Earnings Call Transcript - ENIC Q2 2022

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the Second Quarter and First Half 2022 Results Conference Call. My name is Victor, 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 the forward-looking statements as a result of various factors. These factors are described in Enel Chile’s press release reporting its second quarter and first half 2022 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 second quarter and first half 2022 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 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 of Enel Chile. Please proceed.

Isabela Klemes, Head of Investor Relations

Good afternoon, and welcome to Enel Chile’s second quarter and first semester 2022 results presentation. Thank you all for joining us today. Joining me this afternoon is our CEO, Fabrizio Barderi, and our CFO, Giuseppe Turchiarelli. Let me remind you that our presentation and related financial information are available on our website, www.enel.cl in the Investor Relations section, and in our ask investors. In addition, a replay of the call will be soon available. In the time of this presentation, there will be an opportunity to ask questions via phone or webcast chat through the link ask a question. In the following slides, Fabrizio will open the presentation regarding highlights and strategy updates. And then Giuseppe will walk us through our financial results and our recent material fact release. Thank you all for your attention, and let me now hand over to Fabrizio.

Fabrizio Barderi, CEO

Thank you, Isabela. Good afternoon, and thanks for joining us. Let me now start with the highlights of the period on Slide 3. As you know, the market pressure remained over during the year to second quarter. Given this we have been taking several management actions to offset the pressure and take advantage of the performance of our assets, proving that our strategy is sustainable and resilient. I will give a detailed view of the actions contributing to this in the following slide. We have several initiatives during the first semester, bringing us the right ideological perspective for the second semester. Also, there have been some regulatory updates, like the approval of the second energy subdivision and some recent updates related to the 2022 to 2024 report. Regarding our economic and financial performance, we have faced some temporary headwinds over the margin related to commodity pressure. But thanks to many actions we have put in place, we are comfortable that we will execute our 2022 guidance, as we say in this presentation. Finally, we have just released the asset allocation process as part of our sustainable balance sheet requisition, confirming the quality of our assets and our proposals to unlock value for our shareholders. We expect everything with growth by the year-end. Now let’s move to slide five to briefly talk about the market situation. The national electrical system has been impacted by a set of factors correlated with the rush of income and critical issues from last year. Commodities continue the uptrend, particularly coal prices, which are associated with a lower production, resulting in the sharp increase of the spot price. This scenario has been due to the presence of Argentine natural gas up to April and several actions in terms of thermal optimization that we put in place. Despite the strong adverse scenario, we have been able to implement actions that contributed approximately $130 million in the period. Our solid LNG supply position, which includes our long-term LNG contract that was successfully delivered earlier this year, has helped increase generation volume and optimize our natural gas operation. In addition, our commodity hedging instruments contributed an additional $68 million in the first half. Complementing these short-term actions, and also mindful of the new market configuration, we decided to enter into long-term PPAs with some renewable fuel developments. Let’s now look at how we are consolidating our renewable position on slide six. The current context is undoubtedly an important challenge for the energy sector. And we’ve acted necessary to adapt to this new environment. We have been one of the principal driving forces in the energy system process in account, connecting more than 1,000 megawatts of renewable capacity in 2020. During these years we have already connected 202 megawatts of solar capacity. Furthermore, our efforts are committed to connect, until year end, more significant parts of our projects currently under construction. We are convinced about the potential of Chile as a renewable development board in the region. We will continue contributing to consolidate this position, aiming for a clean energy metric. Now, on page seven, let’s take a look at the conditions and the outlook for the second half of the year. During June and July, there was a significant increase in rainfall, especially in the south of the country. In fact, in the eight regions where the basis of the hydrology are located, the rainfall recorded to date is equivalent to what is usually seen in a year—something that we haven’t seen in three years. The situation in the mountains is clearly better than last year figures, which highlights a very good scenario, allowing us to perceive an optimistic outlook for the rest of the year, especially for the fourth quarter. On the other hand, we have also been carrying out various actions to maintain our portfolio resilience, mainly thanks to the higher availability of gas. During this year, we have been able to reroute our LNG capacity, increasing our trading activities and optimizing our thermal generation. This year, we have rescheduled part of our LNG deliveries. For the second half of the year, the presence of Argentine gas allows us to continue with optimization. Overall, we are convinced that the worst is behind us, and we are recovering our performance, confirming our targets for the full year. Regarding regulatory matters for the energy sector, let me highlight some topics on slide eight. On July 13, the second energy subsidization and emergency funds and established a new mechanism for the sector were approved. The approval of this law is positive for our company and the sector as a whole as it aims to bring back system rationality, meaning that generators will not continue financing sectors. With the new mechanism, we expect to reduce the impact on our cash flow. Furthermore, in June, the consultant report was published on the distribution direct review, and we have already addressed more than 100 performances to the regulator, who shall review any potential discrepancies between the companies and the regulator in the next week. The process is nearing completion, and we expect a new report to be published during the second half. Let me recap our strategy based on its depreciation and decarbonization. Despite all the temporary headwinds within our market, we foresee our long-term goals clearly. Our strategy is best defined by sustainability. The quality and visibility of our network remain a key enabler for the decarbonization and electrification of our final customers. As you can see in our main KPIs, we are improving in all quality and digitalization metrics, demonstrating our commitment to sustainability.

