Colbun SA

SGO:COLBUN

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, and welcome to Colbún's Second Quarter 2023 Results Conference Call.

I will now hand over to Miguel Alarcon to begin the presentation.

[Miguel Alarcón, executive]

Hello to everyone, and welcome to Colbun's Second Quarter 2023 Earnings Review Call. My name is Miguel Alarcon, I am the company's CFO. And joining me today is Macarena Güell, Investor Relations Analyst. 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, we have the model 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's results. 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. On April 24, the company received $116 million corresponding to the final price adjustment associated with the Colbún Transmision sale. Alfa Desarrollo as agreed by the parties in the Purchase and Sale Agreement dated March 30, 2021 whose closing and payment was reported on August 10, 2021, leaving on [indiscernible], a final adjustment price customary in this type of transactions.

On May 12, a dividend was paid of $140 million, consisting of: first, a definitive dividend of $65 million, which together with the provisional dividend paid in December of 2022 totaled $83 million, equivalent to the 50% profit distribution in line with Colbun's policy; and second, an additional dividend charged to the previous fiscal profit year of $75 million. Total dividend distribution amounted to $223 million charged to 2022 fiscal year.

During this quarter, Fenix Power plant performed its major mainteinence which had an extension of 70 days, which is 26 days beyond the original program scheduled. This extension was mainly due at Fenix judgment to a deficient planning and execution by the service provider. As a result, the power plant was available for only 22 days during the second quarter.

Regarding the major maintenance, it should be noted that it allows extending the unit's operating hours by 32,000 factored firing hours. The main activities involved included GT11 and GT12 gas turbines major maintenance that includes removal of rotors, replacement of capital and combustion parts, inspections and non-destructive testing. ST10 steam turbine major maintenance, will include basically the same, and MarkIV control system upgrade in the 3 turbines and of GT11 and GT12 system startup.

As of June 30, the company reached 59% completion for Horizonte wind project. It is worth mentioning that the transportation challenge of oversized wind turbine components from Puerto Angamos in Mejillones to the project located 170 kilometers south of La Negra-Antofagasta location due to police scarcity available for these transfers. The company is making all the efforts at regional and national levels to minimize any delays that the situation may cause to the project, which to date have not occurred. If this problem is not resolved in the coming months, it could cause a delay.

As of June 30, Diego Almagro power plant storage system is awaiting authorization from the National Electric Coordinator for real-time signal testing for commercial operation. These tests completion is essential for the certification and commissioning.

Now please go to Slide #5 to review the main consolidated figures of the company. Consolidated EBITDA in the second quarter of 2023 reached $135 million, decreasing 12% compared to $153 million of EBITDA in the second quarter of 2022. This increase is mainly due to, first, higher energy and capacity purchases in Peru, driven by Fenix Power plant major maintenance expansion, which were at a higher average purchase price due to a significant increase in the marginal cost observed during the quarter due to the dispatch of digital [gifts], and second, higher coal and gas consumption due to a higher average purchase price. These effects were partially offset by higher operating income. As of June 30, the company holds $950 million of cash and net debt-to-EBITDA ratio is 1.5x. Now I will turn to Macarena, who will speak about the main drivers of this quarter's results.

[Macarena Güell, executive]

Thank you, Miguel, and hello to everyone. Now please continue to Slide 7 for physical sales and generation balance analysis in Peru. Total generation of the period decreased 3% compared to the second quarter of 2022, mainly explained by lower generation with diesel, minus 114 gigawatts hour, given a lower economic dispatch and [ REBS ] lower 80 gigawatts hour due to the expiration of third-party energy purchase contract.

This effect was partially offset by a lower hydroelectric generation over 139 gigawatts hour. Physical sales during the quarter reached 3.4 kilowatt hour, 3% lower than the second quarter of 2022, mainly due to, first, lower sales into the spot market, driven by a lower generation recording during the quarter; and second, lower sales to unregulated clients given a lower consumption from this segment. These effects were partially offset by higher sales to regulated clients due to some contract expiration between other generation companies and distribution companies, which generates a higher load factor for those contracts that are being forced.

Spot market balance during the second quarter '23 recorded net sales of 446 gigawatts hour, while the second quarter of 2022, net sales was 535 gigawatts hour were recorded. This variation is mainly explained by the lower generation during the quarter.

Now please continue to Slide 8 to analyze the EBITDA for the generation business in Chile for the quarter. EBITDA in Chile reached $135 million in the second quarter of 2023, increasing 3% compared to the EBITDA of $131 million in the second quarter of 2022, mainly due to higher operating income explained by higher sales to regulate and unregulated clients given the higher average sales price. They were partially offset by higher raw materials and consumable usage costs, mainly due to higher coal and gas consumption costs associated with a higher average purchase price.

