20-F 1 enic-20191231x20f.htm 20-F enic_Current_Folio_20F

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to       

OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report,

Commission file number: 001-37723

 

ENEL CHILE S.A.

(Exact name of Registrant as specified in its charter)

 

ENEL CHILE S.A.

(Translation of Registrant’s name into English)

CHILE

(Jurisdiction of incorporation or organization)

Santa Rosa 76, Santiago, Chile

(Address of principal executive offices)

Nicolás Billikopf, phone: (56-9) 9343 5500, nicolas.billikopf@enel.com, Av. Santa Rosa 76, Piso 15, Comuna de Santiago, Santiago, Chile

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of Each Class 

 

Trading Symbol(s)

Name of Each Exchange on Which Registered

American Depositary Shares Representing Common Stock

 

ENIC

   New York Stock Exchange

Common Stock, no par value *

 

*

New York Stock Exchange

US$ 1,000,000,000 4.875% Notes due June 12, 2028

 

ENIC28

New York Stock Exchange

 

 _____________________

*Listed, not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report

Shares of Common Stock: 69,166,557,220

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes     No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.   Yes      No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer 

Accelerated filer

Non-accelerated filer         Emerging growth company  

 

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act.  

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report    ☒

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

 

 

 

U.S. GAAP

International Financial Reporting Standards as issued

by the International Accounting Standards Board

Other

 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.  Item 17      Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No

 

 

 

 

Enel Chile’s Simplified Organizational Structure (1)

As of the date of this Report

Picture 33


(1)

Only principal operating consolidated entities are presented here.

(2)

As of December 31, 2019 and the date of this Report, Enel S.p.A. owned 61.9% of Enel Chile. Upon the termination and settlement on May 13, 2020 of a swap transaction entered into by Enel S.p.A. with respect to Enel Chile’s American Depositary Shares, Enel S.p.A.’s beneficial ownership interest in Enel Chile is expected to increase to 62.4%.

 

 

1

 

TABLE OF CONTENTS

 

 

 

Page

GLOSSARY 

3

 

 

 

INTRODUCTION 

6

 

 

 

PRESENTATION OF INFORMATION 

7

 

 

 

FORWARD-LOOKING STATEMENTS 

9

 

 

 

PART I 

 

 

 

 

 

Item 1. 

Identity of Directors, Senior Management and Advisers

10

 

 

 

Item 2. 

Offer Statistics and Expected Timetable

10

 

 

 

Item 3. 

Key Information

10

 

 

 

Item 4. 

Information on the Company

24

 

 

 

Item 4A. 

Unresolved Staff Comments

59

 

 

 

Item 5. 

Operating and Financial Review and Prospects

59

 

 

 

Item 6. 

Directors, Senior Management and Employees

92

 

 

 

Item 7. 

Major Shareholders and Related Party Transactions

99

 

 

 

Item 8. 

Financial Information

102

 

 

 

Item 9. 

The Offer and Listing

104

 

 

 

Item 10. 

Additional Information

106

 

 

 

Item 11. 

Quantitative and Qualitative Disclosures About Market Risk

122

 

 

 

Item 12. 

Description of Securities Other Than Equity Securities

127

 

 

 

PART II 

 

 

 

 

 

Item 13. 

Defaults, Dividend Arrearages and Delinquencies

129

 

 

 

Item 14. 

Material Modifications to the Rights of Security Holders and Use of Proceeds

129

 

 

 

Item 15. 

Controls and Procedures

129

 

 

 

Item 16. 

Reserved

130

 

 

 

Item 16A. 

Audit Committee Financial Expert

130

 

 

 

Item 16B. 

Code of Ethics

130

 

 

 

Item 16C. 

Principal Accountant Fees and Services

131

 

 

 

Item 16D. 

Exemptions from the Listing Standards for Audit Committees

132

 

 

 

Item 16E. 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

132

 

 

 

Item 16F. 

Change in Registrant’s Certifying Accountant

132

 

 

 

Item 16G. 

Corporate Governance

133

 

 

 

Item 16H. 

Mine Safety Disclosure

133

 

 

 

PART III 

 

 

 

 

 

Item 17. 

Financial Statements

134

 

 

 

Item 18. 

Financial Statements

134

 

 

 

Item 19. 

Exhibits

134

 

2

GLOSSARY

AFP

    

Administradora de Fondos de Pensiones

    

A legal entity that manages one of the private sector Chilean pension funds in a fully funded capitalization system implemented in 1980.

 

 

 

 

 

CDEC

 

Centro de Despacho Económico de Carga

 

The autonomous entity in charge of coordinating the efficient operation and dispatch of generation units to satisfy demand in the SIC and SING that was replaced by CEN in November 2017.

 

 

 

 

 

Celta

 

Compañía Eléctrica Tarapacá S.A.

 

Celta was a former Chilean generation subsidiary of Enel Generation that operated plants in the SING and the SIC. Celta merged into GasAtacama in November 2016.

 

 

 

 

 

CEN

 

Coordinador Eléctrico Nacional

 

An autonomous entity in charge of coordinating the efficient operation of the SEN, dispatching generation units to satisfy demand and known as the National Electricity Coordinator. It replaced the CDEC for both the SIC and SING in November 2017.

 

 

 

 

 

Chilean Stock Exchanges

 

Chilean Stock Exchanges

 

The two stock exchanges located in Chile: the Santiago Stock Exchange and the Electronic Stock Exchange.

 

 

 

 

 

CMF

 

Comisión para el Mercado Financiero

 

Chilean Financial Market Commission, the governmental authority that supervises the financial markets. Formerly known as the Chilean Superintendence of Securities and Insurance, or SVS in its Spanish acronym.

 

 

 

 

 

CNE

 

Comisión Nacional de Energía

 

Chilean National Energy Commission, governmental entity with responsibilities under the Chilean regulatory framework.

 

 

 

 

 

DCV

 

Depósito Central de Valores S.A.

 

Chilean Central Securities Depositary.

 

 

 

 

 

EGP Chile

 

Enel Green Power Chile S.A.

 

The successor by merger to Enel Green Power Chile Ltda., a subsidiary of Enel Chile engaged in non-conventional renewable electricity generation. On March 1, 2020, Enel Green Power Chile Ltda. merged into Enel Green Power del Sur SpA. On April 14, 2020, the name of Enel Green Power del Sur SpA was changed to Enel Green Power Chile S.A.

 

 

 

 

 

EGPL

 

Enel Green Power Latin America S.A.

 

Formerly a Chilean closely held limited liability stock corporation that held Enel Green Power Chile Ltda. and that merged with us on April 2, 2018. As a result, we consolidate Enel Green Power Chile Ltda.

 

 

 

 

 

3

Enel

 

Enel S.p.A.

 

An Italian energy company with multinational operations in the power and gas markets. A 61.9% beneficial owner of Enel Chile and our ultimate parent company.

 

 

 

 

 

Enel Américas

 

Enel Américas S.A.

 

An affiliated Chilean publicly held limited liability stock corporation headquartered in Chile, with subsidiaries engaged primarily in the generation, transmission and distribution of electricity in Argentina, Brazil, Colombia, and Peru, and which is controlled by Enel.  

 

 

 

 

 

Enel Chile

 

Enel Chile S.A.

 

Our company, a Chilean publicly held limited liability stock corporation, with subsidiaries engaged primarily in the generation and distribution of electricity in Chile. Registrant of this Report. Formerly known on an interim basis as Enersis Chile S.A.

 

 

 

 

 

Enel Distribution 

 

Enel Distribución Chile S.A.

 

A publicly held limited liability stock corporation and our electricity distribution subsidiary operating in the Santiago Metropolitan Region. Formerly known as Chilectra S.A.

 

 

 

 

 

Enel Generation 

 

Enel Generación Chile S.A.

 

A publicly held limited liability stock corporation and our electricity generation subsidiary in Chile. Formerly known as Empresa Nacional de Electricidad S.A. or Endesa Chile.

 

 

 

 

 

Enel X Chile

 

Enel X Chile SpA

 

A  Chilean closely held limited liability stock corporation and our wholly owned subsidiary.

 

 

 

 

 

GasAtacama

 

GasAtacama Chile S.A.

 

Formerly a subsidiary of Enel Generation engaged in gas transportation and electricity generation in northern Chile. On October 1, 2019, GasAtacama merged into Enel Generation.

 

 

 

 

 

GasAtacama Holding

 

Inversiones GasAtacama Holding Ltda.

 

Formerly a holding company subsidiary of Enel Generation, which previously held GasAtacama. GasAtacama Holding merged into Celta during 2016, which later merged into GasAtacama.

 

 

 

 

 

Gener

 

AES Gener S.A.

 

A Chilean generation company and one of our competitors in Chile.

 

 

 

 

 

GNL Quintero

 

GNL Quintero S.A.

 

A company created to develop, build, finance, own and operate a LNG regasification facility at Quintero Bay at which LNG is unloaded, stored and regasified. Enel Generation sold its 20% stake in this company to Enagas Chile S.p.A., an unaffiliated company, in September 2016.

 

 

 

 

 

GSM

 

General Shareholders’ Meeting

 

General Shareholders’ Meeting.

 

 

 

 

 

4

HidroAysén

 

Centrales Hidroeléctricas de Aysén S.A.

 

A company created to develop a hydroelectric project in the Aysén region, southern Chile. Enel Generation owned 51% of HidroAysén and Colbún, an unaffiliated company, owned the remaining 49%. The company terminated its activities in 2017.

 

 

 

 

 

IFRS

 

International Financial Reporting Standards

 

International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB).

 

 

 

 

 

LNG

 

Liquefied Natural Gas.

 

Liquefied natural gas.

 

 

 

 

 

NCRE

 

Non-Conventional Renewable Energy

 

Energy sources that are continuously replenished by natural processes, such as wind, biomass, mini-hydro, geothermal, wave, solar or tidal energy.

 

 

 

 

 

Pehuenche

 

Empresa Eléctrica Pehuenche S.A.

 

A  Chilean publicly held limited liability stock corporation engaged in the electricity generation business, owner of three power stations in the Maule River basin and a subsidiary of Enel Generation.

 

 

 

 

 

SEF

 

Superintendencia de Electricidad y Combustible

 

Chilean Superintendence of Electricity and Fuels, the governmental authority that supervises the Chilean electricity industry.

 

 

 

 

 

SEN

 

Sistema Eléctrico Nacional

 

The National Electricity System is the Chilean national interconnected electricity system formed in November 2017 through the integration of the SIC and SING.

 

 

 

 

 

SIC

 

Sistema Interconectado Central

 

Chilean central interconnected electricity system that was integrated with the SING in November 2017 to form a single interconnected system, the SEN.

 

 

 

 

 

SING

 

Sistema Interconectado del Norte Grande

 

Chilean interconnected electric system operating in northern Chile that was integrated with the SIC in November 2017 to form a single interconnected system, the SEN.

 

 

 

 

 

UF

 

Unidad de Fomento

 

Chilean inflation-indexed, Chilean peso-denominated monetary unit, equivalent to Ch$ 28,309.94 as of December 31, 2019.

 

 

 

 

 

UTA

 

Unidad Tributaria Anual

 

Chilean annual tax unit. One UTA equals 12 Unidades Tributarias Mensuales (“UTM”), a Chilean inflation-indexed monthly tax unit used to define fines, among other purposes. For December 2019, one UTM was equivalent to Ch$ 49,623 and one UTA was equivalent to Ch$ 595,476.

 

 

 

 

 

VAD

 

Valor Agregado de Distribución

 

Value added from distribution of electricity.

 

 

5

INTRODUCTION

 

As used in this Report on Form 20-F (“Report”), first-person personal pronouns such as “we”, “us” or “our”, as well as “Enel Chile” or the “Company”, refer to Enel Chile S.A. and our consolidated subsidiaries unless the context indicates otherwise. Unless otherwise noted, our interest in our principal subsidiaries and jointly-controlled companies and associates is expressed in terms of our economic interest as of December 31, 2019.

 

We are a Chilean company engaged in electricity generation and distribution businesses in Chile through our subsidiaries and affiliates. As of the date of this Report and after giving effect to the 2018 Reorganization (described in “Item 4. Information on the Company — A. History and Development of the Company — The 2018 Reorganization”), we own 93.6% of Enel Generación Chile S.A. (“Enel Generation”), a Chilean electricity generation company with operations in Chile, and 99.1% of Enel Distribución Chile S.A. (“Enel Distribution”), a Chilean electricity distribution company with operation in the Santiago Metropolitan Region.

 

On April 2, 2018, as part of the 2018 Reorganization, Enel Green Power Latin America S.A. (“EGPL”), a Chilean non-conventional electricity generation company with operations in Chile, merged with us. As a result, we now wholly own and consolidate Enel Green Power Chile Ltda. (“EGP Chile”). For additional information relating to the company and the corporate reorganization completed in 2018, please see “Item 4. Information on the Company — A. History and Development of the Company — The 2018 Reorganization”.

 

We are a publicly held limited liability stock corporation organized on March 1, 2016, under the laws of the Republic of Chile as a result of a corporate reorganization completed in 2016 by the former Enersis S.A., which separated its Chilean businesses from its non-Chilean businesses. On October 18, 2016, and as part of this process, (i) our subsidiary Empresa Nacional de Electricidad S.A. changed its name to “Enel Generación Chile S.A.”; (ii) our subsidiary Chilectra Chile S.A. changed its name to “Enel Distribución Chile S.A.”; and (iii) we changed our name from “Enersis Chile S.A.” to “Enel Chile S.A.”

 

As of the date of this Report, Enel S.p.A. (“Enel”), an Italian energy company with multinational operations in the power and gas markets, owns 61.9% of us and is our ultimate controlling shareholder.

