Engie Energia Chile S.A. (ECL.SN) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Engie Energia Chile's Second Quarter 2025 Results Conference Call. If you need a copy of the press release issued on July 30, it is available on our company's website at www.engie.cl. Before we begin, I would like to remind you that this call is being recorded, and that information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements or contacting Investor Relations Officer, Marcela Munoz. We would like to advise that participant of this call is dedicated to investors and market analysts, not for the press. We ask all journalists to contact Engie Energia Chile PR Department for details. I will now turn the call over to Mr. Vincent Sorel. Please go ahead, sir.

Hello. Good afternoon, everybody. So Vincent Sorel speaking, the CFO of Engie Energia Chile. And today, I'm here with Juan Villavicencio, our Chief Executive Officer; Alison Saffery, Head of our Corporate Finance and Investor Relations; Marcela Munoz, Investor Relations Officer; and Bernardita Infante; our Financial Adviser. We are very pleased to present today Engie Chile's first half results for 2025. And without any further transition, I will give the floor to Juan, who will describe our operational performance for the 6 first months.

Good afternoon, everyone. As described in the -- on Page 2, we have organized this presentation into two sections. In the first part, we will briefly go through first half '25 performance. Then in Part 2, we will provide an update vision of our financial results and medium terms of looking for Engie Chile. We can start directly on Page 3, where we share the main highlight for the first half of '25. First, the company continued the trend of strong results in the first half of the year even in the challenging environment of our sector has been facing. Second, we continue to increase our renewable generation capacity. Three projects reached COD during the first half, adding 468 megawatts of renewable capacity to our portfolio. Third, the high availability of our thermal plants during this period allowed us to secure high generation in this challenging environment we are facing, reducing our exposure to the spot market. And fourth, we are continuing in our path towards the energy transition by converting our coal assets, developing our renewable portfolio and investing in transmission. On Page 4, we show the main highlights of our financial performance, which Vincent will discuss later in more detail. We had an EBITDA generation of $362 million. Our CapEx reached $302 million during the first half, while our net debt to 12-month EBITDA ratio continue a strong ground trend, reaching 3.3x. Our net income reached $186 million. We also share our upgraded guidance for the year. We've reached our EBITDA guidance from a range of $525 million to $575 million to $650 million to $700 million, mainly reflecting the recognition of the arbitration award for the breach of contract of our main LNG supplier during 2023 and 2024, as well as a good performance during the first half of the year. On our CapEx guidance, we've increased from $850 million to $900 million range to $900 million to $975 million range by the end of '25. This is mainly due to the addition of a new BESS project as well as good implementation of our investment portfolio. As a result, our expected net debt-to-EBIT ratio should continue at the level of 3.3x by December of '25. On Page 5, we can see the current progress on the execution plan for renewables. As of today, we have already implemented 1.4 gigawatts, including the addition of Wind Kallpa, BESS Tamaya and BESS Capricornio, which together added 468 megawatts of capacity to our portfolio. All of these projects were developed on time and on budget. With this, during the first half of the year, we generate a total of 1,094 gigawatt hour with all renewable assets. Now let's continue on Page 6, where we show how we are giving new life to our coal-based asset with the installation of a synchronous condenser in our former Unit 15, which was closed in 2022. At the same time, we improved, extended the life and increased the capacity by 25 megawatts of our gas-fired combined cycle plant Unit 16 to ensure flexibility in generation and energy supply. We are also working on the conversion of coal plant to general gas, by which we will stop to operation with coal in December of '25 and finish its conversion to initiate operation with natural gas by the second half of '26. Our thermal assets have shown high availability and operational excellence during the first half, providing the net generation required to secure the 24/7 supply for our PPA contracts and reducing our exposure to the spot market. This was especially relevant during the high price environment in the first half of the year, especially during nonsolar hours. The situation of our different coal plants is also explained on Page 7, showing that as well as the conversion mentioned in the previous slide, four of our remaining coal plants will be decommissioned by December '25 in the case of CTM1 and CTM2, while CTA, CTH will be closed in May '26. These four plants will be kept in mothball maintenance while the company decide if and how this asset could be used in the future. On Page 8, we describe how the company has embarked on a complete generation portfolio transformation. Like you know, in 2019, coal generation represented 60% of our generation capacity, while renewable represented only 3%. Total generation capacity at the end of 2019 reached 2.2 gigawatts during 2025. Engie Chile shown a generation capacity of 3.1 gigawatts, of which coal represents 34%. Natural gas and renewable plus batteries represent 44%, a notable increase during this period. On expectation for 2027, considering the renewable and BESS project currently under construction, as well as the conversion of IEM and retirement of the other coal plants, that we should reach a total installed capacity of approximately 3.7 gigawatts, of which 29% will be natural gas and the remaining 71% will be renewable and batteries. Next, on Slide 9, we show the 8 renewable and batteries project we have currently under construction, which are deployed over 5 different regions of Chile, including in the bottom left corner of the slide, the recently added BESS Kallpa, a 57-megawatt battery project being built -- co-located within the Wind Kallpa site, which reached COD during the first half of this year. CapEx on BESS Kallpa is $69 million, and it's expected to reach the COD in the second half of '26. If we move directly to Page 10, we are presenting an updated development plan of renewable and BESS project to be executed between and '25 and '27. These are the projects shown on Slide 9 that are currently under construction. This project should reach COD at different stage between the first half of '26 and the first half of '27. This new project will add around 1.2 gigawatts of additional renewable and BESS capacity to the portfolio and will allow Engie to be full balanced from both business and risk perspective to the end of '27. The contraction and implementation of this project will require approximately USD 1.4 billion between '25 and '27. On the graph on Page 11, we can see how the construction of the previously described project will have a positive impact in balancing our portfolio. We present here the yearly average position of the portfolio. This way, by '27, we should reach a full balance considering the new investments and plant conversion on the generation side as well as the backup PPAs and the end of the unregulated PPA in the north on the [indiscernible] site. At the same time, we are already resuming the commercial effort to recontract our portfolio, a strong '27 and forward and accompany the new demand with new generation and/or back up the PPA to maintain the balance of our portfolio. And now I will leave with Vincent, who will present the detailed evolution of Engie Chile's financial and capital structure as well as the details of the guidance.