Now please continue to Slide 9 for physical sales and generation balance analysis in Peru. Third generation of the period decreased 64% compared to the second quarter of 2022, reaching 338 gigawatt hour, mainly explained by a lower extension of the major maintenance compared to the one carried out during the second quarter of 2022. Physical sales during this quarter reached 889 gigawatt hour, decreasing 7% compared to the second quarter of 2022, mainly explained by lower sales in the spot market, given a lower generation of the power plant due to the major maintenance that's carried out, which has a total extension of 70 days.

This effect was partially offset by higher sales to unregulated clients give the entry into force of new contracts for 37 megawatts. The spot market balance during the second quarter of 2023 recorded net purchases of 524 gigawatts hour compared to the net sales of 380 gigawatt hours during the same quarter of the previous year due to the lower generation recorded in the period, mainly explained by the lower Fenix Power plant availability mentioned before.

Now please continue to Slide 10 to analyze the EBITDA in Peru for the second quarter of 2023. EBITDA in Peru reached $0.2 million in the second quarter of '23, decreasing 99% compared to the $22 million first EBITDA recorded in the second quarter of 2022. This result is mainly explained by higher power and capacity purchases in the spot market explained by the lower generation recorded previously mentioned.

Now please continue to Slide 11 for the consolidated nonoperating income and net income analysis. Nonoperating income in the second quarter of '23 recorded profit of $89 million compared to $41 million of losses recorded in the second quarter of 2022.

As a result of first, the income of $116 million corresponding to the final price adjustment associated with Colbún Transmision sales to Alfa Desarrollo; second, higher cash surpluses investment rates; and third, a lower loss due to the exchange rate appreciation compared to the second quarter of 2022. The company recorded a profit of $131 million compared to the profit of $38 million in the second quarter of 2022, mainly due to the income of $116 million corresponding to the final price adjustment as stated with Colbún Transmision sales to Alfa Desarrollo previously mentioned.

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

[Jose Escobar, executive]

Regarding our growth opportunities in Chile, relevant updates for this quarter are as follows: As of the second quarter of 2023, 59% of the project was completed. Turbine assembly began reaching mechanical completion of the first 13 wind turbines in June. In addition, the construction of internal roads, platforms and foundations for the wind turbines is still in progress with 85% progress as well as substations, transmission lines and main voltage network with 55% progress.

In total, 255 main components have been unloaded to date at the wind turbine site, including blades, towers, hubs and generators. For the Diego de Almagro BESS credit, as of June 30, are awaiting authorization from the National Electric Coordinator maker for real-time signal testing for [indiscernible]. This test completion is essential for the certification and commissioning. For more information regarding our pipeline of products, please review our earnings report.

This concludes Colbun's Second Quarter 2023 Results review. Thank you for listening. And now we are open to answer your questions.

[Operator]

[Operator Instructions]

So our first question comes from Fernan Gonzalez from BTG Pactual.

[Fernan Gonzalez, analyst]

I have 3 questions. One is, what's happening with spot prices in Peru, why are they so high because they kept increasing month after month for the past several months already? So I'm wondering if you could share some thoughts on what's happening in the industry there? An additional question on Peru is whether or not Colbún will try to seek financial compensation for the extended maintenance at [indiscernible]? And my third question is, what's the status on the unregulated energy auctions that the mining industry is executing this year? If you could share some thoughts on that, too.

[Miguel Alarcón, executive]

Fernan, this is Miguel. I hope you can hear me okay. So going question-by-question, first would be about spot prices in Peru. What's happening there it's a combination of things. First of all, at the beginning, we had towards the end of last year, some lower amount of capacity available, especially gas capacity, and that meant into diesel facilities to operate setting the marginal cost, as you may recall over $100 per megawatt hour for the last quarter.

Then particularly, I would say, a couple of months ago, Peru is suffering from a really poor hydrology. And because of that, hydro plants have not been able to fulfill their typical volumes. And because of that, then again, the system had to resort to diesel capacity, which has been saving the marginal costs as mentioned in the last couple of months over $100.

On top of that, this is more recent news, I understand that there's a large hydro plant also unavailable that will also put additional pressure on the marginal costs going forward, at least for the next 2 to 3 months. So basically, we expect at least in the short term, up until the hydrological year starts in Peru, which is in the last quarter of this year, again, some pressure on the marginal cost being set by diesel because unfortunately, gas capacity is not enough to fulfill all of the demand that's actually increasing a lot in that country.

Regarding your second question, I would say that more than from Colbún, from Fenix standpoint, yes, we are in the process of negotiating with our supplier an agreement to get compensation from the significant impact we had in our results as usual in this quarter.

