6% compared to the first half of 2019, mainly due to the lockdown measures applied by the government in Santiago. Our customer base increased by 43,000 clients compared to the first half of last year, bringing the total to around 1.99 million clients. In the digitalization of our distribution business, we continue to improve the quality of our service. We have reached 2,249 telecontrol equipment installed in our grid, and in the next 2 years, we plan to add 585 additional units. To guarantee system reliability and availability, we remain focused on critical areas for SAIDI and SAIFI, replacing approximately 76 kilometers of cables in our low-tension grid and executing approximately 14 kilometers of medium-voltage grid extension and reinforcement in the first half of 2020. Despite the logistical restrictions stemming from social unrest and the pandemic situation, our interruption index in SAIDI decreased by 13%. Lastly, as part of our system quality and resilience plan, we managed to reduce power interruptions due to adverse weather conditions in our networks by 53%. On Page 18, let me walk you through our network's main projects. With respect to the high-voltage investment plan, we have completed important interconnection projects in our concession area, introducing various measures to continue improving the resilience and management of our network. On the medium-voltage side, during the first half of 2020, we completed the construction of 52 kilometers of network and the installation of 169 telecontrol equipment. We will continue to perform significant civil works to cope with the expansion of the e-mobility segment and enhance the electrification of the country. Let's move to Enel X and digitalization on Slide 19. Despite the COVID outbreak, we continue to consolidate our leadership in electric mobility and electrification. In the first half of 2020, we secured new contracts on public lighting, upgrading the lighting infrastructure, which will provide a more efficient system benefiting local municipalities. In support of e-mobility in the country, we have signed a partnership with Shell to implement fast chargers for electric vehicles in the NEx facilities. Our company will also be responsible for maintaining all the charging units to be installed. Moreover, we have secured new contracts with large real estate groups to provide new charging infrastructure for their projects. In June, we put an additional 150 electric buses into operation in the metropolitan region of Santiago. Additionally, we are promoting the use of more efficient and clean technologies, such as electric buses combined with solar energy and stored recharging systems for mining operations. Finally, thanks to collaboration with other public and private partners, we continue our efforts to promote the use of efficient heating to replace wood use, contributing to the reduction of carbon emissions and particulates in Chile. Almost 7,000 devices have been installed since 2017, and we estimate to avoid 22,000 tons of CO2 equivalents annually. Now I will hand over to Giuseppe for the analysis of the results.

