Colbun SA

SGO:COLBUN

Earnings Call Transcript 2018-Q2

[Operator]

Greetings, and welcome to Colbún Second Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

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

[Sebastián Moraga, executive]

Hello, everyone, and welcome to Colbún's Second Quarter 2018 Earnings Review Call.

My name is Sebastián Moraga. I am the CFO of the company, and joining me today are Miguel Alarcón, our deputy CFO; and Verónica Pubill from the Investor Relations team.

I hope that you have received our second quarter 2018 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 2 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 #3 to review the main highlights of the quarter. First, regarding the commercial strategy. In June 2018, Colbún sign a power supply agreement for 550 gigawatt hour with Minera Zaldívar from renewable power sources for a period of 10 years, starting in July 2020. Second, related to the company's international credit rating. In June 2018, Moody's assigned a Baa2 category with a stable outlook to Colbún and best securities issued in the international market. Added to the BBB, stable rating assigned by Standard & Poor's and fixed rating, thus consolidating its investment-grade rate rating.

Finally, in terms of growth. In June 2018, Ovejeria PV project began its commercial operations. The power plant qualifies as a PM GB is located in the metropolitan region with an installed capacity of 9 megawatts.

Now please go to Slide #4 to review the main consolidated figures of the company.

Consolidated EBITDA last 12 months, in this quarter reached $696 million, and net income reached $259 million. As of June 2018, financial investments totaled $696 million and mainly explained by the final dividend payment for $213 million performed in May 2018.

On its part, net debt-to-EBITDA ratio slightly increased to 1.3x closing, and the average long-term financial debt interest rate is 4.5%.

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

[Verónica Pubill, executive]

Thank you, Sebastián, and hello to everyone. Please move to Slide 6 for a review of the main figures of the year, starting with the physical sales and generation balance analysis in Chile.

Total generation of the period increased by 4% compared to the second quarter of 2017, reaching 3.5 terawatt hour, mainly explained by the higher hydro and gas generation, partially offset by a decrease in diesel and coal generation.

Physical sales during the quarter reached 3.4 terawatt hours, increasing by 4% compared to the same period of the previous year, mainly explained by higher sales to unregulated customers and sales to the spot market, partially offset by lower sales to regular customers.

Spot market balance during the quarter recorded net sales for 570 gigawatts hour compared with net sales of 476 gigawatts hours in second quarter of 2017.

During the quarter, a 100% of the company's commercial commitments were supplied with cost-efficient base load generation.

Now please continue to Slide 7 to analyze Chile's EBITDA for the quarter. First, revenues for this quarter reached $349 million, slightly increasing compared to the second quarter of the previous year, mainly explained by higher sales to unregulated customers and hydro generation. The higher revenues were partially offset by lower revenues from transmission costs due to the change in methodology in the collection of these tolls, which as of January 2018 are paid directly to the owner of the transmission facility; and second, sales to regulated customer; and third, energy and capacity sales in spot market.

Raw materials and consumables used increased by 12% in the quarter, mainly explained by higher cost of gas and coal consumption. The higher costs of the quarter were partially offset by lower diesel consumptions and transmission toll cost. We saw EBITDA decreased by 4%, reaching $142 million as of January 2018.

Now please continue to Slide 8 for our review of the main financial figures of Fenix, starting with our physical sales and generation balance analysis.

Fenix thermal gas power generation reached 1 terawatt hour during this quarter. Physical withdrawals from customers on their contract reached 805 gigawatts hour, and the spot market balance recorded net sales of 174 gigawatts hour in the quarter.

Now please continue to Slide 9 to analyze Fenix EBITDA for the quarter. Revenues during the quarter reached $52 million, while raw materials and consumables used amounted to $38 million. On spot the similar and other expenses were $10 million.

We saw EBITDA totalized $12 million in the period. Now let's move to Slide 10 for the consolidated nonoperating income and net income analysis.

Nonoperating income in the second quarter 2018 recorded loss of $31 million, which compares with the loss of $1 million in second quarter 2017. The higher loss in the quarter is mainly explained by, first, a nonrecurring income of $23.4 million as a response of the recognition of our deferred tax assets in our subsidiary Fenix; second, the negative impact of the variations of the exchange rate over temporary balance accounts in local currency during the quarter; and third, accounting record in the lines other profit losses of provisions for impairments of specific assets for $4 million.

