Earnings Call Transcript - ENIC Q1 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to Enel Chile 1Q 2020 Results Conference Call. My name is Gigi, and I will be your operator for today. Questions will be taken through the webcast chat. This call is made for investors and financial analysts and the press is not allowed to ask questions. 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 the Enel Chile's press release reporting its 1Q 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 1Q 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 these forward-looking statements, which may 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 Ms. Isabela Klemes, Head of Investor Relations of Enel Chile. Please proceed.

Isabela Klemes, Head of Investor Relations

Good morning, ladies and gentlemen and welcome to Enel Chile's first quarter 2020 results presentation. I hope you are all 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 Giuseppe Turchiarelli, our CFO. In occasion of these events, we have adopted appropriate prevention measures. We are all connected through our homes or individual offices, which have been sanitized, located in our corporate building. Those who eventually have to translate are using a mask in common spaces and also gloves. Giuseppe will open with the main highlights and I will give an update on the global situation that we are facing. We will then walk you through our financial results and operational performance. The usual Q&A session will follow. Please note that questions will be received only via chat available in our webcast at www.enel.cl in the Investors section. At any time during our presentation, you can submit your questions. Just select the link at the top of the webcast page, Ask a Question. After this call and Q&A, our IR team will continue to be available to provide you with any detailed information you may need regarding the figures included in this presentation. Thank you all for your presence. And now let me hand the call to Giuseppe.

