Colbun SA

SGO:COLBUN

Earnings Call Transcript 2020-Q3

[Operator]

Good day, ladies and gentlemen, and thank you all for joining us for this Colbún Third Quarter 2020 Earnings Conference Call. As a reminder, today's session is being recorded. [Operator Instructions].

To get us started today, I am pleased to turn the floor over to Mr. Sebastián Moraga. Please go ahead, sir.

[Sebastián Moraga, executive]

Hello to everyone, and welcome to Colbún's Third Quarter 2020 Earnings Review Call. My name is Sebastián Moraga, I am the company's CFO. And joining me today are Miguel Alarcón, our Deputy CFO; and 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 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 quarter. First, regarding the COVID-19 pandemic contingency. The company's power plants are operating normally, and Colbún has taken actions considering 2 priority focuses. First, to protect the health of personal suppliers in our surrounding communities. And related to this, home office was established for all the positions that can carry out their functions with this mode. This corresponds to 98% of our headquarters employees.

Secondly, for positions with functions in which an on-site attendance is critical, this working mode is maintained, but with the necessary safeguards.

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

Now regarding the impact of COVID-19 on energy demand. There is still uncertainty about the magnitude and length of this contingency, but energy demand in Chile has decreased approximately 2% during the third quarter of this year compared to same quarter of 2019. While in Peru, there was a decrease of approximately 4%.

In August of this year, Colbún and Walmart Chile extended their energy supply contract, the contract will be supplied with 100% of renewable energy for 330 gigawatt hour a year for a 6-year period. The agreement also includes the installation of 9 charging stations for electric cars and supermarkets in the Metropolitan Region and other regions of the country.

In September of this year, Colbún announced the acquisition of 100% of Efizity, a company focused on energy solutions in the national market, with the purpose of enhancing the company's value proposition by incorporating solutions related to energy management. Efizity is a company specialized in energy services, which aims to improve competitiveness of its customers by promoting energy efficiency through innovative solutions. Today, Efizity holds a diversified client portfolio in the industrial, mining, real estate, retail, educational, hospitality and health sectors, among others.

Finally, regarding company's transmission assets. In September of this year, the Board of Directors agreed to carry out a process that involves invitation of actors with experience in power, infrastructure and financial transmission industries in order to explore their interest and the conditions in which its possible participation could be agreed either as a strategic partner, acquiring a majority position or acquiring up to all the shares of its subsidiary in Colbún transmission.

Now please go to Slide #5 to review the main consolidated figures of the company. Consolidated EBITDA for this quarter reached $175 million, decreasing 2% compared to the $179 million posted in the third quarter of 2019, mainly explained by the lower operating income recorded during the period. This effect was partially offset by lower raw materials and consumable used costs in Chile and lower fixed expenses, especially those denominated in local currency, driven by the exchange rate depreciation compared to the same quarter of last year.

Consolidated profits reached $62 million, 14% higher than the $55 million in profit in the third quarter of 2019, mainly explained by the lower nonoperating loss of record.

Financial investments totalized $966 million, and net-debt-to-EBITDA ratio is at 1.2x. The average long-term financial debt interest rate in U.S. dollars is 3.9%.

Colbún has a total installed capacity of 3,811 megawatts comprised of 2,188 in thermal units, 1,614 in hybrid units and 9 megawatts from the PV plant. In terms of transmission assets, it owns 899 kilometers of transmission lines and 27 substations.

Now I will turn to Soledad, who will speak about the main drivers of this quarter's results.

[Soledad Errázuriz, executive]

Thank you, Sebastián, and hello to everyone. Now please continue to slide 7 for our physical sales and generation balance analysis in Chile. Total generation of the period increased 37% compared to the same quarter of last year, reaching 3.5 terawatt hours, mainly due to, first, a higher gas generation driven by additional contracts that allowed to operate with the 2 combined cycles during the quarter; second, a higher coal generation due to the lower availability of Santa María during the third quarter of 2019, explained by the major maintenance status and the finding of a failure in the steam turbine; and last, due to a high hydro generation explained by more favorable hydrological conditions, these effects were partially offset by a lower wind generation mainly due to the expiration of the San Pedro power plant contract in May 2020.

