Earnings Call Transcript - ENIC Q3 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to Enel Chile Third Quarter and 9 Months 2021 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 third quarter and 9 months 2021 results. The presentation accompanying this conference call and Enel Chile's annual report on Form 20-F include under risk factors. You may access our third quarter and 9 months 2021 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 dates. 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 will now turn the presentation over to Ms. Isabela Klemes, Head of Investor Relations of Enel Chile. Please proceed.

Isabela Klemes, Head of Investor Relations

Thank you, Victor. Good morning, and welcome to Enel Chile's Third Quarter 2020 Results Presentation. Thanks to all for joining us today. I am Isabela Klemes, the Head of Investor Relations. Let me remind you that our presentation and related financial information are available on our website, www.enel.cl in the Investor section and in our investors. Joining me this morning are our CEO, Paolo Pallotti; and our CFO, Giuseppe Turchiarelli. In the following slides, Paolo will open the presentation with the main highlights of our strategy and operational performance of the quarter. Then Giuseppe will go through our financial results. A replay of this call will also be available. And as always, our IR team will be available to provide you with any other information that you need. Thank you all for your patience. And let me hand over to Paolo.

Paolo Pallotti, CEO

Thank you, Isabela. Good morning, and thank you for joining us. Let me begin with the key highlights of this period. First, I want to address the current conditions in the Geneva market. The country is experiencing the driest year on record. As a result, the system continues to need significant support from thermal generation. Additionally, by the end of 2020, Chile faced a shortage of Argentinian natural gas, compounded by rising LNG spot prices. Due to this resource scarcity since January 2021, we took measures to enhance gas availability by purchasing extra LNG and adjusting our costs to supply our plants first before supplying the system. During the first half of 2021, we emerged as the largest importer of LNG in the country. We also initiated projects to improve the performance of our hydro plants under minimal operating conditions. However, despite our efforts in 2021, conditions worsened with rising commodity prices and poor hydrology, particularly in July and early August, leading authorities to implement a preventive rationing decree in March 2022. As a result, our profit margins were impacted. Despite these challenges, investing in renewables to diversify our portfolio and reduce our dependency on hydrological resources remains a key focus. Regarding our 1.3 gigawatts of new projects in development, significant progress is being made. Last quarter, we celebrated the commencement of construction on the first green hydrogen pilot project in Chile and Latin America, based in Magallanes. Furthermore, Enel X recently signed an agreement to introduce the first electric mining truck to Chile. We have replaced over 10,000 wood heating systems with safer, more efficient technology as part of our efforts to combat urban pollution. Our initiatives adhere to ESG standards, enabling us to expand through SDG-linked financial instruments. Moving on to our construction capacity, we are advancing our strategy toward cleaner generation markets. Renewable energy is pivotal for the energy transition and a crucial element of our market positioning. Over the past 18 months, we've faced several challenges due to the COVID-19 pandemic, such as worker mobility restrictions and border closures. Nevertheless, excluding Los Cóndores, we have 1.3 gigawatts of projects underway, with around 0.6 gigawatts already connected to the system as of the end of September. By year-end, we aim to connect at least 900 megawatts to the grid, with an additional 250 megawatts coming online by the first quarter of 2022. Most projects should be fully operational by the first half of 2022, and Renaico II Wind Farm is set to be completed this year, considering transport logistics for wind facility components. Our green hydrogen joint venture with AME and other partners has started construction on the first pilot project in Chile, expected to be functional in the second quarter of 2022. We believe that alongside renewable energy, green hydrogen will play a vital role in the energy transition and accelerate decarbonization in industries with challenging emission reductions. Shifting to decarbonization in final consumption, Enel X is intensifying its efforts to replace polluting energy sources and encourage the use of electricity in both public and private sectors, fostering electrification of industrial processes, fleet, and public transport, alongside energy efficiency improvements in buildings. The Chilean government is committed to achieving 100% electric public transport by 2040 and has initiated a tender process to replace 1,640 buses. Enel X is participating in this effort and has secured a deal for 991 electric buses, solidifying our leadership in public mobility in Chile with an 81% market share. In collaboration with mining company SQM, we introduced the first 30-ton electric mining truck, along with six electric buses for employee transport. Enel X is also establishing necessary charging infrastructure for operations, a significant advancement for Chile's mining sector in reducing emissions. Moreover, we have successfully replaced 10,000 wood stoves with efficient electric heating systems, leading to decreased CO2 emissions while improving the quality of life for over 40,000 people in our communities. In terms of efficient lighting solutions, Enel X has broadened its reach by securing maintenance contracts for public lighting in the Temuco region, which has over 32,000 lights, contributing to a total of 340,000 points of light, with half of these projects located outside Santiago, enhancing city illumination and safety. Regarding networks, energy distribution improvements are reflecting the gradual easing of health restrictions, showing a partial recovery from the previous year. Our investments have boosted service quality, as evidenced by a 16% reduction in SAIDI. Our digitalization investments have improved client interaction, with nearly 90% of contracts processed through these channels. On regulatory updates, with the basic service law extending until the end of 2021, its application still affects overdue debt levels, which reached $180 million by September. To mitigate this impact, we've promoted payment agreements to reduce overdue accounts, achieving over 58,000 agreements in more than a year, with 53% related to the basic service law. In terms of collections, the ongoing efforts to revise fees or lower billing charges have contributed positively to our KPIs compared to previous quarters. We anticipate the collection rate will normalize in the next quarter. A brief update on regulations: for distribution, we expect a consultant report on the reference model to be available in November. If so, the regulator's final report could be out early next year. Anticipating challenges, a final decrease in distribution tariffs is projected for mid-2022. As for transmission, we are in the final phase, and all discrepancies regarding regulatory efforts for 2020-2023 have been submitted, leading us to expect the new VAT charge to be issued early in 2022. Thank you, and now I will hand it over to Giuseppe.

