Colbun SA

SGO:COLBUN

Earnings Call Transcript 2019-Q1

[Operator]

Greetings and welcome to Colbún's First Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Miguel Alarcón. Please go ahead.

[Miguel Alarcón, executive]

Hello, everyone, and welcome to Colbún First Quarter 2019 Earnings Review Call. My name is Miguel Alarcón. I'm the Deputy CFO of the company, and joining me today are Soledad Errázuriz and Isidora Zaldívar from the Investor Relations team.

I hope that you have received our earnings report and an earnings review presentation that we have prepared to complement the analysis of our figures. Otherwise, you can download them at the Investors section of our website.

Agenda for today on Slide 3 is as follows: we will begin talking about the highlights of the quarter to then analyze in detail this quarter's results. And after that, we will provide an update on our growth opportunities. Following the presentation, there will be time to participate in a Q&A session.

Now please go to Slide #4 to review the highlights of this quarter. First, on April 25, the ordinary shareholders' meeting approved the distribution of, first, a final dividend of $156 million, which added to the $84 million paid on December last year, will reach 100% of the distributable liquid income for the year 2018. And second, an additional dividend of $100 million charged to the accumulated income of the previous years. These dividends will be paid from May 7, 2019, onwards.

Second, regarding growth, on April 25 of this year, Colbún made public the acquisition of the projects Diego de Almagro Sur I and II, in connection with the company's strategy to increase the share of renewable energies from viable sources in the generation mix. These projects are located in the Atacama region, 27 kilometers South of Diego de Almagro and consider an overall capacity of approximately 210 megawatts.

Finally, regarding commercial strategy. During this year, the company has contracted approximately 300 gigawatt hour per year of its generation with new unregulated customers.

Now let's go to Slide #5 to review the main consolidated figures of the company. Consolidated EBITDA for the first quarter of this year reached $162 million, in line with the EBITDA of $164 million for the first quarter of 2018. Consolidated net income, on its part, reached $66 million, 3% higher than the first quarter of 2018. Financial investments totalized $816 million, and net debt to EBITDA ratio is at 1.2x. The average long-term financial debt interest rate in the U.S. dollars is 4.5%.

Colbún has a total installed capacity of 3,893 megawatts, comprised of 2,250 megawatts in thermal units; 1,634 megawatts in hydraulic units, and 9 megawatts from the photovoltaic power plant, Ovejería. In terms of transmission assets, it has 941 kilometers of transmission lines and 28 substations.

Now I will turn to Soledad, who will speak about the main drivers of last quarter's results.

[Soledad Errázuriz, executive]

Thank you, Miguel, and hello to everyone. Now please continue to Slide 7 for our physical sales and generation balance analysis in Chile.

Total generation for the period decreased by 3% compared to the first quarter of 2018, reaching 3.3 terawatt hours, mainly due to lower hydro and coal generation, partially offset by an increase in gas and diesel generation.

Physical sales during the first quarter of 2019 reached 3.2 terawatt hours, 5% lower than the first quarter of 2018, mainly explained by lower sales to regulated customers. Spot market balance during the first quarter of 2019 recorded net sales for 673 gigawatt hours, higher compared with net sales for 525 gigawatt hour in the first quarter of 2018.

Now please continue to Slide 8 to analyze the EBITDA from the generation business in Chile for this quarter. EBITDA for generation business in Chile reached $129 million this quarter, decreasing 6% compared to the same quarter of the previous year. The lower EBITDA in the quarter is mainly explained by the decreasing revenues due to lower sales to regulated customers, partially offset by higher energy and capacity sales in the spot market and to unregulated customers. The lower sales to regulated customers reflect the emigration of consumption from regulated customers to free customers as a consequence of the price differential between both segments.

Now please continue to Slide 9 to analyze the EBITDA from the transmission business for the first quarter of 2019. EBITDA for transmission business reached $20 million in the first quarter of 2019, increasing 21% compared to the same quarter of the previous year, mainly explained by the higher operating income due to an increase in the revenues from the zonal transmission assets.

