Earnings Call Transcript - ENIC Q1 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Enel Chile's Q1 2021 Results Conference Call. My name is Buena, and I will be your operator for today. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. 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 the forward-looking statements as a result of various factors. These factors are described in the annual Chile's press release reporting its Q1 2021 results. The presentation accompanying this conference call and Enel Chile's annual report Form 20-F, including under Risk Factors, you may access our Q1 2021 results press release and presentation on our website, www.nl.co 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 such results of which these forward-looking statements become accurate, except as required by law. I would now like to turn the presentation over to Miss Isabela Klemes, Head of Investor Relations of Enel Chile. Please proceed.

Isabela Klemes, Head of Investor Relations

Thank you. Good morning to all, and welcome to Enel Chile First Quarter 2021 Results Presentation. Thanks for joining us today. I hope this finds you well and your family as well. I am Isabela Klemes, Head of Investor Relations. Our presentation and related financial information are available on our website in the Investors section. A replay of the call will also be available. There will be an opportunity to ask questions after the presentation via phone or the chat through the link for questions. Joining me this morning are our CEO, Paolo Pallotti; and our CFO, Giuseppe Turchiarelli. In the following slide, Paolo will open the presentation with the main highlights of our business and operational performance. Then Giuseppe will walk you through our financial results. Let me remind you that media participants are connected only in listening mode, and our IR team will continue to be available to provide you with any pertinent information you may need concerning the figures included in this presentation. Thank you all for your attention, and let me now hand over to Paolo.

