Yahoo Finance Enel Chile S.A. (NYSE:ENIC) Q4 2023 Earnings Call Transcript
Enel Chile S.A. (NYSE:ENIC) Q4 2023 Earnings Call Transcript February 29, 2024
Enel Chile S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, ladies and gentlemen, and welcome to Enel Chile’s Full Year and Fourth Quarter 2023 Results Conference Call. My name is Carmen, and I will be your host for today. [Operator Instructions] Please note 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 Enel Chile’s press release reporting its full year and fourth quarter 2023 results, the presentation accompanying this conference call and in Enel Chile’s annual report on Form 20-F, included under Risk Factors.
You may access our full year and fourth quarter 2023 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 would now like to turn the presentation over to Ms. Isabela Klemes, Head of Investor Relations of Enel Chile. Please proceed.
Isabela Klemes: [Foreign Language] Good afternoon, and welcome to Enel Chile’s 2023 fourth quarter and full year results presentation. Thank you all for joining us today. Joining me this morning is our CEO, Fabrizio Barderi, and our CFO, Giuseppe Turchiarelli. As announced yesterday by our Board of Directors today is the last day of our CEO, Fabrizio Barderi, after 2 years in charge of our company, assuming a new position within Enel S.p.A in Italy. During the period that – the new CEO shall be decided, Giuseppe Turchiarelli shall accept being as Interim CEO of Enel Chile. I take the opportunity to thank Fabrizio for all his contributions to our company over the years. Now our presentation and related financial information are available on our website, www.enel.cl in the Investors section and in our app investors.
In addition, a replay for the call will be soon available. [Operator Instructions] In the following slides, Fabrizio will open the presentation with our key highlights of the period then go through our portfolio management actions, regulatory context updates and guidance achievements. Finally, Giuseppe will give you a view of our business economics and financial performance. Thank you all for your attention. And now let me hand over the call to Fabrizio.
Fabrizio Barderi: Thank you, Isabela. Good afternoon, and thanks for joining us. Let’s start our presentation with our highlights on Slide 3. I want to start with our portfolio management highlights. During the year, we added around 600 megawatts of new renewable energy capacity, including our first BESS project. All these additions will support us in our long-term mission of decarbonization and the continued optimization of our portfolio. As of today, we have received a commercial operation date and cost from the system operator for around 1.4 gigawatts, which is in line with our expectations announced in our last 2 Investor’s Day. This year, we had a remarkable performance of our Generation portfolio. The better-than-expected hydrology due to the El Nino phenomenon and all the gas trading activities’ outstanding performance supported the achievement of our goals and targets.
On the regulatory side, we have some important news to share. First, the Chilean government presented a draft bill to congress introduced the stabilization mechanism. The PEC 3.0, a very important positive and important sign of stability to the energy market. At the same time, the regulator has published the final technical distribution record. Referring to the 2020-2024 cycle, this step was very important to reduce events or uncertainties to the Distribution business remuneration. I will deep dive into most topics later. Finally, I am pleased to announce that will beat all our financial targets for 2023. which reflects our confidence in Enel Chile’s future and solidity. Giuseppe will give you more color on this. To conclude, during 2023, we recovered around $358 million related to the stabilization mechanism, the PEC 2, include the current project, which represented around $180 million, a positive impact in our net income.
Now let us move to Slide 4 to review how we executed our goals and strategy towards a more efficient Generation portfolio. Over the last few years, we have significantly increased our renewable capacity through a diversified pipeline across different tariffs of the towns, increasing our exposure to solar close to center of consumption, to wind and more recently to storage. During 2023, we connected almost 600 megawatts of additional net capacity. In Q4, we connected 106 megawatts related to the last phase of our power plant in Sierra Gorda, 34 megawatts of La Cabana BESS and 39 megawatts of some solar PMGD. During the year, we have also executed some asset rotation in the form of the sale of 416 megawatts of solar generation assets to Sonnedix in the North of Chile and the sale of our Huasco gas turbine power plant.
Both were initiatives aimed at optimizing our portfolio and resizing our capital. Regarding costs, since January 2023, we have received the authorization from the National Electricity Coordinator to begin commercial operation for 1.4 gigawatt. This includes projects such as Campos de Sol, Valle de Sol, Finis Terrae, Guanchoi, Sierra Gorda and the recent announced El Manzano and La Cabana. Now let’s look at some updates on the hydrological situation and gas optimization activities on Slide 5. Favorable agrological conditions during 2023 allowed us to reach a higher-than-expected hydro production, exceeding by 25%, the level recorded in 2022, totaling 12.2 terawatt hour of hydro generation, a scenario that we had seen since 2010. The agrological situation in our reservoirs is also very positive year-to-date, when compared to last year’s figure, especially in the South.