Now please continue to Slide 10 for our physical sales and generation balance analysis in Peru. Total generation of the period increased by 54% compared to the first quarter of 2018, reaching 932 gigawatt hours, mainly explained by the scheduled annual maintenance, which in 2018 was carried out during the month of January and February, while in 2019, the maintenance occurred between March 19 and April 19.

Physical sales during this quarter reached 942 gigawatt hours, 6% (sic) [ 16% ] higher than the first quarter of 2018, mainly explained by higher sales to the spot market. Spot market balance during this quarter recorded net sales for 156 gigawatt hours compared to net purchases of 154 gigawatt hours during the first quarter of 2018, due to the lag in the scheduled maintenance dates previously explained.

Now please continue to Slide 11 to analyze the EBITDA for the generation business in Peru for the first quarter of 2019. EBITDA in Peru reached $13 million this quarter, 28% higher than the EBITDA of $10 million recorded in the first quarter of 2018, due to lower cost in raw materials and consumables used, mainly explained by the higher energy and capacity purchases registered in the first quarter of 2018, due to the maintenance of the power plant carried out during the months of January and February, while the annual maintenance of 2019 was carried out between March and April.

Additionally, the marginal cost of energy purchases during the maintenance of 2018 was $29 per megawatt hour, higher than the cost of $9 per megawatt hour during the 2019 maintenance as a result of the failure in the TGP gas pipeline in February 2018.

Now please continue to Slide 12 for the consolidated nonoperating income and net income analysis. Nonoperating income in the first quarter 2019 presented losses of $15 million, 10% lower than the losses of $17 million in the first quarter of 2018.

The lower losses are mainly explained by, first, a positive effect of the variation of the sol to U.S. dollar and Chilean pesos to U.S. dollar exchange rates on temporary items of the balance sheet in local currency during this quarter.

On the other hand, in the first quarter of 2018, this effect was negative. And it is also explained by higher financial income as a result of higher investment rates of cash surpluses during the quarter, partially offset by a decrease registered in the line "Profit loss of companies accounted for using the equity method" as a result of revaluations of lands owned by Hidroaysén during the first quarter of 2018, due to its accounting at liquidation value.

Tax expenses amounted to $20 million this quarter, 15% lower than the tax expenses of $24 million in the first quarter of 2018. The lower expenses are mainly due to, first, a tax profit registered this quarter in Peru, driven by the appreciation of the Peruvian sol during the period, given that exact tax accounting of Fenix is carried in Peruvian soles; and second, a lower profit before taxes recording during the first quarter of 2019 compared to the same quarter of the previous year.

The company recorded in the first quarter of 2019 a net income of $66 million, higher than the net income of $64 million in the same quarter of the previous year. Increase is mainly explained by the lower tax expenses.

Now continuing with this conference call, please go to Slide #14, where Miguel will give you an update on the status of our growth opportunity.

[Miguel Alarcón, executive]

Regarding our growth opportunities in Chile, we have focused our growth in renewables, meaning hydro, solar and wind, based on 3 pillars.

First, developing a pipeline of projects. Regarding incorporation of renewable energy from variable sources, Colbún has been able to complete a portfolio of locations for wind and solar projects, which are in different stages of studies and development. Horizonte, a wind farm of 607 megawatts located in the Atacama Region, Diego de Almagro Sur I and II, which are 2 photovoltaic projects with an overall capacity of 210 megawatts located in Atacama Region. Sol de Tarapacá, a photovoltaic project of 200 megawatts located in Tarapacá Region. And additionally, at the end of this quarter, Colbún has completed a portfolio of locations for another 4 wind and solar projects with total capacity of approximately 800 megawatts. These projects are in early stages of developments.

