Earnings Call Transcript - ENIC Q1 2022

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to Enel Chile First Quarter 2022 Results Conference Call. My name is Lydia, 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 first quarter 2022 results. The presentation accompanying this conference call and Enel Chile’s Annual Report on Form 20-F, including under Risk Factors. You may access our first quarter 2022 results press release and presentation on our website, www.enel.cl, and our 20-F on the SEC’s website, www.sec.gov. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of their date. Enel Chile undertakes no obligation to update these forward-looking statements or 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 Mrs. Isabela Klemes, Head of Investor Relations of Enel Chile. Please proceed.

Isabela Klemes, Head of Investor Relations

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

Giuseppe Turchiarelli, CFO

Thank you, Isabela. Good afternoon, and thanks for joining us. Let me start with the highlights of the period on Slide 3. We continue to reinforce our leadership in the renewable market, growing with renewable capacity. We connected around 0.2 gigawatts of renewables to the grid during the first quarter of this year, and we still have over 1 gigawatt of projects under construction that will be added during the 2022-2024 period. Argentina's natural gas availability was the positive highlight of the year. During this quarter, the natural gas supply from Argentina was firm, which supported our natural gas traffic, and I will show you later on. Additionally, for this year, we contracted with Shell for around 12 LNG cargoes to fulfill our operation in Chile, a strategy that gives us more flexibility. The Annual General Meeting held on April 27 approved the new dividend policy of a 30% payout ratio for 2021 and 2022. This reflects the final dividend approved of CLP 0.26, with payments made on May 27, totaling a distribution for the 2021 fiscal year of CLP 0.37. Lastly, the Extraordinary General Meeting held right after the AGM approved the E-Mobility business carve-out, which considers selling the 51% stake representing a cash-in of €12.75 million in Enel Chile during Q2 2023. Now let’s move to Slide 4 to briefly talk about the market situation. During 2021, we saw a combination of factors that led to a particularly stressed situation in the Chilean electricity system. Some of these factors continue to impact the energy market, such as hydrology, a delay in the commissioning of some renewable projects at the country level, and the overall increase in commodity prices worsened by the Russia-Ukraine conflict. In addition, there have been several failures and maintenance issues with thermal power plants that have further pressured the system. All these factors have led to an increase in marginal costs during the first quarter of 2022. However, we were able to cope with this situation thanks to our solid LNG supply position, which includes our long-term LNG contract with Shell and the Argentinean gas supply that was successfully delivered during the first quarter. It is worth noting that we have 12 LNG shipments already committed for 2022, ensuring our supply for the entire period, of which we have already received 3 cargoes. On Argentinean gas, we imported an amount of gas equivalent to approximately 5 LNG cargoes in January and April 2022. Our renewable expansion will be core to bringing additional flexibility. Let’s now take a look at our generation portfolio on Slide 5. We are convinced that renewable expansion is a key factor to cope with the energy transition, providing us with a better position in the current challenging context. Therefore, during the first quarter, we connected 178 megawatts of solar capacity to strengthen our consolidated position in renewable development in Chile. In line with our digitization plan and asset optimization, we completed the sale of the Diego de Almagro thermal power plant of 24 megawatts during the first quarter. Chile is now at the forefront of the just energy transition, and we will continue contributing to consolidating the accounting position and reaching the environmental targets set out in the tariff agreement. Now let’s review our evolution in terms of network main KPIs that support the digitization movement on Slide 6. We continue to enhance the digitization of our commercial channel. In the first quarter of 2022, 86% of our client interactions were executed through digital channels. Despite the complexity introduced by the pandemic situation, we have been able to enhance the quality of customer care thanks to the introduction of our app and WhatsApp interfaces to improve communication with our customers. On the network side, our quality indicators continue to improve, supported by an increase in automatic digitization at all levels of our group. As a result, our sales indicator decreased by 15%. To conclude, energy distribution increased by 5% in Q1 2022 compared to Q1 2021, reflecting the easing of sanitary restrictions and the overall economic recovery. Now let’s see the main KPIs and highlights of our beyond commodity strategy that support the digitization and decarbonization on current consumption on Slide 7. Electrification has become one of the main pillars of the decarbonization process and one of the core elements of our strategy. In that sense, we continue to develop different and innovative initiatives, promoting new uses of energy and bringing real changes towards a sustainable