Colbun SA

SGO:COLBUN

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Colbun Second Quarter 2022 Earnings Review Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Sebastian Moraga. Sebastian, over to you.

[Sebastián Moraga, executive]

Hello to everyone, and welcome to Colbun's Second Quarter 2022 Earnings Review Call. My name is Sebastian Moraga, I am the company's CFO. And joining me today is Miguel Alarcón, company's Deputy CFO; and Isidora ZaldÃvar, Head of Investor Relations. 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.

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 year. On May 10, 2022, Colbun pay a dividend of $73 million. This payment is comprised of a definite dividend of $23 million and an additional dividend charged to the profits of the previous fiscal year of $50 million. Based on the foregoing and considering the $250 million and $750 million paid in October 2021 associated to the extraordinary income from Colbun's Transmision sale as interim dividends and eventual dividends, respectively, the total distribution of dividends amounted to $1,073 million.

As it was reported to the CMF through an Essential Fact on May 16, 2022, Mr. Jose Ignacio Escobar was appointed as CEO of Colbun, replacing Mr. Thomas Keller. During Board session on June 28, 2022, Mr. Andres Lehuede resigned from the position of director which became effective as of the same date. In the same session, the Board of Directors agreed to appoint Mr. Jaime Maluk as director.

Now please go to Slide #5 to review the main consolidated figures of the company. Consolidated EBITDA in second quarter reached $153 million, increasing 4% compared to the $148 million EBITDA in the second quarter of last year. The increase is mainly explained by the higher operating income driven by higher sales to the unregulated clients in Chile, higher energy and power sales in the spot market associated with a higher average sales price despite the lower physical sales in this segment, and the income associated with the creation of the Water reserve. These effects were -- was partially offset by lower operating sales from regulated clients, higher cost of raw materials and consumable used, driven by the cost of gas consumption as generation with this fuel was higher this quarter.

The company recorded a profit of $38 million compared to the profit of $33 million in the second quarter of last year, mainly due to the lower tax expenses explained by the appreciation of the Peruvian Sol during the second quarter of 2022 and its impact on the PEC taxes, given that Fenix tax accounting is in Peruvian soles according to the tax legislation in Peru. As of June 30, the company holds $990 million cash and a net debt-to-EBITDA ratio of 2.2x.

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

[Isidora Zaldívar, executive]

Thank you, Sebastian, 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 13% compared to the second quarter of last year, mainly explained by: One, higher generation based on gas and diesel as a result of a higher economic dispatch and recovering in the interconnected system; and two, higher solar generation since Diego de Almagro project started full injecting energy to system. These effects were partially offset by the lower hydroelectric generation, mainly associated with the water reserves.

Physical sales during the quarter reached 3.5 terawatt hours, 15% higher than the last quarter of last year, mainly explained by higher physical sales to unregulated clients driven by the entry into force of BHP contract in January '22. This effect was partially offset by the expiration of CGE contract in December '21.

Spot market balance during this quarter recorded net sales of 537 gigawatt hours, while in the second quarter of '21, net sales reached 622 gigawatt hours. The variation is mainly explained by higher commitments during the period.

Now please continue to Slide 8 to analyze the EBITDA from the generation business in Chile for this quarter. EBITDA in Chile reached $131 million this quarter, increasing 14% compared to last year. This variation is mainly explained by the higher operating income recorded during the period. This effect was partially offset by higher raw materials and consumable use, mainly due to higher generation with gas and diesel during the quarter.

Now please continue to Slide 9 for a physical sales and generation balance analysis in Peru. Total generation of the period increased 19% compared to the second quarter of last year, reaching 929 gigawatt hours, mainly due to a greater economic dispatch of the plant associated with a greater demand of the system. Physical sales during this quarter reached 952 gigawatt hours, increasing 8% compared to the last quarter of last year, mainly explained by higher sales to regulated customers associated with a higher demand for such contracts. Broad market balance during the second quarter of 2022 recorded net sales of 318 gigawatt hours, compared to the net sales of 254 gigawatt hours during the same quarter of the previous year due to the higher generation recorded during the quarter.

Now please continue to Slide 10 to analyze the EBITDA in Peru for this quarter. EBITDA in Peru reached $22 million during the second quarter of '22, 15% higher than the EBITDA of $15 million recorded during the second quarter of '21, mainly due to higher sales to regulated clients; and two, higher sales to the spot market, mainly driven by higher margin of cost after the change in the gas price regulation in July 2021. Those effects were partially offset by lower sales to unregulated clients, given the expiration of Atria contract in December '21.

Now please continue to Slide 11 for the consolidated nonoperating income and net income analysis. Nonoperating income in this quarter recorded losses of $41 million, in line with the losses of $40 million in the second quarter of '21. The company recorded a profit of $38 million compared to the profit of $33 million in the second quarter of '21, mainly explained by the lower tax expenses previously mentioned and the higher operational results.

