Colbun SA

SGO:COLBUN

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and thank you all for joining us for this Colbún Second Quarter 2019 Earnings Conference Call. As a reminder, today's meeting is being recorded. [Operator Instructions] And with that, I will now turn the floor over to the management team.

[Miguel Alarcón, executive]

Hello to everyone, and welcome to Colbún's Second Quarter 2019 Earnings Review Call. My name is Miguel Alarcón, I am 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 on the Investors section of our website.

Agenda for today on the 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 our question-and-answer session.

Now please go to Slide #4 to review the highlights of this quarter. First, on May 7, 2019, dividends for $256.1 million were paid. This payment consisted of: one, a final dividend of $156.1 million, which added to the $84.2 million paid in December of last year, amounted to 100% of the net distributable profit of 2018; and two, an eventual dividend charged to previous fiscal year profits for $100 million.

Second, regarding the commercial strategy. During this year, the company has contracted approximately 590 (sic) [ 490 ] gigawatts hours per year of its generation with new unregulated customers.

Third, regarding the expansion strategy. During the second quarter of this year, Colbún continues looking for renewable projects throughout the country, with the target of consolidating a robust and diversified project portfolio, in line with the goal of doubling our current installed capacity, incorporating renewable generation equivalent to a total of 4,000 megawatts. Thus, and related to the Horizonte project, progress is being made in the feasibility stage and the wind turbine auction concluded. For its part, the Diego de Almagro Sur solar project continues in the environmental processing stage. Regarding the San Pedro project, at the end of April, the environmental authority issued the first Icsara.

Fourth, regarding the fixed costs efficiencies plan implemented during 2018, it can be highlighted that Colbún has continued its execution. This is reflected on the consolidated financial statement’s fixed cost.

Fifth, at the closing of second quarter of this year, in Fenix subsidiary’s financial statements reflect the adoption of the accounting standards IFRS 15 and IFRS 16, and the capitalization of the plant major maintenance performed in April of this year. For more details, see Appendix 1 on Page 30 of the earnings report.

Now, please go to Slide #5 to review the main consolidated figures of the company. Consolidated EBITDA for second quarter of this year reached $174 million, increasing 13% compared to the $154 million EBITDA for the second quarter of 2018, mainly due to lower costs as a result of: one, the recognition of the gas distribution contract with Calidda as a financial leasing, which were $8 million for the first half of this year; and second, higher average sales price to unregulated customers in Chile.

Consolidated profits reached $61 million, 37% higher than the $45 million in profits in the second quarter of the previous year, mainly explained by: First, a higher EBITDA recorded in the quarter, previously explained; and second, the positive effect of the variation of the exchange rate, Chilean peso to U.S. dollar, on temporary balance sheet items in local currency during the quarter.

Financial investments totalized $667 million and net debt-to-EBITDA ratio, it's a 1.5x. The average long-term financial debt interest rate in 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 owns 941 kilometers of transmission lines and 28 substations.

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

[Isidora Zaldívar, executive]

Thank you, Miguel, and hello to everyone. Now please continue to Slide 7 for physical sales and generation balance analysis in Chile. Total generation of the previous decreased by 5% compared to the second quarter of the previous year, reaching 3.3 terawatts, mainly due to the lower gas and hydro generation, partially offset by an increase in coal and variable renewable energy generation.

Physical sales during the second quarter of this year reached 3.3 terawatts, 4% lower than the second quarter of the previous year, mainly explained by lower sales to regulated clients, partially offset by higher sales to unregulated clients and to the spot market.

Spot market balance during the second quarter of this year recorded net sales for 572 gigawatts, 11% higher compared with net sales for 517 gigawatts in the second quarter of the previous year.

Now please continue to Slide 8 to analyze the EBITDA from generation business in Chile for the second quarter of this year. EBITDA of the generation business in Chile reached $133 million in the second quarter of this year, increasing 7% compared to the same quarter of the previous year. The higher EBITDA of this quarter is mainly explained by the lower gas consumption cost, mainly due to: one, a decrease in the purchase price of that fuel; and two, a lower gas generation, partially offset by an increase in the coal consumption cost explained by the increase in the purchase price of that fuel.

Now please continue to Slide 9 to analyze the EBITDA from the transmission business for the second quarter of this year. EBITDA of the transmission business reached $18 million in the second quarter of this year, increased 9% compared to the same quarter of the previous year, mainly explained by an increase in the revenues from solar transmission assets due to the release of the 6T decree in October 2018, which modified the pricing of those assets.

Now please continue to Slide 10 for physical sales and generation balance analysis in Peru. Total generation of the period increased by 6% compared to the second quarter of the previous year, reaching 937 gigawatts, mainly explained by the lower plant availability due to the major maintenance carried out during the month of April 2019. In 2018, on the other hand, a routine maintenance was performed during the first quarter of the year.

