Colbun SA

SGO:COLBUN

Earnings Call Transcript 2021-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Colbun First Quarter 2021 Earnings Event. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Sebastian Moraga. Sir, the floor is yours.

[Sebastián Moraga, executive]

Hello to everyone, and welcome to Colbun's First Quarter 2021 Earnings Review Call. My name is Sebastian Moraga, I am the company's CFO. And joining me today is Carola Possekel; 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 this quarter to then analyze in detail, this quarter 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. Regarding the COVID-19 pandemic contingency, the company's power plants continue operating normally, and Colbun has continued to take actions considering 2 priority focuses. First, to protect the health of workers, collaborators, suppliers and our surrounding communities and second, to ensure the continuity and security of the energy supply.

Regarding the impact of COVID-19 on energy demand, it is worth mentioning that in Chile, it has decreased approximately 0.1% during the first quarter compared to 0.6% to the first quarter of 2020 during the last 12 months. While in Peru, there was an increase of approximately 2.5% in the first quarter of 2021 and a decrease of 6% during the last 12 months.

On February 6, Colbun sold to Chile Electricity PEC the first group of accounts receivables associated to the energy price stabilization mechanism. On April 1, the sale of the second group of accounts receivable was completed. As a whole, these sales comprise accounts receivable for a nominal value of $84 million. It should be noted that the differential between the nominal amount of the accounts receivables sold and the purchase price will be recorded as financial cost and other losses for fiscal year 2021.

In the first quarter of 2021, $14 million were recorded for this concept associated with the first sale of accounts receivables. On March 11, Colbun was included for the first time in the Sustainability Yearbook 2021, a yearbook that group gathered 15% of the companies in each industry with the best core in the Dow Jones Sustainability Index. And groups the companies with the best evaluation in sustainability matters, including economic, social and environmental management as well as corporate governance aspects of these companies.

On March 30, Colbun announced the sale of its subsidiary, Colbun Transmission to Alfa Desarrollo SpA, 80% controlled by APG Energy and Infra Investments and 20% by Celeo Redes. The closing of the transaction and the transfer of the shares are subject to certain usual conditions for this type of operation. The sale price reached 1,295 million, which may experience variations due to the application of the adjustments stipulated in the respective contract, which are usual for this type of transactions.

On May 12, dividends were paid for a total of 246 million. This payment is made of a definite dividend of 81 million, and an eventual dividend charged to the profits of previous years for 164 million. Based on the above and considering the 81 million paid in December 2020 as a provisional dividend, the total distribution of dividends reached 327 million.

Now please go to Slide #5 to review the main consolidated figures of the company. Consolidated EBITDA for this quarter reached 137 million, decreasing 20% compared to the 172 million in the first quarter of 2020, mainly explained by the higher raw materials and consumables used mainly due to higher generation with diesel and purchases in the spot market at a marginal cost higher than the first quarter of 2020, explained by lower hydro generation and less gas availability. Lower operating income recorded during the period and higher personnel expenses in U.S. dollars as a result of the appreciation of exchange rate compared to the first quarter of last year.

The company recorded a consolidated loss of 21 million compared to the 41 million in profits in the same quarter of last year, mainly explained by higher tax expenses, which are explained by a deferred tax recognition of 65 million associated with the Colbun Transmision sale announcement. And to the lower gross profit explained by higher raw materials and consumables used lower operating income recorded during this quarter.

Now I will turn to Carola who will speak about the main drivers of this quarter's results.

[Carola Possekel, executive]

Thank you, Sebastian, and hello to everyone. Now please continue to Slide 7 for physical sales and generation balance analysis in Chile. Total generation of the period decreased 19% compared to first quarter, reaching 2.4 terawatt hours, mainly explained by: first, lower gas generation driven by lower LNG import and lower availability of Argentinean gas compared to first quarter '20; and second, a lower hydro generation explained by less favorable hydrological conditions compared to first quarter '20. Physical sales during the quarter reached 2.5 terawatt hours, 13% lower than first quarter '20. Due to the lower sales in the spot market, explained by the lower gas and hydroelectric generation registered.

Spot market balance during first quarter '21 recorded net purchases of 76 gigawatt hours compared with the net sales for 400 gigawatt hours recorded in first quarter '20. The difference is mainly explained by the lower generation during the quarter.