Giuseppe Turchiarelli, CFO

Thank you, Paolo. Before starting, let me explain how we have adjusted our figures for both 2019 and 2020 on Page 21. For 2019, we are excluding some adjusted figures, the PPA early termination booked in the first quarter of 2019 and the net impact of the impairment of Bocamina 1 and Tarapacá booked in the second quarter of 2019, largely discussed in our previous calls. For the 2020 figures, we are adjusting the EBITDA and net income with the coal stock impairment, which consists of booking at once all the coal fuel that we have bought and not yet used for Bocamina 1 and Bocamina 2, which are assets that will be decommissioned soon. The impact on EBITDA would be around $50 million. Additionally, we are excluding the impact of the impairment of Bocamina 2 as a result of our decision to anticipate the closure of this coal facility. Let's now move to the financial summary for the first half of 2020. The first half of 2020 adjusted EBITDA and net income are basically in line with the last year's adjusted figures. Our total CapEx amounted to $322 million, a 109% increase from the previous year, focused on our decarbonization strategy, digitalization of our distribution business, and new connections. The adjusted FFO increased by 32%, mainly due to lower tax payments from the previous period, which will be further explained later on, partially offset by the impact of EBITDA. Our net debt in the period increased by $448 million compared to December 2019 figures, mainly due to the higher CapEx plan executed at June 2020, lower receivables from our company as a result of the energy stabilization mechanism, and lower collection in distribution. I will provide more details in the following slide. Now on Slide 22, let's begin with the CapEx. Our total CapEx amounted to $322 million, as mentioned earlier, a 109% increase from the previous year, focused on asset development. Customer CapEx totaled $26 million, which is 32% higher than in June 2019, with the main investments allocated to building connections to new customers and due to the increase in our client base, particularly in the first quarter, and improving our commercial system to guarantee better interfaces with our clients. The continuous digitalization of our customer interface and internal commission processes will remain a key factor to address future changes after this contingency period. Asset management CapEx reached $35 million, which is basically in line with the figures from the first half of 2019. The distribution activity represented 48%, primarily focused on repairs in low-voltage underground failures and repairs in facilities affected by social unrest. The generation activities represented 52%, mainly related to investment in digitalization to improve our units. As of June 2020, our development CapEx reached $261 million, primarily allocated to renewable energy as part of our decarbonization strategy, which recorded $244 million, and the digitalization of our network that is enhancing our operational flexibility. Of our total development CapEx estimated for Enel Chile, we have deployed around 30% in the first half of 2020. The remaining part of our CapEx will be concentrated in the third and fourth quarters of 2020 in line with the planned project execution, reflecting the normal construction activity of wind and solar projects. During the first half of 2020, almost 96% of our investment was allocated to meet the SDG targets to which Enel Chile is committed. Now let's move to Slide 23 to see the breakdown of the second quarter EBITDA. As you can see, the second quarter of 2020 adjusted EBITDA was impacted by hydrology for about $33 million. The lockdown measures affected the demand for our generation and distribution business. In our generation business, the impact accounted for $23 million driven by the performance of our regulated contracts, partially offset by the positive performance from our Free Market clients. The demand reduction also affected our distribution business due to lower energy consumption, primarily in small businesses and industries in both the regulated and Free Market segments. The total effect of lower demand at Enel Chile reached $33 million. These effects were mainly offset by $31 million related to lower spot prices as a consequence of commodity price reductions, lower demand, and full capacity of the interconnection transmission system in 2020, $90 million associated with the net commodity coverage effect due to the recovery of Brent prices, as shown in Slide 3 of this presentation, $20 million due to tariff amortization, mainly related to the supply cost recovery in regulated PPAs; and $20 million in OpEx and others, which included lower transmission costs, positive PPA indexation, insurance reimbursements, and management actions to increase overall business efficiency while safeguarding our employees and contractors. Additionally, the cost of impairment had a one-off impact on Enel Generación, negatively affecting the second-quarter results. Let's start with the EBITDA breakdown on Slide 24. As you can see in the slide, we have isolated two of the non-recurring items related to the early termination of PPA agreements in 2019 and the previously mentioned coal stock impairment in 2020. Excluding these effects, our adjusted EBITDA is nearly flat and mainly due to the lower hydro generation impacted by $42 million as a consequence of the drought affecting the country, lower demand on the regulated customer side in the generation business, and lower energy consumption in the distribution business, totaling a negative effect on EBITDA of $50 million primarily related to the lockdown measures; sales of two LNG cargoes during the first half of 2019 that were not executed this year due to lower commodity prices in the international market, impacting $22 million. These negative effects were offset by the following items: lower spot prices totaling $54 million; a positive impact on PPA indexation totaling $19 million; tariff harmonization of $20 million; and other costs for about $8 million, mainly associated with insurance reimbursements booked in 2020. In Slide 25, we have a summary of the performance of our generation business, including Enel Generación and Enel Green Power. Regarding generation EBITDA, I have already walked you through the main variations in the previous slide. What I would like to remind you is that in line with last year's results, we have produced 58% of our generation with renewable sources. As a result of the previously mentioned elements, our generation adjusted EBITDA margin reached 47% in the second quarter of 2020, which is 8% higher than the second quarter of 2019, despite lower hydro production in the commodity channel. The first half of 2020 adjusted EBITDA margin was 2 percentage points higher than the adjusted first half of 2019 EBITDA margin. Please allow me to explain the most relevant operating facts of our distribution and Enel X business. Moving