Giuseppe Turchiarelli, CFO

Thank you, Isabela and good morning, ladies and gentlemen. Let's start by mentioning the highlights of the period. Today, the world is facing one of the biggest health crises we remember. Immediately after the first alert of the COVID pandemic, we took several actions to implement different measures to protect the health of our collaborators and to ensure the continuity of our services. Thanks to our investment in digitalization, we developed a storage platform that has been able to ensure our business continuity. In the last year, we have promoted remote work by adopting new systems and the cloud. Today, we can immediately switch to remote work efficiently and effectively. In line with that, all our generation and network activities are fully operational. We are minimizing risk to protect our people and guarantee that our services are fully available. This year we were rated in the top 10 of LatAm and second in Chile for corporate governance among the topics evaluated, and in Chile, we were awarded first place in transparency and compliance practices. This confirms our solid commitment to our governance practices and to being a transparent company. Additionally, in January this year, we were included for the first time in the RobecoSAM Yearbook receiving Bronze Class distinction, which reflects our strong commitment towards a sustainable business model. With reference to 2019, we announced that dividend distribution will not be impacted by one-time effects related to the decarbonization agreement, as we announced an extraordinary dividend amounting to CLP 1.66 per share, charged from the return in net income to achieve a 60% payout on the pro forma net income, excluding the one-time decarbonization effect. This is a clear demonstration of our commitment to our shareholders and our ESG attitude. Lastly, as we will demonstrate in the next slide, our liquidity places us in a solid position to face these global challenges. I want to start by thanking all our people for their incredible positive reaction and strong commitment to responding to this contingency event. Now, as anticipated, we have taken important measures to face this crisis. We are constantly monitoring information concerning COVID-19, taking preventive measures and all necessary actions. As a matter of fact, we have created a committee with representatives from different areas of the company to analyze the situation day-by-day and coordinate all the required actions we may need to take. The aim is to ensure the health and safety of our staff while guaranteeing the continuity of the services we provide. We immediately activated remote work for all employees. Today, almost 100% of our personnel that can work remotely are doing so. In terms of total figures, as of yesterday, 75% of our total employees are working from home. For those that need to be onsite, we reduced the number of people present, minimized physical interaction, and implemented workplace sanitization with a continuous track of personal income and the use of additional safety equipment. Crucial activities like switch control and planned dispatch are performed with safety measures. In this exceptional situation, we have temporarily closed our distribution commercial facility while simultaneously improving our digital and online services. We have also temporarily suspended residential meter readings to reduce risk for our collaborators and customers. Finally, Enel Group has drawn up an insurance policy to cover over 68,000 worldwide employees in the event of hospitalization if they contract the COVID-19 virus. This solution is the first insurance tool aimed at guaranteeing support at the global level for the current pandemic, as a company providing essential services while Chile adopts all necessary measures to protect the most vulnerable clients and local community. Now moving on to page 3, considering the measures I have mentioned regarding the Distribution business, we are also providing distribution client support by telephone, online, and through our app. Our clients are invited to use our digital platform that we have announced to manage their bills and to get all the information they may need. I want to highlight that on March 31st, we reached 292,000 clients who downloaded our app designed exclusively to cater to our clients' needs. As of March 31st, 65% of payments were performed via digital channels. This represents significant growth compared to the 51% ratio from March 31st, 2019. As additional support to our clients during the emergency period, we are offering special payment plans for our most vulnerable clients with no interest or fees. There will be no power cuts, and we will not disconnect these clients due to non-payment of electric bills. We are also introducing a special meter reading program to support small businesses that were forced to close or reduce their operations. We recognize that their consumption during this period is different compared to previous months. Last week, we launched a campaign called 'Codo a Codo,' which means 'Elbow to Elbow,' to support local communities close to our operations and the most vulnerable parts of our procedure against the COVID pandemic by meeting needs in health and nutrition. Our first package of measures includes the donation of 100 electric ambulances to the Chilean Red Cross, contributions to other public hospitals, and an e-bus that will be used as a mobile laboratory for Universidad Católica. Let me now present the financial highlights for the first quarter of 2020 summarised on slide 5. Our EBITDA amounted to $243 million in the first quarter of 2020, reflecting a negative balance of $37 million compared to the March 31st, 2019 figures, adjusted for the early termination of the PPA booked last year of $151 million. Group net income is 23% lower than expected 2019 adjusted figures, mainly due to lower EBITDA results, higher depreciation in our distribution business due to last year’s investments, accelerated depreciation as part of our decarbonization strategy, and partially offset by lower financial expenses from the liability management executed in the second quarter of 2019. Our total CapEx amounted to $117 million, 65% higher than the previous year, focused on our decarbonization strategy and the digitalization of our distribution business and new connections. FFO decreased by 57% or $170 million, mainly due to a residential impact on EBITDA and the CapEx developed in 2019 whose payments were made in 2020. Our net debt increased to $122 million, mainly due to a higher CapEx plan executed in March 2020 and the interim dividend from the 2019 results, which was paid in January. I'll provide more detail in the following slide. Let's now take a deeper look at the company's financials starting with our CapEx in slide six. Our total CapEx amounted to $117 million, which is 65% higher than the previous year, focused on asset development. This quarter, our development CapEx reached $91 million, mainly allocated to renewables as part of our decarbonization strategy, which recorded $83 million and on the digitalization of our network that is providing us operational flexibility. For our renewable projects, given the current restrictions due to the COVID pandemic, we have been reviewing the logistics and construction plan, taking into account additional safety standards to keep the development and construction of our projects on track. From our total CapEx estimate for Enel Chile, we have deployed around 10% in the first quarter of 2020 as expected. The remaining 90% of our CapEx will be concentrated in the third quarter, with 23% allocated to the second quarter, 37% in the third quarter, and 30% in the last quarter of this year. During the first quarter of 2020, almost 95% of our investment was allocated to achieving the SDG targets that Enel Chile has committed to. Let's start with the EBITDA breakdown on slide seven. As you can see in the graph, in the first quarter of 2019, Enel Chile had a non-recurring effect regarding the early termination of PPA agreements, which amounted to $151 million. Excluding this effect, our adjusted EBITDA decreased by 13% or $37 million, primarily in our Generation business due to lower hydro generation, reflecting a negative impact of $10 million. The net commodity coverage instruments had a negative effect on our EBITDA due to a drop in the international bronze price that brought us a negative impact on the settlement of