Giuseppe Turchiarelli, CFO

Thanks, Paolo. Let me start with the summary of our financial highlights on Slide 8. Before starting, let me explain the extraordinary effect of the period. 2021 adjusted EBITDA and net income considered the effect arising from the coal stock impairment associated with Bocamina 2 and the voluntary retirement program announced last quarter. The coal stock impairment and the voluntary retirement program had an aggregated effect of $56 million and $39 million, respectively, in EBITDA and at the bottom line in cumulative figures. In the third quarter of 2021, the coal stock impairment amounted to $11 million in EBITDA and $8 million in the group net income. For cumulative figures in 2020, the adjustment from the coal stock impairment totals $22 million in EBITDA. The net effect of the impairment of Bocamina 2 is $659 million at the bottom line. All of these effects are described at the bottom of this slide. Now on CapEx deployment on Slide 9. 2021 accumulated CapEx reached $735 million, largely devoted to the construction of our new renewable capacity. Customer CapEx totaled $49 million, mainly allocated for new commissioning and implementation of new commercial systems. Asset management CapEx reached $86 million, 21% higher than the 9 months of 2020, mainly due to the maintenance of the new high voltage project awarded in 2021 and other digitalization projects. Development CapEx reached $600 million, largely driven by our renewable expansion program and the development of our distribution business to enhance the digitalization of our network. Now let's start with the third quarter adjusted EBITDA breakdown on Slide 10 that accounted for $93 million, 71% lower compared to 2020 figures, mainly due to higher PPA sales in the third quarter of 2021, primarily explained by new agreements starting in 2021 with mining companies, AngloAmerican and BHP. The adjustment due to the indexation and the new contracts from Enel Distribution created a customer portfolio at the beginning of the year. Hydrology, the shortfall of Argentinian gas, and higher LNG international prices also explain the main variances of this quarter that forced us to increase the volume of purchases at higher prices than last year. Spot purchases volume represented a variation of almost $120 million, mainly explained by lower hydro generation. Spot purchases cost represented an increase of around $90 million. Variable production costs, partially offset by aging contracts for the year, accounted for a variance of around $100 million. Gas margin represented a positive variance of $6 million in our EBITDA, driven by an increase in natural gas trading activity. Following the chart, we have indicated variances stemming from a recovery in demand in the distribution business, mainly for regulated customers due to the easing of lockdown measures. Network remuneration mainly relates to the provision for lower remuneration on distribution tariffs, which should be retroactive to November 2020 and the lower remuneration of transmission tariffs as a result of the indexation of tariffs. Other aspects accounted for $18 million, primarily related to higher Enel X EBITDA in the quarter, mainly due to the public lighting business. Reduced penalty and compensation costs in the distribution business have resulted in improved quality indicators, along with the temporary effects during the third quarter of 2020 on raising service costs due to logistics restrictions. Let's move now to Slide 11, where we have the summary of our nine-month adjusted EBITDA breakdown, accounting for $536 million, 39% lower than 2020 figures. As you can see, the main effects are similar to those presented in the third quarter. Higher PPA sales in the nine months of 2021 were due to the new agreements that began in 2021. Increased spot purchases volume during the nine months had an effect of $160 million. The rise in spot prices due to demand for commodity availability and other higher commodity prices in the international market had an impact of $151 million. Variable generation costs impacted by third-quarter results, offset by commodity coverage, totaled $45 million for the period. The previously mentioned gas wholesales factor positively impacted EBITDA by $17 million. The distribution