Physical sales during the second quarter of this year reached 983 gigawatts, similar to the second quarter of the previous year. The decrease in sales to customer under contract was offset by higher sales to the spot market. Spot market balance during the second quarter of this year recorded net sales for 209 gigawatts, increasing by 20% compared to the same quarter of the previous year.

Now please continue to Slide 11 to analyze the EBITDA from the generation business in Peru for the second quarter of this year. EBITDA in Peru reached $22 million in the second quarter of this year, 80% higher than the EBITDA of $12 million recorded in the second quarter of the previous year, explained by: one, the recognition of gas distribution contract with Calidda as a financial lease from January 2019 onwards due to the adoption of IFRS 16 accounting standard; and two, the major maintenance performed during the month of April 2019.

Now please continue to Slide 12 for the consolidated nonoperating income and net income analysis. Nonoperating income in the second quarter of this year presented losses of $27 million, 12% lower than the losses of $31 million in the second quarter of the previous year. The lower losses are mainly explained by a positive effect on the variation of the exchange rate, Chilean pesos to U.S. dollar, on temporary balance sheet items on local currency during the quarter. In the second quarter of the previous year, this effect was negative. It was partially offset by higher financial expenses due to the recognition of the gas distribution contract with Calidda as a financial leasing.

Tax expenses amounted to $19 million, similar to expenses registered in the second quarter of the previous year, despite the higher income before taxes recorded during the quarter, mainly due to a deferred tax profit recorded in the second quarter of this year in Fenix, as a result of the Peruvian sol appreciation during the period given that Fenix' taxes accounting is carried out in Peruvian soles, according to the Peruvian tax legislation.

The company recorded in the second quarter of this year profit of $61 million, 37% higher than the $45 million gain in the second quarter of the previous year. The higher profit is mainly explained by: one, a higher EBITDA recorded in the quarter, previously explained; and two, the positive effect of the variation of the exchange rate, Chilean pesos to U.S. dollar, on temporary balance sheet items in local currency during the quarter.

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

[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.

One, developing a pipeline of projects. Regarding the incorporation of renewable energy from variable sources, up to the state, 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 Atacama Region. Diego de Almagro Sur I and II, 2 photovoltaic projects of an overall capacity of 200 megawatts located in the Atacama Region; Sol de Tarapacá, a photovoltaic project of 180 megawatts located in the Tarapacá Region. And additionally, at the end of this quarter, Colbún holds a portfolio of locations for another 4 wind and solar projects which total capacity is approximately 800 megawatts. These projects are in early stages of development. For more details on this slide, you can see the list of our Colbún portfolio of projects or please refer to a latest earnings report available at our website.

Second, the company does not rule out the purchase of renewable assets in operation.

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 [ current transmission ] assets, which are total investment value of approximately $50 million.

In terms of our international 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.

This concludes Colbún's Second Quarter 2019 Results Review. Thank you for listening, and now we're available to answer your questions.

[Operator]

[Operator Instructions] We'll take our first question from the line of [ Martin Perez with S&P Chile ].

[Unknown Analyst]

Miguel, Isidora, Soledad, thank you for the presentation, and congratulations for the good results. My question is regarding the expansion projects, please. In the press release, you have 7 projects individualized there. I would like to ask you 2 things regarding the projects, if I may.

First, what's the amount of total CapEx involved in each one? And secondly, what's the expected time line? And in particular, when do you expect them to start construction and then operation? I know that the second part might be a moving target but probably you have an estimation already.

[Miguel Alarcón, executive]

The status of each project depends on the progress made for each one specifically. For example, in the ones we specifically mentioned in the earnings report, you will see that, for example, Horizonte, it's on the feasibility stage, while others, like for example, Diego de Almagro, it's in the environmental approval phase.

And I think those 2 are the ones with the most advance and the execution will depend on how well do we contract our energy in the near term or in the medium term. [indiscernible] probably would follow the same strategy of progressing first of all in feasibility and then expecting use on the commercial side. Having said that, we will inform the market finally once we have further news about the execution of each project.

Regarding the second part of your question, I think it is too soon to provide our CapEx estimation for either each project or for the complete portfolio. Having said that, and I am sure you are aware, we're having an Investors' Day in the coming week. And I think in that scenario, we will provide further details about the CapEx, at least for the projects with the most advanced.

[Operator]

[Operator Instructions] And we do not have any signals from the group at this time. Isidora, I will turn it back to yourself and the rest of the leadership team for any kind of additional or closing remarks that you may have.

[Miguel Alarcón, executive]

Okay. So thank you, everybody, for joining this conference call and hope to see you again for the next reporting in Q3 2019. Have a good weekend and bye-bye.

[Operator]

Ladies and gentlemen, this does conclude today's conference, and we thank you all for your participation. You may now disconnect your lines. And we hope that you enjoy the rest of your day.