Enel Chile(ENIC) - 2020 Q4 - Annual Report

PART I Key Information This section presents Enel Chile's selected financial and operating data, highlighting a 2020 net loss and key business risks Consolidated Financial Highlights (in Ch$ millions, except per share data) | Indicator | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenues and other operating income | 2,585,402 | 2,770,834 | 2,457,161 | | Operating income (loss) | (34,255) | 526,055 | 670,605 | | Net income (loss) | (52,387) | 316,093 | 412,848 | | Net income (loss) attributable to parent | (50,860) | 296,154 | 361,710 | | Total basic and diluted earnings per share (Ch$) | (0.74) | 4.28 | 5.66 | | Total assets | 7,904,472 | 7,857,988 | 7,488,020 | | Total equity | 3,594,274 | 3,747,284 | 3,674,164 | | Capital expenditures (CAPEX) | 554,314 | 321,079 | 300,539 | Operating Data of Subsidiaries | Subsidiary / Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Enel Distribution | | | | | Electricity sold (GWh) | 16,481 | 17,135 | 16,782 | | Number of customers (thousands) | 2,008 | 1,972 | 1,925 | | Enel Generation | | | | | Installed capacity (MW) | 6,001 | 6,114 | 6,274 | | Generation (GWh) | 15,913 | 17,548 | 17,373 | | EGP Chile | | | | | Installed capacity (MW) | 1,200 | 1,189 | 1,189 | | Generation (GWh) | 3,418 | 3,493 | 2,673 | - The Chilean peso appreciated by 5.3% against the U.S. dollar in 2020, following a devaluation of 7.2% in 2019 and 11.5% in 2018[42] Risk Factors - Business operations are heavily dependent on hydrology, as approximately 49% of installed generation capacity in 2020 was hydroelectric[42] - The company faces risks from regulatory changes, such as the 2019 price stabilization mechanism that defers revenue collection and a new law that lowered the profitability of distribution companies[58] - Political and social instability in Chile, including the 2019 social turmoil and the ongoing process to draft a new constitution, could alter the business outlook and adversely affect operations and financial condition[63][64] - The Covid-19 pandemic has negatively impacted electricity demand and collection rates, contributing to lower net income in 2020[65] - The controlling shareholder, Enel S.p.A., owns 64.9% of voting shares and can determine the outcome of most material matters, which may create interests that differ from those of minority shareholders[68] - A material weakness in internal control over financial reporting was identified as of December 31, 2020, related to general information technology controls (GITCs) over the electricity distribution business revenue process[70] Information on the Company Enel Chile, a major Chilean electric utility controlled by Enel S.p.A., operates in generation and distribution, pursuing decarbonization History and Development of the Company - Enel Chile is a publicly held corporation primarily engaged in electricity generation, transmission, and distribution in Chile[17] - As of the report date, Enel S.p.A. is the ultimate controlling shareholder with 64.9% ownership[72] - A major corporate reorganization in 2018 consolidated Enel's conventional and non-conventional renewable energy (NCRE) businesses in Chile under Enel Chile[73] - This involved a tender offer for Enel Generation shares and a merger with Enel Green Power Latin América S.A. (EGPL), resulting in Enel Chile increasing its stake in Enel Generation to 93.5% and fully owning EGP Chile[75] - As part of its decarbonization strategy, Enel Chile is phasing out its coal-fired power plants, with Bocamina II expected to close by May 2022, well ahead of the 2040 government deadline[76] - On January 1, 2021, Enel Distribution's transmission business was spun off into a new, separate company, Enel Transmission, to comply with Chilean law requiring separation of business lines[79] Capital Expenditures (in millions of Ch$) | Period | Amount | | :--- | :--- | | Estimated 2021-2023 | 1,674,000 | | 2020 | 554,314 | | 2019 | 321,079 | | 2018 | 300,539 | Business Overview Revenues by Segment (in millions of Ch$) | Segment | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Generation | 1,577,422 | 1,726,612 | (8.6)% | | Distribution | 1,382,068 | 1,412,872 | (2.2)% | | Total Revenues | 2,585,402 | 2,770,834 | (6.7)% | - The Generation business accounted for 28% of the National Electricity System's (SEN) total capacity in 2020[87] - The installed capacity