business experienced a demand recovery due to the easing of lockdowns, contributing $5 million in EBITDA, while the negative impact on network remuneration related to lower distribution and transmission tariffs amounted to $33 million. Other accounted for $7 million, mainly due to new contract agreements booked in the first quarter of 2021 with Enel distribution unions. Now on Slide 12, let's discuss the main drivers of our group net income. D&A and bad debt reached $223 million, a variance of $42 million, mainly related to lower D&A in Enel Generación due to the impairments made in Bocamina 2 in 2020 and lower D&A in EGP assets due to the depreciation of the Chilean peso during the period. Net financial results totaled an expense of $165 million, an increase of $47 million, mainly due to higher costs related to the factoring execution in the generation business and stabilization mechanisms, as well as higher financial expenses capitalized during 2021. Income tax reflects the impact of lower EBITDA, higher financial expenses, and higher tax credit in the quarter due to higher monetary correction in the period. As a result, the adjusted net income for nine months in 2021 reached $104 million. The adjusted third quarter of 2021 recorded a loss of $13 million, mainly explained by the lower EBITDA result in the quarter for the reasons mentioned previously, partially offset by lower income tax due to earnings before tax settling out and the monetary correction resulting from higher inflation in the country compared to the previous period. Moving to the cash flow on Slide 13. Nine months of 2021 FFO reached $309 million, 45% lower than prior year figures, primarily due to lower EBITDA, as previously mentioned, spot price impacts, and increased income tax during the first nine months of 2021 stemming from COVID-19 measures from 2020 that postponed part of corporate tax payments to 2021. The depreciating Chilean peso at the end of 2020 generated gains leading to higher tax payments this year, alongside higher financial expenses linked to factoring of stabilization mechanisms. All these effects were partially offset by an increase in working capital versus 2020, explained by factoring in both generation and distribution businesses, accounting for almost $300 million. The transmission line sales in 2020 had a cash impact of $28 million in 2021. Finally, let's discuss our debt on Slide 14. Our gross debt increased by around $700 million compared to December 2020, currently amounting to $4.7 billion, as a result of new issuances in the period with Enel Finance International and third parties. The new issuance is entirely SDG linked, with KPI focused on CO2 emissions from our generation fleet by 2023, mainly tied to CapEx plan execution. We now have 14% of our total gross debt SDG linked. Our plan is to continue pursuing this type of debt line to support our transition towards cleaner metrics. In terms of debt amortization, our schedule remains sustainable with an average of 6 years, aligned with last year's figures. Lastly, in terms of liquidity, our figures provide us with the flexibility to face potential headwinds in the market. On Page 15, since the first quarter of this year, we have been proactive in anticipating our internal view of hydrology for Chile. As demonstrated in this slide, performance is greatly correlated to the driest period we have faced. This has required a much higher national thermal generation level, combined with the lack of natural gas from Argentina and the subsequent sharp increase in LNG and rising prices, making us more vulnerable to a non-competitive mix of generation with higher spot prices. Therefore, we revised our predictions to show 2021 adjusted EBITDA figures between $0.8 million and $0.9 million, equating to a valuation decrease of around $300 million compared to our last quarter guidance. We don't expect significant deviations in CapEx since the majority of our development CapEx is being deployed in the following months. Our view is that the adjustments to the 2021 scenario are not structural. We strongly believe that our strategy to increase renewable capacity will significantly reduce exposure to commodity and hydrology concerns in the upcoming year. Paolo, I'll hand it back to you for closing remarks.