Now please continue to Slide 8 to analyze the EBITDA from the generation business in Chile for the year. EBITDA of the generation business in Chile reached 104 million in first quarter '21, decreasing 23% compared to first quarter '20. This variation is mainly explained by: one, higher raw materials and consumables costs used; and two, higher personnel expenses and other expenses by nature, due to the appreciation of the exchange rate compared to first quarter '20.

Now please continue to Slide 9 to analyze the EBITDA from the transmission business for this year. EBITDA for the transmission business reached [ 70 million ] this quarter, decreasing 10% compared to first quarter '20. Due to the low operating income recorded explained by: first, lower income from national assets driven by 2018 reassessment recorded in first quarter '20; second, lower income from zonal assets due to the reclassification of some assets from this segment announced by the regulator; and third, lower income from the dedicated segment explained by other adjustments in this segment contract.

Now please continue to Slide 10 for physical sales and generation balance analysis in Peru. Total generation of the period increased 52% compared to first quarter '20, reaching 521 gigawatt hours, mainly explained by: first, the preventive maintenance of the TG12 gas turbine carried out during first quarter '20; and second, the COES request to stop operating as a result of the decrease in demand registered in Peru after the state of emergency decree in March 2020, in order to face the COVID-19 pandemic.

Physical sales during this quarter reached 561 gigawatt hours, increasing 9% compared to first quarter '20, mainly due to the same reasons that explain the generation increase. Spot market balance during first quarter '21 recorded net purchases of 6 gigawatt hours compared to 186 gigawatt hours during the same quarter of the previous year. due to the higher generation recorded in the period for the same reason explained above.

Now please continue to Slide 11 to analyze the EBITDA in Peru for first quarter '21. EBITDA in Peru reached [ 17 million ] in first quarter, 14% lower than the EBITDA of 20 million recorded during the first quarter '20, mainly due to the higher gas consumption driven by the higher generation recorded during the quarter.

Now please continue to Slide 12 for the consolidated nonoperating income and net income analysis. Nonoperating income in first quarter '21 presented losses of 44 million, lower than the losses of 49 million in first quarter '20. The lower losses are mainly explained by higher other losses recorded in first quarter '20 associated to the premium paid for the prepayment of the 2024 bond, maturing in 2024, of 17 million. This effect was partially offset by the recording of financial cost on other losses, related to the selling of the first group of account receivables generated by the energy price stabilization mechanism of $14 million. The company recorded a consolidated loss of 41 million, compared with the $41 million in profits in first quarter '20. Mainly explained by higher tax expenses in first quarter, mainly explained by deferred tax recognition of 65 million, associated with the Colbun transmission, sale announcement and second, the lower gross profit explained by higher raw materials and consumables used and lower operating income recorded during this quarter.

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

[Sebastián Moraga, executive]

Thank you, Carola. Regarding our growth opportunities in Chile, we have focused our growth in renewables based on 3 pillars: developing a pipeline of projects; regarding the corporation of renewable energy from variable sources. Up to this date, Colbun 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 approximately 780 megawatts located in the Atacama region, Diego de Almagro Sur I and II, which are PV projects with an overall capacity of approximately 230 megawatts located in the Atacama Region; Inti Pacha, a PV project of approximately 486 megas located in Antofagasta region; Jardin Solar, a PV project of approximately 537 megas located in the Tarapaca region; Machicura, a PV project of 9 megawatts located in the Maule Region; Los Junquillos a wind farm of approximately 360 megas located in the Biobio region. Additionally, at the end of this quarter, Colbun holds a portfolio of locations for other wind and solar projects, which are in early stages of development. For more details on this slide, you can refer to the latest earnings report available at our website.

Second, the company does not rule out the purchase of renewable assets in operation. And finally, third pillar of our growth in renewables is also acquiring energy from third parties.

In terms of our international expansion strategy, as we have mentioned before, we continue searching for growth opportunities in selected countries of the region in order to maintain a leading position in the power generation business and to diversify our sources of income.

This concludes Colbun's First Quarter 2021 results review. Thanks for listening, and now we are open to answer your questions.

[Operator]

[Operator Instructions] Your first question is coming from Murilo Riccini.