our NG coverage of $25 million, partially offset by $9 million in savings on commodity prices due to lower prices. Sales of two LNG cargoes in the first quarter of 2019 were not executed this year due to lower prices of the commodity in the international market, impacting us by $70 million. These effects were mainly offset by higher PPI prices due to the indexation of contracts by PPI and U.S. dollar, partially countered by the negative effect of the early stabilization happening. Now let me delve deeper into the Generation business by moving to slide eight, where I will present our KPIs for the period. Net production decreased by 13%, amounting to 4.8 terawatt hours, driven by a 0.5 terawatt hour reduction in local fire plants caused by the closure of Tarapaca power plant on December 31, 2019, and reflecting lower generation in our hydro plants due to hydrology issues. This trend in lower hydrology is also evident in the Chilean system, as shown on the right side of this slide. In terms of our energy balance, we remain a spot buyer in the market with purchases amounting to 1 terawatt hour in the first quarter of 2020, a balance of 0.6 terawatt hours compared to the first quarter of 2019. This is mainly explained by low hydrology and low marginal cost this season, as shown on the right side of this slide. The lower fees and marginal costs result from the Argentinian natural gas availability and the new transmission line fully operational since June 2019, along with renewable development in the country that explains our production strategy for this quarter, particularly in January and February. Our physical energy sales are nearly on par with 2019, thanks to the fact that we procured new clients in the free market. The balances are explained as follows: a 0.5 terawatt hour reduction in consumption from distribution companies, mainly due to the termination of regulatory PPAs with Fitch and Enel, secured in the 2006 auction, partially offset by a 0.4 terawatt hour increase in higher free-market sales as part of our strategy to capture new clients and recent migrations to the free market. In slide 9, we summarize the performance of our Generation business, including Enel Generacion and Enel Green Power. Regarding Generation EBITDA, I already covered the main variations in the previous slide. What I would like to reiterate is that we produced 66% of our generation using renewable sources, which is a 5% increase compared to last year's results. As a result of earlier mentioned factors, our Generation EBITDA margin reached 41% in the first quarter of 2020, despite lower hydro production and commodity challenges. Regarding our net installed capacity, 65% of our capacity is based on renewable sources. This is part of our strategic plan to increase the presence of emission-free generation by closing our coal facility, which was the case of our Tarapaca plant, which was closed on December 31st last year, and through the addition of new renewable capacity. Let me now explain the most relevant operating facts of our distribution and Enel X business as we move to slide number 10. We assert that the role of the customer is changing, opening up new business opportunities that Enel X has captured. We have secured new contracts for public lighting this quarter, where we will replace the lighting infrastructure with LED systems, bringing a more efficient system to the local municipality. In terms of the digitalization of our distribution business, looking towards the medium-term and continuing to enhance the quality of our services, we installed 2,206 telecontrol equipment in our grid. Over the next two years, we plan to install an additional 585 units. Please move now to slide 11 to explore the most relevant operations results of our network and Enel X business. As of March 2020, the EBITDA of Enel Distribución and Enel X showed a minor barrier when comparing to last year's results, mainly attributed to new smart lighting contracts adding $1.9 million. Tariff indexation totals $1 million but is offset by a $1.4 million income from 26 electric buses registered in 2019 that started operating in the public transportation system in January last year. Higher operation losses, primarily due to logistic restrictions for social distancing in Chile during the first quarter of 2020, increased by $1.6 million, as shown on the right side of the slide, outlining that main KPI. Our customer base increased by 45,000 clients compared to the first quarter of 2019, reaching 1.98 million clients, also reflecting a 0.1 terawatt hour increase in energy distributed, totaling 4.3 terawatt hours in this quarter. In light of the logistical restrictions stemming from the social unrest last week and the pandemic, our interruption measure, SAIDI, increased by 4% in the first quarter of 2020 compared to last year's results. Despite this, we continue to focus on critical areas for SAIDI and safely replace approximately 52 kilometers of cable in our low extension grid while executing over 7 kilometers of major network expansion and reinforcement in this quarter. Energy losses increased by 42 bps, reaching 5.25% due to reduced on-site inspection activities. This decision was made to safeguard the safety of our workers. Now on slide 12, let's examine the main drivers affecting our net income. As mentioned earlier, the 2019 EBITDA includes the PPA early termination. Depreciation and amortization reached $76 million, influenced by higher depreciation in the distribution business from increased investments last year and the new calculation of the useful life of Bocamina 2, in line with our decarbonization strategy, partially compensated by the closure of Tarapaca on December 31st last year. Provision for impairment and bad debt grew by $4 million, mainly in our distribution business due to social unrest. Financial results and others accounted for an expense of $32 million, a decrease of $5 million, mainly due to foreign currency exchange rate appreciation in the first quarter of 2020 and a lower average cost of our debt arising from renegotiation on EGP debt with EFI. Income taxes and minorities reflect the EBITDA performance. As a consequence of these factors, ordinary first quarter 2020 net income reached $88 million, a 59% decrease when compared to the first quarter of 2019. The first quarter of 2020 net income compared to the adjusted net income by the CPI and termination shows a 23% decrease. Now let me touch on our debt on slide 13. Our gross debt increased by $585 million versus December 2019, amounting to $4.17 billion in March 2020, mainly due to the new filing with EFI. The average cost of our debt reduced from 5.2% in December 2019 to 4.7% as of March 2020, showing significant improvement in our financial condition as a result of our ongoing efforts to optimize financial expenses. The average loan maturity is almost seven years. Our FFO reached $57 million, also impacted by energy stabilization effects amounting to $47 million and the CapEx developed in 2019 whose payments were made in 2020. Our net debt as of March 2020 increased by $122 million compared to the same period in 2019. Finally, on our debt amortization slide 14, I want to highlight that our liquidity position enables us to finance our CapEx plan while respecting our commitments to shareholders in the event of a worsening scenario. Regarding our debt amortization, we have an annual average of $281 million maturing over the next year, and our liquidity allows us to support these maturities. Before starting the Q&A section, let me mention some relevant takeaways on slide 15. In this global contingency, we took timely and proactive actions from day one to protect the health of our people, support our clients and community, and guarantee business continuity. We continuously monitor the evolution of the situation to react promptly and simultaneously prepare a mid-term plan to maintain our company at the best efficient level. Digitalization is vital in supporting this period of contingency, and we believe we should leverage this opportunity to guide our new EBITDA goals. Sustainability remains a cornerstone of our business model, which has endured disruptions and maintained our strategy in the medium to long term despite the ongoing pandemic. In conclusion, I want to reaffirm that we currently possess the liquidity to navigate through this global quarantine. Thank you for your attention. Let's now open the Q&A section. I will hand over to Isabela.