Physical sales during the quarter reached 3.5 terawatt hours, 19% higher than the third quarter of 2019 due to, first, higher sales to the spot market, mainly explained by higher generation during the quarter; and second, higher sales to unregulated clients due to new contracts entering the force in that segment. Those effects were partially offset by lower sales to regulated clients, driven by the expiration of the contract with SAESA in December 2019 and by a lower LNG demand driven by the state of emergency, currently declared.

Spot market balance during this quarter recorded net sales for 787 gigawatt hours compared with the net purchases for 338 gigawatt hours in the same quarter of last year, mainly as a result of the higher generation during the 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 $141 million this quarter, decreased 3% compared to the third quarter of 2019. The lower EBITDA of the quarter is mainly explained by the lower operating income recorded during the period. This effect was partially offset by lower cost of raw materials and consumables used and by lower fixed expenses, especially those denominated in local currency as a result of the depreciation of the exchange rate compared to the third quarter of 2019.

Now please continue to slide 9 to analyze the EBITDA from the transmission business for this quarter. EBITDA of the transmission business reached $19 million this quarter, increasing 7% compared to the $17 million EBITDA recorded in the third quarter of 2019, mainly explained by an increase in operating income, driven by an increase in the national segment's income, that mainly due to the commissioning of announcement and expansion projects of the company's current transmission assets and by tariff revenues reassessment corresponding to the period March 2019 and January 2020.

Now please continue to Slide 10 for our physical sales and generation balance analysis in Peru. Total generation of the period decreased 12% compared to the same quarter of last year, reaching 1 terawatt hour, driven by, first, the lower plant availability explained by the gas turbine scale maintenance on our 2020 for 10 days; and second, the COES request to stop operating 3 days during July given the lower system energy demand.

Physical sales during this quarter reached 1 terawatt hour, decreasing 12% compared to the third quarter of 2019. The decrease is mainly explained by lower sales to the spot market, driven by the maintenance performance on August and as a consequence of the COES request not to start for 3 days in July due to the lower system and energy demand. The decrease is also explained by lower sales to customers and the contracts, mainly due to a state of emergency decreed by the Peruvian government by -- due 2 COVID-19 pandemic and to lower sales to regulated clients due to expiration of distributes contracts in December 2019.

Spot market balance during this quarter recorded net sales of 342 gigawatt hours compared to the net sales of 430 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 $16 million, in line with the EBIT recorded in the third quarter of 2019.

Now please continue to Slide 12 for the consolidated nonoperating income and net income analysis. Nonoperating income this quarter presented losses of $25 million, lower than the losses of $34 million in the same quarter of last year. The lower losses are mainly explained by a positive effect of the exchange rate variation on temporary balance sheet in local currency during the quarter, while that effect was negative in the third quarter of 2019. This effect was partially offset by the lower financial income earned during the period, driven by lower interest rates applicable to cash surpluses at local and international level.

The company recorded this quarter profit of $62 million, 14% higher than the $55 million profit of the same quarter of last year. The higher profit is mainly explained by the lower nonoperating losses recorded already explained.

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

[Sebastián Moraga, executive]

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 stage, 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 the Atacama Region. Diego de Almagro Sur I and II, 2 PV projects of an overall capacity of 230 megawatts located in the Atacama Region. The total investment amount approved for this project is $147 million. Machicura, a PV project of 9 megawatts located in Maule Region, total investment approved for this project is $7 million. Inti Pacha, a PV project of 486 megawatts located in the Antofagasta Region. Jardín Solar, a PV project of 537 megawatts located in Tarapacá Region. Los Junquillos, a wind farm of 265 megawatts located in Biobío Region. Additionally, at the end of this quarter, Colbún holds a portfolio of locations from 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 at our website.

Second, the company does not rule out the purchase of renewable assets in operation. And 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 with a total awarded investment value of approximately $34 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.

This concludes Colbún's third quarter of 2020 results review. Thanks for listening, and now we are open to answer your questions.

[Operator]

[Operator Instructions] And gentlemen, we do have a signal from the phone audience, Mr. Rodrigo Mora with Moneda.

[Rodrigo Mora, analyst]

Do you hear me?

[Miguel Alarcón, executive]

Yes, Rodrigo, hi.

[Rodrigo Mora, analyst]

Okay. I just have a couple of questions. The first one is related to the action to factorize the account receivables. If you please give some details about this transaction. The second one is related to the hydro condition for this melting season, if you please give us more color about these hydrology conditions. And the third question is related to the ability of Argentinian gas for this summer time.