to Slide 26, the second quarter of 2020 EBITDA reached $46 million, a 29% decrease compared with the second quarter of 2019, primarily due to lower energy consumption in both regulated and Free Market clients during the second quarter of 2020 compared to the second quarter of 2019, largely driven by the lockdown measures imposed by the government to contain the spread of COVID. Increased energy losses due to reduced activity caused by logistical and safety restrictions also contributed to the decline, along with increased commercial processing costs needed to address the challenging situations our clients are facing. As of June 2020, the EBITDA of Enel Distribution and Enel X reported lower results due to the performance in the second quarter, as previously mentioned, resulting in a 50% decrease in EBITDA compared with the first half of 2019. Now on Slide 27, let's go through the main drivers of our net operating income. As already mentioned, the 2019 EBITDA excludes the PPA early termination. Depreciation and amortization and bad debt increased to $166 million, a 12% increase, mainly due to higher provisions for bad debt primarily on the distribution side due to the 2019 social unrest and COVID-19's effects, increased depreciation in EGP Chile due to the depreciation of the Chilean Peso against the dollar in the first half of 2020, and increased depreciation of the distribution business due to higher investment last year, partially offset by the closure of Tarapacá on December 31 last year and the phaseout of Bocamina 1 and 2. The impairment increased by $530 million, mainly due to the Bocamina 2 impairment booked in June 2020, related to the early closure of the plant planned for May 2022. Financial results of $74 million reflected a decrease of $90 million, primarily due to the lower average cost of our debts resulting from the renegotiation in Enel Green Power's net debt with Enel Finance International, along with the foreign exchange rate appreciation in the first half of 2020 impacting positively on financial receivables denominated in U.S. dollars. Income tax and minorities reflect the lower results relating to the Bocamina 2 impairment effects. Consequently, the reported net income for the first half of 2020 reached a loss of $403 million. The first half of 2020 adjusted net income, excluding the Bocamina 2 impairment, is aligned with the adjusted net income results of the first half of 2019. Now let's move to the cash flow on Slide 28. Our first half of 2020 adjusted FFO reached $166 million, significantly impacted by COVID-19, which resulted in lower collection in our distribution business and lower EBITDA due to decreased demand across our businesses. Despite this challenging situation, our adjusted first half '20 FFO was $40 million higher than the 2019 adjusted figures, primarily due to lower income taxes paid in the first half of 2020, mainly resulting from tax credit reimbursement from the previous year and lower monthly provisional payments, lower financial expenses mainly due to the debt renegotiation with Enel Finance International. However, this was partially offset by lower adjusted EBITDA in 2020 compared to 2019 and lower net working capital, due to lower collections in the distribution business by approximately $62 million and in the generation business by $29 million due to the energy stabilization net lease, as well as Enel X buses payments held in 2020 that were operational during the third quarter of 2019. Let's now take a look at the net and gross debt on Slide 29. Our gross debt increased by $567 million compared to December 2019, amounting to $4.50 billion as of June 2020 due to Enel Chile's new funding with Enel Finance International to finance our renewable CapEx plan, which was partially offset by Enel Generación Chile's debt amortization. Our net debt as of June 2020 increased by $448 million compared to January 1, 2020, mainly due to our CapEx plan. The average cost of our net debt was reduced from 5.2% in December 2019 to 4.6% as of June 2020, showing an important improvement in our financial condition owing to our constant efforts to optimize our financial expenses. The average term of our debt is almost 7 years. Finally, regarding our debt amortization on Slide 30, I would like to highlight that our total liquidity position reached $0.9 billion, enabling us to finance our CapEx plans while maintaining a comfortable position to face any potential worsening scenario in the country. Our debt amortization profile shows no significant concerns, considering the smooth schedule in the next 2 years with an average of about $200 million. Furthermore, we confirm our debt strategy to keep our debt at fixed rates and denominated in U.S. dollars. And now let me conclude this part of the presentation by guiding you through our new EBITDA targets for the year. Before moving to new guidance, let's take a look at what COVID-19 has meant for our financial results during this semester. Now on Slide 32. For EBITDA, the main impact from COVID-19 has been associated with a sharp decline in volumes for both generation and distribution businesses, particularly in regulated demand. The remaining impact on EBITDA results from increased losses and additional costs within our distribution business related to customer care. All these costs have been partially offset by savings activities implemented. Moving down to net income, we recorded a negative impact on depreciation and amortization of $6 million, driven by increased bad debt provisions in the second quarter. Overall, without the COVID impact, our adjusted net income, excluding the cost of impairments, should have been $37 million higher. And now let me conclude this part of the presentation by guiding you through our new EBITDA targets for the year, net of coal stock impairments. As you can see in Slide 33, throughout our presentation, we have addressed several factors that emerged in the past period, changing our outlook for this year. Although our company is strongly committed and working hard to mitigate the negative influences, some impacts are challenging to control and manage, such as hydrology, the implications of COVID-19, demand reductions, and macroeconomic fluctuations affecting commodities, among others. Given our transparency with our investors and all interested parties, we have analyzed several scenarios to reflect the deterioration of variables that are extremely difficult to predict. Any possible changes in that could lead to two different scenarios. Therefore, our EBITDA is expected to depreciate by $350 million to $450 million, to be in a range of $1.20 billion to $1.3 billion for 2020. We are not currently anticipating our view on net income projections, as we are executing various actions to offset most of the observed depreciation in our EBITDA. Regarding CapEx, we do not foresee significant deviations, as the majority of our development CapEx is expected to be deployed in the second half of this year.

