Earnings Call Transcript - ENIC Q3 2020

Operator, Operator

Good day, ladies and gentlemen and welcome to the Enel Chile 9M 2020 Results Conference Call. My name is Tania and I will be your operator for today. Please be advised that today's conference is being recorded. 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 in 9M 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 9M 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 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 morning, ladies and gentlemen and welcome to Enel Chile's third quarter 2020 results presentation. Thanks to all for joining us today. I hope this finds you and your family well and healthy. I am Isabela Klemes, Head of Investor Relations. Our presentation and related financial information are available on our website www.enel.cl at the Investor section. A replay of the call will also be available. There will be an opportunity to ask questions after the presentation via phone or via the chat through the link Ask A Question. Joining me today are CEO Paolo Pallotti; and our CFO Giuseppe Turchiarelli. Paolo will open the presentation with the main highlights and will give us an update on the global situation that we are facing, how the company is actively responding to it, and present some updates in the execution of our strategy. Then Giuseppe will walk you through our financial results and our operational performance. Let me remind you that media participants are connected only in listen-only mode. As always, our IR team will continue to be available to provide you with any detailed information you may need with respect to the included information in this presentation. Thank you all for your presence and let me hand over now to Paolo. Paolo?

Paolo Pallotti, CEO

Thank you, Isabela. Good morning to you all. Let's start by mentioning the highlight of the period on slide two. Over the third quarter, our market contract continued to be under pressure due to the neutral looking downturn. Despite this unprecedented extreme scenario, our operational resilience continues to support our clientele. All the recognition of our matrix and achieving pricing in developing the new renewable project after industrial calendar. We have recently announced the start of construction of Domeyko, the 204-megawatt solar plant and we are going to disconnect the Bocamina 1 by year-end. Within the next days, we will give you more details on the new projects aimed at decreasing city contamination and improving this region into cleaner use of energy. We continue to boost the counter-communication and support our key clients on the new and efficient use of electricity. Consequently, during this third quarter, we have developed new alliances in the public transportation area and in gas service station companies to enhance the development of our plan on electro-mobility to cover the route from Arica to Punta Arenas with 1200 charging points only six kilometers apart. On that let me mention our initiative on hydrogen. We have recently announced our participation with AME in the prospective partners ENAP, Siemens Energy, and Porsche to install a pilot plant for green hydrogen production through an electrolyzer fueled by electricity generated by wind. These pilot projects, which would be one of the largest of its kind in Latin America, will be located in the Magallanes Region in the south of the country. Let's move to Page three. We know the situation of COVID-19 is not over yet. Still, we would like to give you a nutshell of how our company performed and is performing during the center of crisis, especially when Chile and subordinate regions were locked down. 74% of our employees continue to work from home, minimizing the contraction of risk and preventing the disease from spreading. The few that are in the field are working with extreme safety measures. One hundred percent of our plants and network are fully operational, which ensures our service continuity. These results derived from the combination of technology procedures and our people and suppliers' strong commitment. Finally, but not least, we extended our commitment to our clients. Over this year, we have made available more options to access our company services and increased the number of digital payment platforms available to give our clients more flexibility in remote payments.

Giuseppe Turchiarelli, CFO

Thanks, Paolo. Let me start with a summary of our financial highlights, which we'll go through in detail in the following slides. Before I start, let me explain which adjustments we made in our figures both for 2019 and 2020. For what concerns 2019, we had adjusted EBITDA excluding the PPA in early termination effect and the net impact of impairments of Bocamina 1. For the 2020 figures, we have adjusted EBITDA and net income by the effect coming from the anticipation of the closing of Bocamina 1 and Bocamina 2, which details are described in the bottom of the slide. Now moving to slide 20. I will explain in more detail how our EBITDA and MOT online would have been performed excluding the COVID effect. Net of the COVID impact, our adjusted EBITDA would have been slightly higher versus last year, reaching $866 million, which is $58 million higher. The factors associated are $49 million related to the reduction of demand impacting our sales and distribution and generation, net of energy passes in the billion $9 million mainly associated with the higher energy losses, customer care, and other OpEx needed to face the contingency and Enel's lower activities. Moving down the P&L, we record a negative impact related to bad debt provision of $13 million driven by a temporary expansion of the historical collection period. Thus, net of COVID, our adjusted net income would have reached $377 million. Now let's go to our CapEx on slide 21. In the first quarter of 2020, our CapEx reached $264 million, mainly due to the increase of the CapEx allocated for our development activities.