 

6

PRESENTATION OF INFORMATION

 

Financial Information

 

In this Report, unless otherwise specified, references to “U.S. dollars” or “US$”, are to dollars of the United States of America (“United States”); references to “pesos” or “Ch$” are to Chilean pesos, the legal currency of Chile; and references to “UF” are to Unidades de Fomento. The UF is a Chilean inflation-indexed, peso-denominated monetary unit that is adjusted daily to reflect changes in the official Consumer Price Index (“CPI”) of the Chilean National Institute of Statistics (Instituto Nacional de Estadísticas or “INE”). The UF is adjusted in monthly cycles. Each day in the period beginning on the tenth day of the current month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed in order to reflect a proportionate amount of the change in the Chilean CPI during the prior calendar month. As of December 31, 2019, one UF was equivalent to Ch$ 28,309.94. The U.S. dollar equivalent of one UF was US$ 37.81 as of December 31, 2019, using the Observed Exchange Rate reported by the Central Bank of Chile (Banco Central de Chile) as of December 31, 2019, of Ch$ 748.74 per US$ 1.00. The U.S. dollar observed exchange rate (dólar observado) (the “Observed Exchange Rate”), which is reported by the Central Bank of Chile and published daily on its web page, is the weighted-average exchange rate of the previous business day’s transactions in the Formal Exchange Market. Unless the context specifies otherwise, all amounts translated from Chilean pesos to U.S. dollars or vice versa, or from UF to Chilean pesos, have been made at the rates applicable as of December 31, 2019.

 

The Central Bank of Chile may intervene by buying or selling foreign currency on the Formal Exchange Market to maintain the Observed Exchange Rate within a desired range.

 

Our consolidated financial statements and, unless otherwise indicated, other financial information concerning us included in this Report are presented in Chilean pesos. We have prepared our consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

 

All our subsidiaries are integrated and all their assets, liabilities, income, expenses and cash flows are included in the consolidated financial statements after making the adjustments and eliminations related to intra-group transactions. Our participation in associated companies over which we exercise significant influence is included in our consolidated financial statements using the equity method. For detailed information regarding consolidated entities, jointly controlled entities and associated companies, see Appendices 1, 2, and 3 to the consolidated financial statements.

 

This Report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates. Unless otherwise indicated, the U.S. dollar equivalent for information in Chilean pesos is based on the Observed Exchange Rate for December 31, 2019, as defined in “Item 3. Key Information — A. Selected Financial Data — Exchange Rates”. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. No representation is made that the Chilean peso or U.S. dollar amounts that are shown in this Report could have been or could be converted into U.S. dollars or Chilean pesos, at such rate or at any other rate. See “Item 3. Key Information — A. Selected Financial Data — Exchange Rates”.

 

Technical Terms

 

References to “TW” are to terawatts (1012 watts or a trillion watts); references to “GW” and “GWh” are to gigawatts (109 watts or a billion watts) and gigawatt hours, respectively; references to “MW” and “MWh” are to megawatts (106 watts or a million watts) and megawatt hours, respectively; references to “kW” and “kWh” are to kilowatts (103 watts or a thousand watts) and kilowatt hours, respectively; references to “kV” are to kilovolts, and references to “MVA” are to megavolt amperes. References to “BTU” and “MBTU” are to British thermal unit and million British thermal units, respectively. A “BTU” is an energy unit equal to approximately 1,055 joules. References to “Hz” are to hertz, and references to “mtpa” are to metric tons per annum. Unless otherwise indicated, statistics provided in this Report with respect to the installed capacity of electricity generation facilities are expressed in MW. One TW equals 1,000 GW, one GW equals 1,000 MW and one MW equals 1,000 kW. The installed capacity we are presenting in this Report corresponds to the gross installed capacity, without considering the MW that each power plant consumes for its own operation.

7

 

Statistics relating to aggregate annual electricity production are expressed in GWh and based on a year of 8,760 hours, except for leap years, which are based on 8,784 hours. Statistics relating to installed capacity and production of the electricity industry do not include electricity of self-generators.

 

Energy losses experienced by generation companies during transmission are calculated by subtracting the number of GWh of energy sold from the number of GWh of energy generated (excluding their own energy consumption and losses on the part of the power plant), within a given period. Losses are expressed as a percentage of total energy generated.

 

Energy losses during distribution are calculated as the difference between total energy purchased (GWh of electricity demand, including own generation) and the energy sold excluding tolls and energy consumption not billed (also measured in GWh), within a given period. Distribution losses are expressed as a percentage of total energy purchased. Losses in distribution arise from illegally tapped energy as well as technical losses.

 

Calculation of Economic Interest

 

References are made in this Report to the “economic interest” of Enel Chile in its related companies. We could have direct and indirect interest in such companies. In circumstances in which we do not directly own an interest in a related company, our economic interest in such ultimate related company is calculated by multiplying the percentage of economic interest in a directly held related company by the percentage of economic interest of any entity in the ownership chain of such related company. For example, if we directly own a 6% equity stake in an associate company and 40% is directly held by our 60%-owned subsidiary, our economic interest in such associate would be 60% times 40% plus 6%, equal to 30%.

 

Rounding

 

Certain figures included in this Report have been rounded for ease of presentation. It is possible, due to rounding, that sums shown in tables do not exactly equal the sums of the entries.

 

8

FORWARD-LOOKING STATEMENTS

This Report contains statements that are or may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements appear throughout this Report and include statements regarding our intent, belief or current expectations, including but not limited to any statements concerning:

·

our capital investment program;

·

trends affecting our financial condition or results of operations;

·

our dividend policy;

·

the future impact of competition and regulation;

·

political and economic conditions in the countries in which we or our related companies operate or may operate in the future;

·

any statements preceded by, followed by, or that include the words “believes,” “expects,” “predicts,” “anticipates,” “intends,” “estimates,” “should,” “may,” or similar expressions; and

·

other statements contained or incorporated by reference in this Report regarding matters that are not historical facts.

Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to:

·

demographic developments, political events, social unrest, economic fluctuations, public health crises and pandemics, and interventionist measures by authorities in Chile;

·

water supply, droughts, flooding, and other weather conditions;

·

changes in Chilean environmental regulations and the regulatory framework of the electricity industry;

·

our ability to implement proposed capital expenditures, including our ability to arrange financing where required;

·

the nature and extent of future competition in our principal markets; and

·

the factors discussed below under “Risk Factors.”

You should not place undue reliance on such statements, which speak only as of the date that they were made. Our independent registered public accounting firm has not examined or compiled the forward-looking statements and, accordingly, does not provide any assurance with respect to such statements. You should consider these cautionary statements together with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to forward-looking statements contained in this Report to reflect later events or circumstances or the occurrence of unanticipated events, except as required by law.

For all these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

9

PART I

Item  1.      Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2.      Offer Statistics and Expected Timetable

Not applicable.

Item 3.      Key Information

A.   Selected Financial Data.

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements included in this Report. The selected consolidated financial data as of December 31, 2019, and 2018 and for each of the years in the three-year period ended December 31, 2019, are derived from our audited consolidated financial statements included in this Report. The selected consolidated financial data as of December 31, 2017, 2016 and 2015, and for the years ended December 31, 2016, and 2015 are derived from our consolidated financial statements not included in this Report. Our consolidated financial statements were prepared in accordance with IFRS, as issued by the IASB.

 

Amounts in the tables are expressed in millions, except for ratios, operating data and data for shares and American Depositary Shares (“ADS”).  For the convenience of the reader, all data presented in U.S. dollars in the following summary, as of and for the year ended December 31, 2019, has been converted at the U.S. dollar Observed Exchange Rate (dólar observado) for that date of Ch$ 748.74 per US$ 1.00. The Observed Exchange Rate, which is reported and published daily on the Central Bank of Chile’s web page, corresponds to the weighted-average exchange rate of the previous business day’s transactions in the Formal Exchange Market.  For more information concerning historical exchange rates, see “Item 3. Key Information — A. Selected Financial Data— Exchange Rates” below.

 

10

The following tables set forth our selected consolidated financial data and operating data for the years indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the year ended December 31,

 

    

2019 (1)

    

2019

    

2018

    

2017

    

2016

    

2015

 

 

(US$ millions)

 

(Ch$ millions)

Consolidated Statement of Comprehensive Income Data

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other operating income

 

3,701

 

2,770,834

 

2,457,161

 

2,522,978

 

2,541,567

 

2,399,029

Operating costs (2)

 

(2,998)

 

(2,244,780)

 

(1,786,557)

 

(1,944,348)

 

(1,973,778)

 

(1,873,540)

Operating income

 

703

 

526,055

 

670,605

 

578,631

 

567,789

 

525,489

Financial results (3)

 

(202)

 

(150,893)

 

(110,875)

 

(22,415)

 

(20,483)

 

(97,869)

Other non-operating income

 

2.4

 

1,793

 

3,410

 

113,241

 

121,490

 

20,056

Share of profit (loss) of associates and joint ventures accounted for using the equity method

 

0.5

 

366

 

3,190

 

(2,697)

 

7,878

 

8,905

Income before income taxes

 

504

 

377,321

 

566,330

 

666,760

 

676,674

 

456,581

Income tax expenses

 

(82)

 

(61,228)

 

(153,483)

 

(143,342)

 

(111,403)

 

(109,613)

Net income

 

422

 

316,093

 

412,848

 

523,418

 

565,271

 

346,968

Net income attributable to the parent Company

 

396

 

296,154

 

361,710

 

349,383

 

384,160

 

251,838

Net income attributable to non-controlling interests

 

27

 

19,940

 

51,138

 

174,035

 

181,111

 

95,130

Total basic and diluted earnings per average number of shares (Ch$/US$ per share)

 

0.006

 

4.28

 

5.66

 

7.12

 

7.83

 

5.13

Total basic and diluted earnings per average number of ADSs (Ch$/US$ per ADS)

 

0.286

 

214.09

 

282.97

 

355.84

 

391.26

 

256.49

Cash dividends per share (Ch$/US$ per share)(4)

 

0.004

 

3.14

 

3.00

 

3.23

 

2.09

 

 —

Cash dividends per ADS (Ch$/US$ per ADS)(4)

 

0.210

 

156.89

 

149.89

 

161.72

 

104.65

 

 —

Weighted average number of shares of common stock (millions)

 

69,167

 

69,167

 

63,913

 

49,093

 

49,093

 

49,093

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Financial Position Data

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

10,495

 

7,857,988

 

7,488,020

 

5,694,773

 

5,398,711

 

5,325,469

Non-current liabilities

 

4,099

 

3,069,405

 

2,596,392

 

1,090,995

 

1,178,471

 

1,270,006

Equity attributable to the parent company

 

4,654

 

3,484,698

 

3,421,229

 

2,983,384

 

2,763,391

 

2,592,682

Equity attributable to non-controlling interests

 

351

 

262,586

 

252,935

 

803,578

 

699,602

 

609,219

Total equity

 

5,005

 

3,747,284

 

3,674,164

 

3,786,962

 

3,462,994

 

3,201,901

Capital stock

 

5,185

 

3,882,103

 

3,954,491

 

2,229,109

 

2,229,109

 

2,229,109

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Consolidated Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures (CAPEX) (5)

 

429

 

321,079

 

300,539

 

266,030

 

222,386

 

309,503

Depreciation, amortization and impairment losses (6)

 

704

 

527,437

 

220,750

 

160,622

 

197,587

 

150,147

(1)Solely for the convenience of the reader, Chilean peso amounts have been converted into U.S. dollars at the exchange rate of Ch$ 748.74 per U.S. dollar, as of December 31, 2019.

(2)Operating costs represent raw materials and supplies used, other work performed by the entity, employee benefits expenses, depreciation and amortization expenses, impairment losses recognized in the period’s profit or loss and other expenses.

(3)Financial results represent (+) financial income, (-) financial costs, (+/-) foreign currency exchange differences and net gains/losses from indexed assets and liabilities.

(4)For 2016, a payout ratio of 50% was used based on annual consolidated net income for our 2016 annual consolidated net income filed with the CMF, based on 10 months of results starting as of our incorporation on March 1, 2016, and therefore differs from the twelve-month net income included in this Report.

11

(5)Capital Expenditures (CAPEX) amounts listed in this table represent cash flows used for purchases of property, plant and equipment and intangible assets for each year.

(6)For further detail, please refer to Note 31 of the Notes to our consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the year ended December 31,

 

    

2019

    

2018

    

2017

    

2016

    

2015

OPERATING DATA OF SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enel Distribution

 

 

 

 

 

 

 

 

 

 

Electricity sold (GWh)

 

17,107

 

16,782

 

16,438

 

15,924

 

15,893

Number of customers (thousands)

 

1,972

 

1,925

 

1,882

 

1,826

 

1,781

Total energy losses (%) (1)

 

5

 

5

 

5

 

5

 

5

 

 

 

 

 

 

 

 

 

 

 

Enel Generation

 

 

 

 

 

 

 

 

 

 

Installed capacity (MW)

 

6,114

 

6,274

 

6,351

 

6,351

 

6,351

Generation (GWh)

 

17,548

 

17,373

 

17,073

 

17,564

 

18,294

 

 

 

 

 

 

 

 

 

 

 

EGP Chile (2)

 

 

 

 

 

 

 

 

 

 

Installed capacity (MW)

 

1,189

 

1,189

 

 —

 

 —

 

 —

Generation (GWh)

 

3,493

 

2,673

 

 —

 

 —

 

 —

 


(1)

Energy losses in distribution arise from illegally tapped energy as well as technical losses. They are calculated as the difference between total energy generated and purchased and the energy sold, excluding tolls and energy consumption not billed (GWh), within a given period. Losses are expressed as a percentage of total energy purchased.

(2)

EGP Chile has been consolidated since April 2018.

Exchange Rates

Fluctuations in the exchange rate between the Chilean peso and the U.S. dollar will affect the U.S. dollar equivalent of the price in Chilean pesos of our shares of common stock on the Santiago Stock Exchange (Bolsa de Comercio de Santiago) and the Chilean Electronic Stock Exchange (Bolsa Electrónica de Chile). These fluctuations in the exchange rate affect the price of our American Depositary Shares (“ADSs”) and the conversion of cash dividends relating to the common shares represented by ADSs from Chilean pesos to U.S. dollars. In addition, to the extent that our significant financial liabilities are denominated in foreign currencies, fluctuations in the exchange rate may have a considerable impact on our earnings.

 

In Chile, there are two currency markets, the Formal Exchange Market (Mercado Cambiario Formal) and the Informal Exchange Market (Mercado Cambiario Informal). The Formal Exchange Market consists of banks and other entities authorized by the Central Bank of Chile. The Informal Exchange Market includes entities that are not expressly permitted to operate in the Formal Exchange Market, such as foreign currency exchange houses and travel agencies, among others. The Central Bank of Chile has the authority to require that certain purchases and sales of foreign currencies be made on the Formal Exchange Market. Free market forces drive both the Formal and Informal Exchange Markets.  Current regulations require that the Central Bank of Chile be informed of transactions that must be effected through the Formal Exchange Market.