Paolo Pallotti, CEO

Thank you, Giuseppe. The current situation presents a challenging scenario for the sector. Yet, our period-adjusted results reflect a steady and resilient performance based on safeguarding our people, business reliability, digitalization, and quick reactions to external conditions. At the same time, we remain confident in our mid- to long-term performance considering the strength of our diversified business model. Our focus on the development of our generation and distribution projects demonstrates that our company continues to create value in this new environment. Responding to and anticipating our clients' needs is the best way to ensure the quality and reliability of our services tied to the continuous improvement of our digital platform. Finally, the resilience of our sustainable business strategy is supported by the strength of our balance sheet and potential additional liquidity measures to counteract eventual headwinds from the external environment. Thank you for your attention, and let's now open the Q&A section. I will hand over to Isabela.

Isabela Klemes, Head of Investor Relations

Thank you, Paolo. We have received a lot of questions. We're going to select some of them, and for other questions, we will send the same information from me to all of you that asked questions to us. The first question came from Murilo Riccini from Santander. He's asking if we can provide more details on the IDB factoring from the receivables of our companies from both generation and distribution segments. Is that...

Paolo Pallotti, CEO

Yes. I will leave the answer to Giuseppe's side.

Giuseppe Turchiarelli, CFO

Yes. Thank you, Isabela. Let me state that the agreement with IDB aims to create a coordination mechanism involving all other players in the market. The agreement essentially consists of a potential facility for selling to IDB and other banks the receivables accumulated by all generation companies in the market. The facility has a designated period for selling accumulated receivables. We are currently assessing whether the conditions are favorable for us, but we believe it makes sense to reduce the risks of potential changes in regulatory areas.

Isabela Klemes, Head of Investor Relations

Thank you, Giuseppe. We have also received questions from Murilo Riccini from Santander and Tomas Gonzalez from Scotiabank, asking for more details on the delays in the Congress projects, and if you could provide an overview of how much we have already spent in 2020 and what we expect in the next few years.

Paolo Pallotti, CEO

Yes. Regarding the progress of the Los Cóndores projects, as we mentioned in our previous calls, the project involves works on tunnels totaling 14. It also includes a vertical peak that connects the upper and lower sections of the project. In the course of this project, we encountered geological challenges in the development of the vertical connection that required us to review the technology needed to implement this connection. We consulted international advisors for this review. Ultimately, we decided to adopt the safest technology to connect the upper and lower tunnels. While realizing this connection, we will also finalize the horizontal connection towards Laguna with the new boring machine. This explains the delay. Naturally, delays can result in increased CapEx. So far this year, we have spent approximately USD 30 million. Our goal now is to replan CapEx expenditure to align with the project's evolution between the second half of 2020 and the end of 2023. To date, we have reached a total expenditure of $870 million.

Isabela Klemes, Head of Investor Relations

Perfect. Thank you, Paolo. We also have questions from Javier Suarez from Mediobanca. He inquires whether we are noticing any improvement in our working capital as a result of completing our digitalization process. He also asks if we could provide additional details on the likely impact of the basic services deal aimed at favoring the most vulnerable clients, and lastly, what is the expected impact of the suspension in peak power prices in August and September, which we referenced in our presentation.

Paolo Pallotti, CEO

Okay. Let me clarify regarding the basic services law. We have offered most vulnerable clients an agreement to suspend their energy payment obligations and initiate payment once the country exits the emergency period, with 12 monthly installments interest-free and with no risk of service cut-off. This voluntary proposal initially addressed 40% of the country’s poorest families enrolled in the social register. As of June, the government extended the emergency period another 90 days, expanding the number of potentially vulnerable clients to 60%. When the discussion was ongoing in Parliament and the Senate, our offer provided benefits to these vulnerable clients. We haven't seen a material impact on our numbers until now. The law also includes a provision on the inability to cut off service for clients not paying their bills during the emergency period, even if they are not classified as vulnerable. The potential impact of this law is yet to unfold. Following the digital platform improvements to facilitate services, we are successfully managing to reach 88% of clients via these channels since March. Regarding the peak hours, the first decision to exclude peak hour tariffs from April and May had a negligible effect on our distribution income. The decision regarding the August and September tariffs may have a more significant effect, likely to be around $3 million.