[Murilo Riccini, analyst]

Actually, I have some questions for you. Given the higher generation costs of the first quarter of this year, how are you looking at the generation cost of the system in the coming quarters, given that the spot prices remains at unusual high level so far?

And the second one, what are the plans for the cash that you have now after the sale of the transmission assets?

And finally, if you could give us an update on the regulatory situation regarding the gas in Peru?

[Miguel Alarcón, executive]

So Murilo, this is Miguel. So regarding your first question, yes, of course, the first quarter showed higher than before in terms of generation costs and the reason for that, of course, to some extent, poor hydrology and of course, lack of Argentinean gas, which, as you know, is extremely competitive. Going forward what we have planned as a company as we have done before, is to contract available position of gas available to operate both of our combined cycles throughout the third quarter of this year and complement that with, of course, the base load provided by coal and of course, the relevant high growth which we expect to have starting at this time of the year.

[Sebastián Moraga, executive]

Murilo. This is Sebastian. Regarding your second question and the use of funds. Well, it is no doubt that the proceed from the transaction from the sale of the transmission business will represent an important liquidity flow for the company. And it also should be noted that even without these resources, Colbun today enjoys a very good liquidity level, a very robust and healthy cash generation and level of debt in accordance with the investment grade, we have always aimed to be, which, by the way, is also structured in the long term. And all of this allows us to adequately address our growth plan that we have been informing to the market during the last 3 years.

Now the decision about the use of these additional resources from the sale of the transmission business, which, by the way, is the sovereign decision of the shareholders, will be based on a very simple and basic principle. They will go where they generate the most value for our shareholders.

[Miguel Alarcón, executive]

And Murilo, I think your third question was about the gas price situation in Peru? Is that correct?

[Murilo Riccini, analyst]

Yes. Actually, regarding the inflexibility gas in Peru, I understand that we had some news there. Is that right?

[Miguel Alarcón, executive]

So yes, basically, what has happened, and of course, this has been going on for a while in Peru. But recently, at the beginning of this month, actually on May 3, [indiscernible] finally published the final version of the technical procedure, which is #31 that regulates how the company is going forward. We need to reflect the gas [indiscernible] and actually to incorporate the total gas that before only incorporated the supply piece of the equation. With that, we, of course, had some minimum discussions among the market participants. We expect a much more, I would say, normalized situation, more balanced situation in terms of how the gas is being declared and how the gas we actually reflect the market value of that type of fuel. I cannot comment on how do we expect in terms of specific numbers or figures, but of course, we expect that the situation for things in particular, will improve as it generates, we'll discussed and still sell a relevant portion of the production cost of 20% to the spot market that should be more normalized as it was before, some 6 years ago.

[Operator]

Your next question is coming from Luis Serano.

[Unknown Analyst]

I just want to ask if you could please talk about your current views on the strategic importance of Fenix in Peru. And is there anything that has changed since you took that write-down in fourth quarter '20, which was quite meaningful? And related to that, your views on the upcoming election there in Peru. If there's any outcome out of the election like a Castillo win that would make you reconsider your strategy in Peru and specifically towards Fenix?

[Miguel Alarcón, executive]

I would say this. Miguel again here. I would say that, first of all, Fenix, the investment thesis behind Fenix remains the same that we had in mind when we acquired the company in December of 2015, which is to grow the company because we still believe that the market fundamentals in the power sector remains very strong. Peru still represents a significant -- it still represents a much lower consumption in terms of energy per capita compared to Chile and other countries in the region, and because of that and the need to electrify different parts of the population and industries, we still see again relevant potential and upside in that industry. So the fundamentals and our interest in growing that company and make a larger footprint in the sector remains the same.

Having said that, of course, that we acknowledge that there is some volatility and some, I would say, market noise because of the recent election and the upcoming election, but we still believe that we need to wait and see. And we strongly believe that distributions in Peru are very strong. The regulation is also very strong as it was taken from the -- through the sample in Chile. And because of that, again, the investment thesis and our desire to towards the industry remains the same.

[Operator]

Your next question is coming from Andrew McCarthy.

There are no further questions in the queue at this time. [Operator Instructions] Your next question is coming from Rodrigo Mora.

[Rodrigo Mora, analyst]

Sebastian, I would like to ask you if you could add some update, more information about the Horizonte wind power project. I read in the press release, the company updated the capacity of the project and also the generation expected. Please, could you give us some more details about the project, the timetable or maybe if you can give us some idea about the investment cost.