Paolo Pallotti, CEO

Thank you, Isabela. Good morning, and thanks for joining us. Let me start with the main highlights of the period on Slide 2. We continue to reinforce our leadership in the renewable market, growing with renewable capacity additions. We are adding 1.3 gigawatts of renewable projects under construction on an installed base of 1.2 gigawatts already in operation. We recently announced an agreement with IM2 Solar to develop 10 distributed small-scale projects, adding 75 megawatts by 2022. During the first quarter, we closed the transaction for the factoring of accounts receivable related to the application of the transitory mechanism for stabilizing electricity prices, totaling $180 million in nominal terms. For the first time since the creation of Enel Chile, the AGM held on the past 28th of March, appointed two women for the position of Director, tackling diversity at the Board level. We continue to advance in our commitment to promote inclusion and diversity within our organization. Lastly, the AGM has also approved the dividend proposal to be paid on May 28, reaching an amount of CLP 3.077 per share, not affecting our shareholder remuneration with accounting effect related to the impairment made during 2020. Let's now have a look at our decarbonization and renewables development. We constantly seek new ways to boost the energy transition, generate business opportunities, and push efficiency and innovation in all our business lines. Under this approach, we have developed different projects and initiatives as part of our action to tackle climate change and to continue promoting the energy transition and the challenges we face. For instance, we have connected the first 3 out of 10 small solar plants, known in Chile as PMGD, as part of the agreement signed with IM2. In the first phase of this project, during 2021 and early 2022, we will secure 75 megawatts of solar stored capacity directly connected to medium voltage networks in central regions of the country, close to high consumption areas. Finally, as we have already announced, we are currently developing different innovative projects, always embracing the opportunities of energy transition and the efficiency of our operations, such as the first scale wave energy converter in Chile. Now on our capacity under construction on Page 4. We are finalizing 1.3 gigawatts of capacity under construction. Most of these projects will enter into operation this year, contributing to the current decarbonization process. This will be a milestone for Enel's transition, both for us and for the country. Regarding our solar facilities, during the second half of the year, we will finish the construction of Campos del Sol, Azabache, Domeyko, Sol de Lila, Finis Terrae, and part of the first phase of the PNG project previously mentioned. The construction of those projects has faced various challenges due to the headwinds we are encountering since the pandemic, including lockdown restrictions, delays in environmental licenses, and most recently, the closure of the country's borders that have prevented specialized technicians from the new industry from commissioning some plants. Now let me give some detail on market conditions that drove the price volatility during the first quarter. On Page 5, during the first month of this year, we saw a combination of factors that led to a very unusual situation for the Chilean electricity system. On one hand, the system had less water availability at the beginning of the year, with 25% less potential energy stored in reservoirs. On the other hand, since October 2020, the Chilean market showed a deficiency in natural gas availability due to the interruption of Argentina's gas supply, which became more critical at the beginning of 2021. Since the first half of 2021, we implemented measures to improve gas availability and began buying additional LNG cargoes, first to supply our plants in central Chile and then negotiating access to the Mejillones LNG terminal to supply our natural gas power plant in the north. During the second half of March, we started selling natural gas to other generators. Within this framework, we were the generator that maintained the supply of LNG for its plants during the period while also operating our hydro facilities, achieving a generation of 2.1 terawatt hours, contributing to half of the national hydroelectric generation. All these actions allowed us to generate energy with our CGT plants in central areas and reduce the pressure on marginal prices during April. Let's move to the next slide, where I will explain why we believe that this is not a structural imbalance in the Chilean system and the challenges we need to overcome. As you can see on the left side, marginal costs increased significantly during the first quarter, moving from an average of $50 per megawatt hour in the first quarter of 2020 to $75 per megawatt hour in the first quarter of 2021. This reflects the conditions previously presented, primarily the result of hydrological conditions and the lower LNG and Argentina gas availability in the market, which forced the system to recover. I strongly believe that renewable growth based on solar energy is key to continuing to reduce our exposure to gas availability and commodities. We also believe that the situation we have seen is not an unusual one, but rather a short-term one-off condition of the market. Additionally, we think that natural gas will continue to play a leading role during the energy transition to maintain and guarantee supply and client stability in this regard, with Chile remaining an active participant in this technology. We firmly believe that as a transitional decision, any new proposal or technical rules on LNG usage should guarantee system security and profitability since this technology is the enabler of energy transition, complementing the viability of renewable sources. Finally, we have a 1.2 gigawatt portfolio of BESS projects and pipelines in different stages of development, ready to be executed as soon as the regulation is set for this technology. Battery energy storage systems provide an additional option to achieve more stability and diversification for the Chilean energy system. Now let's move to electrification on Page 7. During the first quarter, we signed a partnership with Sodimac to develop an infrastructure plan and install charging points across the country. It's worth highlighting that we have already installed charging points in our corporate buildings and distribution centers to supply our new last-mile electric trucks. In the same line, thanks to an alliance with Anglo-American, we have finished our first public electric charging station. It features 12 high-power charging points for public and private use under the charging as a service model. This agreement allows Anglo-American to use the terminal for eight years to supply their fleet of 17 trucks used to transport materials. Continuing with electrification strategies along with the Energy Sustainability Agency and the Minister of Energy, we have been able to find sustainable sports centers using a mix of technology that not only reduces the carbon footprint but also generates savings. Regarding the more serious initiatives, with the support of the Secretary of Communications, we are developing the first Smart Park in the district, which integrates smart lighting, analytical cameras, Wi-Fi, USB chargers, and other solutions. Now, network updates on Page 8. The distributed energy reflects the impact from standards, which was partially offset by increased consumption. Our investments and action plans have allowed us to provide more efficiency and agility, increasing the course of our service and reducing the total loss rate to 5% despite all the logistics restrictions we faced. Our energy distribution app reached more than 470,000 downloads, 81% higher than March 2020 figures. This confirms the improvement of our digital channels to stay connected with our clients. On the downside, the final report of the distribution reference model is expected to be published during the second quarter this year. Consequently, the regulator's technical report to fix the new tariff definitions should be presented in November. Any discrepancies between the regulator's and company's positions can be challenged in the panel of experts. Consequently, we expect the final distribution tariff decrease to be released during the first half of 2022. Regarding the transmission tariff cycle from 2020 to 2023, we expect the regulator's report fixing the new tariff cycle to be issued in the second quarter, which can also be challenged in the panel of experts. The transmission charges decree is expected to be published between the end of 2021 and early 2022. Let's move to Slide 9. Our efforts in digitalization have also allowed us to maintain our collection level at 98%. In that sense, today, 80% of the interactions with our clients are made through digital channels. Considering the negative economic effects of the COVID-19 pandemic, we have already promoted a payment agreement before the approval of the basic service load. Today, we are discussing conditions for the extension review of the second version of that load. In our view, the problem has been allowed to grow without considering its long-term impact on clients. It's time to find a comprehensive solution that would prevent the most vulnerable families from accumulating an increasingly heavy debt burden. State participation became essential in developing a recovery scheme where the state itself could help recover debts for those in need. Thank you. I will now hand over to Giuseppe.