 

The U.S. dollar Observed Exchange Rate, which is reported by the Central Bank of Chile and published daily on its web page, is the weighted-average exchange rate of the previous business day’s transactions in the Formal Exchange Market. Nevertheless, the Central Bank of Chile may intervene by buying or selling foreign currency on the Formal Exchange Market to attempt to maintain the Observed Exchange Rate within a desired range.

 

The Informal Exchange Market reflects transactions effected at an informal exchange rate. There are no limits imposed on the extent to which the exchange rate in the Informal Exchange Market can fluctuate above or below the U.S. dollar Observed Exchange Rate. Foreign currency for payments and distributions with respect to the ADSs may be

12

purchased either in the Formal or the Informal Exchange Market, but such payments and distributions must be remitted through the Formal Exchange Market.

 

The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. As of December 31, 2019, the U.S. dollar Observed Exchange Rate was Ch$ 748.74 per US$ 1.00. As of April 27, 2020, the U.S. dollar Observed Exchange Rate was Ch$ 856.76 per US$ 1.00.

 

Calculation of the appreciation or devaluation of the Chilean peso against the U.S. dollar in any given period is made by determining the percent change between the reciprocals of the Chilean peso equivalent of US$ 1.00 at the end of the preceding period and the end of the period for which the calculation is being made. For example, to calculate the devaluation of the year-end Chilean peso in 2019, one determines the percentage of change between the reciprocal of Ch$ 694.77, the value of one U.S. dollar as of December 31, 2018, or 0.0014393, and the reciprocal of Ch$ 748.74, the value of one U.S. dollar as of December 31, 2019, or 0.0013356. In this example, the percentage change between the two periods is -7.2%, which represents the 2019 year-end devaluation of the Chilean peso against the 2018 year-end U.S. dollar. A positive percentage change means that the Chilean peso appreciated against the U.S. dollar, while a negative percentage change means that the Chilean peso devaluated against the U.S. dollar.

 

The following table sets forth the period-end rates for U.S. dollars for the years ended December 31, 2015, through December 31, 2019, based on information published by the Central Bank of Chile.

 

 

 

 

 

 

 

 

Ch$ per US$(1)

 

    

Period End

    

Appreciation (Devaluation)

 

 

(in Ch$)

 

(in %)

Year ended December 31,

 

 

 

 

2019

 

748.74

 

(7.2)

2018

 

694.77

 

(11.5)

2017

 

614.75

 

8.9

2016

 

669.47

 

6.1

2015

 

710.16

 

(14.6)

Source: Central Bank of Chile.

(1)

Calculated based on the variation of the reciprocals of the period-end exchange rates.

B.   Capitalization and Indebtedness.

Not applicable.

C.   Reasons for the Offer and Use of Proceeds.

Not applicable.

D.  Risk Factors.

Fluctuations in the Chilean economy, economic interventionist measures by governmental authorities, political and financial events, or other crises in Chile and worldwide may affect our results of operations, financial condition, liquidity, and the value of our securities.

All our operations are in Chile. Accordingly, our revenues are affected by the performance of the Chilean economy. Chile is also vulnerable to external shocks, such as financial and political events, that could cause significant economic difficulties and affect economic growth. If Chile experiences lower than expected economic growth or a recession, it is likely that our customers will demand less electricity and that some of our customers may experience difficulties paying their electric bills, possibly increasing our uncollectible accounts. Any of these situations could adversely affect our results of operations and financial condition. Since 2018, the U.S. and China have been involved in a trade war involving protectionist measures that has increased the volatility of financial markets worldwide due to the uncertainty of political decisions. Instability in the Middle East or in any other major oil-producing region could also result in higher fuel prices

13

worldwide, increasing the operating cost for our thermal generation plants and unfavorably affecting our results of operations and financial condition.

 

An international financial crisis and its disruptive effects on the financial industry could negatively affect our ability to obtain new financings under the same historical terms and conditions that we have benefited from to date. Political events or financial or other crises could also diminish our ability to access Chilean and international capital markets or increase the interest rates available to us. Reduced liquidity, in turn, could adversely affect our capital expenditures, long-term investments and acquisitions, growth prospects and dividend payout policy. Insufficient cash flows could result in the inability to meet our debt obligations and the need to seek waivers to comply with restrictive debt covenants, resulting in increased costs for subsequent financings.

 

Future negative developments in Chile, including political events, financial or other crises, changes to policies regarding foreign exchange controls, regulations, and taxation, may impair our ability to execute our business plan and could adversely affect our results of operations and financial condition. Inflation, devaluation, social instability, and other political, economic or diplomatic developments could also reduce our profitability. Chilean financial and securities markets are influenced by economic and market conditions in other countries and may be affected by international events, which could unfavorably affect the value of our securities.

 

We are exposed to economic and political volatility, including civil unrest in Chile due to the challenges arising from changes in economic conditions, regulatory policies, laws governing foreign trade, manufacturing, development and investments, as well as various crises and uncertainties.  These factors, either individually or in the aggregate, could severely impact Chilean economic growth and our business, results of operations and financial condition. Starting in October 2019, Chile began to experience social turmoil throughout the country, starting initially because of a public transportation fare hike.  Almost immediately, increasingly violent student and civil protests brought about widespread and severe tensions, indiscriminate violence and vandalism, significant public and private sector property damage and disruption to institutions, commerce, general safety, civilian welfare and peace. The government initially declared a 90‑day state of emergency, extendable as necessary.  At the same time, it launched various political, social, and economic reforms, including a guaranteed minimum wage, an increase in government-subsidized pensions, stabilization of electricity costs, a higher tax bracket for high-income earners, new health insurance programs, a pay cut for the members of the Chilean Congress and certain civil servants.

 

In this context, the Chilean government approved calling for a national referendum, now rescheduled for October 2020, to decide whether to create a new Chilean constitution, and if so, whether a popularly elected assembly or a combination of current legislators and a popularly elected assembly would draft the new constitution. The existing constitution has been in place since 1980 and any new constitution could alter the Chilean political situation, affect the Chilean economy and the country’s business outlook.  A new constitution may also change existing rights, including rights to exploit natural resources, and water and property rights, any of which could adversely affect our business, results of operations, and financial condition.

 

We are subject to the adverse effects of worldwide pandemics.

 

An international public health crisis, such as the one attributable to the COVID‑19 pandemic that has become an increasing worldwide source of distress since December 2019, could significantly affect Chile, as well as our trading partners.

 

In March 2020, due to the COVID‑19 pandemic, Chilean President Sebastián Piñera decreed a state of emergency for 90 days, and such emergency measure may be subsequently extended beyond June 2020. Under such executive authority, President Piñera has instituted nighttime military curfews, selective mandatory quarantines in affected areas, control of entrance, exit and traffic within specified zones, the prohibition of mass gatherings, the closing of public schools, among other measures. The private sector has voluntarily taken further measures, such as adopting telecommuting wherever possible and the closing of commercial offices. Many businesses, such as restaurants and retail stores, have temporarily closed, either voluntarily or by executive decree, and companies associated with travel, transportation, and tourism have been severely affected and many may go bankrupt. 

 

14

The cumulative effect of measures of this kind will likely lead to a recession, high unemployment levels, and perhaps a decline in electricity demand. If the COVID-19 pandemic is not adequately contained in 2020, the ability of our businesses to generate income and maintain liquidity levels to allow for normal operations may diminish. We may also experience increased difficulties in receiving payments from our distribution customers, especially those residential customers accustomed to making their monthly electricity bill payments in our commercial offices, some of which have closed. These customers may not have easy access to payment online or may have greater difficulties in settling their electricity bills. We are not presently able to quantify the expected negative effects of the COVID‑19 pandemic on our 2020 results; however, we expect them to be adverse, especially in the distribution business.

 

Our businesses depend heavily on hydrology and are affected by droughts, flooding, storms, ocean currents, and other inclement weather conditions.

Approximately 49% of our installed generation capacity in 2019 was hydroelectric. Accordingly, arid hydrological conditions could negatively affect our business, results of operations, and financial condition. Our results have been adversely affected when hydrological conditions in Chile have been significantly below average.

 

Our subsidiary Enel Generation has entered into certain agreements with the Chilean government and local irrigators regarding the use of water for hydroelectric generation purposes during periods of low water levels. However, if droughts persist, we may face increased pressure from the Chilean government or other third parties to further restrict our water use.

 

Our operating expenses increase during these drought periods when thermal power plants, which have higher operating costs relative to hydroelectric power plants, are dispatched more frequently. We may need to buy electricity at higher spot prices in order to comply with our contractual supply obligations. The cost of these electricity purchases may exceed our contracted electricity sale prices; thus, potentially producing losses from those contracts. For further information with respect to the effect of hydrology on our business and financial results, please refer to “Item 5. Operating and Financial Review and Prospects — A. Operating Results —1. Discussion of Main Factors Affecting Operating Results and Financial Condition of the Company —a. Generation Business.”

 

Droughts also indirectly affect the operation of our thermal power plants, including our facilities that use natural gas, fuel oil, or coal, in the following manner:

 

·

Our thermal power plants require water for cooling, and droughts in extreme situations may reduce the availability of water and increase the cost of transportation. As a result, we have had to purchase water for our San Isidro power plant from agricultural areas that are also experiencing water shortages. These water purchases may increase our operating costs and may require us to negotiate with the local communities.

·

Thermal power plants generate emissions such as nitrogen oxide (NO), carbon dioxide (CO2), carbon monoxide (CO), sulfur dioxide (SO2), and particulate matter into the atmosphere. Therefore, greater use of thermal power plants during droughts generally increases the risk of producing higher levels of greenhouse gas emissions, which also decreases our operating income due to the payment of so-called “green taxes.”

A full recovery from the drought that has been affecting the regions where most of our hydroelectric power plants are located may last for an extended period, and new drought periods may recur in the future. Prolonged droughts may exacerbate the risks described above and have a further negative effect upon our business, results of operations, and financial condition.

 

Our distribution business is also affected by inclement weather. Extreme temperatures can increase demand significantly within a very short period, which may put a strain in our service and could result in service disruptions that would be potentially subject to fines. Depending on weather conditions, results obtained by our distribution business can vary significantly from year to year. For example, as a result of severe rainstorms in June 2017, with high wind gusts that brought down part of the electric network, 125,000 of our customers, or 7%, were left without electricity. In July 2017, a strong snowstorm over the Santiago Metropolitan Region caused massive damage to the electrical infrastructure, and a blackout affected 342,000 of our customers, or 18%, and 17% of our feeders. This was the most damaging

15

snowstorm in Santiago since 1970 and left parts of the capital without electricity for more than a week. These events significantly increased our costs due to emergency responses, including payments related to damage compensation, fines, line maintenance, and tree trimming programs.

 

We are subject to physical, operational, and financial risks related to climate change effects, and potential business risks resulting from climate change legislation and regulation to limit greenhouse gas (GHG) emissions.

 

The electricity generated by our solar and wind generation facilities is highly dependent on suitable solar and wind conditions, which, even under normal operating circumstances, can be very variable. Climate change may also have long-term effects on wind patterns and the amount of solar energy received at a particular solar facility, reducing the output of electricity generated by the facilities. Although we base our business decisions for each renewable energy facility on solar and wind studies, actual conditions may not conform to the findings of these studies. They may be affected by changes in weather patterns, including the potential impact of climate change. Also, severe weather may damage critical components of our renewable power generation systems, including turbines, solar panels, and inverters.

 

If our renewable energy production falls below anticipated levels, we may have to dispatch our back-up thermal power plants to make up the shortfall in electricity generation. Our thermal power plants have higher operating costs and generate GHG emissions. Also, we may need to buy electricity in the spot market to fulfill the contractual supply obligations of our solar and wind generation facilities, which may be at prices higher than the contracted electricity sale prices. These impacts could increase our costs or result in losses and have a material adverse effect on our business, results of operations, and financial condition.

 

Future climate change legislation and regulation restricting or regulating GHG emissions could result in increased operating costs and have a material adverse effect on our business, results of operations, and financial condition. The adoption and implementation of any international treaty or any legislation or regulations imposing new or additional reporting obligations on, or limiting emissions of, GHGs from our operations could require us to incur additional costs to comply with such requirements and possibly require the reduction or limitation of GHG emissions associated with our operations. These higher compliance standards may involve additional costs to operate and maintain our equipment and facilities, install emission controls, or pay taxes and fees relating to GHG emissions, which could have a material adverse effect on our business, results of operations and financial condition.

 

Governmental regulations may unfavorably affect our businesses, cause delays, impede the development of new projects, or increase the costs of operations and capital expenditures.

Our businesses and the tariffs that we charge to our customers are subject to extensive regulation that may negatively affect our profitability. For example, governmental authorities might impose rationing policies during droughts or prolonged failures of power facilities, which may adversely affect our business, results of operations, and financial condition.

 

Some aspects of the Chilean electricity law have been subject to significant regulatory changes, and any such changes may unfavorably affect our future operations and profitability. For example, in the context of the social crisis that began in October 2019, the government established a transitional mechanism for stabilizing electricity prices for customers under the regulated price system. The mechanism eliminates the price increase of 9.2% that would have been applied to regulated customers as of July 2019 and defers the price increase for the sale of electricity under contracts between generation and distribution companies that start before 2021. A price stabilization funding program was implemented by the CNE and is effectively financed by companies in the generation industry, including our subsidiary Enel Generation, through accounts receivable that are generated by the differences between the contractual rates and the stabilized rates, which are expected to enable the generation companies to recover the lost revenues by December 31, 2027. We expect to suffer a financial loss as a result of this revenue deferral because generation companies are being asked to finance such deferral. For further information, please see Note 11 of the Notes to our consolidated financial statements. Other Chilean electricity sector regulations may also affect the ability of our generation companies to collect revenues sufficient to cover their operating costs and adversely affect our future profitability.