future. E-Mobility is one of the challenges towards electrification. On this line, we are working on our infrastructure to accelerate growth. One example is the creation of Enel X main Chile, which will focus on E-Mobility services. During the extraordinary shareholder meeting held on April 27, 80% of our shareholders approved the sale of 51% of this unit to Enel, which benefits from economies of scale. In our view, the growth of these units shall bring additional value to our generation and resolution businesses. During the first quarter, we incorporated 107 new electric buses into the public transportation system associated with our circular cities project. This incorporation is part of developing the infrastructure and energy sales, improving the quality of services and bringing technology closer to the people. Each industry and each city are important for electrification. In line with that, we have developed with the Mandarin Oriental Hotel the first rooftop in Chile that incorporates photovoltaic panels and biodiversity, delivering unique and differentiated experiences with a positive impact on the environment. On this front, we continue to tackle new opportunities to build circular cities outside the Santiago region. Now in Slide 9 is a summary of our main financial highlights of the quarter. Let me start with a quick summary of the adjusted applied and a summary of our main financial highlights. In the first quarter 2022, we applied an adjustment of $21 million in EBITDA due to the impairment made on the coal stock of the period, with a bottom line impact of $14 million. For the same period of 2021, the adjustment due to the coal stock was $15 million with a bottom line impact of $9 million. The Q1 2021 adjusted EBITDA saw a 15% increase or $29 million, mainly due to a positive provision from the transmission business resulting from the conclusion of the regulatory status review process and indexation, as well as a higher volume in the elevation and distribution businesses. In terms of adjusted net income, this increased by 41%, reflecting higher EBITDA and lower financial costs in the period from the factoring of FX accounts seen in Q1 2021 to improve liquidity. CapEx reached $167 million, a 31% decrease compared to the first quarter of 2021, mainly due to connection activities for the new renewable capacity that ended in December 2021. FFO reached minus $151 million, presenting a significant quarter-on-quarter reduction, mainly due to the factoring of bank accounts made in Q1 2021 and the sales of our interregional submission line. Now let’s begin with the CapEx on Slide 10. 2022 first-quarter accumulated CapEx reached $167 million, out of which 93% was allocated to achieve the SDG goals, particularly devoted to the construction of our new renewable capacity. Customer CapEx totaled $15 million, mainly allocated to new connections and implementation of our new distribution commercial system. Asset management CapEx reached $29 million, a 35% increase compared to Q1 2021, mainly due to maintenance in our CCGT unit. Development CapEx reached $123 million, a 41% decrease, mostly driven by our renewable expansion program, which added nearly 0.9 gigawatts of installed capacity in December 2021 and the recently connected Biodel solar power plant. Regarding the network business, we executed lower CapEx due to the quality and digitalization projects made in Q1 2021. Let’s move now to Slide 11, where we have a summary of the first quarter adjusted EBITDA breakdown accounting for $26 million, 15% higher versus the previous year. Our origination portfolio mix resulted in a positive variation of $14 million, mainly related to $82 million higher PPA sales in Q1 2022, primarily explained by the increased foreign exchange of the Chilean peso against the dollar, new PPA agreements that started in 2021, and higher regulatory demand. New renewable capacity connected in December 2021 contributed $18 million in EBITDA over the period. A positive effect on variable costs and purchases, mainly due to more efficient thermal injection in the period, boosted by an aging commodity coverage instrument negotiated for the period. All these elements were partially offset by higher thermal generation costs due to commodity prices. The effects I’ve just mentioned were partially offset by higher spot prices in the system in Q1 2021, mainly due to higher commodity prices, hydrology issues, and several systems’ failures that were seen during the period. Following that slide, let me talk about the other elements that explain our EBITDA. Hydrology continues to have a negative time impact, with 0.2 power less hydro generation impacting our EBITDA by around $60 million. Network remuneration and demand accounted for a positive impact of $20 million, related to the release of the final transmission tag technical report issued by the regulator in the first quarter of 2022. This final tariff allowed us to reduce the provision we have maintained since the beginning of the new regulatory cycle that started in January 2020 and resulted in indexation in both network business and recovery of demand during the period, which increased by 5% in Q1 2022 compared with Q1 2021. Other effects accounted for $10 million, mainly related to lower OpEx in the network business due to the agreement signed in 2021 and higher capitalization in the generation business due to construction sales. Let me now provide more detail on generation on Page 12. Net electricity generation grew by 15% to 5.2 terawatt hours, mainly as a