Giuseppe Turchiarelli, CFO

Thanks, Paulo. Let me start with a summary of our financial highlights on Slide 11, which I will go into detail on the following slides. First, I will explain the adjustments we made in our first quarter 2021 figures. For the first quarter 2021, we adjusted EBITDA and net income considering the sector's rising coal stock impairment associated with Bocamina 2, our last coal-fired power plant. The coal stock impairment has an effect of $15 million on EBITDA and $10 million on the bottom line. All the details are described at the bottom of the slide. In the following slide, I will address each of these figures in more detail. Now we will start reviewing the details of our CapEx allocation on Slide 12. In the first Q 2021, our CapEx reached $272 million, mainly dedicated to the construction of our new renewable capacity. Customer CapEx reached a total of $15 million, in line with the first Q 2020. The CapEx was primarily allocated to building new connections and maintaining the continued supply. Asset management CapEx reached $24 million, $42 million, which is 32% higher than the third Q 2020, mainly due to higher maintenance activity in distribution and digitalization projects in renewables. As of March 21, development CapEx reached almost $235 million, a $134 million increase from the previous year, largely driven by renewable expansion and the development of our distribution business to continue the digitalization of our network. Let's now start with the Q first adjusted EBITDA breakdown on Slide 13, which accounted for $220 million, 18% lower than 2020 figures, mainly due to challenging hydrological conditions leading to more intensive generation in the fourth Q 2020 during the winter season, which decreased hydro reservoir levels. The lack of gas in the system resulted in higher spot prices, which increased the cost of ANG needed to supply our contracted demand. The negative PPA margin effect was primarily associated with the lower price of our regulated PPA due to commodity taxation. New agreements began with a new concept from the Enel distribution free customer portfolio at the start of the year. Lastly, around 50% of the negative variance is explained by the appreciation of the Chilean pesos in the period compared to last year, considering that our book currency is in Chilean pesos and our PPAs are U.S. dollar-denominated. Network business variances stem from lower demand, mainly in regulated customers due to lockdown continuation and provisions for lower remuneration on distribution tariffs retroactive to November 2020. All these effects were partially offset by $29 million from net commodity coverage, $8 million from lower depreciation of channel hedges versus U.S. dollars related to our U.S. dollar loans, and $8 million due to the lower effect of the stabilization mechanism account readjustment and efficiency in OpEx in the generation business. Let me now give you more detail about the generation KPI on Page 14. Our first quarter generation reflects a less efficient mix due to lower availability compared to the first quarter of last year, which was partially offset by renewables and thermal production. Our energy sales show a reduction in regulated energy due to lower demand and the termination of PPAs, more than offset by increases in the free market due to new contracts with Anglo-American and clients from energy distribution as part of the unbundling regulation. This combination accounts for a 0.3% increase from the spot market and a 0.6% increase related to our distribution retail business contracts. In the next slide, we present a summary of the performance of our generation business, including Enel Chile and energy Power Chile, and our network business, including Enel Distribution and Enel Generacion. The main balances were already explained in Slide 15. Now on Slide 16, let's go through the main driver of our group machine. We reached $76 million, a variance of $16 million mainly related to lower depreciation and amortization in LNG generation, primarily due to the impairment made in Bocamina 2 in 2020. Net financial results totaled an expense of $52 million, an increase of $16 million, primarily due to higher costs related to factoring executed in the generation business on the stabilization mechanism account. This effect was partially offset by higher financial expenses capitalized in the first Q 2021 and lower financial costs of debt due to the Chilean peso appreciation versus the U.S. dollar. Income tax and minority reflect the impact of lower EBITDA and higher financial expenses. Moving to cash flow on Slide 17. First Q 2021, FFO reached $213 million, higher than the previous year's figures, mainly due to higher net working capital, largely explained by cash received from the factoring of stabilization mechanism accounts and client receivables in distribution totaling around $200 million. The transmission line sales in 2020 impacted cash this year by $29 million, partially due to a buyback during the first quarter of last year and lower new accounts of the stabilization rate. Higher income tax during first Q 2021 also played a role mainly due to increased income tax payments in the generation business and higher financial expenses linked to the stabilization mechanism account factoring. Let me now take you to Deck on Slide 18. Our gross debt as of March 2021 is in line with December 2020, amounting to $3.99 billion. Our net debt in the period compared with January 1, 2021, increased by $79 million, directly associated with our intensive CapEx plan linked to the 1.3 gigawatts under construction that will start generating EBITDA in the second half of the year. The average cost of our debt remains stable at 4.7% in the first Q 2021. We expect the cost of debt to remain stable throughout 2021. Let me highlight that we just issued our first green company debt of $300 million with a maturity of 10 years and a rate of 2.5%, a very competitive interest rate demonstrating the recognition of our de-risking strategy. The new loan considers the KPI of CO2 emissions from our generation fleet by 2023. In terms of amortization, our schedule remains smooth with an average of six years and around $300 million maturing in the next two years. In terms of liquidity, we maintain $900 million, providing us flexibility to face potential market headwinds. Now I will hand over to Paolo.

