Colbun SA

SGO:COLBUN

Earnings Call Transcript 2021-Q2

[Sebastián Moraga, executive]

Hello to everyone, and welcome to Colbún's Second Quarter 2021 Earnings Review Call. My name is Sebastián Moraga, I am the company's CFO. And joining me today is Miguel Alarcón 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.

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 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 Colbún has continued to take actions considering 2 priority focuses.

First, to protect the health of personnel, 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, there is still uncertainty about the magnitude and length of this contingency.

Energy demand in Chile increased approximately 6.1% during the second quarter compared to the second quarter of last year and 1.3% during the last 12 months, evidencing a successful vaccination process and ease on restriction and broader sectors of the economy reopening, which have translated in more dynamism of the economy.

Meanwhile, in Peru, there was an increase of approximately 31% during the quarter and 6% during the last 12 months. On April 1, Colbún sold to Chile Electricity PEC the second group of accounts receivables associated to the energy price stabilization mechanism.

Subsequently, on June 30, the sale of the third group of accounts receivable was completed. As a whole, these 2 sales comprise accounts receivable for a nominal announced value of $56 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 other losses for fiscal year 2021.

In the second quarter of 2021, approximately $15 million were registered for this concept associated with the second and third group of sales.

On May 12, dividends were paid for a total of $246 million. This payment is comprised of a definite dividend of $81.7 million, an eventual dividend charged to the profit of previous years for $164.6 million.

Based on the above, and considering the $81.2 million paid in December 2020 as a provisional dividend, the total distribution of dividends for 2020 results reached $327 million.

Now please go to Slide #5 to review the main consolidated figures of the company. Consolidated EBITDA for this quarter reached $147 million, decreasing 6% compared to the $155 million of EBITDA in the second quarter of last year, mainly explained by higher personnel expenses in U.S. dollars as a result of the appreciation of the exchange rate compared to the quarter of last year and other expenses by nature associated to a lower comparative basis, explained mostly by third-party services training, travels, among others, but were suspended during the second quarter of last year due to the pandemic.

The company recorded a profit of $33 million compared to the profit of $50 million in the same quarter of last year, mainly explained by the higher losses of nonoperating results previously mentioned and a lower operating results. Now I will turn to Isidora, who will speak about the main drivers of the 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 increased 2% compared to second quarter of last year, mainly due to higher hydro generation, mainly driven by the higher generation on Colbún's context compared to last year; two, higher coal generation, explained by Santa Maria's power plant high economic dispatch during the quarter.

These effects were partially offset by a lower gas generation due to the lower gas availability compared to the second quarter of last year. Physical sales during the quarter reached 3.1 terawatt hour, 2% higher than the second quarter of last year due to higher sales to the spot market, mainly explained by the higher generation during the quarter and higher sales to the regulated segment.

These effects were partially offset by lower sales to unregulated clients, given the expiration of an American contract in December '20. Spot market balance during this quarter recorded net sales of 620 gigawatt hours compared to the net sales of 501 gigawatt hours recorded last year.

The difference is mainly explained by the higher generation during this quarter. 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 $115 million this quarter, decreasing 7% compared to the second quarter of last year. This variation is mainly explained by: one, higher personnel expenses; and two, higher other expenses by nature due to the appreciation 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 $17 million this quarter, lower than the $18 million EBITDA recorded in the second quarter of last year, mainly to the decrease in operating income, explained by the change in the discount rate from regulated assets, which changed from 10% before taxes to 7% after taxes.

Now please continue to Slide 10 for physical sales and generation balance analysis in Peru. Total generation of this period increased 52% compared to the second quarter of last year, reaching 778 gigawatt hours, mainly driven by the higher dispatch of the power plant given the demand recovery on the Peruvian market.

Physical sales during this quarter reached 878 gigawatt hours, increasing 26% compared to the second quarter of last year, mainly explained by: one, higher sales to the spot market as a result of the higher generation of the plant during this quarter; and two, higher sales to customers under contracts, driven by regulated segment demand recovery due to the pandemic and to the entry into force of 40 megawatts of new PPAs during the quarter.

Spot market balance during this quarter recorded net sales of 254 gigawatt hours compared to the 86 gigawatt hour during the same quarter of the previous year due to the higher generation recorded in the quarter.

Now please continue to Slide 11 to analyze the EBITDA in Peru for the quarter. EBITDA in Peru reached $15 million in this quarter, 7% higher than the EBITDA of $14 million recorded in the second quarter of last year, mainly due to the higher income from ordinary activities, explained by: one, higher sales in the spot market; and two, higher sales from customer under contract previously mentioned.

These effects were partially offset by: one, higher gas consumption due to the higher generation; and two, higher other expenses by nature due to an increase in expenses associated with operation and maintenance.