We have included an updated view of our reservoir levels in the annex of our presentation. Rainfall during 2023 surpassed the last 10-year average period, allowing us to have comfortable water availability until the end of the first quarter of 2024. In fact, as of February 3, 2024, water available for generation was equivalent to 1,800 gigawatts hour, 150 gigawatt hour more than the same day in 2023. Regarding our gas optimization and trading activities, we have guaranteed natural gas and LNG supply to our fleet and executed some very profitable sales to local industrial and mining customers and also to foreign market. The foreign market rates were negotiated during 2022 at very attractive price. And the deliveries were mainly concentrated during the first and fourth quarters of 2023, totaling 4 cargoes sold overall.
All the above, contributed around $300 million as margins for 2023. For 2024, we also see the situation as very comfortable. For reference, we have already executed a new firm agreement with several Argentinian gas suppliers for up to 4 million cubic meter per day that are already in operation from October 1 until April – end of April 2024, allowing us to optimize our combined cycle and generation cost. In addition, we have already secured new agreements for 2024 during the period with Argentinian suppliers for up to 2.6 million cubic meter per day from May to September 2024, giving us security to optimize our portfolio during 2024. Now let’s look at some important updates related to the regulatory context on Slide 6. In January this year, the Ministry of Energy presented a draft bill related to the stabilization of energy mechanism with the purpose of continuing the PEC mechanism and mitigating the projected tariff increases to final [indiscernible].
At the same time, they aim to improve the client protection mechanism known as MPC mechanism, to a low gradual repayment of accumulated debt with the generator and establish a transitory subsidy for the most vulnerable clients. Also, during January, the draft bill was reviewed and approved by a Special Energy Commission from the Senate. And now after the Congress annual leaves that end during the month of February, the draft will be discussed first in the Senate plenary and then in the chambers of Congress. Let me say that we consider government proposals very solid and aligned with Chile’s position and growth in incentives investments towards the decarbonization. Let me quickly explain the PDL proposal, starting with how this mechanism is financed.
The PDL considers the 3 sources of finance. First, a temporary state subsidy until 2026 of total $20 million per year, then the public service charge, which involves a regulated and pre-clients and that amounts to around $200 million annually. And finally, the client protection mechanism charge that would be applied only to regulated customers up to 2035. Both charges shall have different fees depending on the consumption of each line. With this finance mechanism in place and also the gradual increase in the tariff, which will depend on the client consumption, shall support the recovery of the generator’s account to receivables generated since the enforcement of PEC 1 and PEC 2. In our case, on December 31, we had an account receivable related to the tariff already net of factoring of $759 million.
In addition, the PDL has confirmed that PEC 1 settlement shall occur up to 2027. Also, the PDL modifies the PEC – the PEC 2 by extending the settlement limit period from 2032 to 2035 and increasing the total amount of the fund by $3,700 million, totaling $5,500 million. We expect that the PDL will be approved and published to, in the first semester for 2024, considering the urgency of the decision and the fact that the next regulatory auction is scheduled to be held during April. Regarding the distribution tariff review, the regulatory’s final report for the 2020-2024 cycle was published early this month of February. And the tariff decrease on the distribution 2020 to 2024 remuneration cycle should be published within the next few months.
And let me say that we had a more positive view of the process when comparing to 2023. Additionally, by November 2024, we should start the distribution regulatory cycle comprising the 2024-2028 period. We have still at the very beginning of this process. Currently, the external consultant responsible for realizing the reference model company studies had started this work. The results of this study shall be known in the following months. Now let us move to Slide 7 to review our main KPIs of 2023 versus our guidance. In terms of renewables and BESS execution, we have achieved our goal reaching 77% of renewables and BESS contribution in our metrics on 31st December 2023, contributing to our commitment to the country’s energy transition. The latter also enabled us to reach our goal of 74% greenhouse gases free production over the total during 2023.
