Colbun SA

SGO:COLBUN

Earnings Call Analysis

Decline in Revenues and Positive Growth Initiatives

Colbun's revenues in Q1 2024 dropped by 31% year-over-year, primarily due to lower sales to both regulated and unregulated clients. Despite this, total costs also fell by 39%, driven by reduced fuel and energy costs. Profit for the quarter stood at $59 million, a significant dip from $92 million the previous year. The company did, however, secure major long-term contracts with Antofagasta Minerals and Codelco and made substantial progress on renewable energy projects, including the Horizonte wind project in Chile and a green hydrogen plant in Peru. Cash flow from operations remained healthy at $75 million.

A Challenging Start to 2024

Colbun experienced significant challenges in the first quarter of 2024, with consolidated operating income dropping by 31% to $382 million from $551 million in the prior year. This downturn was attributed to several factors: reduced sales to regulated and unregulated clients due to the expiration of contracts and lower demand, particularly from the mining industry in Chile. Additionally, the average sale price decreased significantly due to market pressures, indicating a tough competitive environment.

Impact of Maintenance and Market Conditions

The company's generation capacity saw a decline as well, with total electricity generation in Chile decreasing by 6% to 3.2 terawatt-hours. This reduction was largely influenced by scheduled maintenance and a gradual decrease in gas supply availability. Notably, the average marginal cost for electricity in the region dropped 60% year-on-year, reflecting an oversupply in the market that pressured prices downward.

Financials at a Glance

Colbun's consolidated EBITDA fell by 23% to $148 million, compared to $192 million in the first quarter of 2023, driven mainly by lower sales and operational challenges. The company also recorded a profit of $59 million, a significant decrease from $92 million in the same period last year. The net cash flow for the quarter was negative $20 million, an improvement from a negative $91 million in the previous year, demonstrating better cash management despite lower operational performance.

New Contract Developments and Growth Plans

Despite the challenges, Colbun is optimistic about its future. The company signed purchase agreements with 22 clients for up to 2,070 gigawatt-hours annually, securing long-term contracts that will bolster their revenue streams. The significant contracts include a 15-year agreement with Antofagasta Minerals and another with Codelco for renewable energy that will commence in 2026, providing 1.1 terawatt-hours annually.

Investing in Clean Energy and Expansion

Colbun is advancing its clean energy initiatives, including the launch of a green hydrogen plant, which aims to reduce CO2 emissions significantly. In progress are the Horizonte wind project, set to contribute an additional 360 megawatts, and the Cuatro Vientos wind farm, both pivotal to establishing greater renewable energy capacity in the region. The company expects this project to become operational by the end of 2024.

Financial Strategy and Debt Management

Colbun maintained a gross financial debt of $2.1 billion, with a favorable average interest rate of 3.8% over an average life of 5.7 years. The net debt-to-EBITDA ratio stands at a manageable 1.7x, indicating the company’s solid ability to manage debt relative to earnings. This balance is crucial as Colbun aims to invest heavily in infrastructure and renewable projects to strengthen its position in the energy sector.

Outlook and Guidance

Looking ahead, Colbun anticipates continued pressure from the renewable energy market and evolving demand dynamics. The company has not provided explicit revenue growth guidance but expects to benefit from its strategic contracts and infrastructure investments moving forward. Analysts believe that integration of new technologies, including battery storage systems and green hydrogen, alongside continued operational efficiency improvements, will be pivotal for future growth.

Final Thoughts

While Colbun endures a rough quarter with decreased revenues and profits, its strategic pivot towards renewable energy and solid contractual agreements provides a promising outlook. Investors should monitor the execution of its ambitious projects and overall market conditions, as these will play critical roles in determining the company’s future financial stability and growth prospects.

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I would like to welcome you to Colbun's First Quarter 2024 Results Conference Call on the 3rd of May 2024.

[Operator Instructions] So without further ado, I would now like to pass the line to Mr. Jose Ignacio Escobar, the CEO of Colbun.

[Jose Escobar, executive]

Thank you, everyone, for joining us in reviewing our quarterly results. My name is Jose Ignacio Escobar, I'm Colbun's CEO, and joining me today is Miguel Alarcon, the company's CFO, and our Investor Relations team.

I hope you have received our earnings report and our earnings review presentation that we have prepared to complement the analysis of our figures. Otherwise, you can download them from the Investors section on our website. On this occasion, we will review the highlights of the quarter, the company's consolidated results, our liquidity and debt position and finish with an update on the development of our pipeline of projects.