 

16

With respect to distribution companies, in December 2019, the Ministry of Energy’s Law No. 21,194 lowers the profitability of distribution companies and modifies the electricity distribution tariff process. Among other things, the new law reduced the rate for calculating annual investment costs from 10% to a rate calculated by the CNE every four years (which will be an annual after-tax rate of between 6% and 8%) and established that the after-tax rate of return for each distribution company must be between three percentage points below and two percentage points above the rate calculated by the CNE. The Chilean Congress is currently discussing an electricity distribution tariff reform (“ley larga”), which, if approved, may reduce our future profitability. It is possible that social and political pressures prevailing recently may influence regulators in deferring favorable tariff adjustments for 2020 which would otherwise accrue.

 

Our operating subsidiaries are also subject to environmental regulations that, among other things, require us to perform environmental impact studies on future projects and obtain construction and operating permits from local and national regulators. Governmental authorities may withhold or delay the approval of these permits until the completion of environmental impact studies. Therefore, their processing time may be longer than expected. Environmental regulations for existing and future generation capacity have become stricter and require increased capital investments. Any delay in meeting the required emission standards may constitute a violation of the environmental regulations. Failure to certify the original implementation and ongoing emission standard requirements of such monitoring systems may result in significant penalties and sanctions or legal claims for damages. We expect that more restrictive emission limits will be established in the future. We are also subject to an annual “green tax,” based on our greenhouse gas emissions in the previous year. Such taxes may increase in the future and discourage thermal electricity generation.

 

Changes in the regulatory framework are often submitted to legislators and administrative authorities, and some of these changes could have a material adverse effect on our business, results of operations, and financial condition.

 

 

Our business faces risks from the promotion of decarbonization efforts both on a global and on a national scale.

In June 2019, the Chilean government announced its plan to phase out coal entirely from its energy mix by 2040 and achieve carbon neutrality by 2050. Under this plan, Enel Generation and GasAtacama Chile S.A (“GasAtacama,” now merged into Enel Generation) signed an agreement with the Chilean Ministry of Energy. The protocol defines the process for the progressive closure of our coal-fired power plants Tarapacá (158 MW), Bocamina I (128 MW), and Bocamina II (350 MW). Under this agreement, Enel Generation is irrevocably obligated to close Bocamina I and II, and Tarapacá’s coal plant. The Tarapacá coal plant was closed in December 2019. The deadlines for closing Bocamina I and II are December 31, 2023, and December 31, 2040, respectively.

 

Even though the Chilean government’s plan to achieve decarbonization may overlap with our companies’ sustainability strategy, the actual implementation of the governmental targets may exert considerable pressure on us and on our ability to satisfy our contractual obligations with other cleaner sources. In turn, this may increase our expenses, decrease our profitability, and limit our ability to satisfy electricity demand fully.

 

Regulatory authorities may impose fines on our subsidiaries due to operational failures or any breaches of regulations.

Our electricity businesses are subject to regulatory fines for any breach of current regulations, including failures to supply energy. Our generation subsidiaries are supervised by local regulatory entities and may be subject to fines in cases where the regulator determines that the company is responsible for the operational failures that affect the regular energy supply to the system, including coordination issues. Regulations establish a compensation fee to end customers when energy is interrupted more than the standard allowed time due to events or failures affecting transmission facilities.

 

In 2017, Enel Distribution was fined by the SEF for a total amount of 90,000 UTM (Ch$ 4.5 billion) due to various claims of infractions related to extreme inclement weather in June and July 2017. During 2017, Enel Distribution was also fined for a total amount of 35,611 UTM (Ch$ 1.8 billion) associated with breaches of quality standards of supply. For further information on fines, please refer to Note 36.3 of the Notes to our consolidated financial statements.

 

17

We depend on distributions from our subsidiaries to meet our payment obligations.

In order to pay our obligations, we rely on cash from dividends, loans, interest payments, capital reductions, and other distributions from our subsidiaries. Such payments and distributions to us may be subject to legal constraints, such as dividend restrictions and fiduciary obligations.

 

Contractual Constraints: Distribution restrictions included in certain credit agreements of our subsidiaries may prevent dividends and other distributions to shareholders if they do not comply with specified financial ratios. Our credit agreements typically prohibit any type of distribution if there is an ongoing default.

 

Operating Results of Our Subsidiaries: The ability of our subsidiaries to pay dividends or make loan payments or other distributions to us is limited by their operating results. To the extent that the cash requirements of any of our subsidiaries exceed their available cash, the subsidiary will not be able to make cash available to us.

 

Any of the situations described above could adversely affect our business, results of operations, and financial condition.

 

We are involved in litigation proceedings.

We are involved in various litigation proceedings that could result in unfavorable decisions or financial penalties against us. We will continue to be subject to future litigation proceedings, which could cause material adverse consequences to our business. Our financial condition or results of operations could be unfavorably affected if we are unsuccessful in defending lawsuits and proceedings against us. For further information on litigation proceedings, please see “Note 36.3 of the Notes to our consolidated financial statements.

 

Construction and operation of power plants may encounter significant delays, stoppages, cost overruns, and stakeholder opposition that may damage our reputation and result in impairment of our goodwill with stakeholders.

Our power plant projects may be delayed in obtaining regulatory approvals or may face shortages and increases in the price of equipment, materials, or labor. They may be subject to construction delays, strikes, accidents, and human error. Any such event could negatively affect our business, results of operations, and financial condition.

 

Market conditions may change significantly between the approval and completion of a project, which, in some cases, may decrease a project’s profitability or render it impracticable. This has been the case with many of our past projects that were initially planned under very different market conditions when energy prices were higher, and there was less competition. Deviations in market conditions, such as estimates of timing and expenditures, may lead to cost overruns and delays in project completion that widely exceed our initial forecasts. In turn, this may have a material adverse effect on our business, results of operation, and financial condition.

 

We may develop new projects in locations that are sometimes challenging in terms of geographical topography, in some cases on mountain slopes with limited access. These factors may also lead to delays and cost overruns. For example, Cerro Pabellón, our 48 MW geothermal power plant, was built at 4,500 meters above sea level and is currently constructing a third unit that will increase its capacity by 33 MW. We may face challenges associated with high-altitude construction, such as health concerns, and these may affect the schedule and associated investments. Additionally, given the location of some projects, there may be archaeological risks. In 2018, the Superintendence of the Environment filed charges against our subsidiary Geotérmica del Norte S.A. for infractions related to the archaeological and operational components of the Cerro Pabellón project. These charges could result in high fines and the revocation of our environmental permit.

 

The operation of our thermal power plants, especially those that are coal fired, may affect our goodwill with stakeholders due to greenhouse gas emissions that could unfavorably affect the environment and nearby residents. Furthermore, outside stakeholders may influence the interests and perceptions communities have of our company. If we fail to address all relevant stakeholders appropriately, we may face opposition, which could negatively affect our reputation, stall operations, or lead to litigation threats or actions. Our reputation is the foundation of our relationship

18

with key stakeholders and other constituencies. If we do not effectively manage these sensitive issues, our business, results of operations, and financial condition could be adversely affected.

 

Damage to our reputation may exert considerable pressure on regulators, creditors, and other stakeholders, possibly leading to the abandonment of projects and operations. This could cause our share prices to drop and hinder our ability to attract and retain valuable employees. Any of these outcomes could result in an impairment of our goodwill with stakeholders.

 

Political events or financial or other crises in any region worldwide can have a significant impact on Chile, and consequently, may unfavorably affect our operations and liquidity.

Chile is vulnerable to external shocks that could cause significant economic difficulties and affect growth. If Chile experiences lower than expected economic growth or a recession, it is likely that consumer demand for electricity will decrease and that some of our customers may have difficulties paying their electric bills, possibly increasing our uncollectible accounts. Any of these situations could adversely affect our results of operations and financial condition.

 

Financial and political events in other parts of the world could also negatively affect our business. For example, since 2018, the U.S. and China have been involved in a trade war involving protectionist measures that increased volatility in financial markets worldwide due to the uncertainty of political decisions. In addition, instability in the Middle East or any other major oil-producing region could result in higher fuel prices worldwide, which would increase the operating costs for our thermal generation power plants and unfavorably affect our results of operations and financial condition. An international financial crisis and its disruptive effects on the financial industry could adversely affect our ability to obtain new bank financings under the same historical terms and conditions that we have benefited from to date.

 

Political events or financial or other crises could also diminish our ability to access capital markets in Chile and international capital markets as sources of liquidity or increase interest rates available to us. Reduced liquidity could negatively affect our capital expenditures, long-term investments and acquisitions, growth prospects, and dividend payout policy.

 

The U.S. federal government has experienced shutdowns in recent years. The 2018-2019 U.S. government shutdown, the longest in U.S. history, lasted 35 days and affected many federal agencies, including the SEC. Even temporary or threatened U.S. government shutdowns could have a material adverse effect on the timing, execution, and increased expense associated with our international financing and M&A activities.

 

We may be unable to enter into suitable acquisitions or successfully integrate businesses that we acquire.

On an ongoing basis, we review acquisition prospects that may increase our market coverage or provide synergies with our existing businesses, though there can be no assurance that we will be able to identify and acquire suitable companies in the future. The acquisition and integration of independent companies that we do not control is generally a complex, costly, and time-consuming process that requires significant efforts and expenditures. If we do make further acquisitions, we could incur substantial debt, assume unknown liabilities, potentially lose critical employees, be forced to amortize expenses related to tangible assets, and divert management’s attention from other business concerns.

 

Integrating acquired businesses may be difficult, expensive, time-consuming, and a strain on our resources and relationships with our employees and customers. Ultimately, these acquisitions may not be successful or achieve the expected benefits. Any delays or difficulties encountered in connection with acquisitions and the integration of their operations could have a material adverse effect on our business, results of operations, or financial condition.

 

Our business and profitability could be unfavorably affected if water rights are denied or if water concessions are granted with limited duration.

We own water rights granted by the Chilean Water Authority (Dirección General de Aguas) for the supply of water from rivers and lakes near our production facilities. Currently, these water rights are (i) for unlimited duration, (ii) absolute and unconditional property rights, and (iii) not subject to further challenge. Chilean generation companies must

19

pay an annual license fee for unused water rights. New hydroelectric facilities are required to obtain water rights and the conditions of such water rights may affect the design, timing, or profitability of a project.

 

The Chilean Congress has discussed proposed amendments to the Water Code since 2014 to prioritize the use of water by defining its access as a basic human need that must be guaranteed by the state. The amendments would give precedence to water use for human consumption, domestic subsistence, and sanitation in both the granting and limiting of the exercise of rights of exploitation. Restrictions enacted to preserve environmental flows would also reduce water availability for generation purposes. To date, no resolutions regarding these amendments have been approved by the Chilean Congress.

 

Any limitations on our water rights, the granting of additional water rights, or on the duration of our water concessions could have a material adverse effect on our hydroelectric development projects and profitability.

 

Foreign exchange risks may unfavorably affect our results and the U.S. dollar value of dividends payable to ADS holders.

The Chilean peso has been subject to devaluations and appreciations against the U.S. dollar and may be subject to significant fluctuations in the future. For example, the Chilean peso depreciated by 7.2% against the U.S. dollar in 2019. The Chilean peso continues to devalue against the U.S. dollar in 2020 and the U.S. dollar Observed Exchange Rate peaked at Ch$ 867.83 per US$ 1.00 on March 19, 2020. We pay our dividends in Chilean pesos. Historically, a significant portion of our consolidated indebtedness has been in U.S. dollars. Although a substantial portion of our operating cash flows is linked to the U.S. dollar, we are exposed to fluctuations in the Chilean peso against the U.S. dollar because of time lags and other limitations to pegging our tariff rates to the U.S. dollar. This exposure can substantially decrease the value of the cash we generate in U.S. dollars due to the devaluation of the peso. Future volatility in the exchange rate of the currency in which we receive revenues or incur expenditures may adversely affect our business, results of operations, and financial condition.

 

Our long-term electricity sales contracts are subject to fluctuations in the market prices of certain commodities, energy, and other factors.

In our generation business, we have exposure to fluctuations in the market prices of certain commodities that affect our long-term electricity sales contracts. These contracts commit us to material obligations as selling parties and contain prices that are indexed to different commodities, exchange rates, inflation, and the market price of electricity. Unfavorable changes to these indices would reduce the rates we charge under these contracts, which could adversely affect our business, results of operations, and financial condition.

 

We are subject to incremental risks in distribution markets that are becoming more liberalized.

In our distribution business, we are also exposed to fluctuations in electricity prices. Since 2016, some customers who had freely chosen regulated tariffs have been switching to the unregulated tariff regime due to lower prices. These customers are tendering their electricity needs, either directly or in association with other customers, because regulated tariffs are currently higher than unregulated tariffs due to the former being based on contracts tendered in the past at higher prices. Lower market prices may reduce the number of customers who choose regulated tariffs as customers may choose an alternative energy provider. This would reduce our number of customers and could adversely affect our business, results of operations, and financial condition.

 

Our controlling shareholder may exert influence over us and may have a different strategic view for our development from that of our minority shareholders.

Enel, our ultimate controlling shareholder, owns 61.9% of our voting shares as of the date of this Report and has announced its intention to acquire an additional 3% by the end of 2020, which includes an additional 0.45% expected to be acquired in May 2020. Under Chilean corporate law, Enel has the power to determine the outcome of substantially all material matters that require a simple majority of shareholders’ votes,  such as the election of the majority of the seats on our board, and, subject to contractual and legal restrictions, the adoption of our dividend policy. Enel also exercises

20

significant influence over our business strategy and operations. However, in some cases, its interests may differ from those of our minority shareholders. Certain conflicts of interest affecting Enel in these matters may be resolved in a manner that is different from the interests of our company or our minority shareholders.

 

Our electricity business is subject to risks arising from natural disasters, catastrophic accidents, and acts of terrorism, which could unfavorably affect our operations, earnings and cash flow.

Our primary facilities include power plants, and distribution assets that are exposed to damage from catastrophic natural disasters, such as earthquakes and fires, human causes, as well as acts of vandalism, protests, riots, and terrorism. A catastrophic event could cause prolonged unavailability of our assets, disruptions in our business, significant decreases in revenues due to lower demand, or significant additional costs to us not covered by our business interruption insurance. There may be lags between a significant accident or catastrophic event and the final reimbursement from our insurance policies, which typically carry a deductible and are subject to per event policy maximum amounts.