result of the higher dispatch of our power plants and increased solar generation in the period, partially offset by lower hydro generation related to the reduced water availability. Our energy sales increased by 27% during the first quarter of 2022, essentially explained by higher sales to 3 customers, primarily linked to new contracts, coupled with improvements in sales to regulatory capital. Adjusted EBITDA grew 4% to $180 million, reflecting the portfolio effect from previous maintenance. Regarding our sourcing, in addition to the production balances mentioned, we accounted for a total increase of 1.1 terawatt hour primarily on the spot market to meet higher energy demand during the quarter. Now let me provide more detail on the network. In the first quarter of 2022, our network business generated $50 million, marking a 71% increase compared to the first quarter of 2021, driven by previously mentioned factors, including temporary positive impacts on the transmission business. The dark line represents the indexation in both network business and demand recovery, which grew by 5% in the first quarter of 2020 compared to the first quarter of 2021, primarily due to reduced operating expenses from an agreement made in the first quarter of 2021. The network business performed better this quarter than in the first quarter of 2021. Demand increased, leading to higher price expenses, and the phase saw an upward trend in units this quarter. From a regulatory perspective, we anticipate that tariff reductions for the traditional business will be published in the first half of this year. Now on Slide 14, let’s go through the main drivers of our group EBITDA. Adjusted EBITDA increased 15% to reach a total of $26 million, mostly owing to better results in distribution and transmission businesses. D&A impairment and bad debt reached $77 million, $9 million higher than the first quarter of 2021, mainly related to higher depreciation and amortization in energy and power assets, primarily explained by exchange rate effects and the initial commissioning of new solar power plants. Also, there was a higher depreciation in the solution and transmission segment related to the transfer of new investments in operations and higher amortization of intangible assets linked to the new commercial system recently upgraded at Enel distribution. Financial results recorded a $36 million expense, declining by $11 million mainly due to lower expenses related to the factoring executed in Q1 2021 in the generation business on account receivable that arose from the tariff stabilization loan. Increases in income tax were basically related to the improvements in results during Q1 2016, partially compensated by higher tax credits due to increased monetary collection. Consequently, the adjusted Q1 2022 net income reached $89 million, representing a 41% growth compared to the first quarter of last year. Moving to data clock on this quarter 2022 on Slide 15. Q1 2022 FSL reached a negative $151 million, 151% lower than previous year figures, mainly resulting from negative one-off effects related to the factoring made in Q1 2021 of the special account, which has normalized during the period to manage the cash needs of the business operation, and also higher completed accounts within the stabilization framework compared to Q1 2021. This was further impacted by lower collections from corporate clients in Q1 2022 and reduced factoring on distribution receivable accounts in the period compared to Q1 2021, also affecting cash conversion. As for the evolution on Slide 16, our gross tax increased by $0.3 billion, amounting to $5.3 billion as of March 2022. This was due to a company loan granted by Enel Finance International of Chile for $300 million, mainly to fund CapEx and working capital lease. In terms of debt amortization, our scale remains low with an average maturity of 5.5 million. For the current year, we had around $400 million in debt levels. We have already initiated evaluations for several postings in local international markets to identify the most efficient option. The average cost of debt in March 2022 decreased to 3.9% from 4.4% as of December 2021 as a result of the financial management executed over the last few months. We continue to maintain a comfortable utility position. Let me point out some closing remarks. We are always looking for new opportunities to strengthen our generation portfolio, making it cleaner, efficient, and resilient to the commodity volatility that the world is facing. We will continue to focus on the electrification of the country to provide more electricity uses for our clients and communities. We are pleased to announce that we published our first integrated annual report. This report includes financial and non-financial information for the 2021 period, and we also published the 2021 sustainability report. Both reports are aligned with CPSG, GRI, and TCFD standards, and they are available on our website in the investors section. The report reflects how sustainability is fully integrated into our business model and risk management and value creation approach. It also demonstrates the company’s commitment to the energy transition, particularly through electrification and adherence to our lead deal commitment and the group’s commitment to the climate agreement. We are scaling an active portfolio management plan alongside other initiatives to support the implementation of our commercial strategy, strengthening a sound leverage strategy. Let me now hand over to Isabela.