Now please continue to Slide 12 for the consolidated nonoperating income and net income analysis. Nonoperating income this quarter presented losses of $40 million, higher than the losses of the $22 million in the second quarter of last year. The higher losses are mainly explained by: one, the recording of financial costs on other losses line related to the selling of the second and third group of account receivable generated by the energy price stabilization mechanism of $15 million; and two, a lower positive effect of the exchange rate variation of temporary balance sheet items in the local currency compared to the second quarter of last year; and finally, lower financial income recorded during the quarter due to lower interest rate.

The company recorded a profit of $33 million compared to the profit of $50 million in the second quarter of last year, mainly explained by the higher losses on nonoperating results previously mentioned and a lower operating results.

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 our own 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 778 megawatts approximately located in the Atacama Region; Diego de Almagro Sur I and II, 2 PV projects of an overall capacity of approximately 230 megawatts located in the Atacama Region; Inti Pacha, a photovoltaic project of approximately 486 megas located in the Antofagasta Region; Jardin Solar, a photovoltaic project of approximately 537 megas located in Tarapacá Region; Machicura, another photovoltaic project of 9 megas located in the Maule Region; Los Junquillos, a wind farm of 360 megawatts approximately located in the Biobío Region.

Additionally, 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 the latest earnings report available on our website.

Second, the company does not allow the purchase of renewable assets in operations. And finally, the third pillar of our growth in renewables is 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 energy.

With this, we are concluding Colbún's second quarter 2021 results review. Thanks for listening. And now we are open to answer your questions.

[Operator]

[Operator Instructions]

Our first question today is coming from Rodrigo Mora at Moneda.

[Rodrigo Mora, analyst]

I have 2 questions. The first one is related to the hydro situation. If you could make some comment about what is Colbún expecting for the next hydrology, the smelting season and the ability of natural gas?

And the second question is related to the growth opportunities. I would like to know if the company -- what projects are -- will be first to build -- or Horizonte or maybe to proceed with the construction of Inti Pacha?

[Miguel Alarcón, executive]

Rodrigo, this is Miguel. Nice to hear you. So basically, as I'm sure you know, regarding hydrology, up of -- June of this year, the hydrology has been with lower rainfalls compared to an average year. In most of the same basins, being the ones with largest deficits as we said in our earnings report: Aconcagua with more than 70% deficit; Maule, close to 60% deficit; Laja, 4% deficit; and Biobío, almost a 30% deficit.

That, of course, has in turn with the whole system and Colbún turning into thermal units [indiscernible] the most common power plant being used and even some decent facilities that, in some ways, reflect the current level of marginal cost above [ $100 ] a megawatt hour.

Because of that, as you also asked, we're being able to secure more LNG, and that's something that we keep on trying to analyze on a daily basis.

Up until now, we have secured the production with 2 combined cycles for a full period of August for the upcoming month. Then we have one combined cycle up until today for September and October. And we're, of course, also trying to look for more gas depending on how hydro conditions evolve.

From October up until next year, as you know, we also have Argentinian gas secured already. And basically, that's where we're standing right now. Hydrology has been poor. As you know, the melting season, the third forecast only comes in mid-September. So we don't have further visibility about that. And because of that, we cannot make further comments apart from trying to prepare ourselves by securing more LNG assets as we've done so.

I think Isidora will take your next question.

[Isidora Zaldívar, executive]

Regarding the [indiscernible] power project, we expect Horizonte to start operation during 2024. And for now, Inti Pacha is expected to start operations during 2025. It's important to remember that we have another developed projects that are in more advanced level as Diego de Almagro and we expect Diego de Almagro to start operation during the first quarter of next year.

[Rodrigo Mora, analyst]

First quarter?

[Isidora Zaldívar, executive]

Yes.

[Rodrigo Mora, analyst]

Okay. And could you comment about the alternative to make purchase agreement of electricity from third developer?

[Miguel Alarcón, executive]

I'm not sure if I follow, Rodrigo. Maybe you can repeat your question?

[Rodrigo Mora, analyst]

I understand you have an agreement with SunPower started the second half of this year to buy electricity from a solar project. And I would like to know if are there other chances to buy energy from other third developers?

[Miguel Alarcón, executive]

Unfortunately, Rodrigo, I cannot give you a concrete answer on that. As you know, we've always constantly analyzing potential opportunities to acquire more renewables, and we always compare the chance of securing that energy through a third party or building it by ourselves. So I don't have visibility to be honest with you whether or not there is a relevant amount of energy to be contracted. We can certainly try to follow up and then get back to you once we have that information.

[Rodrigo Mora, analyst]

Okay. And finally, could you give an idea about the -- what step is the transaction of selling the Colbún transmission?