Paolo Pallotti, CEO

Thank you, Giuseppe. As we saw in the presentation, the current situation represents a challenging scenario for the sector and our clients. Despite that, with our growth plan, we will consolidate our position as the leading renewable player contributing to the fight against climate change and supporting economic recovery. As you saw today during our presentation, we continue to strongly push for our market decarbonization, incentivizing electrification in the country and providing various solutions to our clients. Four of these are based on self-awarding our people, business reliability, digitalization, and quick reaction to external conditions. This week, I'm pleased to mention that we have been awarded an important recognition from the Leading Trade and Inter-American Development Bank, and in Chile, our company and four others in LatAm from different sectors were recognized by its sustainable standards for work on community development, providing affordable electricity to the weakest areas in the country, and reacting rapidly to proposed solutions to our clients since the start of social unrest. Responding and anticipating our client needs is the best way to ensure the quality and reliability of our services tied to continuous improvement of our digital platform. Finally, the resilience of our business sustaining strategy is supported by the strength of our balance sheet and by eventual additional liquidity measures to support any 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 for your attention. As we have anticipated, we have received questions via phone and chat in the webcast on this occasion. The Q&A section is open. Operator, please start.

Sara Piccinini, Analyst

Hello. Good morning, and thanks for taking my questions. I have three. The first one is on the slide where you show the working capital of $160 million. Could you please explain if this is a figure that has been expanded by the bad debt due to the current situation and if you see this $160 million to increase through the year-end or can it eventually be partly restored? Then the second question is on the guidance. You provided a new guidance during the first half that was at EBITDA $1.2 billion to $1.3 billion. Do you feel comfortable with these numbers or do you see any potential upside or downside? Any color on this? And then the last question is on the renewable projects that you have, you have a very interesting pipeline and obviously you will provide an update with the new business plan but just on these current projects that you announced, could you please explain the strategy behind them? Are these contracted projects with long-term prices? Are these integrated with your client portfolio? So do you see the pricing risk on these projects to be very limited? So this on the price side and on the CapEx side, how much is the CapEx per megawatt that you are spending for this new project? Many thanks.

Paolo Pallotti, CEO

Okay. Thank you very much for your question, Sarah. I will take the second and the third questions and I leave Giuseppe to handle the first one on working capital. Regarding guidance, clearly our review of the numbers is based on the main events that affected 2020 for the company. We think that we can speak to the figures that we released last July, maybe in the lower-end depending on the resolution of the last month and also depending on how some external effects may evolve in the last two months, but we will stick to the numbers announced last July. Regarding renewables and especially the assets of oil price, we are pushing for the recognition of our generation markets to have more renewable assets. This is because of both the convenience of the asset generating electricity and the demand we are receiving from clients. Now, especially large free clients are requesting more and more long-term contracts with renewable energy. We do not have a single asset linked to a single receivable client. We operate through a logical portfolio. We have a portfolio of clients that amounts to the range of 34, 35 terawatts over three years. We sell this portfolio of clients optimizing the generation of our fleets. In some cases, we buy from the stock market where convenient. So we don't see the need for a link between one plant and one client. In terms of CapEx, we are utilizing the cutting-edge technology for the solar plant and the large size we combine in our projects. If we look at the cost of investment, it is in the range between $0.7 million to $0.8 million for the solar plant and $1.1 million to $1.2 million per megawatt for the wind turbine.