Isabela Klemes, Head of Investor Relations

Thank you, Giuseppe. Before we start our Q&A session, I would like to remind everyone if you have any questions, please submit them in the chat or raise your hands on the call. I would also like to highlight that we have now published our integrated report, which is our first integrated report, along with our sustainability report. As Giuseppe mentioned, all reports are aligned with different taxonomies concerning climate change and others. We truly appreciate your feedback and any comments you may have on this report. Thank you very much, and now I will open the Q&A. Lydia, please?

Operator, Operator

Thank you. Our first question comes from the line of Murilo Riccini with Santander. Your line is open.

Murilo Riccini, Analyst

Hello. Hi, Giuseppe and Isabela. Thanks for the call. My first question comes from the generation side. What are your expectations for generation among your several sources? Maybe you could comment a little about how these 12 cargoes of LNG compare to the cargoes that you used last year, and what should we expect from hydro dispatches in the upcoming quarters? Also, can you provide details on the additional $199 million related to working capital that affected your FFO during this first quarter?

Isabela Klemes, Head of Investor Relations

Thank you for your question. We have now Giuseppe, please.

Giuseppe Turchiarelli, CFO

Yes. Hi, Murilo. Regarding the shipment, we have already committed all the cargo for this year and have already received three cargoes. This year, the situation is definitely better than last year due to the availability of natural gas from Argentina, which will cover us till April and we expect to receive more in the summer. Therefore, we believe that this year's gas availability from Argentina will allow us to feel comfortable regarding our sourcing. Regarding the FFO, this year, if you compare it with last year, we had a negative effect because last year we factored approximately $130 million related to the tax accumulated in that moment.

Isabela Klemes, Head of Investor Relations

Okay. Thank you, Murilo. Operator, do you have more questions?

Operator, Operator

Yes, our next question comes from the line of Javier Suarez with Mediobanca. Your line is open.

Javier Suarez, Analyst

Hi, Giuseppe and Isabela, thank you for the presentation and for taking my question. I have three questions. First, do you expect the negative working capital to be absorbed by year-end? Secondly, could you provide insights on your net debt-to-EBITDA ratio by year-end, particularly considering the projection of CapEx? Finally, could you give an update on the ongoing tariff review for your network business?

Isabela Klemes, Head of Investor Relations

Thank you, Javier. May I hand it over to Giuseppe?

Giuseppe Turchiarelli, CFO

Yes. Regarding the FFO and the negative results this year, these are strictly tied to one-off effects we had last year and also the timing of the CapEx. We expect to recover the situation by the end of the year, considering the evolution of our business. In terms of CapEx, we are confirming our earlier guidance of around €1 billion for the full year. For the net debt to EBITDA ratio, we expect to improve compared to 2021. Without asset rotation measures, we could be around 5x EBITDA, slightly above that. As for the last question regarding the tariff review, we currently lack detailed information, unfortunately. However, we expect to receive updates in the second half of the year.

