Colbun SA

SGO:COLBUN

Earnings Call Analysis

Third-Quarter Results Reflect Stability and Growth Plans

In the recent earnings call, the company discussed several key points affecting its outlook and operations. They expect the addition of a new transmission line in northern Chile to mitigate current transformation congestion by 2028 or shortly thereafter. However, further reinforcement may be needed due to upcoming capacity increases. For now, management anticipates maintaining current spot market prices for the next couple of months, benefiting from stabilized conditions. No spot energy purchases were necessary in the past quarter as plants operated smoothly. The average price on unregulated contracts fell by 15% due to lower fossil fuel costs, affecting PPA prices. Gas prices were down to approximately $75 per megawatt-hour. Sustainability of growth is secured with a $1 billion cash position and plans to finance future expansion with corporate financing, potentially through international issuance or bank loans.

Progress Despite Fire Incident and Growth in Renewable Energy Projects

Colbún, during its Q3 2023 earnings call, surmounted concerns by addressing the fire at the Nehuenco Complex with clarity, outlining the rapid containment efforts and confirming adherence to the commissioning date slated for January 2024 for Nehuenco I unit. Significantly, the company reported a robust 63% completion of its Horizonte wind project, signalling commitment to renewable ventures as part of its growth opportunities.

Steady Financial Performance with Strong EBITDA and Healthy Cash Reserves

The company exhibited financial resilience, recording a 10% EBITDA increase to $226 million compared to the same quarter last year. This boost was attributed to heightened hydroelectric generation and reduced thermal plant operation costs. Alongside this EBITDA uptick was the substantial profit growth to $124 million, opposed to $81 million in Q3 2022. Colbún maintains a solid liquidity stance with $1.2 billion in cash and a disciplined net debt-to-EBITDA ratio of 1.2x, indicating a sturdy financial footing.

Mixed Generation and Sales Dynamics with Regional Variations

Generation levels in Chile remained consistent year-over-year, primarily due to increased hydroelectric output. In contrast, thermal generation declined, particularly from coal, aligning with the company's sustainable energy goals. However, physical sales dipped due to shrinking consumption by mining clients, an adverse but partially offset scenario with greater sales to regulated clients and improved spot market transactions. Despite the reported net sales in Chile, the generation business in Peru shone with a striking 98% jump in EBITDA, fuelled by elevated spot market energy and power sales.

Operational Efficiencies and Cost Management

In Peru, Colbún avoided spot market energy purchases due to the full operational capacity of their plant throughout the quarter, reflecting operational efficiency. They also discussed ongoing, though currently unproductive, negotiations regarding potential compensation tied to the extended maintenance of Fenix's Power in the prior quarter.

Impact of Market Conditions on Contract Pricing

The average price on unregulated contracts in the company was reduced by 15%, from approximately $120 to $100 this quarter. This reduction was influenced by a downward trend in fossil fuel prices, which is directly tied to some of the Power Purchase Agreements (PPAs) Colbún has, indexing to these costs.

Strategic Financing for Future Expansion

Colbún holds a significant $1 billion cash reserve poised for deployment in their expansion endeavors, reinforcing its financial strategy to follow through with corporate financing methods. Anticipation of future activities includes either international securities issuance or bank loans, methods with which they are familiar and comfortable, signalling a proactive and consistent approach to financing their growth initiatives.

Earnings Call Transcript 2023-Q3

[Miguel Alarcón, executive]

Hello to everyone, and welcome to Colbún's Third Quarter 2023 Earnings Review Call. My name is Miguel Alarcon, I'm the company's CFO; and joining me today is Federico Urgelles, Financial Manager; and 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, 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'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 August 4, a fire broke out in the gas turbine filter area of Unit 1 and the Nehuenco Complex. The cause of this fire was the fall of an incandescent piece of metal into an area with flammable material filters. At a moment, one of the metal component was being rolled to the structure of the filter area.

