Colbun SA

SGO:COLBUN

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, hello, and welcome. Thank you for joining us for this Colbún Second Quarter 2020 Earnings Conference Call. As a reminder, today's session is being recorded. [Operator Instructions]

To get us started with opening remarks and introductions, I am pleased to turn the floor over to Mr. Sebastián Moraga. Mr. Moraga. Good morning.

[Sebastián Moraga, executive]

Hello, to everyone, and welcome to Colbún's Second Quarter 2020 Earnings Review Call. My name is Sebastián Moraga. I am the company's CFO. And joining me today are Miguel Alarcón, the Deputy CFO; Soledad Errázuriz; and Isidora Zaldívar from our Investor Relations team.

I hope that you have received our earnings report and 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.

Our 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'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, regarding the COVID-19 pandemic contingency, the company's power plants are operating normally and Colbún has taken actions considering two priority focuses.

First, protect the health of our workers, collaborators, suppliers and our surrounding communities. Home office was established for all the positions that can carry out their functions with this mode, and this corresponds to approximately 98% of our headquarters employees.

For positions with functions in which an on-site attendance is critical, this working mode is maintained, but with the necessary safeguards. Different preventive measures have been adopted in the company's power plants to prevent contagion, such as equipment, segmentation, safeguarding feeding places, temperature controls, collective and individual cleaning and disinfection practices and special transportation to and from the home of our workers.

Secondly, to ensure the continuity and security of the energy supply, measures have been adopted to ensure the procurement of the necessary supplies for the correct operation of all our power plants. And some power plants' maintenance have been postponed after assessing in the cases that it didn't risk the operational continuity and integrity of each generation units.

Regarding the impact of COVID-19 on energy demand, there is still uncertainty about the magnitude and length of this contingency. Energy demand in Chile decreased approximately 2% during the second quarter of 2020 compared to the 1% in 2019, while in Perú, there was a decrease of approximately 23%.

Regarding Colbún's project pipeline. On June 2020, our Board of Directors approved the construction of 2 PV projects: first, Diego de Almagro Sur I and II, which are located in the Atacama Region with an installed capacity of 220 megawatts. The construction is scheduled to start in the third quarter of this year and the commissioning should occur on the first quarter of year 2022. The total investment of this project is approximately $147 million. Second is the project PV Machicura, which is located on the Maule Region with an installed capacity of approximately 9 megawatts. Its construction is scheduled for third quarter of this year and its commissioning for the first quarter of year 2021. Total investment of this project is approximately $7 million.

Now regarding the Fenix plant gas supply. In June of this year, there was a modification to the gas supply contract with Pluspetrol, which mainly introduced the following changes. The take-or-pay clause was significantly reduced compared to the previous contract. The allotted maintenance period was increased, therefore, giving greater flexibility to the company. This contract was extended until December 2029. And all of these changes were applied to the contract retroactively from December 2019 onwards.

Now please go to Slide #5 to review the main consolidated figures of the company. Consolidated EBITDA for this quarter reached $155 million, increasing 9% compared to the $170 million EBITDA in the same quarter of last year. This difference is mainly explained by the lower operating income recorded during the period. Now this effect was partially offset by lower raw materials and consumables use cost in Chile and lower expenses denominated in local currency, driven by the exchange rate depreciation compared to the one of the same quarter in last year.

The consolidated profit reached $50 million, 20% lower than the $62 million posted on same quarter of last year, which is mainly explained by the lower EBITDA recorded during the quarter and higher tax expenses. These effects were partially offset by lower nonoperating losses. Regarding financial investments, this totalized $854 million. And regarding net debt-to-EBITDA ratio, it is at 1.2x.

Now looking at the average long-term financial debt interest rate of our company, it currently stands at 3.9% measured in U.S. dollars. Colbún has a total installed capacity of 3.8 teras, comprised of 2.1 tera in thermal units, 1.6 teras in hydro units and 9 megawatts from the PV power plant Ovejeria. In terms of transmission assets, it owns roughly 940 kilometers of transmission lines and 31 substations.

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

[Isidora Zaldívar, executive]

Thank you, Sebastián, 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 7% compared to the second quarter of last year, reaching 3.1 terawatt hours, mainly due to: One, lower hydro generation driven by the less favorable hydrological conditions for most of the quarter; two, lower coal generation driven by lower economic dispatch during certain hours of the day; and three, lower wind farm generation explained by the expiration of San Pedro plant contract in May '20. These effects were partially offset by higher gas generation.

Physical sales during the quarter reached 3.0 terawatts, 8% lower than the second quarter of last year, due to: One, lower sales to regulated clients, mainly explained by the expiration of the contract with SAESA in December '19 and a lower energy demand driven by State of Emergency; and two, to lower sales in the spot market, partially offset by higher sales to unregulated clients.

Spot market balance during this quarter recorded net sales of 511 gigawatt hours, compared with the net sales of 566 gigawatt hours in the second quarter of last year as a result of the lower generation during the quarter, driven by the lower energy demand due to the State of Emergency.