[Sebastián Moraga, executive]

Rodrigo, well, Regarding Horizonte, we continue moving forward with this project. We have been negotiating the supply contracts, mostly with the wind turbine assembly. The -- everything related with the bidding processes of the civil works and the electrical balance of plant. We are also working to elaborate the second addendum. And as you mentioned, obviously, it's important the fact that we have increase the installed capacity up to approximately 780 megawatts. And that was basically driven because of the, I would say, advancement of technology of the wind turbines and the amount of the wind turbines. So now we're talking approximately of 144 wind turbines, and each with a size of 5.5 megas. As we have been informing, there are no relevant delays in this project regarding everything given the COVID scenario. So I think, Rodrigo, I could certainly say that we are still on track, and there have been no major, major delays.

[Rodrigo Mora, analyst]

Do you have any idea approximately how much could reach the total investment of this project? And maybe when if all the environmental licenses will be approved when the company could -- or the Board could make a decision about this project?

[Sebastián Moraga, executive]

Obviously, timeframes, given the scenario, the scenario that the world is dealing with COVID today, Rodrigo. Given certainty of exact dates, it's difficult. But I would say that we are probably looking forward to bring the final investment decision, I would say, during this year. So we are in the middle of the year because technically, next week is June. And I would say we are, in some way, targeting that we should have all the data and the permits advancement to go and take, I would say, the decision moving forward to the Board of Directors in Colbun this year.

[Rodrigo Mora, analyst]

Certain -- has Colbun sign a kind of agreement with the supplier of wind turbine? I was seeing that in Brazil, a, if Brazil sign a huge supply agreement with Enercon, the German wind producer.

[Sebastián Moraga, executive]

I'm sorry, Rodrigo, I'm not probably understanding your question. You can do it in Spanish. I don't have no problem.

[Rodrigo Mora, analyst]

[Foreign Language]

[Sebastián Moraga, executive]

[Foreign Language] We already selected Enercon 2 years ago or approximately 2 years ago, and we are working with them. And actually, when I mentioned that we are targeting the 144 wind turbines with the installed capacity that I just mentioned, it is Enercon technology.

[Operator]

Your next question is coming from Andrew McCarthy.

[Andrew McCarthy, analyst]

Sebastian, Miguel and the rest of the team, thanks very much for the call. My first question, I just wanted to follow up a little bit on the investment projects outlook in Chile that Rodrigo was asking about. Just a bit more sort of generally wondering about given the results of the election on May 16. How you're seeing the outlook now, in particular? Generally your thoughts on that result for Colbun in the industry. And how that might be now playing into your calculus on your investment decisions and when you take those investment decisions over the next 12 months? Any color you can provide on that would be really helpful.

[Sebastián Moraga, executive]

Andrew. Well, the -- doing business carries always risks. And I would say our philosophy is that companies need to take into account risk, adjust anything necessary to tolerate any new risk if it's out there and basically move on. We are in an industry that is essential, no matter what the outcome of the [Foreign Language ] or the outcome of the presidential elections will be. I can agree that we all have the certainty that more energy will be needed in this country. More green energy will be needed in this country. So I would say, given the nature of the industry that we work in, you have for sure that the country will need all this energy.

So yes, I would say as any company out there, we are obviously looking at the political situation in Chile, we are also looking at the political situation in Peru. But as I mentioned, I would say on my first statement, risks are everywhere, and it's the nature of doing business. It's not only political risk, it's environmental risk, credit risk, financial risks. So we are a company, which is used to working with risks. We have a very solid, I would say, risk area. I would say we have a very savvy Board of Directors, a very, I would say, very savvy also management team. So to your answer, life goes on.

[Andrew McCarthy, analyst]

Very clear. And I just wanted also to ask a follow-up on the transmission business sale process. I was wondering if you could give any more color on the expected timing of the completion of the deal already announced on March 30? And is it possible to give some kind of quantification to the adjustments that could occur that you're referring to the overall price of $1.295 billion. Any kind of order of magnitude you can give there to have an idea?

And just sorry, finally, on the -- in terms of the use of proceeds, Sebastian, you mentioned that the shareholders would consider their -- the use that would generate most value for shareholders. Is there any more color you can give on how that thought process would work and what options are being considered? Any metrics, in particular, that the shareholders would be taking into account in that decision-making process? That would be really helpful.