However, it is important to note that this procedure is start of the major maintenance process that the mentioned unit was undergoing at the time of the fire. Additionally, thanks to the action of the complex's emergency brigade and the Quillota Fire Department, the fire was quickly contained without any injuries or spreading to other areas of the complex.

As a result, the estimated commissioning date for the Nehuenco I unit is expected to be on January 20, 2024, a date that's already been communicated to the National Electric Coordinator. It should be noted that the company has insurance coverage for these type of events. As of September 30, the company has achieved 63% progress on Horizonte wind project reaching mechanical completion of 29 wind turbines. On September 12, the signing of 100% renewable energy contract between Colbún and Ujina, Collahuasi for up to 650 gigawatt hour per year was announced.

The contract period is from January 2024 to December 2035. The first phase which corresponds to the period of 2024 to 2025, it's an agreement for 230 gigawatts hour per year and the second phase for the remaining period up until 2025, is for a total amount of 650 gigawatt hours per year, which will be supplied by both renewable assets already under construction and new projects to be built. As of September 30, Diego de Almagro Power Plant battery storage system has conducted real-time signal testing.

Now please go to Slide #5 to review the main consolidated figures of the company. Consolidated EBITDA in the third quarter of this year reached $226 million, increasing 10% compared to the $205 million EBITDA in the third quarter of 2022. This increase is explained by a decrease in costs due to a higher hydroelectric generation and consequently, lower generation from thermal power plants during the quarter. Those effects were partially offset by, first, an increase in the cost of energy and power purchases in the spot market due to the higher average price improved and in second, lower revenue from the sale of energy and capacity in the spot market due to a lower average sale price in Chile.

The company recorded a profit of $124 million compared to the $81 million profit presented in the same quarter of last year, mainly due to a higher EBITDA and nonoperating income. This impact was partially offset by the higher tax expenses in this period. As of September 30, the company holds $1.2 billion of cash and net debt-to-EBITDA ratio is at 1.2x.

Now I will turn to Federico, who will speak about the main drivers of the third quarter of 2023 results.

[Federico Urgelles, executive]

Thank you, Miguel, and hello to everyone. Now please continue to Slide #7 for physical sales and generation balance analysis in Chile. Total generation of the period remained in line with third quarter of 2022. This generation level was mainly due to increased hydroelectric generation plus 773 gigawatt hour driven by better hydrology conditions, which offset a decrease in thermal generation, minus 764 gigawatt hour, particularly from coal, minus 496-kilowatt hour.

Physical sales during the quarter reached 3.2 terawatt hour, lower than the third quarter 2022, mainly due to lower physical sales to our unregulated clients primarily explained by reduced consumption among mining clients. This effect was partially offset by, first, increased sales in the spot market due to lower consumption by our unregulated clients during this quarter; and second, increase in physical sales to regulated clients, explained by the expiration of contracts between other generation companies and distribution companies, resulting in a higher load factor for the contracts are still in force.

Spot market balance during third quarter 2023 recorded net sales of 248 gigawatt hour compared to 195 gigawatt hour of net sales in third quarter 2022. This variation is mainly explained by the reduced consumption of unregulated clients mentioned earlier. Now please continue to Slide #8 to analyze the EBITDA from the generation business in Chile for the quarter. EBITDA Chile reached $177 million in the third quarter of 2023, increasing by 2% compared to the EBITDA of $180 million in the third quarter 2022 mainly due to lower operating income, partially offset by lower raw materials and fuel costs associated with reduced generation from gas and coal which, in turn, is explained by higher hydroelectric generation during the quarter.

Now please continue to Slide #9 for physical sales and generation balance analysis improved. Total generation of the period increased 2% compared to the third quarter 2022, reaching 1,197 gigawatt hours. This high generation is mainly explained because during third quarter of 2022, there was force unavailability of the plant due to turbine failures which meant that fixed thermal power plant was operating intermittently during the month of July and August in the third quarter of 2022.