mix is 49.5% hydroelectric, 34.1% thermal, and 16.4% from other renewable sources (solar, wind, geothermal)[90] - The Distribution business, through Enel Distribution, is one of Chile's largest, serving over 2 million customers in a 2,105 sq km concession area in the Santiago metropolitan region[107] - Total energy sales decreased by 3.8% in 2020 compared to 2019[107] - The Chilean electricity market consists of four main agents: generators, transmitters, distributors, and large customers, operating within three main networks, the largest being the SEN, which is coordinated by the CEN (National Electricity Coordinator)[111][113] - The industry is regulated by the Ministry of Energy, the National Energy Commission (CNE), and the Superintendence of Electricity and Fuels (SEF)[118] - Chilean law promotes Non-Conventional Renewable Energy (NCRE), mandating a 20% share of NCRE sources in total contracted energy sales by 2025 for contracts signed after 2013[124] Organizational Structure - Enel Chile is controlled by Enel S.p.A., an Italian utility company, which beneficially owned 64.9% of its shares as of December 31, 2020[142] Principal Subsidiaries and Ownership (as of Dec 31, 2020) | Subsidiary | Business Segment | % Ownership by Enel Chile | | :--- | :--- | :--- | | Enel Generación | Electricity Generation | 93.5% | | EGP Chile | Electricity Generation | 99.9% | | Enel Distribución | Electricity Distribution | 99.1% | - The company is pursuing a decarbonization process through its subsidiary Enel Generation, aiming to be the first electricity company in Chile to complete this process by closing its Bocamina II coal plant by May 2022[150] - Effective January 1, 2021, the transmission business was spun off from Enel Distribution into a new company, Enel Transmission, in which Enel Chile holds a 99.1% economic interest[155] Property, Plant, and Equipment - As of December 31, 2020, the company owns and operates 48 power plants in Chile with a total installed capacity of 7,200 MW[156] - The portfolio includes 18 hydroelectric plants (3,561 MW), 10 thermal/geothermal plants (2,502 MW), 10 solar plants (496 MW), and 9 wind farms (642 MW)[158] - The distribution business operates a network including 683 km of transmission lines and over 21,997 distribution transformers within a 2,105 sq km concession area[163][166] - Major projects under construction include the 150 MW Los Cóndores hydroelectric project (expected completion 2023) and several large-scale solar and wind projects like the 382 MW Campos del Sol I and the 144 MW Renaico II wind project, both expected to be completed in 2021[176][181][186] - The company is developing a pipeline of new renewable projects, including the 398 MW Campos del Sol II solar project and the 375 MW Sierra Gorda solar project, with construction expected to begin in 2021[193][197] Operating and Financial Review and Prospects This section details Enel Chile's financial performance, liquidity, and operational trends, highlighting the 2020 operating loss due to impairment Operating Results - Financial results are materially affected by hydrological conditions, fuel prices, regulatory developments, and Chilean economic conditions[203] - The 2020 results include significant impairment costs (Ch$697.9 billion) for the accelerated closure of the Bocamina II coal plant, while 2019 results included non-recurring income from an early contract termination[239] Comparison of Results: 2020 vs. 2019 (in millions of Ch$) | Item | 2020 | 2019 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | 2,585,402 | 2,770,834 | (185,432) | (6.7)% | | Operating (Loss) / Income | (34,255) | 526,055 | (560,310) | (106.5)% | | Net (Loss) / Income | (52,387) | 316,093 | (368,480) | (116.6)% | - The operating loss in 2020 was primarily driven by a Ch$415.5 billion increase in depreciation, amortization, and impairment costs, mainly from the impairment of the Bocamina II coal plant as part of the company's decarbonization strategy[239] Comparison of Results: 2019 vs. 2018 (in millions of Ch$) | Item | 2019 | 2018 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | 2,770,834 | 2,457,161 | 313,673 | 12.8% | | Operating Income | 526,055 | 670,605 | (144,550) | (21.6)% | | Net Income | 316,093 | 412,848 | (96,755) | (23.4)% | - The decrease in operating income in 2019 compared to 2018 was mainly due to impairment expenses of Ch$280 