Now please go to Slide #4 to review the highlights of this year. First, regarding the operation of our power plants. On January 11, 2024, Santa Maria power plant completed its major maintenance, which lasted for 75 days. Among the main activities carried out in this major maintenance are: improvements to the steam turbine control system; change of the low pressure type and rotor; change of the valve's design that control the entry of high pressure steam; predictive boiler inspection among others.

On January 20, 2024, Unit 1 of the Nehuenco complex restarted operations after the unit's fire on August 4, 2023 while it was undergoing major maintenance. During the first quarter, Fenix Power carried out its annual maintenance, which caused the plant to be out of service for the last 16 days of February.

Second, with respect to our commercial strategy. This quarter, we signed our purchase agreement with 22 clients for up to 2,070 gigawatt hours per year. Among the main contracts signed are: first, Antofagasta Minerals, 100% renewable energy supply contract for the project Minera Centinela. This contract has a term of 15 years and is for a total up to 912 gigahertz hours starting from 2025 onwards.

Second, Codelco, 100% renewable energy supply contract, which will enter into force in January 2026 for 15 years, providing up to 1.1 terawatt hours per year.

Third, regarding our growth opportunities in Chile, the relevant updates for this quarter are as follows: on January 26, the company began the environmental impact assessment of the Cuatro Vientos wind farm in [ Llanquihue ]. This project will consist of 48 wind turbines with an installed capacity of up to 360 megawatt.

Environmental evaluation services indicated that the storage projects linked to the Diego de Almagro solar power plant, Inti Pacha and Jardin Solar power plants don't have to submit a new environmental impact assessment.

During the first quarter of 2024, 80% progress was reached of the Horizonte wind project. As of today, $668 million have been disbursed of a total of approximately $900 million. Additionally, on March 28, the company entered a modification project into the environmental impact assessment system, which will increase the total capacity by 20%. This expansion will add up to 180 megawatts of additional capacity through the installation of 24 new wind turbines.

Regarding growth opportunities in Peru, relevant updates for this quarter are as follows: on January 25, Fenix Power began the operation of its first green hydrogen plant. This project will allow to replace 100% of the gray hydrogen consumed by the plant, reducing its carbon footprint by around 70 tons of CO2 equivalent per year.

On March 14, Fenix Power entered the Bayovar project into environmental impact approval studies in Peru. The project has a maximum installed capacity of 660 megawatts to be built in 2 phases. This wind farm is located in the [ Department ] of Piura in the North of Peru. For more information regarding our pipeline of projects, please review our earnings reports.

Finally, subsequent highlights. On April 25, the ordinary shareholders meeting was held and agreed to distribute a final dividend of $25 million, which added up to the $169 million paid in December 23, reached a total of $175 million, which represents 50% of the distributable net income for the 2023 year according to the dividend distribution policy agreed on 2023 Annual Shareholders Meeting.

Now I will turn to Miguel, who will speak about the main drivers of the results for this quarter. Miguel?

[Miguel Alarcón, executive]

Thank you, Jose Ignacio, and hello to everyone. Before starting with our quarterly results review, I would like to highlight some relevant data about the systems operation.

In Chile, average marginal cost measured at Alto Jahuel decreased 60% compared to the first quarter of last year, averaging $47 per megawatt hour in the first quarter of 2024. Electricity demand grew at a rate of 3.8% compared to the first quarter of '23.

On the other hand, [ hemological ] year, which is measured from April 2023 to March 2024 ended with a probability of exceedance of 57% compared to 89% recorded in 2023. In Peru, Santa Rosa's average marginal cost during the Q1 '24 reached $32 per megawatt hour. Electricity demand grew at a rate of 3.6% compared to the first quarter of 2023. In turn, the related year ended with probability of exceedance of 10% compared to 78% recording last year.

Please go to Slide #10 to review our physical sales in each country and our consolidated operating income figures. In Chile, physical sales during the quarter reached 3.1 terawatt hour, decreasing by 7% compared to the same quarter of last year, mainly due to, first, lower sales regulated clients driven by the expiration of contracts in this segment in December of 2023; and second, lower physical sales unregulated clients, explained by a lower consumption recorded this quarter by the mining industry.

In Peru, physical sales during this quarter reached 817 gigawatts hour, decreasing by 14% compared to the first quarter of 2023, primarily due to, first, lower sales to regulated clients due to an option execution that extended the contract's maturity at the expense of lowering the annual contracted capacity; and second, lower sales to unregulated clients given the expiration of contracts in this segment in December of last year.