Giuseppe Turchiarelli, CFO

Yes. The total amount of the working capital is influenced significantly during these nine months by the lower collection in the distribution business because of COVID, which amounts to $99 million, and the energy stabilization mechanism that amounts to $153 million.

Sara Piccinini, Analyst

Sorry. And do you expect this figure to increase or be reabsorbed by the year-end?

Giuseppe Turchiarelli, CFO

For energy stabilization, we expect that it will increase in the following quarter because of the mechanism that will work in the interim. And regarding the collection, we believe that we are able to start taking cutting measures and we expect to recover a significant part of this amount. Of course, it's difficult to understand how much, but the projection is positive.

Murilo Riccini, Analyst

Hi, good morning, guys. Hi, Paolo, Giuseppe, and Isabela, thanks for the call. I have a couple of questions if I may. First of all, talking about the portability bill that is being discussed in the lower house. If this deal is approved in 2021 or 2022, how are you seeing the migration movement going forward? What levels of demand do you expect for your regulated PPAs in the coming years? Which kind of mechanisms could be implemented to ensure the financial balance of the current regulated contracts? And do you see major impacts on your regulated PPAs? The second one is regarding gas activities. Could you provide more color on gas sales, and how do you expect this activity to perform going forward, please? And the last one is regarding CapEx. How do you expect to end the year compared to the guidance released last year? This is all. Thank you.

Paolo Pallotti, CEO

Thank you for your question. I will address the first and third inquiries and leave Giuseppe for the second one. Regarding portability, it's a good question. It may be too early to be specific as what we see today is a general proposal for the opening of the market, which should be quite extensive. Currently, Congress is discussing the possibility of moving through this law. We expect that if such a decision is made, it will take substantial time for discussion at the congressional level followed by government approval and the definition of the decrees for the market opening. Thus, we foresee that this process will likely extend between 2022 and 2023. Simultaneously, the rules for the opening are still not clear, as there is a proposal to have a full opening but still with geographical options starting from the most affected areas due to pollution or various country conditions. We see this as a natural evolution of the sector. At this point, it's difficult to evaluate the tangible impacts.

Giuseppe Turchiarelli, CFO

Yes. Regarding gas sales, the margin we achieved last year was associated with the price in the international market. This year, the market has changed dramatically with price drops in commodities, and thus we don't see such margins available this year. Next year, the scenario may differ.

Paolo Pallotti, CEO

Concerning CapEx, as we have mentioned, we continue with the implementation of our renewable projects. While 2020 is not a regular year due to the pandemic, we have had to manage successfully the continuity of construction under very strong measures. We think we can reach close to the anticipated figure but perhaps not the full amount as we continue to invest in all our planned projects.

Murilo Riccini, Analyst

Are you still negotiating the monetization of both receivables, the ones being accumulated in the generation unit and the other regarding the distribution unit?

Paolo Pallotti, CEO

Regarding the receivables coming from the stabilization mechanism, yes, we are negotiating with some banks in partnership with ABID and we believe that we will close the deal by the end of the year. For what concerns distribution, we will evaluate how to handle it in the following months. Both factoring will be conducted in early December.

Andrew McCarthy, Analyst

How high was your dividend payout on 2020 net income? Were you just paying a provisional dividend in January as you did last year?

Paolo Pallotti, CEO

Regarding the dividend policy, we think that clearly this year is based on the company's capability to generate cash. We will approach this similar to last year, where despite the impact on accounting, we decided to distribute dividends on a pro forma basis. We will decide on this in the coming months and again, we will distribute in January based on this approach.

Giuseppe Turchiarelli, CFO

Concerning the generation by source, we expect hydro generation in the second semester to be in the range of 5.8 to 6 terawatt-hours approximately. We expect a 70% probability of outcomes aligning with the melting season between October and December.

Isabela Klemes, Head of Investor Relations

Thank you for your attention. I would like to remind everyone that our Investor Relations team will be available for any further questions you may have. Have a nice day.

Operator, Operator

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