Paolo Pallotti, CEO

Thank you, Giuseppe. Executing our investment plan will remain our priority and create additional flexibility and resilience in our current portfolio. Last month, the regulator presented a proposal to define a new framework for storage remuneration in the electrical system. Companies and associations submitted their feedback on the proposal, and we are awaiting the final version of this regulation, expected to be published next month. This is an important step forward for the improvement of effective technology use, fostering resilience and flexibility in the system. We will continue to support our clients and communities to accelerate the electrification of energy usage to reach net-zero targets. Our strategy will continue to be implemented under the highest ESG standards. For example, we were recognized in a 2021 report as the best company in terms of reporting and purpose and acknowledged in a PwC study as one of the companies with the best practices in corporate governance in Chile. Thank you for your attention. Now let's move into the Q&A session.

Operator, Operator

Our first question will come from Javier Suarez from Mediobanca.

Javier Suarez, Analyst

I have three questions. The first one is about the margin for the generation activity this quarter that has been affected by hydro. I guess that the company is taking measures to address that, and also by the lack of Argentinian gas and very high international gas prices. So I was wondering if you could give us an update on your natural gas supply strategy and outlook for the next couple of quarters because that will be very relevant for your profitability if hydro conditions continue to be challenging. Any guidance on managerial action to improve natural gas supply for the next quarter and perhaps mitigate that negative impact would be helpful. The second question is about the KPIs during the third quarter. There has been some deterioration in the collection, as you mentioned during the presentation. Could you elaborate on the reasons for the deterioration of collections? And the third question is on Slides 12 and 13, regarding your factoring strategy or factoring related to the stabilization mechanism. If you could help us understand how this is working and how that is being accounted.

Paolo Pallotti, CEO

Okay. Thank you, Javier, for your questions. I will take the first two, and then Giuseppe Turchiarelli will cover the second one. Regarding the gas strategy, just to give you an update on the situation: starting from the end of September, I would say, very early October, Argentinian gas has become available for the Chilean market. We began importing gas from Argentina, and this has continued until now. Just as an analysis, we don't have 100% certainty, but I can mention that today the flow beginning in early October started at 2.5 million cubic meters per day and is gradually increasing. Together with other players in the Chilean market, we have a firm contract with Argentinian counterparts. Considering the current situation, and given that energy demand in Brazil is somewhat lower now, we are importing gas from Argentina rather than Brazil. We see more stability in the availability of Argentinian gas. It is hard to predict how it will end, but this does provide some relief within the current situation. In terms of additional elements during this period, we are analyzing negotiations with our LNG gas contract counterparts to define delivery availability for the coming years, beginning in early 2022. This is important because we want to cover the entire year of 2022, especially considering that, typically, in a standard year, we would rely solely on Argentinian gas. Now, we are taking a more calibrated approach on this availability. We are also exploring other options for gas supply. The issuance of the rationing decree by the Minister, along with agreements signed with local communities in our water basins, allows us to maintain higher levels in the basins, considering the availability of Argentinian gas as I mentioned. The outlook for the next month, despite the limited contribution from melting snow and rain, is not negative. However, everything depends on how the situation evolves in the months to come. Additionally, commodity prices remain high when looking at the forward curve for the year-end and early 2022. Regarding collections: as we mentioned, Giuseppe and I are in the process of upgrading our systems, which requires adequate time to migrate 2 million clients from one system to another. It's essential that we align everything to ensure proper functioning. Clearly, once we are fully operational, we stand to gain substantially in terms of speed and accuracy. For the time being, we are finalizing the transition and have issued bids for September and finished by October. We will still encounter some weeks of delays that we plan on covering during November and December. As for factoring, I'll let Giuseppe take that.