[Miguel Alarcón, executive]

Sebastián, do you want to take that or should I take it? So Rodrigo, as you know, we are in the what we believe is the final stage of that transaction. We expect to have, in the upcoming weeks, the resolution from the Fiscalía Nacional Económica.

And with that, hopefully, the idea would be around September probably to have the transaction finalized. That, of course, is a moving date since again, depends on the condition already mentioned, which is the approval from the Fiscalía Nacional Económica that to our best knowledge is not in some way affect or having any issues so far.

[Operator]

Our next question today is coming from Martin Zetzsche at Fundamenta Capital.

[Martin Zetzsche, analyst]

I was wondering if maybe you could give us some color on what will be the main uses of the incoming cash from the transmissions business sale.

[Miguel Alarcón, executive]

Miguel here. So as I think we've said in the conference call last quarter, we haven't yet decided the use of the transmission assets proceeds. And the reason for that is that, that's in the case, for example, of a dividend or something that it's out of what would be to reinvest the money into the company will need approval from an external shareholders meeting.

What we can say so far is that because of the significant liquidity position of the company, because of the expected incoming cash flow in the upcoming years, and comparing that against the CapEx need and the data monetization profile we have, I think a possibility will be to distribute a dividend. But that's something that we will announce in due time once, first of all, the transaction is finalized and then we receive the funds.

[Martin Zetzsche, analyst]

Okay. Great. And then second question, could you maybe tell us what load factors are you guys expecting for the projects in your pipeline, solar and the wind projects?

[Isidora Zaldívar, executive]

Yes of course. The load factor for these projects are around 35% in average.

[Martin Zetzsche, analyst]

Okay. And for both sources, right?

[Isidora Zaldívar, executive]

Yes. Yes.

[Operator]

Our next question is coming from Murilo Riccini at Banco Santander.

[Murilo Riccini, analyst]

Actually, I have 2 questions. What is your view for the marginal cost in the second half of 2021 as we have seen very high levels during July due to unavailability of some official units? Should it be an issue for the whole second half of this year in your point of view? We know that also hydro output should increase during this period as well. So that will be very helpful to understand what you are expecting.

And the second one is if you are analyzing the use of batteries in your generation portfolio as well, along with this new renewable projects that you are -- that you'll be constructing in the coming years?

[Miguel Alarcón, executive]

Miguel. Thank you for your questions. So regarding your first one, I would say that , that in some way, is trying to answer what Rodrigo Mora previously asked, which is our view about hydrology. And we try to be very cautious in the sense of providing forecasts, which we cannot do.

What we can say is that in some way, I already mentioned this, is that, first of all, hydrology has been poor so far, and at least for the next 10 to 14 days, most of the channels or forecasts don't foresee rain coming in.

On top of that, you see that commodity prices and fuel prices in general, the ones relevant for setting the marginal cost in Chile have been high. And because of that, I think, unfortunately, the system is fully stretched. And because of that, we see at least marginal costs higher than the ones we saw in the same period last year. We cannot comment firmly on that apart from saying that, as you remind, Colbún has some commercial policy that aims to be out of the spot market and because of that, trying to reduce the volatility in our results because sourcing our contracts with our own generation.

That's what I would say for the first question. For the second one, yes, we are starting batteries. We have certain, I would say, projects and prototypes that try to, in some way, increase our knowledge of that technology, and that also applies to a number of different, I would say, advances in this industry.

We don't have a concrete information to share right now. But as soon as I think we have a more in deep progress about batteries, we for sure are going to disclose that to the market.

[Murilo Riccini, analyst]

Great. And with a follow-up question. Are you experiencing any inflation pressures in your -- in the construction of your renewable projects?

[Miguel Alarcón, executive]

You said inflation?

[Murilo Riccini, analyst]

Yes. So the price of the equipment is like higher than expected because of the inflation that we are seeing in the country.

[Miguel Alarcón, executive]

No. Yes, I would say that we haven't had any material pressures linked to inflation or prices. What is happening worldwide is that, of course, procurement of the equipment is in some way being more stretched because of all the congestion affecting ports and, I think, supplies worldwide.

Apart from that, we haven't had any material deviations from the CapEx program that Isidora mentioned. But that's still the issue that we need to fine-tune with much more care, the procurement of various equipments in order to keep on track with estimated progress for each of those projects, but nothing apart from that.

[Operator]

[Operator Instructions]

We have no further questions in the queue at this time. Are there any closing comments you'd like to finish with?

[Miguel Alarcón, executive]

Just to thank everyone for joining this call, for your interest in the company, and we'll see you in the next quarter results in 3 more months. Have a great weekend to all. Bye-bye.

[Operator]

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.