Isabela Klemes, Head of Investor Relations

Thank you, Giuseppe. As we anticipated, in this session, we received questions via chat in our webcast. I will start with our first question from Mourinho Riccini from Santander. The first question is: Could you please provide more details regarding the 38.6 year-over-year contraction in operational cash flow? How much of that was affected by the stabilization mechanism, and how much was due to lower collections? Are there any other relevant effects impacting the numbers, maybe payments to suppliers growing 10% year-over-year? The second question from Mourinho is regarding Generation. Are there ways to mitigate the issues affecting Bocamina one and two being unavailable? What might you do to avoid suffering similar impacts in future periods? Please, Giuseppe.

Giuseppe Turchiarelli, CFO

Thank you, Isabela. Regarding the FFO, the main differences from 2019 are due to a decrease in EBITDA and the capital expenditure made in 2019, which has been accounted for in 2020. Additionally, this year we have spent about $25 million more on e-buses than last year. We do not see a significant impact from the stabilization mechanism or collections, at least as of March 2020. Concerning Bocamina one and two, we had to close our Boc plant after an incident involving a transmission line not owned by us. We are fully committed to resolving this issue. Since 2018, Enel Generacion has been collaborating with 1,370 families to apply international standards to the resettlement process, focusing on transparency and objectivity based on audited standards to address disparities in the agreements made at that time. However, some individuals pursuing this process appear to be seeking additional monetary compensation beyond what they are currently receiving. This describes the current situation.

Isabela Klemes, Head of Investor Relations

Thank you, Giuseppe. We have our second question from Javier Suarez from Mediobanca. He actually has two questions. The first is: can you help to understand the reasons behind the FFO decreasing during the first quarter? I believe we have already answered that, but you could provide additional information if you want. The last question from Javier is whether the company feels the necessity to revise downward its latest guidance? Thank you, Javier. Giuseppe?

Giuseppe Turchiarelli, CFO

Okay. Regarding the FFO, I have already answered. The main variances are attributable to EBITDA and the CapEx executed in 2019, which has impacted 2020. As for the guidance, at this point, we don't see a major impact in terms of COVID. I find it hard to believe that we won't recover the delta situation. So, frankly speaking, as of today, I am not in a position to state whether we will provide a different guidance. Therefore, I won’t confirm the guidance.

Isabela Klemes, Head of Investor Relations

Thank you, Giuseppe. We have a question from Rodrigo Mora from Moneda. The first question concerns the forced disconnection of Bocamina, which has been discussed previously. The second question is for more information about the renewable projects and their completion dates that were included in the business plan presented last December. Additionally, Rodrigo has a third question regarding the supply contract and how many gigawatt hours it encompasses. Thank you, Rodrigo, for your questions. Giuseppe, I’ll let you respond.

Giuseppe Turchiarelli, CFO

Okay. Concerning the CapEx, despite the international situation, we cannot confirm our arrangements. In fact, we found ways to keep our construction on track. So, except for a few weeks that can be compensated, I confirm our plan for 2020. Regarding the supply contract that ended in the first quarter, let me verify and I will provide an update. It's around 0.4 terawatt hours if I am not mistaken. Yes, we are discussing 0.4 terawatt hours, the contract that ended up with the regulator following the dissolution of sales with Enel. This volume of terawatt hours has been compensated by new distribution, so we did not breach contracts in the free market.

Isabela Klemes, Head of Investor Relations

Okay. Thank you, Giuseppe. We have another question from Arturo Murua from Toesca. Hi, everyone. My question concerns the announcement of indexation purchases with Enel Green Power. We see that physical sales between both companies declined almost 20%. However, the total purchase costs remain the same. Thank you. So Giuseppe, this is the question.