Now continuing with this conference call, please go to Slide #13, where Sebastian will give you an update on the status of our growth opportunities.

[Sebastián Moraga, executive]

Thank you, Isidora. Regarding our growth opportunities in Chile, the relevant update for this quarter is as follows: Horizonte. In the second quarter, an 18% progress was achieved in line with budget. The delivery of the first stage of the camp was completed. The mobilization to the site of the main contractors was concluded, and the construction of platforms and foundations of the wind turbines begun. 36 anchoring systems for the towers arrived at the site, which will be installed in the foundations of the wind turbines from the third quarter of 2022.

Los Junquillos. During the second quarter of the year, progress continued on the environmental impact study. It is expected to enter the processing of the environmental impact study in the coming months.

Celda Solar. During the second quarter, advancement was achieved on the review of the final version of the environmental impact study prior to its entry for processing. Meetings were also helped to socialize the project with the relevant authorities, residents and communities of the zone. The preparation of the EIA was concluded for a 420-megawatt project and a 240-megawatt battery of 5 hours duration, which is expected to be processed in the coming months.

For more information regarding our pipeline of projects, please review our earnings report. This concludes Colbun's second quarter of 2022 results review. Thanks for listening, and now we are open to answer your questions.

[Operator]

[Operator Instructions] Your first question is coming from Martin [ Ariset ] of Balanz Capital.

[Unknown Analyst]

This is Martin [ Ariset ] from Balanz Capital. Well, first of all, congratulations on the results. I have 4 questions. Sorry for the extension. I would like to go one by one, if that's okay.

Well, my first question regarding Horizonte. Just to check, is the budget formally closed and fixed with the EPCs? Or do you have some open budget items? And also, if you could give us an expected COD in 2024.

[Miguel Alarcón, executive]

Martin, Miguel here. Thank you for your question. So I would say that, yes, Horizonte has its main contracts duly signed. And because of that, we expect to be in line with the announced CapEx -- total CapEx. That CapEx was updated because of the increase in the installed capacity of the power plant, and it is about [ 898 million ], sorry, for 812 megawatts of installed capacity. The expected commissioning date remains the same. That would be starting in November of '23 to finalize full commission [indiscernible] in November '24.

[Unknown Analyst]

Okay. Perfect. My second one is regarding Santa Maria. When do you expect to see marginal cost for dispatch closer to international coal prices?

[Miguel Alarcón, executive]

Sorry. Can you please repeat the question, Martin?

[Unknown Analyst]

Yes. Regarding Santa Maria, when do you expect to see marginal cost for dispatch closer to international coal prices?

[Miguel Alarcón, executive]

So -- so I cannot give you a specific date. What I would say is that we tend to have purchase programs for coal, and we do that regularly, let's say, twice a year. And because of that, yes, there is some catch up to make in terms of the variable cost of the power plant and the actual cost of fossil fuel, of coal, in this case. And because of that, we still have some coal stored that goes beyond the actual total cost.

What I would say that you need to remember that because of a particular PPA that we have with this power plant, there is a complete pass-through of the variable cost of this unit. And because of that, we are, in some way, protected in terms of the expected margin of this plant going forward, and we should be not materially affected by changes in the price of coal going forward.

[Unknown Analyst]

Okay. Perfect. Well, then regarding gas in Chile, could you share with us the mix of gas supply for this quarter? How much from the local contract? And how much for Argentina? Confirm that you did not buy any spot volumes on the LNG market?

[Isidora Zaldívar, executive]

Yes, of course. So for this quarter, we have Argentinian Gas for 226 -- sorry, sorry, sorry. I will repeat. We have Argentinian Gas for 436 gigawatt hour. And for the ENAP contract, we have 1,128 gigawatt hours. That's for this quarter. In terms of the semester, Argentinian Gas reached 1,400 gigawatt hours and the ENAP contract, 1,700 gigawatt hour.

[Unknown Analyst]

Okay. Well, my last question then, going to Peru, Fenix shown solid cash flow generation. What cash uses do you see us more likely moving forward? Do you see opportunities for expanding with your renewals footprint there? Or perhaps -- perhaps we attach an auction with distributors or maybe industrial PPAs? And also, is there the alternative of maybe dividends into Colbun Chile?

[Miguel Alarcón, executive]

I didn't get the last part, Martin. Let me try to answer your question. First of all, the Peruvian business has been improving significantly over the last, I would say, 12 months after the change in the gas exploration price that took place in July of last year. Because of that, we are having a cash surplus, as you correctly point out. The main uses for this cash in the second semester would be to service debt in September and to pay the scheduled maintenance.

Apart from that, I'm talking more about Colbun's point of view. I would say that we maintain our intention to expand the platform into by growing that generation unit, hopefully trying to make it more diversified and hopefully, incorporating different types of technology, namely renewables. That's still the intention that we maintain for a few years now.

[Operator]

Your next question is coming from Alejandra Andrade of JPMorgan.