Let me point out that our efforts intending to improve efficiency and quality of the Distribution business have led us to the increased indicators such as target and also to achieve our goal regarding network losses in spite the more complex market scenario. On the electrification efforts, we have all touched our goal. Now let us review on to Slide 8, our main financial indicators over our 2023 guidance. During 2023, we experienced a significant improvement in our operation, mostly explained by a more efficient generation mix related to a better agrological situation and the contribution of our optimization portfolio action plans developed and executed during the last year. That later coupled with the conclusion of optimization initiatives, such as the sale of Arcadia last October, enabled us to achieve our EBITDA and net income committed.
On the last financial year, we have reached the upper range of the guidance announced during 2023 Investors Day. Giuseppe will provide details on our performance on EBITDA and net income in the following slide. All the above guaranteed our leverage and net debt-to-EBITDA committed, meeting a comfortable – recommending the maintenance of the committed payout which was also the company’s Board of Directors recommendation and was also in line with our guidance. Now I will hand over the call to Giuseppe, the floor is yours.
Giuseppe Turchiarelli: Many thanks, Fabrizio. Good afternoon to all our investors connected. I will start my presentation with a summary of our main results of this year. To better evaluate our company earnings performance, we present the 2022 figures as a pro forma that includes the following adjustments. First, the full year 2022 EBITDA has been adjusted by the impairment of the coal stock and the write-off of generation projects totaling $124 million. This adjustment was $63 million in Q4. Likewise, these adjustments affected the bottom line by a total of $83 million in the full year and $41 million in the Q4 of 2022. Additionally, we have excluded from these figures in order to better evaluate the operational performance of our company, two one-off effects.
The operational results and capital gain of the sale of Enel Transmision and the impact of the agreement with Shell, both executed in December 2022 totaling $643 million in the full year and $568 million in Q4. These adjustments affected the bottom line by a total of $1,230 million and $1,185 million in the full year and in the Q4, respectively. Regarding the FFO, the figure for 2023 – in 2022 have been adjusted only by the sale of Enel Transmision. It means that 2022 figures include the Shell agreement, in 2022, in terms of cash, the adjustment to $20 million in the full year and $2 million Q4. In 2023, we have excluded $310 million paid in taxes on capital gains obtained from this transaction. Considering these adjustments, let’s see how the earnings indicate on an FFO performance.
As you can see in the full-year period and the fourth quarter 2023, our earnings indicator present an important improvement compared to the 2022 figures. Regarding EBITDA and net income, the improvement is mainly explained by a more efficient generation mix thanks to the outstanding hydro renewables performance and due to greater gas trading activities, we will see more detail in the following slides. Regarding the FFO, the ‘23 full year figures show a relevant improvement impacted mainly by the effects of factoring executed for around $345 million and other cash management optimization actions. Let me remind you that the Q4 2022 FFO includes $520 million agreement. We will see more details later on. Let’s review now progress on CapEx. Our 2023 total CapEx reached $804 million, basically in line with our guidance for the year.
I would like to highlight that 78% of our total CapEx was related to the renewables and storage in line with our strategy of rebalancing our portfolio to adapt it to the new market context. In addition, 15% of our CapEx was mainly related to client new connection in grids, considering the growth in our customer base. Customer CapEx totaled $78 million, 7% higher than the previous year, mainly associated with the new customer connections. Asset management CapEx reached $129 million, 36% lower than previous year, mainly due to lower maintenance activity in conventional generation plants in Distribution business. Development CapEx reached $597 million, representing a decrease of 33% versus last year’s figures in line with the remaining renewable portfolio under construction.
Let’s now take a look at Slide 12, where we have the summary of the fourth quarter 2023 EBITDA breakdown accounting for $471 million. First of all, let me remind you that we have included the pro forma of our fourth quarter 2022 EBITDA for comparison purposes. We have been – we have excluded from the 2022 EBITDA, the impact of the one-off effect from the sales of transmission that we [indiscernible] Chile and the agreement signed with Shell. Taking this into the consideration, our fourth quarter 2023 EBITDA was around $71 million higher than 2022 pro forma, mainly explained by the following: First, a positive contribution from hydro and renewable assets totaling $41 million, mainly related to the improved hydrology in the quarter. Second, a positive effect of $83 million on variable costs, mainly explained by lower withdrawal, spot price, lower transmission fees and savings due lower fuel consumption, both as a consequence of best hydrology in the period.