These assets were partially offset by, first, higher financial income due to higher rates of return on investments of cash surpluses; and second, an increase registered in the lines profit loss of companies accounted for using the equity method as a result of the dissolution of 5% in November 2017, which prior to the dissolution presented losses.

Tax expenses amounted to $19 million, in line with the second quarter of 2017. Although, second quarter of this year shows lower profits before taxes than the same quarter of the previous year, tax expenses remain in line mainly due to the increase in the income tax rate from 25.5% to 27% in Chile and because the profit at business combination level in our subsidiary Fenix registered in the second quarter of 2017, previously explained, is not taxable income. The company recorded in second quarter of this year a net income of $45 million, lower than the net income of $78 million of the second quarter of the previous year. The lower profit is mainly explained by the higher nonoperating losses recorded during the second quarter of the previous year, previously explained.

Now continuing with the conference call, please go to Slide #12 where Sebastián will give you an update on the status of our growth opportunities.

[Sebastián Moraga, executive]

Thank you, Verónica. As we have mentioned before, we continue searching for growth opportunities in Chile, Peru, Colombia and Argentina in order to maintain a leading position in the power generation business and to diversify our sources of income.

Regarding our growth opportunities in Chile, we have focused our growth in renewables based on 3 pillars. The first one is developing a pipeline of projects. And within this, although the power market is balanced in terms of efficient supply and demand, in a scenario of low growth in power demand and a significant pipeline of renewable projects, our goal is to maintain a relevant position in the sector, for which it is very important to have a diversified portfolio project both in terms of technology and location.

For more details on this slide, you can see the list of our current portfolio of projects or please refer to the latest earnings report available at our website.

Second, acquiring energy from third party. And in this context, we have signed contracts with Acciona for 95 gigawatts hour a year and with Total [ and ] SunPower for 500 gigawatt a year. And finally, as a third pillar, the company does not rule out the purchase of renewable assets that are currently in operation.

With this, we are concluding Colbún's second quarter results review. Thanks for listening, and now we are open to answer your questions.

[Operator]

[Operator Instructions] Our first question comes from Arturo Murua with Santander Bank.

[Arturo Murua, analyst]

Sebastián, Verónica, and my question is regarding to the provision for the impairment. If I'm not mistaken, it's about Santa Sofia, which is a solar project. I want to know why the impairment if you have yet to go through renewal. So just a bit of color about this impairment?

[Miguel Alarcón, executive]

Arturo, this is Miguel speaking. So regarding your question, this asset impairment corresponds mainly to a photo-type project that we acquired as part of the [ finalization ] transaction that occurred about 2 years ago, in which Colbún finally decided not to pursue its project for the moment as part of its ongoing review that we've currently performed for all of our portfolio projects. We purchased this project as part of the [ finalization ] on PPAs. But as mentioned, we decided not to pursue since these assets comprised mainly of rights of way and studies.

[Operator]

Our next question comes from Miguel Ovalle with Colbún.

[Miguel Ovalle, analyst]

Just one short question regarding the color for the remaining of the year and your expectations regarding maybe revenues and of the performance of the unit. If you have some guidance or any color regarding the EBITDA, it'll be helpful as well.

[Miguel Alarcón, executive]

Miguel, this is Miguel again from Colbún. So as I think we have mentioned before, unfortunately, we cannot provide guidance or estimations about either hydrology and performance of the units or results in general.

[Miguel Ovalle, analyst]

All right. Okay, understood. But do you have like any kind of expectations about the -- like the performance of the company in the short term, given the lower EBITDA produced during the period, especially, if you're going to proceed something like that, just any color will be helpful on that.

[Miguel Alarcón, executive]

I would say, Miguel that again, in general, we cannot provide estimations or color of what you're asking. As you know, typically, we work considering an expected hydrology based on an average of the previous years. And with that, we put together a certain expectation of output on the different units and [ link to add results ] for the company. Having said that, again, it is too soon to give information about hydrology. And we need to wait for the melting forecast that will come in August and before that on the [ actually ] waiting [ following the ] months to come.

[Operator]

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Sebastián Moraga for closing remarks.

[Miguel Alarcón, executive]

This is Miguel. So thank you, everyone, for joining this conference call, and we hope to see you all again for the next quarter review. Have a nice weekend and goodbye.