Hopefully, and this is positive news. I think, as I previously mentioned, because of the spot situation in Peru and being Fenix an exceller in the spot market, we're benefiting from that situation and actually making an increased margin on a daily basis as long as this marginal cost increase continues to occur. And regarding your final question, I cannot comment much. We have talked in the past that, yes, we've seen significant volumes of mining companies being discussed. Some of them in tender processes.

One, of course is public, which is the Diego process because they had a spare amount to recontract -- actually a contract readjusted with us, with Colbún. But on top of that, there are a couple of large mining companies into those processes. And hopefully, soon, we will have some news to share with you and the rest of the investors community.

[Operator]

Our next question comes from Florencia [indiscernible] from MetLife.

[Unknown Analyst]

I have a couple of questions. One is -- so we already mentioned that just to ensure that the maintenance of Fenix is already completed. This is the first one. Second, I am curious about your coal inventory. What's your expectation on that? And do you think that you were able to dispatch most of them during the second quarter or we should continue to see this in the third quarter or in the second half of this year? And the last one is regarding considering better hydrology expectation, if you are expecting to maintain or are more optimistic regarding the guidance for the full year?

[Miguel Alarcón, executive]

So I'll go with the first 2 questions, Florencis and then Macarena will take the third one. So basically, regarding maintenance of things, yes, it's completely finished. The plant has been operating for more than a month, I think. It began operations again in the second week of June, I think. And that's why we're operating for -- as we said in our earnings report, about 22 days in this quarter. That's completely finished. And the plans after that has been operating up or when without any issues.

Regarding your second question that was about, sorry, inventories. So you should have seen an increase in our inventory levels, especially in this quarter. A reason for that is that we need to prepare ourselves for 2 significant maintenances that are planned to accrue in the second half of this year, while it's already in progress regarding the Nehuenco 1 power plant and the other one is yet to be determined the exact initial beginning date, but that's for the Santa Maria power plant.

And typically, before a large maintenance, we need to stock up with spare parts, and that's the reason you're seeing the inventory levels going up. But nothing, I would say -- typically all in order, nothing uneventful to comment on or nothing particular with this level.

[Macarena Güell, executive]

I will help you with the last question. So it was regarding about hydrological projection for this year, if I understood properly. So about the projection, we actually cannot see that much because it is too soon yet to kind of say how it will be for the next half of the year. But what I can say to you is that if we look to, for example, [indiscernible], those were levels are even higher to an average year or even to [indiscernible] year of 2022. So yes, however, we should expect at least for the third quarter of 2023 should be a little bit higher than the previous year. And in terms of energy, the basis on the [indiscernible] are also higher. I mean, the [indiscernible] for the end of the year represents another 0.9 terawatt hour in terms of energy.

But in terms of projections, we are still with a conservative scenario, and we're still saying that the generation should be the [indiscernible], which is a conservative although we think another 0.9 terawatt hour at the end of June '24, but we cannot say that much.

[Unknown Analyst]

Can I have another more question regarding, you always mentioned your intention to expand internationally. You already are in Peru. Are you looking now another country particularly, to take an opportunity and to continue growing in renewable?

[Miguel Alarcón, executive]

Miguel, again. Yes, we, of course, plan to expand our operation in Peru, and we plan to do so in 2 ways. One would be losing our potential M&A opportunities as we've been doing so far. And the other one, which I think probably is the main one currently is to try to build up our own platform for that process. And I think we've discussed this in the past, we have a pipeline of 5 to 6 products in different stages of development.

Some of them are solar, some of them are wind in the intention to put into commercial operation, an additional 500 megawatts in the next 5 years. That at least is the goal for now. Regarding additional countries, we are in the process of defining those in the final phase of that definition, and we plan to share that with you, hopefully later this year.

[Operator]

[Operator Instructions]

So we have a text question next. There are actually 2 questions. So this is from Martin Zetzsche from Fundamental Capital. Number one, what is the cause for the revenues? Miguel, you read it if you want.

[Miguel Alarcón, executive]

Yes, I'm seeing those. So yes. So Martin is asking about cost or the revenues of BHP doubling in the quarter. Is there a new contract or was it cost by indexation? Regarding that question, I don't see actually the sales to this particular client doubling, I do see an increase, which is caused by 2 effects. On one side, we are seeing a 10% increase in demand, meaning 10% more volume. And we're also seeing a similar amount of variation in terms of price linked to the sales. So yes, there is an increase in total sales, and it has to do with these 2 effects I just mentioned, but I don't see them doubling. Maybe, Martin, if you need further information, we can have a separate call to see your numbers.

