Enel Chile S.A.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Enel Chile is a Chilean utility company engaged in electricity generation, transmission, and distribution across Chile, Argentina, Peru, Colombia and Brazil.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Enel Chile S.A., formerly known as Enersis Chile S.A., is a subsidiary of Enel Group. It operates primarily in the Latin American energy sector, specifically focusing on electricity distribution and generation.

Business Description

Enel Chile’s business is primarily focused on three core segments:

  • Generation: The company generates electricity through hydroelectric, thermal, solar, and wind power plants across Chile. They are increasingly investing in non-conventional renewable energy sources, as seen in recent results.
  • Distribution and Networks: The company is the largest electricity distributor in Chile, serving a vast number of regulated customers.
  • Other Services: Enel provides services related to energy, including IT and consulting.

The competitive landscape is marked by significant regulatory oversight and intense competition among existing players.

The energy industry is undergoing a significant shift towards sustainability and renewable energy, driven by government policies, environmental awareness, and technological advancements. This transition involves significant investment in new technologies, power transmission capabilities, and grid modernization.

The industry is seeing increased volatility in recent years due to volatile prices in energy, fluctuating demand, and increasingly complex regulations.

Financials Overview

Analyzing recent financial results reveals a mixed picture for Enel Chile.

  • Revenue: Revenue grew by 12.3% YoY in the 9 months ending September 2024, due to greater energy sales and a more efficient generation mix. However, these revenue results were partially impacted by negative exchange rate differences in Chilean Peso and related to the currency hedging activities. Operating revenue was up 33% in Q3 2024, mainly due to higher energy sales prices (which are expressed in Chilean Pesos).
  • Profitability: The operating profit, earnings, and EBITDA show some improvement, mostly on the back of the improved margins. However, net income attributable to the shareholders of Enel Chile decreased by 16% YoY in the first 9 months of 2024, due to higher financial expenses and losses from currency fluctuations.
  • Balance Sheet: The company has a fair amount of debt, but has also increased cash and short term investments on the balance sheet. The Debt is mostly long term and related to finance new growth projects.

There have been significant shifts in tax liabilities over the course of 2022-2024 due to regulatory changes in Chile. Please refer to section F, Tax Considerations, in the Form 6-K for more details on specific tax effects and implications for ENIC. This section should be read carefully to have full comprehension of the effects.

In their report for the financial period ended September 30, 2024, the company announced a change in its functional currency from Chilean pesos to USD and that it will operate on this basis going forward. Please see page 1 of the report.

While not specifically called out in their financial filings or earnings calls, we can infer that recent regulatory changes in Chile (including a new rate stabilization plan for electricity prices) that are aimed at controlling cost-of-living are expected to have a negative impact on Enel’s revenues.

Moat Assessment

ENIC possesses some characteristics that could be considered moats, but they’re not significant enough to provide substantial competitive advantage:

  1. Regulatory Framework: ENIC benefits to some extent from the regulatory structure of the electricity industry, which involves a certain amount of protection to the established operators, that is, at least until there is a disruption. However, this framework also introduces some volatility and uncertainty.
  2. Vertical integration: ENIC has some degree of vertical integration from generation all the way down to distribution, which in theory provides competitive advantages, in practice, those advantages are limited since there are different players for each vertical slice.
  3. Scale: Being the largest electricity distributor in Chile does afford some economies of scale, but other competitors still operate and compete effectively at smaller scales.

Given these factors, ENIC can be said to have a narrow moat, or level 2 / 5, as it has some competitive advantages that create an economic moat, but this moat isn’t sustainable over the long term, or does not create a sizable advantage for the business.

Risks to the Moat and Business Resilience

Several risks could threaten Enel Chile’s business and moat:

  • Regulatory Risk: The company’s business is susceptible to regulatory changes which can be detrimental to profit and future growth of the business.
  • Competition: While the regulatory framework helps existing incumbents, it does not fully insulate companies from competitors.
  • Economic Instability: Macroeconomic factors, such as inflation and exchange rate volatility, especially in Latin America, can affect Enel Chile’s revenue and cost structure. A prime example of this is the functional currency change from CLP to USD that has now been implemented.
  • Commodity Price Fluctuations: As a producer of electricity that uses fossil fuels and natural gas, volatility in these raw material prices can severely impact the profitability and margins for ENIC.
  • Climate Change: Climate related events may reduce the availability of hydro resources in Chile and, consequently affect profits.
  • Geopolitical Factors: Political unrest or instability in the countries where Enel Chile operates could lead to operational disruptions and reduced profitability.

Business Resilience: Given the above, ENIC exhibits reasonable business resilience in a normal operating environment, but is not immune to shocks and negative macro conditions.

Understandability Assessment

Enel Chile’s business is complex and not the most easy to understand. The nature of its revenues and operations across multiple markets, as well as complex regulatory framework, require a detailed analysis and understanding of each component. For a casual investor, the business might be challenging to understand without a deep dive into their financial and operational aspects. Therefore, a rating of 2/5 is appropriate.

Balance Sheet Health Assessment

ENIC has a fairly complex balance sheet due to its multinational nature and numerous obligations. While debt is relatively manageable at its current levels, increased leverage in the future could threaten the long term stability of the business. Their credit ratings are also average and need to be actively monitored. Their liquidity seems adequate and they seem able to cover their immediate debt obligations with current assets. Given this, a rating of 3/5 seems appropriate.