Paolo Pallotti, CEO

Thank you, Giuseppe. Let's move to closing remarks. Despite the challenging circumstances, Enel is taking all necessary actions to mitigate the impact of growth affecting the country and the effects that COVID-19 has caused to achieve our guidance for 2021. Our clients will remain at the center of our strategy and will be the focus of our efforts in improving service and enhancing the customer experience based on our digital operations. This year, our decarbonization plan will focus on the execution of renewable projects to achieve our target of 2.4 gigawatts of new capacity as proposed in our 2021 to 2023 plan. Our business resilience and sustainable strategy are supported by our balance sheet strength and long-term vision, especially against the sector headwinds we are facing. Thank you for your attention. Let me now open the Q&A session. I will hand over to Isabela.

Isabela Klemes, Head of Investor Relations

Thank you. As an anticipation, we will receive questions via phone and chat for the occasion. The training session is open. Operator, you may start.

Operator, Operator

Your first question is from Murilo Riccini of Santander.

Murilo Riccini, Analyst

My first question, do you expect higher provisions in the coming quarters due to the extension of the pandemic? And could you give us an update on the last talks and developments on the basic service law? The second one if you are expected to review your guidance during the coming months. And the last one, could you elaborate a bit more on the storage plan? Are the batteries you will be installing related to the arbitrage of marginal price or more focused on providing complementary services? How are you seeing the investment costs in these technologies that you have access to? And when do you expect the installation of this type of technology to accelerate in Chile?

Paolo Pallotti, CEO

Thank you, Murilo, for your questions. Let's start with the answer on the basic service law. You know that this has been a long debate here in Chile. It has been stalled. The current situation is that there are two projects coming from the Senate that are moving forward and will be voted on. The content of these projects is to extend the deadline until the end of this year and to extend the number of payments allowed to clients to 48 quarters. Additionally, the perimeter of clients allowed to access special repayment agreements will expand to 80% of the clients in the social register in Chile. This is the current situation, and we expect it could be approved very soon. At the same time, there is ongoing debate, introducing for the first time a different approach in the sense that there is a growing understanding of the impact this extension may have on clients. There could be technical discussions between the Senate and the government to fix certain rules involving the state of Chile in the final scheme to recover the debt. We are eager to understand what the outcome of these discussions will be. Regarding the guidance, we do not issue any change today. We are working to recover the gap we experienced in the first quarter and have an action plan to realign our results. We'll see in the coming months what the outcome of the action plan is. Regarding storage, we believe it's an essential element in the system. We see storage linked to renewable facilities, especially solar facilities, as it can stabilize the output. Energy storage should also enable energy flow from the north to the central area where consumption is higher. Thus, these are some additional services that storage can provide to the system. We're waiting for regulations to allow us to start selecting our partners, and we have some projects ready to install as soon as the regulation is finalized.