Thank you, Juan. So on Page 12, we will start with the second part of this presentation that demonstrates the successful execution of our strategy and our ability to capture value. Moving to Page 13. This page summarize our financial performance during this first half of the year. We see EBITDA that reached $362 million, $67 million increase compared to the first half of 2024. Main reason behind this EBITDA increase include the electricity margin that is improved and the generation margin of our asset. The award of the arbitration procedure related to the breach of one of our LNG supply contract that Juan mentioned in the beginning of presentation was also recognized as of June 2025. Net result reached $186 million in the first half, $36 million higher than last year. The positive trend in our net debt-to-EBITDA ratio was also confirmed with a 3.3x ratio as of June 2025. I will now comment the chart on Slide 14. As mentioned, the increase of $67 million for the EBITDA can be analyzed as follows. One of the reasons for this EBITDA improvement was the increase in the electricity margin, which rose by USD 13 million. The main positive effect driving this increase were, first, a $37 million positive effect of an increase in our own generation, roughly half of it from the 3 projects that reached COD this year: Wind Kallpa, BESS Tamaya and BESS Capricornio. Also, our thermal assets were readily available and were dispatched. This allowed us to reduce energy purchases from the spot market. Second, we benefited from higher PPA revenue for USD 25 million. This is mainly thanks to an increase in physical sales to distribution companies as a result, notably, of increase in our pro rata share of regulated supply as other generating companies contracts were suspended or early terminated due to execution problem. This offset the 9% drop in physical sales to free clients, explained by maintenance work and some mining and industrial operation. Those two positive effects allowed us to cope with the significant increase in energy purchase prices driven by lower availability of other thermal plants, lower availability of Argentine gas, lower hydro generation in the system. And this increase represents a $50 million negative effect that we were able to offset. In short, our efforts to reduce our exposure to the spot market, especially during nonsolar hours, proved very successful in the first half of 2025. Outside of the electricity margin, we can also observe a $13 million increase in revenue from gas sales to third parties, in part due to the major maintenance and upgrade in our U16 combined CCGT in the first quarter. Our EBITDA also benefits year-on-year of $61 million from one-off. These were largely attributed to the recognition in 2025 of approximately USD 100 million related to the outcome of the arbitration with our main LNG supplier for the unfulfillment of one of our LNG supply contract in '23 and '24. This was partially offset by positive impact reported last year, notably a $17 million insurance compensation from a past loss at the CTA plant. Finally, we see a negative impact of $19 million, coming mainly from increased operation and maintenance expense and higher transmission toll, leading to an EBITDA of $362 million. All the above explain the 23% increase in EBITDA as well as our upgraded EBITDA guidance for 2025. Moving forward to Slide 15. This one illustrates in detail, the evolution of our energy margin. This chart shows available energy for the first half of 2025, which was 6.5 terawatt hours, and how this energy was supplied. Notably, the spot purchases during this period were lower in a higher spot price environment, as we discussed, mainly due to the high performance of our generation assets as well from the addition of the new renewable and batteries project previously mentioned. Slide 16 shows all this increase in EBITDA helped by foreign exchange gain offset the increase in net financial costs, driving to a $36 million increase in net income, which climbed to $186 million in the first half of the year. The increase that you see in net financial cost was mainly explained by the recognition last year of a one-off on PEC-related accounts receivable as interest income in the first half of 2024 for USD 50 million. Important to note that the recurrence of one-off items above and below EBITDA differ in nature, but are roughly similar in total value, contributes to a stable year-on-year variance. In Slide 17, we see that our net debt decreased by $41 million to $1.9 billion. On the one hand, we reported strong cash generation as well as $112 million proceeds from the last year [ flat ] sale of PEC-3 document this year. This allowed us to finance capital expenditure of $287 million, plus a $54 million dividend payment, the first one since late 2021, as well as interest and so on. Important to see here for this first half, our source and use of funds were balanced. Also, our cash flow from operating activities after interest and tax amount to USD 382 million, significantly higher than last year for the same period that amounted to USD 71 million. Let's move to Slide 18. As a reminder, our rating is BBB stable outlook confirmed by Fitch and S&P. Net financial debt reached $1.9 billion at the end of June, with net debt to last 12 months EBITDA down to 3.3x. We continue to improve our debt profile. We reduced our net debt to EBITDA, notably thanks to EBITDA recovery. The maturity profile of our debt is also strong with a reduced refinancing risk, and it leaves headroom for future financing. On the bottom part of the slide, you can see a 5.4 average coupon on our debt and the average remaining life of our debt of 4.9 years. Note that we repaid $136 million of the U.S. bond that was maturing in January and we made other principal debt repayment for USD 78 million. That explains the reduction of the high level of cash that we were holding end of 2024. Slide 19 shows the evolution of our investment plan from 2029 to the estimated CapEx amount for '25. Our investment should accelerate during the second half of the year compared to the first semester. During the last 5 years, it has been increasingly concentrated in renewable as well as BESS in the last 3 years. Between '25 and '27, we will invest $1.4 billion in renewable and BESS projects that are currently under construction. These projects are expected to reduce our exposure to the spot market, and thanks to the batteries, reduce as well the risk associated to renewables. We are also investing in conversion projects on our coal-fired plant as well as transmission projects needed for our portfolio. Please, let's continue on Slide 20. As a result of the investment plan we just explained, our EBITDA is increasing, notably positively, impacted by the reduction of our average supply cost. Leverage remains under control during this intensive CapEx phase. This is why the net debt-to-EBITDA ratio has been showing a downward trend, reaching a level of 3.3x at the end of the first half of the year, and it's expected to stay at this level by the end of the year. Moving to Slide 21. As you can see, we have upgraded our guidance both for EBITDA and CapEx for the end of 2025. On the EBITDA front, we have increased the guidance from the previous $525 million-$575 million range to $650 million to $700 million EBITDA range. The main reason for the increase is the recognition of the arbitration award for the -- related to the breach of contract with our main LNG supplier. On the CapEx side, we have upgraded the guidance to $900 million to $975 million range. This upgrade is related to the addition of a new battery project that started construction during the second quarter and good execution of the construction of the project in the portfolio. The resulting net debt-to-EBITDA ratio should reach then, 3.3x by the end of 2025. As usual, this guidance is considering the driver and assumption presented in the left side of the site that can affect our business. I now hand over to Juan for the conclusion.