Now please continue to Slide 8 to analyze the EBITDA from the generation business in Chile for the quarter. EBITDA of the generation business in Chile reached $123 million this quarter, decreasing 8% compared to the second quarter of last year. The lower EBITDA of this quarter is mainly explained by the lower operating income recorded during the period. These effects were partially offset by lower cost of raw materials and consumable use and lower expense denominated in local currency as a result of the depreciation of the exchange rate compared to the second quarter of last year.

Now please continue to Slide 9 to analyze the EBITDA from the transmission business for this quarter. EBITDA of the transmission business reached $18.5 million this quarter, in line with the $18.4 million EBITDA recorded in the second quarter of last year.

Now please continue to Slide 10 for physical sales and generation balance analysis in Peru. Total generation of the period decreased 45% compared to the second quarter of last year, reaching 513 gigawatt hours, mainly explained by the lower economic dispatch of the plant driven by the State of Emergency decree since March 16. Physical sales during this quarter reached 628 gigawatt hours, decreasing 36% compared to the second quarter of last year. The decrease is mainly explained by the lower sales to customer under contract, mainly explained by the State of Emergency decreed by the Peruvian government since March 18 due to the COVID-19 pandemic and lower sales to regulated clients due to the expiration of Distriluz contract in December and to lower sales in the spot market as a consequence of the COES request to stop dispatch from March 18 until April 30 due to the demand decrease recorded in the country after the State of Emergency previously mentioned. Since May, the government regularly began to activate some economic sectors, and the plant started to be dispatched.

Spot market balance during this quarter recorded net purchases of 5 gigawatt hours compared to the net sales of 209 gigawatt hours during the same quarter of the previous year due to the lower generation of the period.

Now please continue to Slide 11 to analyze the EBITDA in Peru for this quarter. EBITDA in Peru reached $14 million in this quarter, 27% lower than the EBITDA of $19 million recorded in the second quarter of last year mainly due to the lower operating income recorded during the period.

Now please continue to Slide 12 for the consolidated nonoperating income and net income analysis. Nonoperating income of this quarter presented losses of $22 million, lower than the losses of $25 million recorded in the second quarter of last year. The lower losses are mainly explained by a positive effect of the exchange rate variation of temporary balance sheet items in local currencies during the quarter. The company recorded a quarter profit of $500 million (sic) [ $50 million ] 20% lower than the $62 million profit of the same quarter of last year. The lower profit is mainly explained by the lower EBITDA recorded during the quarter and by higher tax expenses. These effects were partially offset by lower nonoperating losses.

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

[Sebastián Moraga, executive]

Thank you, Isidora. Regarding our growth opportunities in Chile, we have focused our growth in renewables based on 3 pillars: first, developing a pipeline of projects. Regarding the incorporation of renewable energy from variable sources, up to this date, 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 approximately 607 megawatts located in the Atacama Region; Diego de Almagro Sur I and II, PV projects of a capacity of 220 megawatts, as commented earlier; Inti Pacha, a PV project of 486 megawatts located in the Antofagasta region; Jardin Solar, a PV project of 537 megawatts located in the Tarapacá Region; Machicura, a PV project of 9 megawatts located in the Maule Region, which was commented earlier; Los Junquillos, a wind farm of 265 megawatts located in Biobío Region. In addition to all of these projects, at the end of this quarter, Colbún 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 our latest earnings report available on our website.

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

And finally, the third pillar of our growth in renewables is acquiring energy from third parties.

Regarding our transmission business, Colbún has several projects for the expansion and enhancement of the company's current transmission asset, with a total awarded investment value of approximately $40 million. 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.

With this, we are concluding Colbún's second quarter of 2020 results review. Thank you very much for listening. And now we are open to answer your questions.

[Operator]

[Operator Instructions] We'll hear first from Murilo Riccini.

[Murilo Riccini, analyst]

This is Murilo Riccini from Santander. We are seeing a better hydro output in July and spot price that could be at low levels during the second half of the year. How do you see this dynamic for Colbún? And do you expect to benefit from this situation in the second half? And my second question, this is a follow-up on the receivable. How much receivables are you accumulating to date? And how are the negotiations to find alternatives for this -- to fund these receivables?

[Miguel Alarcón, executive]

Murilo, this is Miguel. Thank you for your questions. So regarding hydrology, as you mentioned, since last week of June, higher rainfalls than average were recorded. With that, as of July of this year, hydrological year presents higher rainfall in most of the basins in the system. Colbún reservers present a higher level than last year, but it's probable that there should be more in accumulation. Although after this date, we don't have no official quantification released. So we estimate that this, of course, could translate into a better hydro output in the second half. I think we cannot comment more than that up to this point.

[Murilo Riccini, analyst]

Okay. And regarding the receivables, do you have the number that you are accumulating to date?