 

In mid-October 2019, widespread street demonstrations and protests erupted in Santiago and quickly spread throughout the rest of Chile. These actions have since become commonplace, and, at times, have been accompanied by looting, arson, and severe vandalism. Violent confrontations between protesters and the police and armed forces have resulted in a significant loss of human lives and severe injuries. The accumulated damage to public and private property could amount to billions of dollars. Damage to Chile’s economy, prospects for growth, perception of risk, and immediate repercussions in terms of unemployment and loss of productivity are also significant. Our corporate headquarters in Santiago suffered a severe arson attack on October 18, 2019, resulting in the dislocation of our management and headquarters employees for an extended period. An electricity substation belonging to an unrelated company in the northern city of Copiapó was set on fire on November 28, 2019. Chilean public authorities have voiced their concern for the country’s strategic electricity infrastructure, including power stations, transmission lines and distribution substations. It is not possible to estimate when such violence will come to an end or the final effects on our business, but there may be material long-term negative effects resulting from this social crisis.

 

Any natural or human catastrophic disruption to our electricity assets in Chile could lead to significant adverse effects on our operations and financial condition.

 

We are subject to financing risks, such as those associated with funding our new projects and capital expenditures or refinancing existing obligations.

As of December 31, 2019, our consolidated debt totaled Ch$ 2,661 billion (including Ch$ 781 billion with Enel Finance International N.V., a related company). As of December 31, 2019, our most material debt obligation was the US$ 1.7 billion principal amount of SEC‑registered bonds issued in the U.S. under the law of the State of New York.

 

Our debt agreements are subject to several of the following provisions including (1) financial covenants, (2) affirmative and negative covenants, (3) events of default, (4) mandatory prepayments for contractual breaches, (5) change of control clauses for material mergers and divestments, and (6) bankruptcy and insolvency proceeding covenants, among others.

 

A significant portion of our financial indebtedness is subject to cross default provisions, which have varying definitions, criteria, materiality thresholds, and applicability concerning subsidiaries that could result in cross default. Our debt may also become immediately due and payable in cases involving bankruptcy or insolvency proceedings of a significant or material subsidiary. Likewise, some of our debtholders may decide to accelerate our debt in events of cross default dealing with significant or material subsidiaries, among other potential covenant defaults.

 

We may be unable to refinance our debt or obtain such refinancing on terms acceptable to us. In the absence of such refinancing, we could be forced to liquidate assets at unfavorable prices in order to make payments due on our debt. Furthermore, we may be unable to sell our assets at opportune moments or sufficiently high prices to obtain proceeds that would enable us to make such payments.

 

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We may also be unable to raise the necessary funds required to finish our projects under development or construction. Market conditions or unforeseen project costs prevailing when we need funds could compromise our ability to finance these projects and expenditures.

 

Our inability to finance new projects or capital expenditures, refinance our existing debt, or comply with our covenants could negatively affect our results of operation and financial condition.

 

If third party electricity transmission facilities, gas pipeline infrastructure, or fuel supply contracts fail to provide us with adequate service, we may be unable to deliver the electricity we sell to our final customers.

We depend on transmission facilities owned and operated by other companies to deliver the electricity we sell. This dependence exposes us to several risks. If the transmission is disrupted, or transmission capacity is inadequate, we may be unable to sell and deliver our electricity. If a region’s power transmission infrastructure is inadequate, our recovery of sales costs and profits may be insufficient. If restrictive transmission price regulations are imposed, transmission companies we rely on may not have sufficient incentives to invest in expanding their infrastructure, which could unfavorably affect our results of operations and financial condition or affect our ability to deploy our portfolio of projects under development. The construction of new transmission lines may take longer than in the past, mainly because of sustainability, social, and environmental requirements that create uncertainties as to the timing of project completion. In addition, our thermal power plants connected to natural gas pipelines are subject to stoppages should material disruptions in the pipeline occur. Stoppages could force us to purchase electricity at spot market prices, which could be higher than the contracted fixed sale price to customers. This scenario could adversely affect our business, results of operations, and financial condition.

 

We may be unable to reach satisfactory collective bargaining agreements with our unionized employees or retain key employees in cases of labor conflict.

A large percentage of our employees are members of unions and have collective bargaining agreements that must be renewed regularly. Our business, results of operations, and financial condition could be unfavorably affected by a failure to reach a collective bargaining agreement with any labor union, or by an agreement with a labor union that contains terms we view as unfavorable. Chilean law provides legal mechanisms for judicial authorities to impose a collective bargaining agreement if the parties are unable to come to an agreement. This is particularly true for some of our subsidiaries, including Enel Distribution, Colina, and Panguipulli, and these agreements may materially increase our costs.

 

We employ many highly specialized employees, and specific actions such as strikes, walkouts, or work stoppages by these employees could negatively affect our business, results of operations, financial condition, and reputation.

 

The Chilean legislative branch is currently analyzing proposed bills that could increase our labor costs for the Company, such as a reduction in the workweek from 45 to 40 hours, and an increase of 6% in employer contributions to employee pension funds. If enacted, these measures could lead to reduced productivity and higher expenses.

 

The relative illiquidity and volatility of the Chilean securities markets could unfavorably affect the price of our common stock and ADSs.

Chilean securities markets are substantially smaller and have less liquidity than major securities markets in the United States and other developed countries. The low liquidity of the Chilean markets may impair the ability of shareholders to sell shares, or holders of ADSs to sell shares of our common stock withdrawn from the ADS program, on Chilean stock exchanges in the amount and at the desired price and time.

 

Lawsuits against us brought outside of Chile, or complaints against us based on foreign legal concepts may be unsuccessful.

All our operations are located outside of the United States. All our directors and officers reside outside of the United States, and substantially all their assets are located outside the United States. If any investor were to bring a lawsuit

22

against our directors and officers in the United States, it may be difficult for them to effect service of legal process within the United States upon these persons or to enforce judgments obtained in the U.S. courts based on civil liability provisions of U.S. federal securities laws against them in U.S. or Chilean courts. There is also doubt as to whether an action could be brought successfully in Chile for liability based solely on the civil liability provisions of U.S. federal securities laws.

 

Interruption in or failure of our information technology, control, and communications systems or cyberattacks to or cybersecurity breaches of these systems could have a material adverse effect on our business, results of operations, and financial condition.

We operate in an industry that requires the continued operation of sophisticated information technology, control, and communications systems (“IT Systems”) and network infrastructure. We use our IT Systems and infrastructure to create, collect, use, disclose, store, dispose of, and otherwise process sensitive information, including company and customer data, and personal information regarding customers, employees and their dependents, contractors, shareholders, and other individuals. In our generation business, IT Systems are critical to controlling and monitoring our power plants’ operations, maintaining generation and network performance, generating invoices to bill customers, achieving operating efficiencies, and meeting our service targets and standards. Our distribution business increasingly relies on IT Systems to monitor smart grids, billing processes for millions of customers and customer service platforms. The operation of our generation, transmission, and distribution systems is dependent not only on the physical interconnection of our facilities with the electricity network infrastructure but also on communications among the various parties connected to the network. The reliance on IT Systems to manage information and communication among and between those parties has increased significantly since the deployment of smart meters and intelligent grids in Chile.

 

Our generation, and distribution facilities, IT Systems, and other infrastructure, as well as the information processed in our IT Systems, could be affected by cybersecurity incidents, including those caused by human error. Our industry has begun to see an increased volume and sophistication of cybersecurity incidents from international activist organizations, nation states, and individuals, and are among the emerging risks identified in our planning process. Cybersecurity incidents could harm our businesses by limiting our generation, and distribution capabilities, delaying our development and construction of new facilities or capital improvement projects to existing facilities, disrupting our customer operations, or exposing us to liability. Our generation and distribution business systems are part of an interconnected system. Therefore, a disruption caused by the impact of a cybersecurity incident in the electric transmission grid, network infrastructure, fuel sources, or our third party service providers’ operations could also unfavorably affect our business.

 

Our business requires the collection and retention of personally identifiable information of our customers, employees, and shareholders, who expect that we will adequately protect the privacy of such information. Cybersecurity breaches may expose us to a risk of loss or misuse of confidential and proprietary information. Significant theft, loss, or fraudulent use of personally identifiable information may lead to potentially large costs to notify and protect the impacted persons and could cause us to become subject to significant litigation, losses, liability, fines, or penalties, any of which could materially and adversely affect our results of operations and reputation with customers, shareholders, and regulators, among others. We may also be required to incur significant costs associated with governmental actions in response to such intrusions or to strengthen our information and electronic control systems.

 

The cybersecurity threat is dynamic and evolving and is increasing in sophistication, magnitude, and frequency. We may not be able to implement adequate preventive measures or accurately assess the likelihood of a cybersecurity incident. We are unable to quantify the potential impact of cybersecurity incidents on our business and reputation. These potential cybersecurity incidents and corresponding regulatory action could result in a material decrease in revenues and high additional costs, including penalties, third party claims, repair costs, increased insurance expense, litigation costs, notification and remediation costs, security costs, and compliance costs.

 

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Item  4.      Information on the Company

A.History and Development of the Company.

We are a publicly held limited liability stock corporation organized on March 1, 2016, under the laws of the Republic of Chile. Since April 2016, we have been registered in Santiago with the CMF under Registration No. 1139. We are also registered with the SEC under the commission file number 001-37723. Our full name is Enel Chile S.A., and we are also known commercially as “Enel Chile.” As of the date of this Report, Enel beneficially owns 61.9% of our shares. Enel has announced its intention to acquire an additional 3% of our shares during 2020, which includes an additional 0.45% expected to be acquired in May 2020. Our shares are listed and traded on the Chilean Stock Exchanges under the trading symbol “ENELCHILE,” and our ADSs are listed and traded on the NYSE under the trading symbol “ENIC.”

 

Our contact information in Chile is:

 

 

 

Contact Person:

Nicolás Billikopf

Street Address:

Av. Santa Rosa 76 piso 15

Comuna de Santiago

Santiago, Chile

Email:

nicolas.billikopf@enel.com

Telephone:

(56-9) 9343 5500

Website:

www.enel.cl; www.enelchile.cl

 

The information contained on or linked from our website is not included as part of, or incorporated by reference into this Report. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, such as our company, at www.sec.gov.

 

We are an electric utility company engaged, through our subsidiaries and affiliates, in the generation, transmission, and distribution of electricity businesses in Chile. As of December 31, 2019, we had 7,303 MW of net installed capacity and 1.97 million distribution customers.  Our installed capacity is comprised of 48 generation facilities, of which 49% are hydroelectric power plants.  As of December 31, 2019, we had consolidated assets amounting to Ch$ 7,858 billion and operating revenues of Ch$ 2,771 billion.

 

We have been known as Enel Chile since the completion of the 2016 Reorganization that separated Enersis’s Chilean businesses from its non-Chilean businesses. However, we trace our origins to Compañía Chilena de Electricidad Ltda. (“CCE”), which was formed in 1921 as a result of the merger of Chilean Electric Tramway and Light Co., founded in 1889, and Compañía Nacional de Fuerza Eléctrica, with operations dating back to 1919. Following the nationalization of CCE in the 1970s, during the 1980s, the Chilean electric utility sector was reorganized through the Chilean Electricity Law, known as Decree with Force of Law No. 1 of 1982 (“DFL1”). CCE’s operations were divided into one generation company, a currently unrelated company, and two distribution companies, one with a concession in the Valparaíso Region, and the other, our predecessor company, with a concession in the Santiago Metropolitan Region. From 1982 to 1987, the Chilean electric utility sector went through a process of re-privatization. In August 1988, our predecessor company changed its name to Enersis S.A. (“Enersis” and currently known as Enel Américas S.A.) and became the new parent company of Distribuidora Chilectra Metropolitana S.A., later renamed Chilectra S.A (“Chilectra” and currently known as Enel Distribución Chile S.A.). In the 1990s, Enersis diversified into electricity generation through increasing equity stakes in Endesa Chile S.A. (currently known as Enel Generación Chile S.A.).  As of December 31, 2019, Enel Chile owns 99.1% of Enel Distribution and 93.6% of Enel Generation.  

 

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The 2018 Reorganization

 

On August 25, 2017, we proposed a corporate reorganization (the “2018 Reorganization”) to consolidate Enel’s conventional and non-conventional renewable energy (“NCRE”) businesses in Chile under our company, Enel Chile, Enel’s only vehicle to invest in Chile. The 2018 Reorganization involved the following transactions:

 

·

a cash tender offer by Enel Chile for all outstanding shares of common stock (including ADSs) of Enel Generation. The tender offer was subject to the condition that the tendering holders of Enel Generation shares and ADSs use Ch$ 236 of the Ch$ 590 tender offer consideration for each Enel Generation share and Ch$ 7,080 of the Ch$ 17,700 tender offer consideration for each Enel Generation ADS to subscribe for shares of our common stock at a subscription price of Ch$ 82 per Enel Chile share (or Ch$ 2,460 per Enel Chile ADS);

 

·

a capital increase to make available a sufficient number of shares of common stock of Enel Chile to deliver to tendering holders of Enel Generation shares and ADSs to satisfy all conditions precedent; and

 

·

a merger in which Enel Green Power Latin América S.A. (“EGPL”) merged into Enel Chile. EGPL was a closely held stock corporation organized under the laws of the Republic of Chile. Before the 2018 Reorganization, EGPL was a member of the Enel Green Power group of companies. Enel Green Power is a transnational company dedicated to electricity generation with renewable resources, which in turn is controlled by Enel. EGPL was a renewable energy generation holding company engaged in the electricity generation business in Chile through its wholly owned subsidiary Enel Green Power Chile Ltda. (“EGP Chile”).

 

The respective shareholders of Enel Chile, Enel Generation, and EGPL approved the different steps of the 2018 Reorganization at their extraordinary shareholders’ meetings held on December 20, 2017. The tender offer occurred between February 16, 2018 and March 22, 2018, the preemptive rights offering in connection with the capital increase took place between February 15, 2018 and March 16, 2018, and the 2018 Reorganization was completed and effective on April 2, 2018.