The first quarter of the year, consolidated operating income amounted to $382 million, decreasing by 31% compared to the revenues recorded in the first quarter of last year. In Chile, operating income for the first quarter of '24 amounted to $332 million, decreasing by 33% compared to $495 million recording in the first quarter of 2023, mainly due to: number one, lower sales to unregulated clients associated to the lower average sale price, given the decrease in the value of these contracts' [ indexator ] accompanied by lower physical sales in this segment; number two, lower sales with regulated clients, mainly associated with contracts expirations in this segment and finally, lower sales in the spot market, primarily explained by a low average sale price.

Improved operating income amounted to $51 million, decreasing by 15% compared to the income of $60 million recorded in the first quarter of 2023, mainly explained by lower sales regulated clients due to the lower contracted annual capacity associated with the contract's expiration in this segment.

Now please go to Slide #11 to review our total generation for each country and the consolidated raw materials consumables used cost figures. In Chile, total generation for the quarter reached 3.2 terawatt hour, decreasing 6% compared to the same quarter of last year. This was mainly due to a lower gas generation explained by a lower economic dispatch and the availability of Unit 1 of the Nehuenco complex until January 20 due to the fire incidences in the third quarter of 2023. These effects were partially offset by higher [ hydrographical ] generation, given the better hydro conditions since June of last year.

In Peru, total generation reached 771 gigawatt hour, a 20% decrease compared to the first quarter of 2023, mainly due to the maintenance carried out, which caused the power plants we are observing for the last 16 days of February. Raw materials and consumable used costs in the first quarter of this year amounted to $196 million, decreasing by 39% compared to the same quarter of last year.

In Chile, the 43% lower figure is mainly explained by: number one, lower gas consumption costs associated with the lower generation with this fuel; number two, lower energy and capacity purchases mainly due to the previously mentioned contract expiration; and number three, lower coal consumption costs explained by the lower average price of this fuel compared to the first quarter of 2023.

The figure in Peru also shows a decrease compared to the first quarter of last year, mainly explained by the lower gas consumption costs associated with the reduced generation with this fuel due to the power plant availability resulting from its maintenance carried out at the end of February.

Now please go to Slide #12 to review the main differences in the consolidated EBITDA for this quarter. Consolidated EBITDA reached $148 million during this quarter, decreasing 23% compared to $192 million EBITDA in the first quarter of 2023. The main factors which explain the decrease are: in Chile, lower sales to unregulated customers and to a spot market, partially offset by lower gas consumption, lower energy and capacity purchases and finally, lower coal consumption; while in Peru, it was lower sales to regulated customers, partially offset by higher energy and capacity sales and lower gas consumption.

To conclude with the financial figures review, please go to Slide #13 to review this quarter's consolidated profit. The company recorded a profit of $59 million in the first quarter of 2024 compared to $92 million profit obtained in the same period of last year, primarily due to the lower EBITDA previously mentioned. This impact was partially offset by, first, lower tax expense in the period; and second, a lower nonoperating loss recorded during the period.

Now please go to Slide #15 to analyze the consolidated cash flow of the quarter. The company recorded a negative net cash flow of $20 million, which compares to a negative net cash flow from $91 million in the first quarter of 2023. In terms of operating activities during the first quarter of this year, a positive net cash flow of $75 million was generated compared to a positive net cash flow of $78 million in the first quarter of last year, mainly explained by the lower operational income recording during the period. In terms of financing activities, they generated a negative net cash flow of $48 million during the first quarter of this year, in line with the negative net cash flow of $47 million in the same quarter of last year.

And finally, in terms of investment activities, they generated a negative net cash flow of $47 million during the first quarter of 2024 compared to a negative net cash of $122 million in the first quarter of 2023, mainly explained by lower CapEx disbursements associated with the Horizonte wind farm compared with discrete disbursements during this first quarter of 2023.

Now please go to Slide #16 to analyze consolidated financial debt held by the company. Gross financial debt this quarter reached $2,102 million with an average life of 5.7 years and an average interest rate of 3.8%. Net debt-to-EBITDA ratio for this quarter reached 1.7x. During this quarter, $17 million were destinated to debt service, of which $5 million corresponds to interest and $12 million to capital amortization payments.

With this, we conclude Colbun's First Quarter 2024 Results Review. Thank you for listening, and now we're open to answer your questions.

[Operator]

[Operator Instructions] Our first question comes from Fernan Gonzales from BTG.

[Fernan Gonzalez, analyst]

Could you explain a bit further the lower regulated volumes in Peru, I mean, this option to extend the contract maturity at the expense of lowering the annual contracted capacity? If you could provide more details on that. please? And my second question is that in the operating income in Chile, there was a $38 million gain in the quarter, which is normally a lot lower than that. If you could explain also what's behind that number.