In addition, a positive contribution of $80 million related to the gas optimization activity, mainly due to increased gas trading activity for 0.9 tera BTU made in Q4 2023. At a very – increase in prices, negotiating in end of 2022 when the international prices were very attractive. The above maintenance effects were partially offset by $115 million from lower PPA sales in Q4 2023 primarily due to lower average PPA price, mainly related to lower commodity indexation in the regulated market. $18 million in OpEx and other costs mainly explained by our new renewable capacity inflection across all the businesses and negative effects in [indiscernible] due to a higher recognition of gross margin in 2022 partially offsetting the positive effect in distribution margin of $3 million, mainly due to indexation.
Let’s move on to the next slide, where we will review the full year EBITDA breakdown summary accounting for $1,237 million. In the full year 2023, our EBITDA increased $358 million versus 2022 pro forma, mainly explained by the following effects: first, a positive contribution from hydro and renewable totaling $213 million, mainly relating to improved hydrology volumes; second, a positive effect of $94 million in variable costs, mainly explained by lower spot price in the period due to a better hydrology since June 2023; a one-off effect of an agreement with one of our PPA suppliers and lower transition fees, partially offset by a lower [indiscernible] generation margin. In addition, a positive side of $81 million related to the gas optimization activities, mainly due to increased gas trading activities from 1 tera BTU in the full year.
And finally, a positive contribution of $27 million in grid margin, mainly due to increased remuneration related to indexation, lower financing compensation and higher demand. The above-mentioned effects were partially offset by $17 million from lower PPA sales in the full year 2023, mainly due to lower average PPA price due to indexation partially offset by higher capacity payments in this year, $41 million OpEx and other costs mainly in Generation business explained primarily by our new renewable capacity and maintenance of plants and inflation across all the business. Let’s move on to Slide 14 to take a look at our Generation business new KPIs. Net electricity totaled 24.1 terawatt hours as of December 2023, exceeding by 9% the production during 2022, mainly due to higher hydro and solar generation resulting from the improved hydrology and the addition of new projects, respectively.
This also offset the lower thermal dispatch, mostly relating to the disconnection of Bocamina 2 in September 2022. If we exclude the production of Bocamina 2 in 2022, the real increase in the company generation was equivalent to a growth of 15% coming mainly by hydro and renewable contribution. During 4Q 2023, net generation grew by 15% to 6.6 terawatt hour. Mainly due to higher hydro, solar and wind generation. Our energy sales totaled 3.9 terawatt hour in 2023, 0.5% higher than the level recorded in 2022, primarily due to higher sales to pre-customers. It’s worth mentioning that our commitment with our clients were fulfilled with a higher portion of our renewable generation, which also led us to lower energy purchases in the spot market, mainly the non-solar hours.
During Q4 2023, physical energy sales increased by 2.2% to 7.6 terawatt hour, mainly due to higher sales to pre-customer. Let me point out that during the last quarter of 2023, our increased renewable production also allowed us to reach 0 net purchases in the spot market. Now on Slide 15, let’s go through the main drivers of our group net income. Our net income increased by 66% excluding the net impact of Arcadia sale of $183 million versus last year pro forma figures. Let me drive you through the main essence, a greater EBITDA of $358 million, as I already explained, higher depreciation and amortization of $22 million, mainly resulting from our new renewable projects in operation, which was offset by lower depreciation in Enel [indiscernible] mainly as a consequence of new investment in power plants that increased the average useful life of property, plants in the city, higher-amortization intangible assets in energy distribution due to the new IT system development, partially offset by lower depreciation and amortization due to the sales of Enel Transmision in December 2022.
A lower bad debt mainly related to the client net debt recovery due to several commercial actions. Regarding financial results and net investment, we recorded a $35 million improvement, primarily explained by $98 million related to higher interest and adjustments due to PEC 2 recognition, $10 million, mainly due to equity income linked to not consolidated company and capital gains basically associated to the sales of Huasco thermal power plant. All the above effect were partially offset by lower income related to monetary adjustments, higher financial costs associated to payment schedule optimization agreement with supplier and higher financial expense linked to the sales of part of [indiscernible] business. Income tax increased by $138 million mainly related to the income tax associated with the sales of Arcadia of $148 million.