 

As a result of the 2018 Reorganization, we increased our economic interest in Enel Generation from 60% to 93.6%  and EGP Chile is wholly owned. We continue to own 99.1% of Enel Distribution. Currently, we consolidate our Chilean conventional electricity generation business under Enel Generation, our Chilean electricity distribution business under Enel Distribution and our Chilean NCRE generation business under EGP Chile. Enel remains as our parent company and majority shareholder, owning 61.9% of our Company as of December 31, 2019, and the date of this Report.

 

During the last few years, our business strategy has focused on our core business. We have increased our shareholdings in subsidiaries related to electricity generation, divested certain non-strategic assets, and reduced the number of our companies, simplifying our corporate structure, mainly through mergers.

 

Enel Generation

 

In June 2019, Enel Generation and its subsidiary GasAtacama Chile (now merged with and into Enel Generation),  signed an agreement with the Ministry of Energy that complements our sustainability strategy and strategic plan and defines how to proceed with the progressive closure of our coal-fired power plants Tarapacá, Bocamina I and Bocamina II, which have a gross installed capacity of 158 MW, 128MW and 350 MW, respectively.

 

The agreement is subject to the condition that the Power Transfer Regulation be fully implemented. The regulation defines the Strategic Reserve State and establishes, among others, the essential conditions that ensure non-discriminatory treatment between generation companies. Under the agreement, we are formally and irrevocably obligated to close Bocamina I and Tarapacá, respectively. The deadline for closing Tarapacá is May 31, 2020; however, we closed the plant in December 2019 upon receiving authorization from the National Energy Commission (“CNE” in its Spanish acronym) to move up the date of the closure of Tarapacá to December 31, 2019. Pursuant to the agreement, the deadline for closing Bocamina I is December 31, 2023 and for Bocamina II is December 31, 2040, but we expect to close the

25

Bocamina II plant before the deadline to help meet our decarbonization goals. These steps are subject to the authorization established in the General Law of Electrical Services

 

We have conducted the following sales of non-core assets over the past few years:

 

·

On September 14, 2016, we sold our 20% equity interest in GNL Quintero S.A. (“GNL Quintero”), to Enagás Chile S.p.A.  We obtained this 20% interest in GNL Quintero in 2007, as part of a consortium we formed along with ENAP, Metrogas and British Gas to build the LNG regasification facility in Quintero Bay.  Partial commercial operations of the facility began in September 2009 and full commercial operations began on January 1, 2011.

 

·

On December 16, 2016, we sold our 42.5% equity interest in Electrogas S.A. (“Electrogas”). Electrogas is a company dedicated to the transportation of natural gas and other fuels, and serves our San Isidro and Quintero power plants, among others.  We received the proceeds of this sale, amounting to US$ 180 million (Ch$ 115 billion at that time), on February 7, 2017.

 

In order to simplify our corporate structure, we have continued to reduce the number of our companies over the last several years:

 

·

During 2016, Inversiones GasAtacama Holding Ltda. merged into Celta, which later merged into GasAtacama, the surviving company on November 1, 2016.  Celta was our investment vehicle through which we owned the San Isidro thermal plants, the Pangue hydroelectric plant and the Tarapacá thermal generation facility, in addition to our interest in Central Eólica Canela S.A., which owns the Canela wind farms.

 

·

On November 9, 2017, GasAtacama purchased the  remaining 25% minority interest in Central Eólica Canela S.A, which was dissolved on December 22, 2017. Our economic interest in GasAtacama was 93.7% as of December 31, 2018.

 

In September 2019, we completed the intercompany sale of our 2.6% stake in GasAtacama to Enel Generation. On October 1, 2019, GasAtacama merged into Enel Generation. This transaction reorganized and simplified the corporate structures of the subsidiaries that comprised the GasAtacama group to generate corporate and operational efficiencies for us.

Capital Investments, Capital Expenditures and Divestitures

 

We coordinate our overall financing strategy, including the terms and conditions of loans and intercompany advances entered into by our subsidiaries, to optimize debt and liquidity management. Generally, our operating subsidiaries independently plan capital expenditures financed by internally generated funds or direct financings. One of our goals is to focus on investments that will provide long-term benefits.  In the distribution business we will continue investing with the aim to allow the connection of new customers, increase the quality of our service and introduce new technologies (such as smart meters) to automate our networks. Although we have considered how these investments will be financed as part of our budget process, we have not committed to any particular financing structure, and investments will depend on the prevailing market conditions at the time the cash flows are needed.

 

Our investment plan is flexible enough to adapt to changing circumstances by giving different priorities to each project considering profitability and strategic fit, which includes sustainability considerations. We are currently focused on making investments on behalf of the distribution business related to network reliability, capacity improvement, and new technology developments, such as smart meters, while keeping in mind the environment.

 

For the 2020-2022 period, we expect to make capital expenditures of Ch$ 1,585 billion in our subsidiaries, related to investments currently in progress, maintenance of our distribution network and generation plants, and in studies required to develop other potential generation and distribution projects. For further detail regarding these projects, please see “Item 4. Information on the Company — D. Property, Plant and Equipment — Projects Under Development”.

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The table below sets forth the expected capital expenditures for the 2020-2022 period and the capital expenditures incurred in 2019, 2018, and 2017:

 

 

 

 

 

 

 

 

 

 

 

    

Estimated
2020-2022

    

2019

    

2018

    

2017

 

 

(in millions of Ch$)

Capital Expenditure (1)

 

1,585,000

 

321,079

 

300,539

 

266,030

(1)

Capital Expenditure amounts listed in this table represent cash flows used for purchases of property, plant and equipment and intangible assets for each year, except for future projections.

While our planned investments go beyond the three years highlighted in this table, we are reporting three years to be aligned with Enel’s three-year industrial plan disclosed in December 2019. For further information, please refer to “Item 4. Information on the Company — D. Property, Plant and Equipment — Project Investments” and “Item 5. Operating and Financial Review and Prospects — F. Tabular Disclosure of Contractual Obligations.”

 

Capital Expenditures in 2019, 2018, and 2017

 

Our capital expenditures in the last three years were principally related to the optimization of the 350 MW Bocamina II power plant, improvements to the Tarapacá coal-fired power plant, the construction of the 150 MW Los Cóndores power plant, and maintenance of our current power plants. Investments related to the Bocamina II and Tarapacá power plants focused on making improvements to reduce environmental impact.  These improvements were the consequence of environmental injunctions in the case of Bocamina II and new environmental regulations in the case of Tarapacá. We completed the upgrades to Bocamina II in 2018 and Tarapacá in 2017. We subsequently decided to shut down our coal‑fired Tarapacá plant in December 2019, in anticipation of the deadline for its closure under our decarbonization plan agreed with the Ministry of Energy. During 2018, we also concluded investments associated with the 48 MW Cerro Pabellón power plant, the first geothermal plant in South America.

 

In 2018, our investments in the distribution business were focused on connections of new customers, reinforcing feeders mainly to increase our service quality, increasing the capacity of our substations, automation of our systems through the installation of control remote devices and smart meters for residential customers.

 

In our generation business, material plans in progress include the Los Cóndores project, which began construction in 2014 with completion expected during 2021. For further detail of the Los Cóndores project, please see “Item 4. Information on the Company — D. Property, Plant and Equipment — Projects Under Construction.”

 

In our distribution business, we plan to continue to expand our services, control energy losses and increase our quality of service to improve the efficiency of our facilities, profitability of our business and increase our capacity to satisfy our growing number of customers and their increasing demands.

 

We reserve a portion of our capital expenditures for maintenance and the assurance of quality and operational standards of our facilities. Projects in progress will be financed with resources provided by external financing as well as internally generated funds.

B.Business Overview.

We are a publicly held limited liability stock corporation that operates in Chile. Our core business is electricity, both generation and distribution. We conduct our business through Enel Generation and Enel Distribution, and their respective subsidiaries.

 

We also participate in other activities but that are not core businesses and represent less than 1% of our 2019 revenues. We do not report them as separate business segment in this Report nor in our consolidated financial statements.

 

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The table below presents our revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

Revenues

    

2019

    

2018

    

2017

    

Change 2019 vs. 2018

 

 

(in millions of Ch$)

 

(in %)

Generation

 

1,726,612

 

1,580,653

 

1,634,937

 

9.2

Distribution

 

1,412,872

 

1,263,224

 

1,326,659

 

11.8

Other businesses and intercompany transaction adjustments

 

(368,649)

 

(386,716)

 

(438,618)

 

(4.7)

Total revenues

 

2,770,834

 

2,457,161

 

2,522,978

 

12.8

 

For further financial information related to our revenues, see “Item 5. Operating and Financial Review and Prospects — A. Operating Results” and Note 28 of the Notes to our consolidated financial statements.

 

Electricity Generation Business Segment

 

We, through our subsidiary Enel Generation, in which we hold a 93.6% economic interest as of the date of this Report, are a generation operator in the SEN, representing 32.8% of the electricity market share in 2019.

 

As of December 31, 2019, we accounted for 29.7% of the SEN’s total generation capacity, measured by the installed capacity, according to figures published by the National Electricity Coordinator (“CEN” in its Spanish acronym). Hydroelectric, thermal, solar, wind, and geothermal power represent 48.6%, 35.3%, 6.7%, 8.8% and 0.6% of our total installed capacity in Chile, respectively.

 

For additional detail on our historical capacity, see “Item 4. Information on the Company — D. Property, Plant and Equipment.”

 

The following tables summarize the information relating to our capacity, electricity generation and energy sales:

 

ELECTRICITY DATA

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

    

2017

Number of generating units(1) (2)

 

1,029

 

1,030

 

111

Installed capacity (MW) (3)

 

7,303

 

7,463

 

6,351

Electricity generation (GWh)

 

21,041

 

20,046

 

17,073

Energy sales (GWh)

 

23,513

 

24,369

 

23,356

(1)

For details on generation facilities, see “Item 4. Information on the Company — D. Property, Plant and Equipment — Property, Plant and Equipment of Generation Companies.”

(2)

The increase in the number of generating units from 2017 to 2018 is the result of including the EGP Chile solar plants, since each inverter element is considered a generating unit.

(3)

Total installed capacity is defined as the maximum capacity (MW), under specific technical conditions and characteristics. In most cases, installed capacity is confirmed by satisfaction guarantee tests performed by equipment suppliers. Figures may differ from installed capacity declared to governmental authorities and customers, according to criteria defined by such authorities and relevant contracts.

 

Our consolidated electricity generation was 21,041 GWh in 2019 and our sales were 23,513 GWh, which represents a 5% increase in electricity generation and a 4% decrease in sales compared to 2018.

 

Dividing the electricity generation business into hydroelectric, thermoelectric, and other generation is customary in the electricity industry, because each generation type has significantly different variable costs. Thermoelectric generation, for instance, requires the purchase of fuel, which generally leads to higher variable costs than hydroelectric generation from reservoirs or rivers that normally has minimal variable costs. Of our total consolidated generation in

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2019, 50.3% was from hydroelectric sources, 34.4% was from thermal sources and 15.4% was from solar and wind energy.

 

The following table summarizes our consolidated generation by type of energy:

 

GENERATION BY TYPE OF ENERGY (GWh)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2019

 

2018

 

2017

 

    

Generation   

    

%  

    

Generation   

    

%  

    

Generation   

    

%  

Hydroelectric

 

10,578

 

50.3

 

11,395

 

56.8

 

9,652

 

56.5

Thermal

 

7,233

 

34.4

 

6,268

 

31.3

 

7,292

 

42.7

Other generation(1)

 

3,230

 

15.4

 

2,384

 

11.9

 

129

 

0.8

Total generation

 

21,041

 

100.0

 

20,046

 

100.0

 

17,073

 

100.0

(1)

Other generation refers to the generation from wind and solar energy.

The following table contains information regarding our consolidated sales of electricity by type of customer for each of the periods indicated:

ELECTRICITY SALES BY CUSTOMER TYPE (GWh)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2019

 

2018

 

2017

 

    

Sales

    

% of Sales
Volume 

    

Sales

    

% of Sales
Volume 

    

Sales

    

% of Sales 
Volume 

Regulated customers

 

12,712

 

54.1

 

15,645

 

64.2

 

17,029

 

72.9

Unregulated customers

 

9,902

 

42.1

 

7,549

 

31.0

 

5,586

 

23.9

Total contracted sales(1)

 

22,614

 

96.2

 

23,194

 

95.2

 

22,615

 

96.8

Electricity pool market sales

 

899

 

3.8

 

1,174

 

4.8

 

742

 

3.2

Total electricity sales

 

23,513

 

100.0

 

24,369

 

100.0

 

23,356

 

100.0

(1)

Includes sales to distribution companies not backed by contracts.

Dividing sales by customer type in terms of regulated and unregulated customer is useful in managing and understanding the business. We sell electricity to regulated customers through distribution companies and to unregulated customers directly. The sales to distribution companies to supply their regulated customers, that is, residential, commercial, or others, are classified as regulated sales and subject to government regulated electricity tariffs. The sales of generation companies to distribution companies to supply their unregulated customers are classified as unregulated sales and governed by contracts at freely negotiated prices and terms. We directly sell to large commercial and industrial customers and other generators. The sales to generators are classified as unregulated sales and generally governed by contracts with freely negotiated prices and terms. Finally, pool market sales take place either when generation companies are dispatched by CEN in excess of their contractual obligations and therefore must sell their surplus electricity in the pool market, or when the generators’ electricity dispatched is less than their contractual commitments with their customers and therefore, they must purchase the deficit in the pool market. These purchase and sale transactions among electricity generation companies are normally made in the pool market at the spot price and do not require a contractual agreement.

 

The regulatory framework often requires that electricity distribution companies have contracts to support their commitments to small volume customers. Chilean regulations also determine which customers can purchase energy directly in the electricity pool market.

 

We attempt to minimize the risk of electricity generation deficits resulting from poor hydrological conditions in any given year by limiting our contractual sales requirements to a quantity that does not exceed our estimated electricity

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production in a dry year. We consider the available statistical information concerning rainfall, mountain snow and ice, when they are expected to melt, hydrological levels, and the capacity of key reservoirs to determine our estimated production for a dry year. In addition to limiting contracted sales, we may adopt other strategies including installing temporary thermal capacity, negotiating lower consumption levels with unregulated customers, negotiating with other water users and including pass-through cost clauses in contracts with customers to cover the cost of spot market purchases.