[Miguel Alarcón, executive]

Yes, sure. So let's take one by one, right? This is Miguel, by the way. So first of all, regarding the stabilization mechanism financing, as you know, over the past month, we've been working in a financing solution for the accounts receivable generated by the mechanism I just explained with IADB, the Inter-American Development Bank, and also our commercial. The financing mechanism is same as the structure of true sale. That would mean that we would sell the account receivable without any recourse to Colbún or other generation companies that can participate into our facility. That financing is still underway. It's still in progress, and we expect to close this financing by year-end. Apart from that, I think we cannot provide any more details about, of course, the financial terms of conditions since this is still something being co-restructured.

[Rodrigo Mora, analyst]

Okay. The...

[Miguel Alarcón, executive]

Do you want to go to your next question? Or do you have a follow-up?

[Rodrigo Mora, analyst]

Yes.

[Miguel Alarcón, executive]

Okay.

[Rodrigo Mora, analyst]

Yes. I...

[Miguel Alarcón, executive]

So regarding the next question, Rodrigo, as you know, in terms of the hydrological year, meaning from April to March, we are a bit below what is an average year in the different basins of the company, being the one most affected the Aconcagua Basin as has been the case in the previous years. In terms of reservoir levels, basically, we're seeing a similar level that we saw last year. For example, the Colbún reservoir is currently 426 meters above sea level, which is 4 meters high compared to the same period last year. And finally, as you mentioned, according to a third melting forecast published by coordinators some 3 weeks ago, we see that there's an average exceedance probability for the system that is lower than the one registered in the same forecast of some report in 2019. That means that we expect greater water inflows than the ones from the same period last year.

[Rodrigo Mora, analyst]

Sorry, could you repeat the situation at Aconcagua Valley, please?

[Miguel Alarcón, executive]

Yes. So just to have in mind that I'm making figures in comparison to an average year not the previous year. So I said that compared to another 2 years, the basin most affected is the Aconcagua Basin. And the least affected, of course, is the Laja Basin, which actually presents close to -- sorry, not the last the Laja, the Chapo Basin represents a surplus, 0.4% surplus.

[Rodrigo Mora, analyst]

Over a normal year?

[Miguel Alarcón, executive]

Yes, an average year.

[Rodrigo Mora, analyst]

In Aconcagua?

[Miguel Alarcón, executive]

No, sir, in the Chapo. In Aconcagua, it's 40% below.

[Rodrigo Mora, analyst]

Okay. [indiscernible] that is south of region.

[Miguel Alarcón, executive]

Yes. And that is the one mostly affected, close to 40% in Aconcagua.

[Rodrigo Mora, analyst]

So that was 40% less than a normal year?

[Miguel Alarcón, executive]

Yes. All of these figures, Rodrigo, nevertheless, a report in our earnings report, separate by basin.

[Rodrigo Mora, analyst]

Okay. Okay. Perfect. And the situation in Maule and Laja and Biobío.

[Miguel Alarcón, executive]

Again, I would think...

[Rodrigo Mora, analyst]

So Chapo is 0.4% less than a normal year.

[Miguel Alarcón, executive]

So Chapo is 0.4% over a normal. It's better than the normal year.

[Rodrigo Mora, analyst]

Oh, over a normal year.

[Miguel Alarcón, executive]

Yes. The Aconcagua is 40% below a normal year. And the basins in between, I would say, also in between those figures. But again, so not to take everybody's time, I think we can either go in a separate call or you can refer to the earnings report that we report -- that we published last -- a couple of days ago.

[Rodrigo Mora, analyst]

Okay.

[Miguel Alarcón, executive]

Regarding gas, we also asked about gas, right?

[Rodrigo Mora, analyst]

Yes. The ability of gas for this summer time from Argentina.

[Miguel Alarcón, executive]

I'm not sure if gas is going to be available or not at this point of view because, currently, we are in negotiations with local suppliers for potentially this summer period and for the first quarter of next year. Having said that, you have to recall, first, that these agreements needs approval from government since they work as export licenses. But more important than that, because of the current margin and cost level, which is, let's say, $30 per megawatt hour on average. We don't -- at this point, at least and considering also the melting forecast I just described, I don't see a particular need for nominating gas at least up to this point. This, of course, is dynamic and might evolve in the coming weeks. But again, the message is that we are currently under negotiations to see if gas is going to be available. And after that, if we decided not to nominate the gas.