Physical sales during this quarter reached 1,169 gigawatt hours, increasing by 2% compared to third quarter 2022. The higher physical sales are primarily explained by increased sales to unregulated clients due to the entry of new supply contracts. This effect was partially offset by lower spot market sales compared to third quarter 2022, mainly due to the increased commitment with the unregulated clients mentioned before. Spot market balance during the third quarter of 2023 recorded net sales of 355 gigawatt hour compared to net sales of 553 gigawatt hours, during third quarter of 2022, due to increased consumption by unregulated clients resulting from the entry of new contracts mentioned before.

Now please continue to Slide #10 to analyze the EBITDA in Peru for the third quarter 2023. EBITDA in Peru reached $49 million in third quarter 2023, recording a 98% increase compared to the EBITDA of $25 million recorded in third quarter 2022. This result is mainly explained by higher sales of energy and power in the spot market, as a result of the higher average sale price.

Now please continue to Slide #11 for the consolidated nonoperating income and net income analysis. Nonoperating income in third quarter 2023 recorded profits of $0.5 million, which compares to the loss of $34 million in third quarter 2022, mainly associated with: first, higher financial income due to the increase in interest rate during this quarter; and second, higher other profits mainly due to the income of $8.3 million corresponding to an insurance payment because of the Nehuenco II thermal power plant that occurred in January 2022.

The company recorded a profit of $118 million compared to the profit of $81 million in third quarter 2022. Mainly due to the higher EBITDA and nonoperating income mentioned above.

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

[Miguel Alarcón, executive]

Thank you, Federico. Regarding our growth opportunities in Chile, relevant updates for this quarter are as follows: Horizonte. As of the third quarter of 2023, 63% of the project was completed. Turbine assembly began reaching mechanical completion of 29 wind turbines by the end of the quarter. The construction of foundations has been completed and work on internal roads and turbine platforms is still in progress with an overall progress of 93% for civil works, substations, transmission lines and medium voltage networks. As well as 78% progress in electrical works.

In total, 407 main components have been unloaded at the wind turbine side. It's worth mentioning that we've experienced some challenges transporting oversized components from Puerto Angamos in Mejillones to the project due to the shortage of available police escorts for these transfers as stated in the regulation. Therefore, during this quarter, there has been progress with the possibility of implementing private escorts on a trial basis.

Diego de Almagro BESS. As of September 30, Diego de Almagro power plant's battery storage system has conducted real-time signal testing, which was essential for its certification and commercial operations. Currently is performing daily energy charging and injection operations, but awaits approval from the National Electric Coordinator for commercial operation.

For more information regarding our patent projects, please review our Earnings Report. This concludes Colbún's third quarter of 2023 Results Review. Thank you for listening.

And now we are open to answer your questions.

[Operator]

[Operator Instructions] Our first question comes from Alejandra Andrade from JPMorgan.

[Alejandra Andrade Carrillo, analyst]

I had a couple of questions. First, I wanted to get more color in terms of the regulatory environment and we've seen obviously headline and proposals to implement continuous kind of stabilization funds or that type of mechanism. If you could give us more color on that, it would be great.

Secondly, I just wanted to check in terms of CapEx, what you're expecting for the fourth quarter? And then specifically for Horizonte, can you specify how much you've spent to date and how much is still missing?

And then finally, on the new contracts that you shared, the minor contracts. I was just wondering, is that to replace other expiring contracts? Or should we think of that as a new additional volume in terms of contract?

[Federico Urgelles, executive]

Alejandra, I will answer your first question. So regarding the spec 2 extension discussions, there some discussions have been taking place between the Parliament and the Ministry of Energy currently regarding modifications to the PEGI law, right? And there are 3 key takeaways. The first one is an increase in the NPC fund currently is set in $1,900 million. The second one is an extension in the limit payment date from December 2032 to December 2035.

And the third one is the application of social electric subside for the most vulnerable clients. And this mechanism of how this bond will work is still very preliminary. So we are not able to give further details.

[Operator]

We have a question from Martín Arancet from Balanz.