 

In 2022, distribution company contracts awarded in the August 2016 auction will come into effect and therefore the tariffs of our regulated contracts will decrease by 6% as a consequence of the lower prices offered by NCRE providers in the energy auction for distribution companies. In 2024, contracts awarded in the November 2017 auction will come into effect with an average price of US$ 32.5 per MWh, which is 31% lower than the average price of the previous tender process. We routinely participate in energy bids and we have been awarded long-term energy sale contracts that incorporate the expected variable costs considering changes to the most relevant variables. These contracts secure the sale of our current and expected new capacity and allow us to stabilize our income.

 

In November 2017, the outcome of the latest bidding process was announced. This process tendered 2,200 GWh per year to be delivered between 2024 and 2043. The total amount of energy tendered was based on renewable energy offers, thus representing a milestone in the industry. We, through Enel Generation, were awarded 54% of the tender, corresponding to 1.2 TWh at an average price of US$ 34.7 per MWh with a mix of wind, solar, and geothermal generation. These prices are 6.8% higher than the average price.

 

In terms of expenses, the primary variable costs involved in the electricity generation business, in addition to the direct variable cost of generating hydroelectric or thermal electricity such as fuel costs, are energy purchases and transportation costs. During periods of relatively low hydrology, the amount of our thermal generation increases. This involves an increase in the amount of fuel required and the costs of its transportation to the thermal generation power plants. Under dry conditions, electricity that we have contractually agreed to provide may exceed the amount of electricity that we are able to generate. Therefore, to satisfy our contractual commitments, we may be required to purchase electricity in the pool at spot market prices. The cost of these purchases at spot prices, under certain circumstances, may exceed the price at which we sell electricity under contracts and, therefore, may result in a loss. We attempt to minimize the effect of poor hydrological conditions on our operations in any given year by limiting our contractual sales requirements to a quantity that does not exceed our estimated electricity production in a dry year. We consider the available statistical information concerning rainfall, mountain snow and ice, and when they are expected to melt, hydrological levels, and the capacity of key reservoirs to determine our estimated production for a dry year. In addition to limiting contracted sales, we may adopt other strategies including installing temporary thermal capacity, negotiating lower consumption levels with unregulated customers, negotiating with other water users, and including pass-through cost clauses in contracts with customers.

 

Seasonality

 

While our core business is subject to weather patterns, generally only extreme events such as prolonged droughts, which may adversely affect our generation capacity, rather than seasonal weather variations, materially affect our operating results and financial condition.

 

The generation business is affected by seasonal changes throughout the year. During normal hydrological years, snowmelts typically occur during the warmer months of October through March. These snowmelts increase the level of water in our reservoirs. The months with most precipitation are typically May through August.

 

When there is more precipitation, hydroelectric generating facilities can accumulate additional water to be used for generation. The increased level of our reservoirs allows us to generate more electricity with hydro power plants during months in which marginal electricity costs are lower.

 

In general, hydrological conditions such as droughts and insufficient rainfall adversely affect our generation capacity. For example, severe prolonged drought conditions or reduced rainfall levels in Chile caused by the El Niño phenomenon reduces the amount of water that can be accumulated in reservoirs, thereby curtailing our hydroelectric

30

generation capacity. In order to mitigate hydrological risk, hydroelectric generation may be substituted with thermal generation (natural gas, LNG, coal or diesel) and energy purchases on the spot market, both of which could result in higher costs, in order to meet our obligations under contracts with both regulated and unregulated customers.

 

Operations

 

We own and operate a total of 48 generation power plants in Chile through our subsidiaries, Enel Generation, EGP Chile, and Pehuenche. Of these generation power plants, 18 are hydroelectric, with a total installed capacity of 3,548 MW, representing 49 % of our total installed capacity in Chile. There are 11 thermal generation power plants (including a geothermal power plant) that operate with gas, coal or oil with a total installed capacity of 2,580 MW, representing 35 % of our total installed capacity in Chile. There are 9 wind powered generation power plants with an aggregate installed capacity of 642 MW, representing 9% of our total installed capacity in Chile. There are 10 solar powered generation power plants with an aggregate installed capacity of 492 MW, representing 7% of our total installed capacity in Chile. On November 21, 2017, the integration of the SIC and the SING into one interconnected system was completed and resulted in the creation of the SEN, a new national interconnected system that extends from Arica in the north of Chile to Chiloé in the south of Chile.

 

For information on the installed generation capacity for each of our subsidiaries, see “Item 4. Information on the Company — D. Property, Plant and Equipment.”

 

Our total gross electricity generation in Chile accounted for 28.1 % of total gross electricity generation in Chile during 2019.

 

The following table sets forth the electricity generation by each of our generation companies:

ELECTRICITY GENERATION BY COMPANY (GWh)

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

    

2017

Enel Generation

 

15,428

 

11,314

 

10,976

EGP Chile (1)

 

3,493

 

2,673

 

 —

Pehuenche

 

2,120

 

2,794

 

2,443

GasAtacama (2)

 

 —

 

3,265

 

3,654

Total

 

21,041

 

20,046

 

17,073

(1)Includes all of EGP Chile’s subsidiaries.

(2)GasAtacama was merged into Enel Generation in October 2019.

 

The following table sets forth the electricity generation by type:

ELECTRICITY GENERATION BY TYPE (GWh)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2019

 

2018

 

2017

 

    

Generation    

    

%  

    

Generation

    

%  

    

Generation

    

%  

Hydroelectric generation

 

10,523

 

50.0

 

11,101

 

55.4

 

9,392

 

55.0

Thermal generation

 

7,233

 

34.4

 

6,268

 

31.3

 

7,292

 

42.7

Wind generation – NCRE(1)

 

1,845

 

8.8

 

1,352

 

6.7

 

129

 

0.8

Mini-hydro generation – NCRE(2)

 

55

 

0.3

 

293

 

1.5

 

260

 

1.5

Solar generation – NCRE (2)

 

1,190

 

5.7

 

872

 

4.4

 

 —

 

 —

Geothermal generation – NCRE (2)

 

194

 

0.9

 

159

 

0.8

 

 —

 

 —

Total generation

 

21,041

 

100.0

 

20,046

 

100.0

 

17,073

 

100.0

(1)Electricity generated by the Canela I and Canela II wind farms, and since 2018 all EGP Chile wind farms.

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(2)Electricity generated in 2019 refers to the Ojos de Agua mini-hydroelectric plant.  Before 2019, the information also includes generation by the Palmucho plant.

 

Water Agreements

Water agreements refer to the right of a user to utilize water from a particular source, such as a river, stream, pond or groundwater. In times of good hydrological conditions, water agreements are generally not complicated or contentious. However, in times of poor hydrological conditions, water agreements protect our right to use water resources for hydroelectric generation.

 

Through our subsidiaries, we have three agreements in force with the purpose of utilizing water for both irrigation and hydroelectric generation more efficiently. Two of them are agreements between Enel Generation and the Chilean Water Works Authority (“DOH” in its Spanish acronym) and are related to the water consumption during the most intense irrigation period (normally from September to April) from Laja Lake and Maule Lagoon, both located in southern Chile. Enel Generation signed the first agreement with DOH related to Laja Lake and Maule Lagoon on October 24, 1958 and September 9, 1947, respectively.

 

After four years of studies and dialogue with different sectors making use of water from the Laja Lake, on November 16, 2017, the Operation and Recovery of Laja Lake Agreement was signed, which complements the agreement signed with the DOH in 1958. This agreement provides reasonable irrigation security to irrigators in the area, giving priority to extractions for irrigation when the reservoir is at low levels, which are also used for generation. It contemplates the use of a certain volume of water to maintain the scenic beauty of Salto del Laja, a well-known tourist attraction in the area.  It also significantly improves flexibility in the use of water, eliminating most of the restrictions that existed in the form of water extraction, replacing it by annual volumes that will manage irrigation and generation according to their needs. Another agreement was signed in October 2018 between our subsidiary Pehuenche and the irrigators of the Maule Lagoon Monitoring Board to optimize the use of water during drought periods. These agreements allow us to use the water more efficiently and to avoid further litigation with the local community, especially with farmers.

 

Thermal Generation

 

Our thermal electricity generation facilities use mostly LNG, coal, and, to a lesser extent, diesel. This mix allows us to use other fuels if the price of LNG were relatively too high, if there were a shortage of supply, or if another circumstance were to make LNG unavailable. To satisfy our natural gas and transportation requirements, we signed a long-term gas supply contract with suppliers that establishes maximum supply amounts and prices, as well as long-term gas transportation agreements with the pipeline companies. Gasoducto GasAndes S.A. and Electrogas S.A. are our current gas transportation providers. Since March 2008, all of our natural gas units can operate using either natural gas or diesel, and since December 2009, our San Isidro, San Isidro 2, and Quintero power plants operate using LNG.

 

The LNG contract is the largest supply contract and is based on long-term agreements between us and Quintero LNG Terminal for regasification services and British Gas for supply. Our LNG Sale and Purchase Agreement is in force through 2030 and is indexed to the Henry Hub/Brent commodity prices. During 2019, Enel Generation used 441 million cubic meters of LNG from Quintero LNG Terminal for its generation and commercialization requirements.

 

Regarding the supply of natural gas, a milestone was achieved during the last quarter of 2018. In a new environment of cooperation and promotion of energy integration by governments and private actors in Argentina and Chile, and after eleven years of interrupted gas supply, it was possible to reactivate the import of natural gas from Argentina. During 2019, Enel Generation imported a total of 667 million cubic meters of natural gas with a very competitive price under supply agreements with YPF and Total Austral, influencing system energy prices during the year.

 

The agreement of the Nueva Renca thermal power plant that was entered into by AES Gener and subsequently by Empresa Eléctrica Santiago (currently known as Generadora Metropolitana SpA), allowed natural gas to be available to Nueva Renca beginning in 2019. With this availability, the electrical energy produced by Nueva Renca, which was

32

approximately 0.5 TWh, accounted for the electrical energy balance of Enel Generation and helped to reduce our spot energy purchases.

 

From the point of view of gas commercialization, during 2019, Enel Generation had three LNG shipment sales transactions, including the sale to Enel Global Trading with delivery to the United Kingdom and Brazil, continuing international trading transactions for shipments under the contract with BG Global Energy Ltda. in relevant international markets, outside of Latin America.

 

In 2019, the Terminal Use Agreement signed with GNL Mejillones allowed the unloading of an LNG shipment at this terminal. This agreement allowed the renewal of gas purchase agreements with important mining and industrial customers in the north of Chile, making Enel Generation the main industrial gas trader in the north of Chile, in addition to having volumes of this gas available to Enel Generation thermal units connected to the northern gas pipeline network (Taltal and GasAtacama).

 

In relation to the commercialization of LNG by trucks, 2019 was marked by deliveries of a total of 60 million cubic meters which represents a 36 % increase compared to 2018. During 2019, new agreements were reached that will allow the increased supply of natural gas for distribution for the next several years.

 

With respect to coal-based power plant operations, during 2019, 1.3 million tons of coal were consumed by the Tarapacá and Bocamina power plants. This consumption was equivalent of 2.3 TWh of energy generated by Bocamina II, 0.6 TWh generated by Bocamina I and 0.6 TWh generated by Tarapacá.

 

Generation from NCRE sources

 

Under Chilean law, electricity generation companies must derive a minimum amount of their energy sales from NCRE. This minimum amount depends on the date of execution of the sale contract and ranges from zero, for those signed prior to 2007, to 20% for those signed starting in July 2013. Currently, our Canela wind farms and Ojos de Agua mini-hydroelectric plant, as well as most of EGP Chile’s power plants (except the Pullinque and Pilamiquén power plants), qualify as NCRE facilities.

 

Electricity sales and generation

 

The SEN’s electricity sales increased 0.7% during 2019 compared to 2018, as set forth in the following table:

ELECTRICITY SALES IN THE SEN (GWh)

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

    

2017

Total electricity sales (SEN)

 

71,670

 

71,179

 

68,256

 

Our electricity sales reached 23,513 GWh in 2019, 24,369 GWh in 2018, and 23,356 GWh in 2017, which represented a 32.8%, 34.2%, and 34.2% market share, respectively. The energy purchases to comply with our contractual obligations to third parties decreased by 42.8% in 2019, compared to 2018, primarily due to (i) EGP Chile’s purchases  no longer being included in the total since its acquisition because they are considered intercompany sales, and (ii) lower energy available under the contract with Nueva Renca, which is included in the total.

 

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The following table sets forth our electricity generation and purchases:

ELECTRICITY GENERATION AND PURCHASES (GWh)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2019

 

2018

 

2017

 

    

(GWh)

    

%
of
 Volume

    

(GWh)

    

%
of Volume

    

(GWh)

    

%
of Volume

Electricity generation

 

21,041

 

89.5

 

20,046

 

82.3

 

17,073

 

73.1

Electricity purchases

 

2,472

 

10.5

 

4,323

 

17.7

 

6,283

 

26.9

Total

 

23,513

 

100.0

 

24,369

 

100.0

 

23,356

 

100.0

 

We supply electricity to the major regulated electricity distribution companies, large unregulated industrial firms (primarily in the mining, pulp and steel sectors), and the pool market. Commercial relationships with our customers are usually governed by contracts. Supply contracts with distribution companies must be auctioned and are generally standardized with an average term of ten years.

 

Supply contracts with unregulated customers (large industrial customers) are specific to the needs of each customer, and the conditions are agreed upon by both parties, reflecting competitive market conditions.

 

In 2019, 2018, and 2017 we had 315, 294, and 152 customers, respectively. This significant increase in 2019 is mainly due the increase in the number of unregulated customers. Regulated customers of a certain size may elect to become unregulated customers in order to benefit from the current market situation, which offers lower prices than would be paid as regulated customers. In 2019 our customers included 20 regulated customers and 302 unregulated customers.

 

The most significant supply contracts with regulated customers are with our subsidiary Enel Distribution and with Compañía General de Electricidad S.A. (“CGE”), an unaffiliated entity. These are the two largest electricity distribution companies in Chile in terms of sales.