Second question from Martin was regarding gas costs for this quarter, the majority of the gas consumption is hedged via contract within that 10% Brent. Why was the realized cost so much higher than the [indiscernible] adjustments? So yes, there are 2 parts of this question. One would be that, as you will recall, Martin, we source ourselves from 2 country or places. One is via the Höegh contract with LNG, it has a link to Brent prices. And the other one is the gas we get from Argentina. Most of the gas, this second quarter came from the Höegh contract, I would say, 2/3 and 1/3 came from Argentina, both prices were a bit higher than the same quarter last year.

On top of that, due to the failures the recertification price went also up and that's the reason why you see higher gas costs than the previous quarter. And a guy from Santander posted a question regarding if there is any insurance or compensation associated to the Fenix problem? First of all, there's no insurance since in order to get an insurance compensation, there needs to be a failure, which is not the case here. So no insurance policy to claim. And regarding the compensation with the supplier as already mentioned, that's something that we are discussing with this particular company, and hopefully, as soon as we have some news, we will share that with you.

[Operator]

Thank you, Miguel. We have another voice question this time from Martín Arancet from Balanz Capital.

[Martín Arancet, analyst]

Yes. I sent the same questions in writing. So you can ignore. There are 2 questions. My first one is how you expect to collect from initial [indiscernible]? And my second question is [indiscernible] looks quite important, like in this kind of specifics in opinion. I was wondering what are the items [indiscernible] margins?

[Macarena Güell, executive]

Martin, I think you have a problem with your microphone. I don't think [indiscernible] properly?

[Martín Arancet, analyst]

Yes. Can you hear me?

[Miguel Alarcón, executive]

Now it's better. I think we only got the first question about monetization. The rest, I couldn't understand it. I think if you can repeat it.

[Martín Arancet, analyst]

Yes, how much do you expect like from initial [indiscernible] decision that we understand that it should come in [indiscernible]?

[Macarena Güell, executive]

Okay, Martin. So I can help you with this. We have $34 million of [indiscernible]. So those will be received by us. Sorry, can you hear me?

[Martín Arancet, analyst]

Yes.

[Miguel Alarcón, executive]

Martin, can you hear me better? I think there is some issue with your microphone or your connection.

[Martín Arancet, analyst]

Yes. Sorry about that.

[Operator]

We're still having some issues, Martin. Perhaps you can follow up separately afterwards and maybe move on to the text question for the time being. Miguel?

[Miguel Alarcón, executive]

Yes. But maybe just to answer the part that we got from Martin and for everyone's benefits. In terms of PEC compensation, as Macarena mentioned, we expect to sell soon during the next month, hopefully, what's -- the remaining portion of PEC1 or excess PEC1 which is close to $35 million. There might be a case because this is still under documentation review that we will be able to sell a portion of PEC2, but I think it's more likely to occur in a couple of months from that initial sale, and that should be another $85 million linked to PEC2. So $35 million for PEC1 during August, maybe 2 more months from that point, $85 million more from PEC2. Hope this helps.

[Operator]

Perfect. So I'm going to close Martin's line. Thank you. So maybe we can have another text question. Do you want to take one of the 2 text questions, Miguel?

[Miguel Alarcón, executive]

I think all of them have been already addressed because they all are the same questions that some people asked before.

[Operator]

No problem at all. [Operator Instructions] I think we've got a follow-up question from Fernan Gonzalez at BTG Pactual.

[Fernan Gonzalez, analyst]

Miguel, just one final question is you've mentioned in the past that you were looking or analyzing to invest in this other business lines about [indiscernible] plants or waste to energy. And I'm wondering, is this something that could happen in the relatively short term? Or is this really a very long-term thing for Colbún?

[Miguel Alarcón, executive]

Thank you, Fernan for your question. First, I would say, an update. The 2 main businesses we are trying to focus on are currently lower as you pointed out. But green hydrogen, the second one, we are putting the other one, the one you mentioned [indiscernible]. So waste-to-energy, we're putting them to side for now because we believe there are fewer opportunities compared to green hydrogen or water business.

But yes, those are long-term. We don't expect to announce anything at least material in the short term, but we are looking for opportunities in both businesses. In water, we have a pipeline of identified opportunities. And we also have a pipeline for green hydrogen, whether it's domestic opportunities or international ones, I would say that all of them, especially green hydrogen is much more new to the company. It's just a newer industry. And because of that, I think when you compare both of them, probably water should come first than green hydrogen in terms of relevant volumes to the investments.

[Operator]

All right. Perfect. I'm not seeing any more questions. So maybe Miguel I can pass the line back to you for closing remarks.

[Miguel Alarcón, executive]

Absolutely. So thank you, everyone, for your interest. I've seen a number of people connected more than before, which I'm happy because of that. So thank you for your interest again. Great to have you here. Hopefully, you'll have a great weekend. And see you again for third quarter results call. Bye-bye.