Giuseppe Turchiarelli, CFO

Yes. Well, let me first say that so far we have sold $226 million in receivables from the price stabilization mechanism, and we have agreements to sell up to around $350 million. Thus, there remains a portion of equity that will be sold in the future. According to the decree release, as we've discussed previously, we can sell the receivables only once the regulator issues a decree stating exactly how much credit each bank has in the portfolio. That said, the impact we are experiencing in our profit and loss is significant because the discount for the receivables assumes cash collection by the end of 2027. This means that the delay in receiving money from 2017 until now is quite considerable. This is the reason for the high level of interest expenses this year that resulted from $226 million of factoring. This is the underlying reason for the substantial amount we are incurring in interest expenses.

Operator, Operator

Our next question will come from the line of Murilo Riccini from Santander.

Murilo Riccini, Analyst

I have some questions, and I apologize if I repeat any that have already been answered. Could you comment on the production of your solar facilities? Are they producing in line with your estimates? Are you seeing any seasonal variations in this regard? My second question is whether there has been any deviation in CapEx versus the expected guidance. Could we see a lower-than-expected CapEx execution since most of it is concentrated at the end of this year? Finally, to confirm the previous question about natural gas: you were unable to secure more gas PPAs during the past year. Is that correct or did I misunderstand something?

Paolo Pallotti, CEO

Murilo, thank you for your questions. Regarding the production of solar facilities, let me address that if we look at the expected generation curve projected at the beginning of the year, I believe there have been adjustments due to project execution delays stemming from the pandemic. In some cases, we had to wait until the borders opened to ensure workforce on site. We have managed the situation well this year regarding delays due to hydrology. We now are almost at our full capacity, though each site has its particularities. By year-end, we expect at least 900 megawatts to be connected to the grid. The remaining 250 megawatts will be connected in early 2022, while the remaining plant will require more time due to grid transfer. We are on track with site work, and we are progressing well with project connections. As for CapEx, we expect to remain within the forecasted levels for this year and we are also preparing for additional projects in the upcoming years. Our activities are advancing and we do not expect to lower CapEx for this year. Regarding gas, looking back at this year, it is essential to remember that our dispatch plans were discussed and agreed upon with the counterparts back in September. At that time, it was impossible to foresee the Argentinian gas shortage. Across the gas market in Chile, we were all challenged by resource constraints early in 2021. We successfully procured some LNG shipments and took some additional measures to secure our gas supply as necessary, leading to imports from Argentina later in March and April. However, in July and August, particularly during the first half of August, the demand soared, forcing us to purchase additional shipments. Looking ahead, we are working to achieve a more balanced delivery of gas throughout 2022 through negotiations with our counterparts and considering global pressures on the sector.

Operator, Operator

I'm not showing any further questions in the queue. I'd like to turn the call back over to Isabela for any closing remarks.

Isabela Klemes, Head of Investor Relations

Thank you all for your attention and for being here with us today. As I anticipated, we received questions. Thank you for your questions that we have received. If you have any other questions or comments, please let us know. Just send us a message for the IR team. Many thanks for your patience, and stay safe. Goodbye.

Paolo Pallotti, CEO

Thank you. Bye-bye.

Giuseppe Turchiarelli, CFO

Thank you. Bye-bye.

Operator, Operator

And this concludes our conference call for today. Thank you for your participation. You may now disconnect. Have a great day.