 

Our generation contracts with unregulated customers are generally on a long-term basis and typically range from five to fifteen years. Such contracts are usually automatically extended at the end of the applicable term, unless terminated by either party upon prior notice. Contracts with unregulated customers may also include specifications regarding power sources and equipment, which may be provided at special rates, as well as provisions for technical assistance to the customer. We have not experienced any supply interruptions under our contracts. If we experienced a force majeure event, as defined in the contract, we can reject purchases and have no obligation to supply electricity to our unregulated customers. Disputes are typically subject to binding arbitration between the parties, with limited exceptions.

 

For the year ended December 31, 2019, our principal distribution customers were (in alphabetical order): Enel Distribution.  Grupo CGE,  Grupo Chilquinta and Grupo Saesa.

 

Our principal unregulated customers were (in alphabetical order): Compañia Minera Doña Inés de Collahuasi SCM, Enel Distribution,  Empresa CMPC S.A., and SCM Minera Lumina Copper Chile.

 

Electricity generation companies compete largely based on price, technical experience, and reliability. In addition, because 48% of our installed capacity connected to the SEN is hydroelectric, we have lower marginal production costs than companies whose installed capacity is primarily thermal. Our installed thermal capacity benefits from access to gas from the Quintero LNG Terminal. However, during periods of extended droughts, we may be forced to buy more expensive electricity from thermal generators at spot prices in order to comply with our contractual obligations.

 

34

Electricity Distribution Business Segment

 

Through our subsidiary Enel Distribution, in which we have a 99.1% economic interest, we are one of the largest electricity distribution companies in Chile in terms of the number of regulated customers, distribution assets and energy sales.

 

We operate in a concession area of 2,105 square kilometers, under an indefinite concession granted by the Chilean government. We transmit and distribute electricity in 33 municipalities in the Santiago metropolitan region. Our service area is primarily defined as a densely populated area under the Chilean tariff regulations, which govern electricity distribution companies and includes all residential, commercial, industrial, governmental electricity customers, and toll customers. The Santiago metropolitan region, which includes the capital of Chile, is the country’s most densely populated area and has the highest concentration of industries, industrial parks and office facilities in the country. As of December 31, 2019, we distributed electricity to approximately 1.97 million customers. Energy losses were 5.0% in 2019, 5.0% in 2018, and 5.1% in 2017.

 

For the year ended December 31, 2019, residential, commercial, industrial, and other customers, who are primarily municipalities, represented 28.6%, 28.6%, 11.4%, and 31.3%, respectively, of our total energy sales of 17,107 GWh, which is an increase of 1.9% in comparison with the same period in 2018.

 

The following table sets forth our principal operating data for each of the periods indicated:

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

    

2017

Electricity sales (GWh)

 

17,107

 

16,782

 

16,438

Residential

 

4,897

 

4,702

 

4,676

Commercial

 

4,896

 

5,107

 

5,271

Industrial

 

1,954

 

2,202

 

2,451

Other customers (1)

 

5,360

 

4,771

 

4,039

Number of customers (thousands)

 

1,972

 

1,925

 

1,882

Residential

 

1,768

 

1,725

 

1,686

Commercial

 

152

 

149

 

146

Industrial

 

13

 

13

 

13

Other customers (1)

 

40

 

39

 

38

Energy purchased (GWh) (2)

 

18,115

 

17,718

 

17,373

Total energy losses (%) (3)

 

5

 

5

 

5

(1)The data for other customers includes tolls.

(2)During 2019, 2018, and 2017, Enel Distribution acquired from Enel Generation 33%, 37%, and 39% , respectively, of its electricity purchases.

(3)Energy losses are calculated as the percent difference between energy purchased and energy sold excluding tolls and energy consumption not billed (GWh) within a given period. Losses in distribution arise from illegally tapped lines as well as technical losses.

 

Enel Distribution’s tariff review process, which set the tariffs for the 2016-2020 period, was finalized in August 2017. The new tariffs were applied retroactively as of November 2016 and the review did not have a significant effect on Enel Distribution’s tariffs.

 

The seasonally adjusted collection rate corresponds to the ratio between the amount collected in the last 12 months and the amount of debt invoiced in the same period. In 2019 this ratio was 99.28%, compared to 99.63% during the same period in 2018.

 

For the supply to regulated distribution customers, Enel Distribution has entered into contracts with the following generation companies: Enel Generation, AES Gener S.A.,  Colbún S.A. and other companies.

 

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In 2017, the distribution companies of the former SIC jointly submitted a 2,200 GWh/year bid for the period of 2024 through 2043. In November 2017, the following generation companies were awarded the most relevant amounts of the bid companies: Enel Generation, Energía Renovable Verano Tres SpA, Cox Energía SpA, Atacama Energy Holdings S.A. and Atacama Solar S.A.

 

For the supply to unregulated distribution customers, Enel Distribution has contracts with the following generation companies: Empresa Eléctrica Guacolda S.A.Hidroeléctrica La Higuera S.A.Hidroeléctrica La Confluencia S.A.Pacific Hydro Chile S.A., and Enel Generation.

 

Seasonality

 

Seasonal changes in energy demand directly influence the distribution business. Although the price at which a distribution company purchases electricity can change seasonally and has an impact on the price at which it is sold to end users, it does not have an impact on our profitability since the cost of electricity purchased is passed to end users through tariffs that are set for multi-year periods. However, in the case of regulated customers, an increase in tariffs due to rate adjustments may not happen immediately, which could affect our profitability in the short term. During 2018, the effects of low temperatures (especially during the winter) positively impacted our residential customers’ per capita consumption, which represented 28% of our electricity distribution.

 

ELECTRICITY INDUSTRY STRUCTURE AND REGULATORY FRAMEWORK

1. Overview and Industry Structure

In the Chilean Electricity Market, there are four categories of local agents: generators, transmitters, distributors and large customers.

The following chart shows the relationships among the various participants in the Chilean electricity market:

Picture 8

The Chilean electricity sector is physically divided into three main networks: the SEN and two smaller isolated networks (Aysén and Magallanes). The SEN was created after the integration of the SIC and the SING that took place in November 2017 and extends from Arica in the north of Chile to Chiloé in the south of Chile. CEN (Coordinador Eléctrico Nacional), a centralized dispatch center, coordinates the SEN’s operations. Until the interconnection of the SIC and SING in 2017, each system was coordinated by its respective dispatch center, the CDEC-SIC and the CDEC-SING.

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The industry’s three business segments—generation, transmission, and distribution—must operate in an interconnected and coordinated manner to supply electricity to final customers at minimum cost and within the standards of quality and security required by the industry’s rules and regulations.

 

i)Generators:

 

Generators supply electricity to end customers using lines and substations that belong to transmission and distribution companies. The generation segment operates competitively and does not require a concession granted by the authorities. Generators may sell their energy to unregulated customers and other generation companies through contracts at freely negotiated prices. They may also sell to distribution companies to supply regulated customers through contracts governed by bids defined by the authorities.

 

The operation of electricity generation companies is coordinated by CEN, with an efficiency criterion in which the lowest cost producer available is usually required to satisfy demand at any moment in time. Any differences between electricity production and generators’ contracted sales are sold in the spot market at a price equal to the hourly marginal cost of the system.

 

ii)Transmitters:

 

Transmission companies own lines and substations with a voltage higher than 23 kV flowing from generators’ production points to the centers of consumption or distribution, charging a regulated toll for the use of their installations. The transmission segment is a natural monopoly subject to special industry regulations, including antitrust legislation. Tariffs are regulated, and access must be open and guaranteed under nondiscriminatory conditions.

 

iii)Distributors:

 

Distribution companies supply electricity to end customers using electricity infrastructure lower than 23 kV. The distribution segment is a natural monopoly subject to special industry regulations as well, including antitrust legislation. The electricity network is open access, and distribution tariffs are regulated. Distribution companies must provide electricity to the regulated customers within their concession area and at regulated prices. They may sell to unregulated customers through contracts at freely negotiated prices.

 

Customers are classified as “regulated” or “unregulated” according to their demand. Certain customers have the choice to be either regulated or unregulated, and therefore subject to the respective price regime. Demand requirements to qualify as a regulated or unregulated customer are described below under “—3. Generation Segment — Dispatch, Customers and Pricing”.

 

2. Electricity Law and Authorities

 

The goal of the Chilean Electricity Law is to provide incentives to maximize efficiency and to provide a simplified regulatory scheme and tariff-setting process that limits the discretionary role of the government. This goal is achieved by establishing objective criteria for setting prices that offer a competitive rate of return on investment to stimulate private investment while ensuring the availability of electricity in the system to all who request it.

 

Since its inception, private sector companies have developed the Chilean electricity industry; however, nationalization by the government was conducted between 1970 and 1973. During the 1980s, the sector was reorganized through the Chilean Electricity Law, known as Decreto con Fuerza de Ley DFL 1 (“DFL 1”), allowing for the renewed participation of the private sector.

 

The industry is currently governed by the electricity law Ley General de Servicios Eléctricos No. 20,018 and its modifications, under the Electricity Law, known as Decreto con Fuerza de Ley DFL 4 (“DFL 4”), the restated DFL 1, published in 2006 by the Ministry of Economy and its respective regulations included in Decreto Supremo D.S. No. 327/1998.

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The Ministry of Energy has been the leading authority in the energy industry since February 1, 2010. It elaborates and coordinates plans, policies and standards for the proper operation of the sector and the development of the industry in Chile.

 

The National Energy Commission (“CNE” in its Spanish acronym) and the Superintendence of Electricity and Fuel (“SEF”) are also relevant industry authorities. They report to the Ministry of Energy.

 

The CNE is the entity in charge of approving the annual transmission expansion plans, elaborating the indicative plan for the construction of new electricity generation facilities, and proposing regulated tariffs to the Ministry of Energy for approval. SEF inspects and oversees compliance with the law, rules, regulations and technical norms applicable to the generation, transmission, and distribution of electricity, as well as liquid fuels and gas.

 

The Energy Sustainability Agency was created in 2018 and replaced the Energy Efficiency Agency that was in charge of promoting energy efficiency.

 

Additionally, the law provides for a “Panel of Experts,” whose primary responsibility is to acts as a court, issuing enforceable resolutions in disputes related to subjects referred to by DFL 4 and other electricity related laws. This panel is comprised of professional experts, all of whom are elected every six years by the antitrust government agency, Tribunal de la Libre Competencia (“TDLC” in its Spanish acronym).

 

CEN is an independent entity in charge of coordinating the operation of the electricity system with the following objectives:

 

·

maintain service security;

 

·

guarantee the efficient operation of facilities connected to the system; and

 

·

guarantee open access to all transmission networks.

 

CEN’s main activities include:

 

·

coordination of electricity market operations;

 

·

authorization of connections;

 

·

ancillary services management, implementation of information systems available for the public; and

 

·

monitor competition and payments, among others.

 

CEN performs the calculation of market balances (energy injections and withdrawals), determines the transfers among generation companies, and calculates the hourly marginal cost, which is the price at which energy transfers are made in the spot market. CEN does not, however, calculate the rates of generation capacity. The CNE calculates such prices.

 

Limits on Integration and Concentration

 

The antitrust legislation established in DFL 211 (modified in 2016 by Law No. 20,945) and the regulations applicable to the electricity industry stated in DFL 4, and Law No. 20,018 have established the criteria to avoid economic concentration and abusive market practices in Chile.

 

Companies can participate in different market segments (generation, distribution, transmission) to the extent that they are appropriately separated, both from an accounting and corporate perspective, according to the requirements

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established in DFL 4, Law No. 20,018, and the antitrust law DL 211 referred to above. Companies must also comply with the conditions set in Resolution No. 667/2002, discussed below.

 

The transmission sector is subject to the most significant restrictions, mainly because of its open access requirements. DFL 4 sets limits on the shareholdings of generation and distribution companies in companies that participate in the national transmission segment of the transmission system.

 

The owners of the National Transmission System (“STN” in its Spanish acronym) must be limited liability stock corporations. Individual interests in the STN by companies operating in another electricity or unregulated customer segment cannot exceed, directly or indirectly, 8% of the total investment value of the STN. The aggregate interest of all such agents in the STN cannot exceed 40% of the total investment value.

 

According to the Electricity Law, there are no restrictions on market concentration for generation and distribution activities. However, Chilean antitrust authorities have imposed certain measures to increase transparency associated with our subsidiaries and us through Resolution No. 667/2002 issued by the TDLC.

 

Resolution No. 667/2002 states that:

 

electricity generation and distribution activities cannot be merged (Enel Chile must continue to keep both business segments separate and manage them as independent business units);

 

Enel Chile, Enel Generation, and Enel Distribution are registered with the CMF and must remain subject to the regulatory authority of the CMF and comply with the regulations applicable to publicly held stock corporations, even if any of these companies should lose such designation;

 

members of the Board of Directors must be elected from different and independent groups; and

 

the external auditors of the companies must be different for local statutory purposes.

 

Also, the Water Utility Services Law sets restrictions on the overlapping of different utility concessions in the same area. It establishes limits on the ownership of the property for water and sewage service concessions and utilities that are natural monopolies, such as electricity distribution, gas or home telephone networks. For example, an electricity distribution company and a water utility company that belong to the same owner cannot operate in the same concession area.

 

3. Generation Segment

 

The generation segment is comprised of companies that own electricity generation power plants. They operate under market conditions delivering their electricity to end customers through transmission and distribution networks. Generation companies freely determine whether to sell their energy and capacity to regulated or unregulated customers, but CEN decides the operation of their power plants. The surplus or deficit between a generation company’s electricity sales and production is sold or purchased, as the case may be, to other generators at the spot market price.

 

Law No. 20,257 (2008) promotes the development of NCRE generation. In Chile, NCRE refers to electricity from wind, solar, geothermal, biomass, ocean (movement of tides, waves, and currents, as well as the ocean’s thermal gradient) and mini-hydro power plants with a capacity under 20 MW.

 

Law No. 20,257 required generators, between 2010 and 2014, to supply at least 5% of their total contracted sales from NCRE sources, with progressive increases of 0.5% per year beginning in 2015, ultimately reaching 10% by 2024. Law No. 20,698 (2013) modified the requirements of Law No. 20,257 and established a mandatory 20% share of NCRE source as a percentage of total contracted energy sales by 2025 but allowed contracts signed between 2007 and 2013 to maintain the 10% target by 2024.