Javier Suarez, Analyst

Thank you for your answers. To follow up, what level of net debt-to-EBITDA does the company consider sustainable for Enel Chile?

Giuseppe Turchiarelli, CFO

We are implementing several actions to improve our net ratio. One significant measure will be asset rotation, and we will communicate more as additional information becomes available. We believe it's necessary to reduce net debt to EBITDA, especially as Enel Chile escalates its ambitions in decarbonization. This situation is temporary because as all renewable projects come online, the situation will improve compared to last year.

Operator, Operator

Our next question is from Isaque Fernandez with Valence. Your line is open.

Unidentified Analyst, Analyst

Hi. Good afternoon, everybody, and thank you for the materials. I have a question on the package limit, the receivables for the stabilization fund. We know that the government and power generators are in talks, but could you share details on whether a new agreement might imply a higher limit for the fund or maybe a lower price for a longer duration agreement on the BPA side?

Giuseppe Turchiarelli, CFO

First, it's a good thing that the government is making progress on this decision. You'll know that by June 1, it will be utilized completely. Therefore, by July, we need a new solution. We don’t have detailed information about the new proposal yet, but we understand that it is better than the previous one as it aims to manage client perimeter with the system. We believe that this proposal is temporary and is an interim measure to find a better long-term solution.

Unidentified Analyst, Analyst

Thank you for the insights. One last question regarding the renewable projects winning bids lately for $20, $25 per megawatt-hour for solar and wind. With the new spot price conditions likely being much higher than before for at least a few years, do you think any of these projects set to start in 2023, 2024, or 2025 may be at risk of not being commissioned?

Giuseppe Turchiarelli, CFO

The price trend is indeed different than last year. When we decide to move forward with a project, we consider our sales portfolio. All of our projects and expected energy consumption are on track, but the question is broad. If we look at the potential seasonal competition, some players could be impacted by the price trend. However, this is a moment to plan for the short, medium, and long term. In the short and medium terms, price trends are likely to be higher than what we saw last year. However, we believe the long-term situation will return to previous estimates.

Operator, Operator

Our next question comes from Andrew McCarthy with CrediCorp Capital. Your line is open.

Andrew McCarthy, Analyst

Good afternoon Giuseppe and Isabela. Thanks for the call and for taking my questions. Regarding the transmission business, could you provide an update about the potential formal sale of that asset? Additionally, based on the presentation, should we think of the annualized transmission EBITDA going forward as in the order of $75 million to $80 million? Secondly, regarding unit coal costs, particularly in Q1, if we adjust for provisions, the unit costs appear very low. Can you confirm if I am interpreting that correctly and provide some background?

Giuseppe Turchiarelli, CFO

First, let me clarify about the tariff adjustment. The new tariff cycle started in January 2020. We began making provisions at that time. According to the latest technical report from the regulator, the provision we made since 2020 was underestimated. Therefore, we realized a positive impact for the current period. It is a one-off effect as we’re recovering what we estimated initially. Regarding the sale of our transmission assets, we are still in the process. Once we have more concrete information, we will communicate it to the market. Regarding the coal costs in Q1 2022, excluding impairments, the costs range from $150 to $200 per ton.

Isabela Klemes, Head of Investor Relations

Thank you, Andrew. Operator, do we have more questions?

Operator, Operator

I am showing no further questions on the phone line.

Isabela Klemes, Head of Investor Relations

Thank you all for your attention and for joining us today. I conclude our conference call. The Investor Relations team will be available for any doubts and feedback that you may have. Please contact us through our website, email, or telephone. Thank you very much for your attention, and have a good day. Goodbye.

Giuseppe Turchiarelli, CFO

Thank you. Bye-bye.

Operator, Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.