Andrew McCarthy, Analyst

I have three questions. The first one, just on the guidance and the likelihood of hitting the $1.4 billion to $1.5 billion target for this year. Just trying to think through what needs to now go right for that to be achievable? I mean, maybe could you talk a little bit about what you need to happen in terms of the hydrology, the availability of gas, the proper operation of coal plants in the system on the generation side of the business, and what you're seeing maybe today on those fronts and whether that's maybe going to help in the coming weeks drive down a little bit the prices? That's my first question. My second question is, I was wondering if you could provide a bit more color on the margin you might be expecting to make on this PMGD business, and you talked about 75 megawatts between 2021 and 2022. How much scale could that business have longer-term? And then the final question, trying to understand the saving you saw in the net commodities coverage of $29 million in the quarter, whether that was a one-time effect or not? Those are my three questions.

Paolo Pallotti, CEO

Okay. I will take the first two, and I'll leave the last to Giuseppe. Regarding guidance, our numbers are indeed affected by various elements, such as what has happened during the first four months. This can have a positive or negative effect depending on the evolution. The contribution from our project is also critical in reaching our guidance, and we are focusing on their development to meet the necessary deadlines. The situation is complicated by the pandemic's impact, which continues to affect our ability to have people on-site to support operations. Gas availability entering this season looks promising according to our LNG delivery schedule. However, we must remain cautious regarding the water situation, which could impact availability of Argentinian gas. We have received some news regarding improved availability, and we expect these contracts will come into play by September or October. Overall, this is not a guarantee but something we're optimistic about. The focus is on internal actions to recover certain elements and confirm that structure. Regarding your second question, the PMGD margins reflect the beginning of our agreement to have solar facilities in the central area of the country, which is competitive generation based on solar. For the subsidiary business transitioning from distribution to generation, I will pass it to Giuseppe.

Giuseppe Turchiarelli, CFO

Well, in general, we need to cover our exposure to the commodity. The impact will depend on the trend of commodities going forward. We saw this positive impact versus last year, and we'll need to monitor the commodity trend as we move forward.

Isabela Klemes, Head of Investor Relations

Operator, I don't know if you have any other questions?

Sara Kuchanny, Analyst

Can you hear me? The first question is on working capital evolution. We see the positive effect on working capital in this first quarter. If you can comment on the dynamics behind that? And how do you see the evolution during 2021? The second question is on the negative impact in the first quarter related to the PPA margin. Do you see this factor continuing in the coming quarters? And if yes, what are the dynamics behind that? And third question is on the regulatory review on networks. If you had any contact with the regulator? And what do you expect from this review? Lastly, can you update us on the evolution of the free market and the impact you see on the company's margins?

Paolo Pallotti, CEO

Thank you, Sara, for your question. I will take the last two and leave the first two to Giuseppe. Regarding networks, there are two tariff revisions ongoing. There is a formal contract with the regulator since there is a committee composed of representatives from our company that has regular meetings with the regulator. They are currently working mainly on the distribution side, especially at the consultant level to help the regulator in the issuance of their report. Based on this report, the regulator will issue their internal report. This process requires time, and we believe that this discussion will take place in the second half of this year, and the distribution tariff decrease may be fixed by the first half of 2022. The process regarding transmission may be more advanced than distribution. We anticipate it will be fixed by early next year. For the second question regarding the free market evolution, we have not seen significant progress regarding portability law. The current focus at Congress is on the basic service law and other changes in the energy sector. Regarding the current situation, some residual clients can opt for the free market, which is happening more, but it's still small compared to the overall size of the free market. I will pass it over to Giuseppe for the first two questions.