[Alejandra Andrade Carrillo, analyst]

I have a couple of questions. First, I don't know if you can comment a little bit on hydrology going forward and how you're seeing that develop in Chile. And then secondly, if you could just comment on your gas contracts with ENAP, how is pricing done for those? Is it just LNG? Is it more Henry Hub? Or what's the reference for those ones?

[Isidora Zaldívar, executive]

Alejandra, this is Isidora. In terms of hydrology, we have experienced greater rainfalls in most of the basins in Chile, and also most impacted in the basins that we have the most installed capacity. So it's very good news for the company. If we compare rainfalls of the hydrological year compared to the last one, we have in, for example, Maule Region, 3% higher than last year; 5% in Laja; and 9% in Biobio. And also, if we compare that figure with an average year, we maintain a higher rainfall of 2% in Maule; 9% in Laja; and 11% in Biobio. So we expect to have greater hydroelectric generation in the coming quarters.

[Miguel Alarcón, executive]

Yes. Sorry, just to complement, Alejandra, the previous question. We're still waiting for the first melting forecast. That melting forecast should be available by the beginning of September. And with that, we should have more visibility on accumulated rainfall and what to expect in the final quarter of this year regarding hydro outputs.

Regarding your second question about the LNG and the ENAP contract. That contract has a reference that, in some way, replicates the main supply contract that ENAP with its own suppliers, and the reference to that is linked to brand prices. So there is a brand indexation that is adjusted in the pricing supply. I do have to say that in Colbun, we have a hedging program that -- and with that, we try to cover our exposure to brand prices, and we do that using especially call options. And so -- and that's it.

[Operator]

Your next question is coming from Andrew McCarthy of CrediCorp Capital.

[Andrew McCarthy, analyst]

I had a couple of questions. First one, is just in terms of the greenfield projects in Chile, especially the ones that already have their environmental approval in Inti Pacha and Jardin Solar. I'm just wondering if you have any further color there on expected timing of when those could maybe get green lit?

Just connected to that, how you're thinking about that sort of -- from a management perspective, that sort of capital allocation decision, maybe accelerating the CapEx versus payment of dividends to shareholders, how you -- that sort of dilemma as it were as you're thinking about that at the moment?

And then my second question is just on the regulated segment public power option we had last week. We've got obviously the results of all the bids there, big upward shift in where people -- or where companies were making their offers, heavy preponderance of offers around sort of $45 to $50 per megawatt hour range versus $30, I think more or less kind of the average where people were offering last year. So a big upward shift. So just interested to hear what your take is on that. And also with respect to where Colbun was bidding in that auction or the sort of rationale there that you were seeing, I'd be very interested to hear your thoughts on that.

[Sebastián Moraga, executive]

Andrew, this is Sebastian. Thanks for your question. Regarding the first one in greenfield projects. I would say we keep on following the strategy we have been explaining probably the last 7 years, which is basically we seek the opportunities to secure the location. That location must have good characteristics, such as in the case of the solar projects, a good radiation, location to the consumption centers, distance from the transmission lines and having obviously the social and environmental, I would say, issue well covered.

Having said that, yes, today, as you mentioned, we have a couple of projects awaiting there. And what are those projects awaiting there is basically our philosophy of having projects and assets and a portfolio of assets tied to PPAs. So we -- it is very unlikely we would move forward those projects without having a PPA going into that equation. So it would be unlikely for us to develop that project going into, say, the spot market.

And also, we are looking in varying detail all the transmission issues that are happening in the system. So that, I would say, is a moving ingredient into the equation. So in simple, Andrew, is those projects would be most likely triggered if we would be successful in saying a relevant PPA such as what happened with BHP and Horizonte 3 years ago. And I would add to that equation today is how we are seeing that the transmission congestion, especially in the north, would be solved in the couple of months coming through.

On that note, the question to the regulated option, yes, I share your view that there was a shift in prices. And I would say that's -- from us, that's natural, basically because today, we are seeing an increase in the CapEx. Today, well, if you go to public information sites, you see that the cost both of solar and weight capacity have spiked for different reasons, basically raw materials, disruption in supply chain, et cetera. And you need to have a new ingredient, which is the financing costs. Financing costs have been coming up.

And I would also add to the last piece of the equation is also again, transmission issues. These regulated options imply that you typically need to inject or you need to serve customers in a wide range of locations. And that obviously has some basis risk in terms of pricing. And I would say those, for me, would be the 3 elements that could explain that the prices in this option showed a different level from the ones that we have been probably seeing in the last 5 years.

[Operator]

[Operator Instructions] Okay. There are no more questions in the queue with the phone lines. Isidora, do you have any questions on the webcast?

[Sebastián Moraga, executive]

Okay. So if there are no more questions, well, we would like to thank all the -- all the investors that tuned in into this second quarter results presentation, and hope to see you soon the next quarter. And then we wish you all a very good weekend. Bye-bye.

[Operator]

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