[Miguel Alarcón, executive]

Sorry. So to wrap up before that, I think we were missing a couple of questions from Alejandra.

Regarding the second question, Alejandra, about the CapEx for Horizonte, the total capital spend [indiscernible] has been a little over $500 million [indiscernible]. Out of those $300 million roughly was spent in 2023. So with that, there's another a little over $200 million remaining for the fourth quarter of this year and for 2024.

And the final question regarding the new contract. I mean, it's always a combination, right? Because on one side, we have a relevant exploration of a contract with CGU. And this is basically the same amount that we are in some way contracting or recontracting with this new clients. Having said that, we do have a portfolio approach. So in a sense, we try to look at expirations all in one together. So it's not that we're replacing this particular contract with the new one. It's more like a portfolio point to have a balanced contracting position between our generation output and our PTA level.

[Operator]

Thank you, Alejandra, and apologies for that. So Martín, please, you have a question. Please go ahead.

[Martín Arancet, analyst]

Well, you were just mentioning your growth opportunities in Chile. I was wondering if is it a big concern, the problems in the transmission networks that might cause curtailment? Or do you think these problems are temporary and the system operator will be able to solve these issues via the expansion of new lines, use of batteries, tweaking the dispatch rules or something else?

And my second question is, what do you expect in terms of hydroelectric output and spot prices given the El Niño phenomenon. And when should we expect the more intense impact in that region?

[Miguel Alarcón, executive]

Miguel speaking. I didn't get the last part of your second question and maybe you can repeat after I answer the first one. Regarding transformation congestion, yes, we do see a number of challenges currently especially in the northern part of Chile that are [indiscernible] everyone in this call, I would say. Having said that, we do believe that most of those will be sold with the addition of this relevant new transmission line being built by a third party that should come in line around 2028 or a bit after that in terms of what they have declared so far.

I do think that, that transmission line should not be enough going forward because as I'm sure you know, there's relevant new capacity also being available in the northern part of Chile in the future. And because of that, there might be the need to further strengthen that transmission line.

I think your second question was regarding spot prices. As you know, we cannot give forecasts in terms of fee expectation and prices. What I can say is that we basically expect for the system to keep on operating at least in the next 1 or 2 months with the same combination of the relation output that we've seen in the last couple of months. And that should virtually maintain the spot market prices in the same levels they are today. I think there might be a final part of the question, which I did not get as I mentioned.

[Martín Arancet, analyst]

Yes. I was wondering the impact that El Niño could have in Peru in terms of hydro output or other spot prices that you as mentioned?

[Miguel Alarcón, executive]

So yes, so I have to say, right, because of some share, the minimum of the rain to seasonality in Peru is the opposite of Chile. So the rain system actually started officially in September and the 1st September, we did see a lot of dry conditions involved and that meant marginal costs were not well above 100-megawatt hours. There nowadays because rain fully expanded, we see a much more normalized situation with the spot market prices around $35 on average. Having said that, I think it's too early to call it dry or wet because we don't have enough visibility so far. So other one, we need to wait a bit to see how that plan unfolds in Peru.

[Operator]

So we have a question now from Fernan Gonzalez from BTG Pactual.

[Fernan Gonzalez, analyst]

Yes. I have 2 questions about Peru. You reported 0 spot market purchases in the quarter and yet you booked like $30 million of energy and capacity purchase costs. So I'm wondering how this so -- is this related perhaps to some delayed invoicing from the prior quarter? Or I really started to understand that?

And my second question is on the compensation that you mentioned in the last call about the extended maintenance of Fenix’ Power. Is there any progress in that negotiation with your supplier? If you could share some color on that, too.

[Miguel Alarcón, executive]

So sorry, but we cannot hear you properly. There might be some connection issues. So if you can maybe get closer to your microphone, and repeat both questions that would be great.

[Fernan Gonzalez, analyst]

Okay. Can you hear me well now?

[Miguel Alarcón, executive]

A bit better, I would say.