[Miguel Alarcón, executive]

This is Miguel. Thank you for your question. Related to the Peru question operation, this is something that we've done in previous quarters. And basically, it's a reflection of the situation that's happening in the market in which most of the distribution companies are overcontracted in terms of capacity. And we, on the other side, are willing, of course, to extend the maturity of those contracts, trying to displace contracted capacity from current period to long-term contracts in future in time.

That's why there's a mechanism that's in some way consolidated in the system in which you can agree with them modification, the PPA contracts in the sense of reducing the amount of product capacity and moving forward, further running the contract to make it longer. And this, of course, helps in turn that is cost to reduce the overcapacity situation.

There's a payment linked to that, that we registered in the management's statements. And it basically tries to be close to NPV0 exercise. That's basically the first question. And the second one, if you can repeat it, please?

[Fernan Gonzalez, analyst]

The -- in Chile in the operating income, you had a $38.5 million gain, which is relatively large when you look at it historically. So I wanted to know if there was something one-off, something special that is explaining that number.

[Miguel Alarcón, executive]

Give me a minute, please. I don't see the gain -- number of operational gains. Basically on the nonoperating side, we don't have anything in particular. It's a combination which I actually see a loss of $16.6 million loss -- sorry, in other operating income.

[Fernan Gonzalez, analyst]

Yes, I was looking at it at the press release.

[Miguel Alarcón, executive]

Give me this a minute. I'll take another question. I'll get back to you with the answer later on this call.

[Fernan Gonzalez, analyst]

And then just my final question would be the Bayovar project in Peru, if you could share the rationale behind the decision of selecting that particular project, which is in Northern Peru. So if you could share why you decided to go for that one. Is it the location? Are there big PPAs in the area that you could compete for? The solar resource is better? I don't know, if you could share your thoughts on this.

[Jose Escobar, executive]

Yes. Thank you. I will answer on that. Yes, you're referring to Bayovar project in the North, the wind farm. So yes, we are permanently scanning the country for finding new projects that are in line with our growth strategy, both in solar and in wind. And yes, the wind in the north of Peru we find very good resource. There's also more capacity available in the transmission systems in the north that we see in the mid to long term in the south of Peru. It's a bit more tight in terms of potential curtailment because they're much -- there's more development.

Also, in the particular site of Bayovar, one of the -- probably one of the most important highlights of that project, it is a private land. It's owned by a mining company. And in Peru, the land control, especially if it's public land, it's one of the critical activities and it's a big risk in Peru. So finding big private land with the good resources, it's not an easy task to do.

And finally, also, we are talking with several customers within the area or Bayovar for potential PP offtakes. So good size, good resource, good land and also potential offtakers.

[Operator]

So our next question comes from Martin Arancet from Balanz Capital.

[Martin Arancet, analyst]

Just 2 questions. First, regarding the Nehuenco complex, if you already have an estimate on the additional costs and the nonproceed revenues due to the failure and how much of that you could get back from the insurance company. And then regarding your contract status in Chile. If you could share with us the -- your long-term strategy if you mean to be fully contracted or if you feel comfortable with some positive exposure to the spot market.

[Miguel Alarcón, executive]

Miguel here. So basically regarding your question about the Nehuenco complex. You have to remember that -- I assume you referred to the fire incidence that occurred in the third quarter of last year. And basically, that did not have a significant effect on our loss of EBITDA or operational income since it occurred at the same time in which to add ample [ life ] to hyrdo generation.

So basically, the only cost in some way is linked to the [ retirement ] in terms of physical terms of the fixed assets that were damaged in the fire. This is a nonmaterial amount. And because of that, it doesn't have an impact on our results, while at the same time, we would expect a material recovery from the insurance companies.

[Jose Escobar, executive]

Yes. Regarding the second question on the commercial balance. We have been very successful this quarter on signing 22 new PPAs, in particular, the 2 big ones I already mentioned. Those PPAs are going to stay with our current portfolio. Of course, in -- for every PPA, we submit offers, we evaluate the current portfolio, we evaluate hydrology, we evaluate the production of our renewable assets.

And depending where it's a contract that requires 100% renewal certificates or not, it's how to allocate that -- our current mix with the compromises for that contract. For sure, we cannot -- our commercial policy is not to take annual spot exposure. But for sure, in an hourly basis, depending on the profile of the consumption of the contract and the profile of our generation mix, there are some others which we are exposed to spot and it is part of the [ election ] we do for every contract.

So no, we don't foresee taking more exposure to spot market. We try to deliver the products that we can produce with our own portfolio. So that's why we are very careful deciding each opportunity with a very tight balance between our generation capacity and the demand of that particular contract. So that same -- that strategy will be applied during the -- was applied during this quarter and for sure, it's going to be applied for the next of the year.