Giuseppe Turchiarelli, CFO

To clarify, regarding the Enel Generacion purchase with Enel Green Power, the decline in production is primarily linked to the absence of the Tarapaca plant, impacted by worse performance in hydro. Last year, the system margin and costs were considerably high, making it favorable for the company to produce from our plants. This year, that situation has altered, at least in recent months, and this explains why our performance differs from the past. Was this your question?

Isabela Klemes, Head of Investor Relations

Yes. And he's also questioning, Giuseppe, regarding the increase in price on the PPA between wind power, Enel Green Power, and Enel Generacion.

Giuseppe Turchiarelli, CFO

All PPAs between Enel Green Power and Enel Generacion are arranged according to market prices, so they essentially reflect the prevailing market conditions.

Isabela Klemes, Head of Investor Relations

Okay. Thank you, Giuseppe. Moving on, we have a question from Alex Varschavsky. The first question Alex has is: Are you expecting that the delay in bill collections from the distribution segment could affect the Transmission and Generation sectors? Have you conducted an analysis on that? I believe this question relates to discussions regarding the most vulnerable clients. The second question we have from Alex is: given the context of COVID-19, how do you foresee the ramp-up of our growth projects?

Giuseppe Turchiarelli, CFO

Regarding collection delays in our distribution company, in general, we do not expect any repercussions on the transmission and generation sectors. We believe we are actually working in tandem with BID, Banco Interamericano de Desarrollo, for the distribution sector to develop a strategy to mitigate any potential impacts of collection delays and avoid disruptions in the payment chain across the sector. Therefore, we do not foresee repercussions on the transmission and generation companies. As for the CapEx regarding COVID impacts on project timelines, it is true that part of our equipment comes from China, but we have already secured regular supply, and those items are currently on their way. Consequently, we do not anticipate any impact, and we expect to comply with our project construction timelines by the end of this year.

Isabela Klemes, Head of Investor Relations

Okay. Thank you, Giuseppe. That question was from CrediCorp. Now we have a question from Alex Varschavsky. Could you please provide some insight regarding your LNG obligations? And what impact could arise in a scenario of lower international gas prices and higher availability of Argentinian gas? So this is Alex's question.

Giuseppe Turchiarelli, CFO

As we mentioned during the investor presentation last year, we have two primary sources for gas supply: one is the Argentinian gas, and the other is our LNG contract. The LNG contract provides a safeguard against potential interruptions of Argentinian gas. Basically, we have a long-term contract guaranteeing our supply. The contract stipulates a certain volume of gas that we need to purchase yearly, and we have conditions in place to align our gas purchases as per our needs. Hence, this contract is beneficial for us in terms of flexibility. It's important to note that international prices will affect this contract in two main ways: first, we may utilize the contract to make trading margins similar to what we did last year. However, this year we may not have that opportunity. Nevertheless, it does not mean we will be significantly affected; we will again buy from Argentina if it's cheaper than LNG, or otherwise, we will need to utilize our contractual obligations.

Isabela Klemes, Head of Investor Relations

Okay, thank you, Giuseppe. Now moving on, let's address a question from Enrico Bartoli from MainFirst.

Enrico Bartoli, Analyst

The first question is whether you see any risk of increasing bad debt due to the COVID emergency. Are there discussions with the regulator about how to manage and recover any unpaid bills?

Giuseppe Turchiarelli, CFO

It is evident that the COVID emergency could affect our bad debt provision levels somewhat. In March, we did not encounter significant changes. We also emphasize pushing our digital channels to minimize debt levels as much as possible. At present, the impact seems to stem more from the previous social unrest we faced in October last year than from COVID. As of March, we have not observed any substantial influence from COVID. Regarding the regulator discussions about any unpaid bills, we are in contact with them to understand how to face this situation.

Isabela Klemes, Head of Investor Relations

Okay, thank you, Giuseppe. We have another question from Rodrigo Mora regarding the Los Cóndores project. Just to clarify, how will the current needs affect the COD for the Los Cóndores project? Any information would be appreciated.

Giuseppe Turchiarelli, CFO

Regarding the Los Cóndores project, as we mentioned earlier, we are reviewing all of our projects to comply with new safety standards. This is a common practice for us to assess and understand how the projects are progressing. As soon as we conduct our next review, we will communicate if there are any changes from our prior statements.

Isabela Klemes, Head of Investor Relations

Okay, Giuseppe, thank you. I believe we have answered all the questions. If there are no further inquiries, I would like to conclude the results conference call. I want to remind everyone connecting that our Investor Relations team is available for any further questions you might have. Thank you for your attention and stay safe. Thank you. Goodbye.

Giuseppe Turchiarelli, CFO

Goodbye.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.