Isabela Klemes, Head of Investor Relations

Perfect. Thank you, Paolo. We have another question from Cesar Perez from BTG, as well as Andrés Castro from Credicorp and an unidentified party. They are all requesting more details on our guidance, as well as information on the dividends we plan to distribute in 2021 concerning 2020 results.

Paolo Pallotti, CEO

Let me address the dividend query first. You should use last year as a reference. Last year, we accounted for the impairment of Tarapacá and Bocamina 1, which influenced our results. We then applied our dividend policy on a pro forma basis, ignoring the accounting impact of the impairments. We will follow a similar approach this year. As of now, we have not altered our dividend policy. We will evaluate the evolution of the second half of 2020 in terms of cash generation to make the final decision regarding the application of our dividend policy. But as always, our reference will be last year’s decisions. Now I’ll let Giuseppe provide guidance details.

Giuseppe Turchiarelli, CFO

For guidance, we are observing significant impacts primarily due to COVID, which affects demand for both generation and distribution. This is particularly relevant regarding small businesses which are vital for our generation and distribution. Our analysis indicates we will continue facing a negative situation in July, with a slight recovery in August, which does not imply we will return to prior demand levels due to closure of certain small enterprises. We expect to return to a normalized demand level by the end of the year. Regarding hydrology, we have factored in expectations similar to last year—estimating around 10.5 terawatt-hours of hydro production—recognizing that conditions show improvement but remain uncertain. Lastly, on the macro scenario, we have variations that could be significant, primarily relating to foreign exchange and commodity price fluctuations, both of which impact our business operations and financials. If the exchange rate were to align around CLP 800 per US dollar, we project a net guidance range of approximately $450 million.

Isabela Klemes, Head of Investor Relations

Thank you, Giuseppe. Due to time constraints, we can only accommodate two more questions. The first question is from Tomas Gonzales from Scotiabank, Rodrigo Mora from Moneda, and Murilo Riccini from Santander, who seek more details on our LNG contracts, considering the reduced prices expected in the second half of the year. Can you share insights on these contracts and whether we can ask for more shipments on our arrangements?

Paolo Pallotti, CEO

I will leave this question to Giuseppe. However, allow me to add an important point concerning the development of the company, especially in relation to the new timelines for Los Cóndores. Our planned development from today until the end of 2022 aims to grow through the procurement of 2,000 megawatts of renewable capacity currently in the pipeline and optimizing the portfolio in line with the decarbonization of Bocamina’s coal-fired facility. This plan is unrelated to the delays with Los Cóndores in terms of preparing our strategy to achieve the target market position driven by developments already identified. And just to clarify further, we also have the basic service laws factored into our business strategy. We are actively providing benefits to vulnerable clients, and the impact of this law, while uncertain right now, is aligned with supporting clients given the recession. In terms of cash collection, we are striving to support clients using our digital channels as much as possible. Now I'll pass it to Giuseppe for comments on LNG contracts.

Giuseppe Turchiarelli, CFO

Thank you, Paolo. Regarding LNG contracts, we maintain long-term agreements tied to market price indices. These contracts are primarily used for our power plants. However, if advantageous, we can also offload excess gas. Last year, we achieved favorable trades due to high market prices. This year, with lower commodity prices overall, our ability to trade profitably was reduced, leading to tighter margins. Presently, our contract price for July stands at approximately $4 per million Btu. This situation means our margins aren't as lucrative compared to last year, but we do benefit from lower gas costs in our internal operations.

Isabela Klemes, Head of Investor Relations

Thank you, Giuseppe. We have received more questions than we have time for, but we want to express our gratitude for your participation. Our Investor Relations team remains available for any further questions you may have. Paolo, would you like to provide the final remarks to our connected investors?

Paolo Pallotti, CEO

Yes, I would like to confirm, first of all, the resilience of the company and the fact that, given the challenging situation we are facing in the country, from both a health and economic perspective, we have continued to deliver and develop our activities across all sectors where we are involved—managing construction projects, operating facilities, and enhancing investments in our grid, as well as pursuing activities related to expanding electricity services. Although we are facing substantial challenges, I feel confident that we will be able to address these current realities. Thank you for your attention, and now let’s open the Q&A section.

Isabela Klemes, Head of Investor Relations

Thank you so much, Paolo. I will turn the call over to the operator now.

Operator, Operator

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may all disconnect. Everyone, have a great day.