Thank you, Vincent. Finally, on Slide 22, we summarize how we continue on track by working on rebalancing our portfolio by adding new renewable generation and storage, expanding the life and increasing capacity of our LNG generation assets and adding backup PPAs. We continue moving forward with our intensive CapEx program in renewable, transmission and conversion of coal power plant for the energy transition during the period of '25 to '27. And we leverage our asset by reaching high availability of our plants and excellence in their operations, all of the above maintaining a strong result and balance sheet. Thank you for your attention, and we are now open to any questions you may have.

[Operator Instructions] Our first question comes from Isabella Pacheco from Bank of America. And it's a written question. Can you give more color on how your energy transition is going to impact EBITDA and net leverage metrics in 2027?

Thank you, Isabella. Indeed, we have a significant energy transition plan. This, as we've shown, is expected to happen in the context where we keep our balance sheet metrics under control. And notably, I would refer to the S&P notes that disclose it in a bit more detail. But as a nutshell, I would say, we target at this stage, without giving any precise figure for 2027 because we don't give guidance on that horizon. I would target something around 4.5x EBITDA or below.

[Operator Instructions] Our next question comes from Florencia Mayorga. Can you provide thoughts on recent headline about intention to renegotiate regulated contracts?

Thank you very much for your question. From Engie perspective, we are in a clear position to defend our contract, obviously, and we have been very clear in our communication with the regulators and the different Senate. To secure that, the contract will be respected. We are seeing this like a red flag for us. And we are seeing in the last days that the progress in the Congress has been -- in terms of the concept that has been discussed and how is evolving the proposal of the government. So the Congress is improving a lot and in the way to respect or contract. But obviously, we are monitoring this very closely until the end of the discussion in the Congress to understand how this will be addressed at the end of the process. From our side, obviously, our vision is we need to continue pushing and communicating the [indiscernible] in the contract. So like we have done in all the period of this discussion in the Congress.

[Operator Instructions] Our next question comes from Felipe Flores. Is increase in CapEx mostly related to the new BESS Kallpa project? Any guidance on 2026 CapEx?

Thanks. The increase in guidance on CapEx reflects, first of all, I would say, a very good execution of our projects that are on track, on time, on budget. And we are, I would say, progressive very quickly because the key for us is to execute according to this plan. This partially explains the increase. And on the other side, we also have indeed the BESS Kallpa that is adding a bit less than $100 million of CapEx to this year. For 2026, we are currently -- I mean, we will be [ averse ] to reestimate our entire CapEx schedule. But at this stage, I would prefer to -- not to give a precise figure for 2026. However, you note that we have presented in this presentation, $1.4 billion of CapEx between '25 and 2027 for the renewable investment that would be spread out over this year, based on -- between 20 -- balance will be spread out between '26 and '27 according to the new execution schedules.

Our next question comes from Fernan Gonzalez from BTG Pactual. I would like to understand the whole of coal going forward. In your view, is there a chance that the CNE will request CTM, CTH and CTA to remain operational for longer? And if so, for how long are we going to see more coal inventories, provisions in the coming quarters? Thank you.

Thank you very much for your question. We are following the rules of the regulation to request the coal exit of our asset. This means that we need to request with 2 years of anticipation. And we did in the proper moment to say that CTM1 and CTM2 will exit at the end of this year and CTA, CTH in May of '26. And obviously, the authority has the right to extend the call exit of each asset per 1 year more, depends of the systemic risk that they are evaluating. We are continuously discussing and very closely reviewing what is the plan of the coordinator with the most anticipation that we can to manage properly, the storage of the coal in our asset. Obviously depends on how the market is going and how the risk of the coordinator is requesting the dispatch of the coal assets. Concretely, about the storage of coal, we are seeing that we will have to maintain some level because like you can see, the asset has been dispatched and probably will continue being dispatched in the next month. And however, about your question, yes, the authority can extend by 1 year. Is it a limit? This means that CTA, CTH could continue until May '27, the continuity of the operation.

Our next question comes also from Fernan Gonzalez from BTG. Also, could you please update us on what your exposure to the spot market is today, both in terms of geography and time of day?

About the exposure today, you know that we have finalized the first package of project, including the batteries, that are supporting our portfolio during the night, plus the relevant dispatch of gas and oil in the first semester, and that is continuing today. This means that our exposure during the night has been properly controlled, especially in the north of the country. And the main relevance is that we have some exposure during the solar hours that is the good exposure for the P&L that we are continuing on that.

Our next question is also from Fernan Gonzalez. And finally, about the BESS Kallpa. In the CEN's connection authorization report, it says the planned capacity is 160 megawatts and not 57 megawatts. Is there a plan to expand it at a larger later stage?

We have a development -- next development phase that is not confirmed yet to concrete the final capacity of the next step of this asset. Today, the consumed capacity that we have is 57-megawatt. That is related to the business plan to secure the management of the curtailment in the node where the asset is connected.