[Rodrigo Mora, analyst]

So the June is not made until now.

[Miguel Alarcón, executive]

Yes, it is not because on one side, we are still negotiating potential agreements. While on the other, it is not clear at least to me if that gas is needed or not considering the marginal cost level and the potential improvement in water inflows.

[Rodrigo Mora, analyst]

Yes. Okay. But -- so you are expecting that the average marginal cost of the first quarter 2021 will be in average, $30 per megawatt hour.

[Miguel Alarcón, executive]

No, no, Rodrigo. No, Rodrigo. I'm making the comment from the summer time, for the upcoming months. For the first quarter of next year, I think it's safe to assume as has been in the past that the system and Colbún will need gas for the combined cycles, and we're working in the most efficient way to source that gas. That's still under development. I'm not trying to make a forecast on the annual cost for the first quarter of 2021.

[Rodrigo Mora, analyst]

Okay. Okay. May I ask you a last question. It's related to the Colbún transmission business, when the Board will make a decision about the alternatives that the company is exploring at the market.

[Miguel Alarcón, executive]

Yes. So regarding the point, first of all, Rodrigo, as you recall, it was back in September 8 when we published this essential fact, stating the Board's decision that was to agree to carry out a process that involved, inviting those actors, local international in order to see potential alternatives regarding our transmission assets, right?

In terms of the status, I can say a few things. First of all is that the process has generated high interest from national international potential investors. We, of course, cannot further comment on details about which parties are the ones that already have signed documentation in order to access for more information. The discussion at this point with those parties have been on the assets, technical, operational and financial information, and we progress into those areas. Unfortunately, to your question, Rodrigo, we cannot provide further details on the process of time frames involved and when do we expect to reach a decision. But it's according to our schedule.

[Rodrigo Mora, analyst]

Okay. Miguel, just only one question related to yesterday or the lower chamber. Chile approved the idea to close -- the closure of all coal power plant at 2025. I would like to have the impression of Colbún and the impact that Colbún will have to have. And maybe legal actions that Colbún will have to take against the Chilean state in case this law would approve.

[Miguel Alarcón, executive]

Yes, already, we are following, of course, that discussion with a lot of interest. I would say that it's too soon to maybe discuss what you're asking because that's still something that needs to go to different stages along the way, and the actual decision and the conclusion might change along the way. Having said that, of course, that we've been part of the reorganization process led by the Ministry of Energy. We have participated in the decarbonization table along with the other generators. And we, of course, I would say, as a general idea, we share the -- we agree with the concerns and arguments presented by the Ministry of Energy and government -- and environment, sorry, as well as the C&E. Other than that, of course, at least I cannot comment about potential consequences of impact for Colbún about this issue because, as I mentioned, this is still a process in progress, and the final outcome cannot be anticipated at this time.

[Rodrigo Mora, analyst]

But do you understand that the shareholder at the next shareholder meeting will demand to the Board that in case that the parliament, the Chilean parliament, approved this low to closure, coal power plant at the end of 2025, the shareholder will demand to the Board take class action against the Chilean state, right?

[Miguel Alarcón, executive]

I understand, Rodrigo, that...

[Sebastián Moraga, executive]

Rodrigo -- Miguel?

[Miguel Alarcón, executive]

Go Sebastián. Yes, please go ahead.

[Sebastián Moraga, executive]

Rodrigo, this is Sebastián. We obviously cannot comment what supposedly will happen on the future shareholders meeting, Rodrigo. And whatever the shareholders demand, well, the time will come, and we'll see what happens at the shareholders meeting. We cannot advance or give any thoughts on what could happen. So we cannot cover your concerns in this conference call, Rodrigo.

[Operator]

[Operator Instructions] Mr. Alarcón and Mr. Moraga, we have no signals from the phone audience. Gentlemen, I will turn it back to you for any additional or closing remarks.

[Sebastián Moraga, executive]

Okay. I would like to take this opportunity to thank you for attending our third quarter conference call. It was great being with you. And hopefully, we'll see you on our next conference call meeting when we have our closing figures for the year 2020. So I wish you a very good afternoon and a happy weekend. So take care, and bye-bye to everyone.

[Operator]

Ladies and gentlemen, this does conclude today's Colbún conference call. Thank you all for your attendance. You may now disconnect your lines, and we hope that you enjoy your weekend.