Giuseppe Turchiarelli, CFO

Yes, regarding net working capital, as I said on Slide 17, the variation results from the factoring of the stabilization mechanism account and client receivables in our distribution company. We are progressing with this factoring and anticipate moving ahead with factoring in the next two quarters. The negative PPA margin relates primarily to commodity indexation with regulated PPAs. The lag time on commodity indexation is six months, so the indices we saw were related to the previous six months. We will need to monitor how commodities evolve over the coming months regarding the second PPA margin-related question. Additionally, the new contracts will change based on the generation portfolio.

Rodrigo Mora, Analyst

Thank you for the presentation. I would like to understand why the company is making an impairment of the coal stockpile. The second question is related to the distribution business. Can the company cut service to customers with high consumption? I read an interview with the CEO of Enel Distribution mentioning that some customers who consume around 500 kilowatt hours per month, which is more than 2.5 times the average consumption, didn't pay their bill. I want to understand if the company can cut or is able to cut the service to those kinds of consumers. Lastly, I would appreciate your input on the impact of the EBITDA or the free customer business that Enel is transitioning from distribution to generation this last year.

Paolo Pallotti, CEO

Rodrigo, I will take the second question and leave the numbers to Giuseppe. This question is crucial because if we look at the concession area of Santiago and consider residential clients, we have an average consumption of around 220 to 230 kilowatt hours per month. What you are referring to are large domestic clients who consume more than 1,000 kilowatt hours per month. We have several such clients who currently are not paying, and the point is that, under the law, we cannot cut services to residential clients. This is the current law, and we are calling for a change to focus on supporting only those truly vulnerable families defined in the latest guidelines. This is an important discussion point we are actively exploring. Giuseppe, can you elaborate on the coal stock impairment?

Giuseppe Turchiarelli, CFO

The impairment of the coal stockpile is in line with the accounting treatment we followed last year when we impaired the assets. Based on the situation of Bocamina, we will reevaluate the stock quantity and make impairments if necessary in the coming quarters. We need to ensure the coal stock values reflect this situation accurately, especially since these stocks are needed to produce energy for the system. We look at our coal the same way we analyze our generation capabilities. Regarding your final question about the transition of clients from distribution to generation, it does not generate any direct financial impact since it is essentially moving from one segment to another. Last year, the margin of this contract was $6 million.

Paolo Pallotti, CEO

I hope that clarifies your questions. Please continue, and I will respond to the next queries.

Operator, Operator

The following questions are related to the process of transmission, the current evaluation of transmission assets, and the preliminary report released by the National Commission of Energy. What is the current situation with the report, and what are the following steps the company must take in response to it?

Paolo Pallotti, CEO

We can provide comments on this preliminary report. The deadline for comments is the 18th of May, and we are providing our feedback. The regulator will collect comments from involved parties and then publish the final report. Once we analyze it, we will consider it, and if there are discrepancies, we can go to the panel of experts. For now, this is our process.

Sebastian Ramirez, Analyst

I got two questions. One is that I was keen to understand what you expect in terms of differences between injections and withdrawals within generation, given the large amount of renewables entering the system. Do you see any meaningful congestion regarding your operations? The other is on mid-term expectations for CapEx going forward; what should we think in terms of growth going forward, and should we expect that level of CapEx to be maintained longer than the investor plan suggests?

Paolo Pallotti, CEO

Regarding the injections and withdrawals, we expect that our clients and energy generation in various regions will remain balanced. We have large contracts with several industries in northern Chile, and we don't anticipate major bottlenecks in our operations despite the influx of renewables. As for CapEx expectations, we continue to follow our investment plan aiming for 2.4 gigawatts of renewable capacity by 2023. We don't foresee any alterations to our current CapEx levels; they are aligned with our growth objectives.

Isabela Klemes, Head of Investor Relations

Thank you for your answers. I would like to thank everyone for joining us today. If you have any other remaining questions, please feel free to reach out to our Investor Relations team. Thank you very much, and have a great week.

Paolo Pallotti, CEO

Thank you. Bye-bye.

Giuseppe Turchiarelli, CFO

Bye-bye.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.