[Operator]

[Operator Instructions] The next question we have is a text question from Martin Zetzsche at Fundamental Capital. He asks, when should we expect the Horizonte wind farm to start generating? How should we expect the average price of contracts regulated, unregulated to behave for the rest of the year and in 2025?

[Jose Escobar, executive]

Thank you. This is Jose Ignacio again. Regarding Horizonte, we are very thrilled that the connecting substation to the grid substation in [ Parinas ] has been energized last week. So we are in the process of working with the grid operator in order to start receiving the connection of our first 70 wind turbines. In this particular case, because of the size of the project, the grid operator has accepted basically to have a first COD of the first 70 turbines and there by the end of the year, a second COD of the other 70 turbines.

So at this moment, we are being -- we are working on the process of connecting the first 70 wind turbines that are all fully erected of course. So those turbines are going to be -- start injecting electrons probably by mid-May and have a full COD of those wind turbines probably by end of May. And the balance, the other 70 wind turbines, those are expected to be received throughout the fourth quarter of this year. So the -- Parinas should be fully operational by the end of 2024.

Regarding the second question, Well, as you probably know, we've just received the results of the tender -- our regulated tender process that was done last month, and the offers were opened yesterday. So we are seeing a trend that is reflecting basically the risks of the technologies from the market and in particular, the regulated contracts. So it's an upward trend.

We didn't submit an offer in that trend because of the previous questions. We don't feel comfortable of submitting offers of energy, basically, we cannot cover with our own assets. So in this case, we didn't submit an offer. But anyway, we think that, that trend is, I would say, properly reflecting the current risks of the regulated situation.

And in the particular case of the private contracts, again, I think what we have seen in the last tenders, particularly the ones that we participate that were awarded, again, I would say they're reflecting the current situation of the market in terms of the system costs, there are labor payments. And of course, the increase in the cost of the technology, for example, like wind, that has an increase in CapEx of almost 40% in the last year.

So all that in place, what we have seen in this -- probably the last 6 months, it's an upward trend of prices that is reflecting risk and is reflecting the current CapEx.

[Operator]

[Operator Instructions] So we have one more text question from [ Pedro Atelier ] at [ Exelate ]. He asks, Are you going to have gas from Argentina during fall and winter season?

[Jose Escobar, executive]

Well, that's a good question. I think, yes, we have -- of course, as Miguel explained before, we had a real -- we had a first quarter with a lot of hydropower. The melting -- the ice melting was much lower than expected, so that's why our coal and gas units apart from the maintenance that we explained before, were used much less than the hydro, which was still very high until almost end of March, which was pretty incredible.

For the rest of the year, of course, we see some commitment that we have from both on G&L and also from the Argentinian gas, particularly from April onwards. The volumes are still being negotiated, but we are talking about having more or less an average of a bit more of 1 million cubic meters of gas between May and September and something similar by spring and summer.

Of course, it will depend a bit on the hydrology, but that's the full commitment that we are looking for at this moment. But yes, the expectation is that, yes, we will have as every -- as has been in the past 5 years, some [ machine ] in the quarter.

[Operator]

I'm not seeing any more questions, so perhaps I could hand back to you, Jose Ignacio, for closing remarks.

[Jose Escobar, executive]

Yes, for sure. Well, we are very happy to have this chat with you. Our first quarter has been a very interesting year, very different with a lot of water during the summer without of flexibility requirements for our units. So again, I think we're in a very good position and in terms of being an active participant of the transition that Chile is leading, I would say that the most clear example of that is that the biggest mining companies in Chile are backing us up with very good long-term contracts.

We have a lot of commercial activity during this quarter, and we expect that activity to move forward during the rest of the year. We are preparing a pretty robust pipeline of new projects coming online, and we expect to have news throughout this year on battery storage systems and new generation capacity.

So again, to sort of give an answer to our customers that are willing to, again, to have a long-term partnership with companies like Colbun. So very [ thrilled ] for what's coming up next for the year, very excited to be moving forward with our 500 projects, both in Chile and Peru. Also, the exploring of new technologies like green hydrogen, what we hope will be just opened in Peru, we are also building the same, a very similar project here in Chile of green hydrogen supply to our gas refrigerated systems.

So again, very thrilled of what's coming up for the year. Thank you very much for your time. And of course, open to have any inquiries or questions during the next weeks. I don't know, Miguel, if you want to have some closing remarks.

[Miguel Alarcón, executive]

No, thank you to everyone, and thank you for listening again. Hopefully, you'll join us on the next quarter results. Have a good weekend now. Bye-bye.

[Operator]

That concludes the call for today. Thank you, and have a nice day.