billion related to the announced closures of the Tarapacá and Bocamina I coal plants, partially offset by non-recurring income from an early contract termination with Anglo American Sur[265][268] Liquidity and Capital Resources Consolidated Cash Flow Summary (in billions of Ch$) | Cash Flow Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Operating Activities | 756 | 744 | 736 | | Investing Activities | (555) | (312) | (1,882) | | Financing Activities | (128) | (440) | 967 | - Net cash from operating activities increased slightly to Ch$756 billion in 2020, supported by collections from asset leasing and lower income tax payments, but partially offset by lower collections from sales of goods and services[281] - Cash used in investing activities increased to Ch$555 billion in 2020, driven by fixed asset investments in renewable projects by EGP Chile, the Los Cóndores power plant by Enel Generation, and network improvements by Enel Distribution[283] - As of December 31, 2020, consolidated interest-bearing debt totaled Ch$2.9 trillion[289] - The company has access to committed undrawn revolving loans of up to Ch$347 billion[294] - The company is exposed to the transition away from LIBOR, with a total debt exposure of US$550 million as of March 31, 2021[297] - Existing debt agreements include provisions to transition to an alternative benchmark rate[300] Trend Information - The generation business aims to mitigate spot market volatility by contracting a significant portion of its expected electricity generation through long-term supply contracts[303] - Growth in the generation business is expected to be driven by Non-Conventional Renewable Energy (NCRE)[303] - The company has a competitive pipeline of NCRE projects and has secured long-term Power Purchase Agreements (PPAs) with major mining companies[305] - In the distribution business, a trend of customers switching from regulated to unregulated tariffs is expected to continue until lower-cost contracts are reflected in regulated rates around 2024[306] - Growth will focus on network digitalization and automation, including smart meters[306] - The Tariff Stabilization Law (Law No. 21,185) directly affects generation companies by deferring revenues and impacting cash flows, creating accounts receivable that are expected to be recovered by December 31, 2027[309] Tabular Disclosure of Contractual Obligations Contractual Obligations as of December 31, 2020 (in Ch$ billion) | Obligation Type | Total | 2021 | 2022-2023 | 2024-2025 | After 2025 | | :--- | :--- | :--- | :--- | :--- | :--- | | Purchase obligations | 8,769 | 3,227 | 3,000 | 1,856 | 686 | | Yankee bonds | 1,221 | — | — | 284 | 936 | | Bank debt | 1,297 | 107 | 448 | 229 | 513 | | Interest expense | 936 | 132 | 235 | 178 | 392 | | Total | 12,637 | 3,515 | 3,770 | 2,617 | 2,736 | Directors, Senior Management, and Employees This section details Enel Chile's corporate governance, leadership, and workforce, including board structure, compensation, and employee demographics Directors and Senior Management - The Board of Directors consists of seven members elected for a three-year term[316] - The board as of December 31, 2020, was chaired by Herman Chadwick P[318] - The Chief Executive Officer is Paolo Pallotti, and the Chief Financial Officer is Giuseppe Turchiarelli[326] Compensation - Director compensation includes a fixed monthly fee of UF 216 and a per-meeting fee of UF 79.2, with the Chairman receiving double compensation[329] - Directors who are also employees of other Enel group companies waived their compensation[329] - The aggregate gross compensation for all executive officers for fiscal year 2020 was Ch$2.6 billion, which included Ch$419 million in variable compensation and benefits[331] Board Practices - The company has a Directors Committee that performs the functions of an Audit Committee, in compliance with Chilean law, Sarbanes-Oxley Act (SOX), SEC, and NYSE requirements[338] - All members of this committee must satisfy NYSE independence requirements[338] - Corporate governance is guided by several policies, including a Code of Ethics, a Zero Tolerance Anti-Corruption Plan, and a Penal Risk Prevention Model to comply with Chilean Law 20,393 on corporate criminal liability[335] Employees Number of Employees by Company | Company | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Enel Distribution | 755 | 711 | 681 | | Enel Generation | 668 | 670 | 678 | | Enel Chile | 494 | 467 | 451 | | EGP Chile | 285 | 214 | 163 | | Total Personnel | 2,219 | 2,062 | 2,062 | - The company has multiple collective bargaining agreements with its unionized employees across its various subsidiaries, with expiration dates ranging from 2022 to 2023[343] Major Shareholders and Related Party Transactions This section outlines Enel Chile's ownership structure, with Enel S.p.A. as the controlling shareholder, and details related-party transactions Major Shareholders - As of December 31, 2020, Enel S.p.A. was the controlling shareholder, owning 64.9% of Enel Chile's outstanding common stock[344][346] - Other significant shareholders as of December 31, 2020, include Chilean private pension funds (AFPs) holding 14.2%, and other institutional investors and ADR holders holding 19.8% collectively[344] Related-Party Transactions - Related-party transactions are required by Chilean law to be conducted at market prices and terms, and must be approved by an absolute majority of non-interested directors[347] - The company engages in significant financial transactions with related parties, including term loans and credit lines with Enel Finance International N.V. and short-term intercompany loans for cash management purposes[349] - Enel Chile provides various administrative, legal, financial, and corporate support services to its subsidiaries under intercompany agreements, which are priced at market rates or at cost-plus[349] Financial Information This section covers Enel Chile's legal proceedings and dividend policy, which targets a payout of at least 30% of annual net income Consolidated Statements and Other Financial Information - The company is party to legal proceedings in the ordinary course of business but believes no material loss is likely to significantly affect business development[352] - Lawsuits with a potential impact over US$10 million are disclosed[352] - The dividend policy, subject to shareholder approval, typically involves a final dividend of at least 30% of annual net income[353] - For 2019, a final dividend representing a 60% payout ratio was approved[355] - For 2020, due to the net loss, a dividend was approved against retained earnings[355] - The proposed policy for 2021 is a 50% payout ratio[355] Dividends Distributed per Share/ADS | Year | Ch$ per Share | US$ per ADS | | :--- | :--- | :--- | | 2020 | 4.23 | 0.30 | | 2019 | 3.14 | 0.21 | | 2018 | 2.99 | 0.22 | | 2017 | 3.23 | 0.26 | The Offer and Listing This section details the trading markets for Enel Chile's common stock on Chilean exchanges and its American Depositary Shares on the NYSE - Enel Chile's common stock trades on the Chilean Stock Exchanges under the symbol "ENELCHILE," and its American Depositary Shares (ADS) trade on the NYSE under the symbol "ENIC"[358] - In 2020, 75% of the total traded shares were on Chilean exchanges, while 25% were traded in the United States (as ADSs)[361] Additional Information This section details Enel Chile's corporate structure, shareholder rights, and key regulatory frameworks concerning exchange controls and taxation Memorandum and Articles of Association - Shareholders' rights are governed by Chilean Corporations Law and the company's bylaws (estatutos)[366] - Key provisions include preemptive rights for existing shareholders to purchase new shares to maintain their ownership percentage[377] - Significant corporate actions, such as mergers, changes in corporate domicile, or disposition of 50% or more of assets, require a qualified majority vote of at least a two-thirds majority of outstanding shares with voting rights[380] - The company's bylaws prohibit any single shareholder from owning more than 65% of the outstanding shares or exercising voting power over more than 65% of shares[390] - This does not apply to the depositary but does apply to beneficial ADS holders[390] - Dissenting shareholders have withdrawal rights, allowing them to compel the company to repurchase their shares at a price based on a weighted average trading price, upon the approval of certain major corporate resolutions[391][393] Exchange Controls - The Central Bank of Chile is responsible for exchange controls[399] - Under Chapter XIV of the Compendium of Foreign Exchange Regulations, investors may repatriate their investment and profits at any time, subject to reporting requirements