During the fourth quarter of 2023, net income increased 44% to $426 million, primarily explained by higher EBITDA, as detailed in the previous line, higher depreciation and amortization for $10 million which is mainly explained by the Generation business due to new renewable energy projects in operations, higher financial results and equity investment of $13 million. This is explained by $84 million related to the previously mentioned PEC 2 adjustments, partially offset by higher financial expense linked to sales of [indiscernible] business, higher franchise costs related to the payment schedule optimization agreement with suppliers, higher financial costs mainly related to the higher cost of debt. And basically, slight variation on the quarter in terms of income taxes.
Moving to the FFO analysis on the next slide, let’s review in detail our FFO for this period. Regarding the FFO, the figure for 2023 – 2022 have been adjusted only by the sales of Enel Transmision but not by the sale agreement executed in 2022. Last year, in terms of cash the adjustment amounted to $20 million in the full year. In 2023, we have excluded $310 million paid in taxes from capital gains obtained from this transaction. Our FFO in 2023 reached $986 million, representing improvement of $334 million. The main effects that explain our FFO in this period are the following: $1.3 billion coming from EBITDA driven by the strong hydrology contribution, gas trading activity and better results in the Distribution business, $406 million negative impact from the cumulative stabilization mechanism effect in our receivables, reducing the cash conversion of that period.
This situation has been improved by the impact of the execution of the IDB factoring related to PEC 2, which amounted to $345 million. Working capital reached a positive balance of $88 million as a consequence of cash [indiscernible] from the sale of Santa Rosa buildings and cash management optimization, partially offset by VAT payments related to stabilization mechanism. Working capital improvement once compared to last year’s figures mainly comes from the sales of Santa Rosa building and other managerial actions as well as better collection on the Distribution business. $34 million income tax net payment mainly related to tax payments in Generation business in 2023, offset by tax recovery from previous periods before for both Generation and Distribution business contribution.
Once compared to the income paid – income tax paid in 2023 versus last year, the main difference comes from the faster recovery from previous period obtained during this year. To conclude, regarding financial expense, we paid $299 million. This is explained mainly due to the debt interest related to the average impact on the gross debt of 4.9% that reflects also the new interest associated with the revolving credit facility. Once we compare the 2023 financial expenses with last year’s figures, we see an increase also explained by higher average interest rates on the gross debt and monthly payment relative to the revolving credit facility as a bridge instrument for the PEC 2 delay. Now let’s look at our liquidity and leverage position.
Our gross debt decreased around $0.3 billion to $4.4 billion as of December 2023 compared to December 2022. This decrease was primarily due to the repayment of regulatory increase in line, partially thanks to the use of the proceeds from Arcadia sale concluded last October 2023. The average of our debt maturity increased to 6.1 years as of December 2023, also improving the portion of the fixed rate to 88% of total debt from 37% in September 2023. The average cost of our debt reached 4.9% as of December 2023, mostly owning to the new profile of our debt, the financial market condition and the prepayment of some bridge short-term instruments. In terms of liquidity, we have a comfortable position in order to support the coming debt maturity in 2024 and also to cope with possible headwinds in the debt market related to the economic situation.
Talking about 2024, we had approximately $750 million maturing in 2024, including $400 million of the Yankee bond. In line with our financing strategy and according to our 2024 financial plan, we are evaluating the best alternatives to face this maturity. These would be done through the payment with cash, the use of long-term committed credit lines, executing a new financing at Enel Chile level or a mix between alternatives. Currently, we are in advanced conversation with several banks and financial institutions, which has shown great interest in participating in possible new financing. In the first quarter, we’ll give you more color on it. Now I will hand over to Fabrizio for closing remarks.
Fabrizio Barderi: Thanks, Giuseppe. Enel Chile’s sustainable business model demonstrated its resiliency and rationale and this while sustaining operating and financial results in the management group to conclude the company’s strategy towards decarbonization, electrification and profitability. As planned, the Arcadia transaction was concluded last October. With this, our asset rotation plan was successfully concluded. The 2023 results showed a solid operating performance. The better-than-expected hydrology and the gas trading activities during this year, complemented by the several managerial actions we have taken over the last year, supported us in achieving our commitment towards our shareholders. Finally, we would like to announce that the 2024 Annual General Meeting will be held on April 29 during which our shareholders will deliver on the final dividend for the 2023 results. Let me now hand it over to Isabela.
Isabela Klemes: Thank you, Fabrizio, and thank you all for your attention. So now let’s begin the Q&A session. We will receive questions via phone and chat in the webcast. The Q&A section is open. Operator, please, you may start.
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