For more details on this slide, you can see the list of our Colbún portfolio of projects or please refer to our latest earnings report available at our website. Second, the company does not rule out the purchase of our own assets in operation. And finally, the third pillar of our growth in renewables is acquiring energy from third parties. Regarding the transmission business, Colbún has several projects for the expansion and enhancement of the company's coal and transmission assets with a total investment value approximately $50 million.

In terms of contract expansion strategy, as we have mentioned before, we continue searching for growth opportunities in Peru, Colombia and Argentina, in order to maintain our leading position in the power generation business and to diversify our sources of income.

With this, we conclude Colbún's First Quarter 2019 Results Review. Thank you for listening, and now we're open to answer your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Ezequiel Fernández with CrediCorp.

[Ezequiel Fernández López, analyst]

I have 4 questions. I would like to go one by one, if you don't mind. The first one is related to the gas output. If I'm right, you generated 1.4 terawatt during the quarter. And I wanted to get an idea of how much of that is Argentinian gas? How much of that is through your usual local agreements? Or if that includes also some LNG, some owned LNG vessel.

[Miguel Alarcón, executive]

Ezequiel, this is Miguel. Can you please also ask your second question, and then we'll answer those one by one?

[Ezequiel Fernández López, analyst]

Okay. It's 4 questions, actually, but okay, I'll go with the 4. No worries. The first one, sir, was related to the gas supply. The second one is related to the regulated sales. They dropped 23% year-on-year. I wanted to know if there's any contract maturing in that period or if it's entirely related to customer migrations and the sort of over auctioning process, if any. The third question is related to overall OpEx or SG&A. Any costs that are not related to fuel, emission taxes, LNG transmission overhead, I mean. It's down materially year-over-year and quarter-over-quarter. I wanted to know if you are engaged in some sort of cost-cutting initiative. And the last question is related to the new 0.3 gigawatt in -- or sorry terawatt, in contracts that you closed this quarter. If those are new customers or renegotiations? And what is the average duration for those new contracts?

[Miguel Alarcón, executive]

Thanks, again. Miguel here. So thank you for all those questions. So the first question related to gas. So the Argentinian portion, it's only 50 gigawatt hours throughout the quarter, and the reason for that is that basically, as you know, we try to contract, in advance, enough supply for the first quarter of this year in which we typically know it's the end of the melting season. And because of that, we need to rely on full certainty about the availability of the gas. And because of that, as mentioned, we only have a smaller percentage of gas coming from Argentina in the quarter.

The second question regarding the decrease in regulated sales. It is basically, as you mentioned, has to do with that 23% reduction compared to the previous quarter of last year. Those are around 300 gigawatt hour. And there's actually 2 reasons within that reduction. The first one is that you have to remember that as a system, there were new contracts that were tendered in 2014 that become available starting this year, and that's a one effect. And the other, as you mentioned on your question, is the migration of clients due to the new legislation that they can opt to be free customers who are unregulated depending on their own consumption. Going forward to your question, there was no maturity in any of those contracts within the period.

Your third question regarding SG&A, as I think was mentioned before, and I think we did this in our earnings report in the end of last year, we are in the process of optimization of some of our cost structures regarding SG&A. That has to do with the maintenance, operations and other contracts. And because of that, we reduced actually our SG&A amount last year of about $14 million, I think, compared to 2017.

And finally, regarding customers. The increase in the volume sales to the free segment is 100% new customers. No renegotiation of existing contracts.

[Ezequiel Fernández López, analyst]

Okay. That's great. Two more follow-ups on the gas supply. You said 50 gigawatts coming from Argentina. The rest is part of your agreement with ENAP? Or do you have any LNG cargo that came in?

[Miguel Alarcón, executive]

No. Both with ENAP and Metrogas, the local suppliers.

[Operator]

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for closing remarks.

[Miguel Alarcón, executive]

Okay. So thank you, everyone, for attending, for joining this conference call, and hope to see you again for the next quarter review. Have a great weekend. Bye-bye.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.