Giuseppe Turchiarelli, CFO

Thank you, Fabrizio. Good evening to our investors. I will start my presentation on slide 11 with a quick summary of the adjusted results in the period. In the first half and the second quarter of 2022, we applied an adjustment in the EBITDA due to the impairment made to the cost stock of the period, which amounted to $62 million and $41 million, respectively. The second quarter of 2022 adjusted EBITDA decreased by 54%, mainly due to the higher commodity prices. In the second quarter, the net income decreased by 65% due to the factors mentioned before. First half 2022 CapEx almost reached $500 million, with significant investments focused on the construction of new renewable capacity. Let’s review more about our CapEx on slide 12. Throughout the last year, our primary efforts have been focused on boosting the country’s energy transition. As a result, during the first half of 2022, accumulated CapEx reached $499 million, of which $95 million was mainly related to customer projects. Development CapEx reached $397 million, representing an increase of 10%, mainly due to our construction activities. This is a clear signal that our renewable expansion plan is on track. The summary of the second quarter adjusted EBITDA breakdown is presented on slide 13. This variation was mainly due to an increase in our CPA sales of $100 million primarily explained by the higher valuation of the Chilean pesos against the dollar. However, these effects were offset by the lower hydrology and negative impacts on variable costs mainly due to higher termination costs driven by increased commodity prices and outages during the period. Moving to slide 14, the summary of the first half EBITDA breakdown accounts for $330 million, 21% lower compared to 2021 figures. We are seeing a negative impact due to higher generation costs resulting from commodity prices. The network remuneration and demand accounted for a positive impact of $60 million due to improved regulated demand recovering during the period. Let’s discuss our adjusted EBITDA guidance for the year-end on slide 17. As you know, our generation business is quite seasonal, and we expect higher EBITDA in the second semester of the year. The new long-term contracts and the perspective of returning to more normalized hydro-generation levels give us confidence in achieving our guidance. As mentioned previously, our first half adjusted net income amounted to $102 million. The variation comes mainly from lower adjusted EBITDA and higher impairments as well as increased financial results. We expect to see improvements as we move into the second half of the year.

Fabrizio Barderi, CEO

Thank you, Giuseppe. Just to point out some closing remarks, we have taken several actions to face the challenges posed by the current commodities market. We believe we are on the right path to continue conducting the energy transition, the decarbonization of our operations, and the electrification of consumption. Our actions give us confidence that we will reach our 2022 guidance.

Isabela Klemes, Head of Investor Relations

Thank you, Fabrizio, and let us open now the Q&A section as anticipated. We will receive questions via phone or chat in the webcast. Operator, please start the Q&A section.

Murilo Riccini, Analyst

Many thanks for the call and information provided here today. So considering the level of water and usage so far, and the reservoir in the mountains, can it be possible to generate approximately 10 terawatt hours of hydro generation this year? This is my first question. And the second one is, could you provide us your view on the availability and prices of fuel during the second half of this year? And my third question is, do you have any other assets rotation in process or under analysis? Thank you.

Fabrizio Barderi, CEO

We are quite optimistic about the second semester, and we think that we could reach our hydro production target for the year. Regarding fuel supply, we don’t foresee any issues; our contracts are structured to protect us. As for assets rotation, we always consider opportunities in the market but currently have nothing on the table.

Unidentified Analyst, Analyst

Hi, good afternoon, everybody. Thank you very much. I have four questions, and I would like to go one by one if you don’t mind. The first question is regarding an unusual jump in other operational expenses, impacting EBITDA. Could you please tell us what was behind this?

Fabrizio Barderi, CEO

Could you clarify which line you’re referring to?

Unidentified Analyst, Analyst

Yes, the last one that says other operational expenses that jumped significantly.

Fabrizio Barderi, CEO

We are committed to fulfilling the schedule defined by the minister of energy and do not foresee any reasons for further postponements.

Giuseppe Turchiarelli, CFO

Regarding the tax on the transmission line sale, we expect to pay around $240 million to $250 million next year. We will use the proceeds to pay down our next maturity, which is predominantly revolving credit intended to be paid off with upcoming asset proceeds. We don’t have an equity injection plan on the table as of today.

Unidentified Analyst, Analyst

Thank you. The second question is about the annual EBITDA of the traditional business. Is it still about $70 million?

Giuseppe Turchiarelli, CFO

Yes, it's around $70 million.

Unidentified Analyst, Analyst

What type of assets might Enel Chile consider selling or rotating?

Fabrizio Barderi, CEO

We evaluate all kinds of assets, primarily focused on renewable and distribution as part of our strategic initiatives.

Isabela Klemes, Head of Investor Relations

Thank you, Fabrizio and Giuseppe, and thank you all for being connected today. If you have any further doubts or questions, please reach out to our Investor Relations team. Thank you, and have a nice day.

Operator, Operator

This concludes today’s conference. Thank you for participating. You may now disconnect. Everyone have a good day.