[Fernan Gonzalez, analyst]

Okay. So the thing is I'm wondering about the spot market. I mean, the energy and capacity purchases in Peru, you booked $33 billion in energy and capacity costs. But in terms of volume, you have no purchases in the spot market. So I'm wondering why that is.

And the second question was related to any compensation that you might get from the extended maintenance of Fenix’ Power in the second quarter.

[Miguel Alarcón, executive]

So regarding the spot market balance in Peru, as you know, Fernan, we credit our net sellers, so there might be just due to presentation that we presented that effect we're actually showing 0 purchases or in other words, a net seller position. Having said that, I think in this particular quarter, we did not have to purchase energy from the spot market because the plant was operational throughout the whole quarter. And I didn't get your second question.

[Fernan Gonzalez, analyst]

Well, the second one is about any financial compensation you might get from the company that made the maintenance of Fenix’s Power in the second quarter that was overextended?

[Miguel Alarcón, executive]

Yes. Sorry for that. So we keep in conversations with them, no news on that end. I think you might recall that we mentioned last time that getting a compensation is actually really hard because although we still believe that they were responsible for most of the delays leading to that to actually put that in a complete way and, let's say, in relation to that binding in contracts and agreements, it's actually really hard to achieve. So we keep on engaging in discussions with them, but no news so far.

[Operator]

[Operator Instructions] We have a text question from Martin Zetzsche from Fundamental Capital. He asks, why did the average price on unregulated contracts decreased 15% versus the last quarter? So it went from around USD 120 to $100 this quarter.

[Miguel Alarcón, executive]

So basically, the reason is that as you may know, we have [indiscernible] our people contract, some of them are linked to CPI and [indiscernible] by levels to cost influence, particularly, we've seen a downward trend in fossil fuel prices that in turn explains the reduction in the PPA prices, especially in the contracts related to those prices. It's as simple as that.

[Operator]

Understood. We have another text question from Carlos Hinojosa from LarrainVial. Congratulation for the results. Just some quick questions so I can adjust my numbers. Number one, gas cost per megawatt hour was around $116. What's the main reason for this increase? And what level should we expect going forward? I guess that was answered just now. Number two, can you give us more color in the decrease in unregulated revenues, particularly what indexes are the main ones moving the prices so low quarter-on-quarter?

[Miguel Alarcón, executive]

Basically, regarding gas prices, we've seen a decrease in the gas prices, as you may recall that we explained this in the past. In our case, we have a long-term gas contract with [indiscernible] that is, in turn, linked to brand prices. It's a formula based on them. So since we have seen, as I already mentioned in my previous answer, fossil fuel prices, particularly [indiscernible] going down over the last year, we do see that also reflected in the cost per unit in gas prices, in which we basically saw something in the way of $75 per megawatt hour for natural gas.

Going forward, I would say that we should expect if the brand prices will maintain within the same level also the same prices for LNG.

[Operator]

Okay. Thank you. We have another tax question. This one is from Eric [indiscernible] from [indiscernible]. How will the company finance the new renewables projects that support the new renewable contract that was signed this quarter? Will it be from free cash flows.

[Federico Urgelles, executive]

Federico here. Well, we currently hold a $1 billion cash position, and we expect to use that around for our expansion plan in -- to cover one part of our expansion plan. And we -- as always been doing, we will finance our plan through corporate financing, which means that probably with international issuance or a subscription of a bank loan. Because -- well, it's the way that we've been doing this and basically how we feel comfortable and the way that we think that we will keep doing in the future.

[Operator]

[Operator Instructions] Okay. I'm not seeing any more questions. So perhaps I can hand back to Miguel and the team for closing remarks.

[Miguel Alarcón, executive]

Okay. So thank you, everyone, for joining us again in this conference call for our third quarter results. Hopefully you'll have a great weekend. And hope to see you soon. Goodbye.

[Operator]

Thank you. That concludes the call for today. Thank you, and have a nice day.