[Miguel Alarcón, executive]

Just give me a second, please. So up to this point, as of June of this year, the total amount is approximately from, let's say, $60 million to $80 million, roughly speaking. Or maybe just we are a narrower range, I would say, around $70 million.

[Operator]

Our next question comes from -- and I do apologize if I mispronounce your last name. Our next question will come from John Wiske at HSBC.

[John Wiske, analyst]

Just a quick follow-up to Marcelo's (sic) [ Murilo's ] question. What are you anticipating in terms of different amounts for the stabilization impact in the second half, and why? Could you provide some details on the nature and timing of the factoring that's being contemplated for these accounts?

And separately, are you anticipating a capital injection to Fenix? And if not, what are the conditions that would prompt such an injection?

[Miguel Alarcón, executive]

John, this is Miguel again. I didn't get your second question, but let's go with the first, at the beginning. So basically, I would say that for the second half of this year, we should accumulate something close to 50% of the credit balance, let's say, another $30 million to $35 million. That, of course, has to do with a number of factors, the FX exchange rates and demand, among others. That's the first question.

Regarding your second question, it is? Sorry, what? If you can repeat?

[John Wiske, analyst]

So I understand that there are plans to factor or the intention to factor some of these accounts. I was wondering if you could give some detail as to the nature of those plans and the timing.

[Miguel Alarcón, executive]

Yes, yes, yes. Sorry. But I think this has been somehow mentioned in the press. So we are working on a financing solution with a number of our gencos and some commercial banks in order to, as you mentioned, a structure, what would be a sale of this accounts receivable. We are working in that financing, and we should expect to have news in the next 2 to 3 months. But we're still working in the time line, and no time to provide more update than that.

[John Wiske, analyst]

Okay. Great. And then with respect to anticipating a capital injection to Fenix, could you give some color on that?

[Miguel Alarcón, executive]

So first of all, I would say that up to his point, think our cash position, that it's closer to $20 million, as for the second quarter of this year. As you know, John, we've discussed this in the past, the shareholders provided a form of support to Fenix with a cash support agreement that was signed last year. And that I think that should cover any shortfall in the liquidity needed for Fenix in terms of its funding need and especially its debt repayment schedule.

I think up to this point, we cannot comment. It's not fair to comment about our capital injection because, among other things, and this is also something that I think we've discussed in previous calls, we had an insurance claim that was underway, and that's mostly collected. Because as you remember, there was a failure in the TG12 (sic) [ GT12 ] in October of last year that meant a claim for the insurance companies closer to $20 million, and that's almost completely already funded into Fenix.

[Operator]

Next, we'll hear from -- and again, I apologize if I mispronounce your last name, Gabriela. We'll hear from an associate at PineBridge, Gabriela Bahachille.

[Gabriela Bahachille, analyst]

So I have 2 questions. So the first one is if you could please confirm your total CapEx plan for 2020, including the new projects of Diego de Almagro and Machicura. And the second question would be if you could please provide an updated EBITDA guidance and leverage guidance for 2020.

[Soledad Errázuriz, executive]

Gabriela, this is Soledad from Colbún. So regarding the CapEx update, I'd say that it is still close to the one we predicted by the beginning of the year, so around $60 million to $80 million in maintenance CapEx. And also, we have to add the CapEx of Diego de Almagro, Machicura project that would be around $80 million for this year.

And regarding the EBITDA guidance. Sorry, but we cannot give any guidance on that matter because of our Investor Relation policy.

[Gabriela Bahachille, analyst]

Sorry, Soledad, a follow-up question on the CapEx plan. So I remember from a call, like, 2 months ago, that the CapEx that you had estimated for the entire year, the investment CapEx, was 100 -- wait a minute -- a little bit, like $100 million. Yes, $100 million just for investment besides the maintenance CapEx. So the -- what I wanted to confirm is that if the new project of Diego de Almagro and Machicura are included in this CapEx or that's additional.

[Soledad Errázuriz, executive]

The figure of $100 million probably contain some of the investment CapEx. So the maintenance CapEx for the year is around $60 million to $80 million. To that, you have to add the expansion CapEx from the Diego de Almagro and Machicura project. So the total CapEx for Diego de Almagro is around $150 million, but roughly 50% will be expensed this year. And to that, you have to add a small CapEx from Machicura, which the total CapEx of this project is around $7 million, and we will extend most of that CapEx this year. So with that, you'd have a total of around $100 million of new CapEx this year and $60 million of maintenance CapEx. That's on roughly figures.

[Operator]

And to our leadership team for Colbún, I'd like to let you know that we have no further questions at this time. [Operator Instructions] We have no further signals from the group. I'll turn it back to you, Mr. Moraga, for any additional or closing remarks.

[Sebastián Moraga, executive]

Yes. I just wanted to thank everyone for joining this conference call. I hope everyone is safe at home or at work. And I wish you have a very pleasant and good weekend. So bye-bye to all.