[Sebastián Moraga, executive]

Absolutely, Andrew. So I have -- if I understood well, you had 3 questions. So I will address them in order. Well, as we announced when we published the [Foreign Language], the closing of this transaction, obviously, is subject to the approval of the Fiscala Nacional Economica, okay? The transaction documentation was presented through the Fiscala Nacional Economica approximately on mid-May. And given our experience in other transactions that we have seen in the market regarding how much time does the Fiscala Nacional Economica take to review these kinds of transaction. I would say a good guess could be that the authority should give a pronouncement in the following 2 to 4 months, somewhere in between that range, Andrew. Being too probably a very, I would say, speed-up process and up to a slower one. So I would probably stick it in the middle.

Regarding the -- what you mentioned regarding the valuation of the last transmission asset valuation that we were informed a couple of weeks ago. First of all, I would like to probably let you know that Colbun Transmision is part of the [ Greenhill ] Association of the Transmission Companies. And we have participated together with the rest of the transmission companies representing our concern in the ongoing process of valuation of these kinds of assets.

Now regarding what could be the impact on the price that we announced in the material fact that we published on late March. Well, in that material fact, we said that as it is customary on these types of transactions, the sale agreement considers price adjustments. Now it should be noted that the main source of income in our transmission business is dedicated assets, which if you see our 2020 figures, represents approximately 60% of our revenues. And as you may be aware, Andrew, the dedicated assets were not modified by the ongoing [Foreign Language]. So obviously, I cannot give you more details exactly on how are we potentially assessing the impact. But I'm probably giving you some color that most of the revenues generated by our Colbun Transmision Affiliate were not subject to this ongoing process.

And your last question, Andrew, well, I am guessing you are trying to read between the lines. But the message I was trying to convey regarding the use of funds is that today, Colbun has been, in some way, highlighting all our expansion strategy with the wind and solar projects. We have been, I would say, very, very generous in giving you the time frames, the investment amounts. We have a position of liquidity, which we feel is very, very good. We have a healthy cash generation, and we have, in no means any problem regarding debt constraints or pressure. Actually, we have -- we think we have a very well structured debt in the long term.

So given that, potentially, we will receive -- if the fiscal year approves this transaction, obviously, an important liquidity flow for the company. That's where, again, it is not our decision, but the shareholders, for sure, will see the position, the liquidity position of the company, the debt, the CapEx program, and they will again take the decision on where to put this liquidity flow where it will generate most value for them. And again, in finance, 1.0, we were taught that the capital structure of the company needs to be an adequate capital structure.

[Operator]

There are no further questions in the queue at this time. [Operator Instructions] Your next question is coming from Andrew McCarthy.

[Andrew McCarthy, analyst]

Have a follow-up question. I just wanted to finally ask about the decarbonization process in Chile. In Congress, in the last couple of days, we've seen that the -- this build it's aiming to withdraw all coal plants by 2025, appears to be advancing. I think there are still several steps that it needs to go through, but continues to advance. So I was wondering if you could give us any idea about what your thoughts are on that bill. And if it were to pass, what potential implications you're seeing for Colbun, in particular, thinking about the Santa Maria coal plant and the contract with the PPAs with Codelco?

[Miguel Alarcón, executive]

Andrew, Miguel here. Great talking to you. First, I would say that -- and I think we've said this in the past that as a general idea, we agree with the concerns and the arguments that was presented before by the Minister of Energy and Environment, by the [ CME ], by the coordinator, even by some experts in the sense and the potential impact of having this idea of moving forward, the big organization and the phasing out of coal in the entire country. We cannot, of course, comment about the specifics in terms of potential consequences and impacts for Colbun and the commercial policy you referred to.

But of course, You have to be -- you have to remember that back in 2019, we already committed as [indiscernible] companies did to sign this voluntary agreement to completely phase out coal and not to build new more coal facilities. So we of course comply with whatever comes out of Congress, and we are taking any potential measure to try to accommodate the company in that sense. One, of course, all this -- all the section we are taking is to moving ahead with our renewabless CapEx program, as we already explained.

[Operator]

There are no further questions in the queue at this time. [Operator Instructions] There are no further questions in the queue. Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.