and remitting funds through the Formal Exchange Market[400] Taxation - For foreign holders, cash dividends are subject to a 35% Chilean withholding tax[405] - However, a credit for the Corporate Income Tax (CIT) paid by the company can be applied[405] - Holders from countries with a tax treaty with Chile (signed before Jan 1, 2020, like the US treaty, even if not yet ratified) can credit 100% of the CIT, while others can credit 65%[405] - Gains from the sale of ADSs outside Chile are not subject to Chilean taxation[408] - Gains from the sale of shares on a Chilean stock exchange are generally exempt from capital gains tax, provided the shares have "sufficient stock market liquidity"[408] - For U.S. Holders, distributions are treated as foreign-source dividend income[418] - Dividends are generally expected to be "qualified dividends" subject to preferential U.S. tax rates, provided certain conditions are met and the company is not a Passive Foreign Investment Company (PFIC)[418] Quantitative and Qualitative Disclosures About Market Risk This section details Enel Chile's exposure to market risks, including commodity prices, interest rates, and foreign currency fluctuations, and its mitigation strategies - The company is exposed to commodity price risk from electricity, natural gas, diesel, and coal[429] - It mitigates this through long-term contracts and financial hedging instruments like swaps for Brent oil and Henry Hub gas[429] - As of December 31, 2020, 99% of the company's total outstanding debt had fixed interest rates, minimizing exposure to interest rate volatility[434] - Foreign currency risk is managed by balancing the currencies of cash flows and debt, and by using derivatives like cross-currency swaps and forwards[437] - Most subsidiaries have access to funding in the same currency as their revenues[437] Description of Securities Other Than Equity Securities This section details the fees charged by the Depositary for Enel Chile's American Depositary Shares (ADSs) and related reimbursements Depositary Fees for ADS Holders | Service | Fee | | :--- | :--- | | Issuance of ADS | Up to US$ 5 per 100 ADS | | Surrender of ADS | Up to US$ 5 per 100 ADS | | Cash distribution | Up to US$ 5 per 100 ADS | | Depositary services | Up to US$ 5 per 100 ADS held on record date | - In 2020, the Depositary (Citibank, N.A.) reimbursed Enel Chile approximately US$1 million for expenses related to the ADS program, primarily for investor relations activities[450] PART II Controls and Procedures This section addresses the effectiveness of Enel Chile's disclosure and internal controls, noting a material weakness in IT controls and an adverse audit opinion - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020, due to a material weakness in internal control over financial reporting[455] - A material weakness was identified in general information technology controls (GITCs), specifically regarding program change and access controls related to the IT systems for the electricity distribution business revenue process[455][457] - The independent registered public accounting firm, KPMG, issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[457] - A remediation plan is being implemented to address the material weakness by revising and enhancing GITCs, including integrating new tools for tracking changes, providing additional training, and reviewing control design[458] Other Information This section covers Enel Chile's governance, compliance, auditor change, and the controlling shareholder's increased ownership - The Directors Committee functions as the Audit Committee, and Mr. Fernán Gazmuri P. was determined to be the committee's financial expert[460] - The company has adopted a Code of Ethics, a Zero Tolerance Anti-Corruption Plan, and other policies to govern ethical conduct[461][463] Principal Accountant Fees (in millions of Ch$) | Service Type | 2020 | 2019 | | :--- | :--- | :--- | | Audit fees | 905 | 968 | | Audit-related fees | 127 | 104 | | Total | 1,032 | 1,072 | - In 2020, the controlling shareholder, Enel, increased its beneficial ownership in the company from 61.9% to 64.9% through the settlement of swap transactions[473] PART III Financial Statements This section contains Enel Chile's audited consolidated financial statements for 2020, including KPMG's unqualified opinion on financials and adverse opinion on internal controls