Colbun SA

SGO:COLBUN

Earnings Call Transcript 2020-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Colbún Fourth Quarter 2020 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Sebastián Moraga. Sir, the floor is yours.

[Sebastián Moraga, executive]

Hello to everyone, and welcome to Colbún's Fourth Quarter 2020 Earnings Review Call. My name is Sebastián Moraga. I am this company's CFO. And joining me today are Miguel Alarcón, our Deputy CFO; and Soledad Errázuriz and Isidora Zaldívar from our Investor Relations team.

I hope that you have received our earnings report and an earnings review presentation that we have prepared to complement the analysis of our figures. Otherwise, you can download them at the Investors section of our website.

Our agenda for today on Slide 3 is as follows. We will begin talking about the highlights of this year, then to analyze in details this year's 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 and 5 to review the highlights of this year. Regarding the COVID-19 pandemic contingency, and as we have been informing the last quarters, the company's overall operations and, specifically, its power plants keep operating normally, taking into consideration the protection and health of our personnel, suppliers and our surrounding communities.

Regarding the impact of COVID-19 on energy demand, it is worth mentioning that in Chile, it increased approximately 1.6% during the fourth quarter of 2020 compared to last year, and 0.4% during 2020 compared to 2019. While in Peru, there was a decrease of approximately 0.3% in the last quarter and 7% during the whole year 2020.

During 2020, Colbún continued participating in various energy bidding processes. This year, new energy contracts were signed with 52 clients for almost 700-gigawatt hour. Among the main contracts signed are the renewal of energy supply agreements with Walmart, Sonda, Grupo Camanchaca and Concha y Toro Winery. On March, Colbún issued a new bond series in international markets for $500 million with a 10-year maturity, obtaining a 3.3% yield. Of the obtained funds, $343 million were used to partially refinance the $500 million bond of the same type that matures in 2024.

On June 2020, the Board of Directors approved the construction of 2 PV projects. First, Diego de Almagro Sur I and II for 230 megawatts of installed capacity located in the Atacama Region. Construction started on the third quarter of last year, and the commissioning is estimated for the first quarter of 2022. Total investment approved for this project is $147 million.

Second, Machicura of 9 megawatts, which is located the Maule region. Construction started in the third quarter of last year, and the commissioning is estimated for the third quarter of this year. Total investment approved for this project is $7 million.

In September of this year, Colbún announced the acquisition 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. Today, Efizity holds a diversified client portfolio in the industrial, mining, real estate, retail, educational, hospitality and health sectors, among others.

During the third quarter, Colbún was selected to list in the Dow Jones Sustainability Index Chile for the fifth consecutive year and for the fourth year in the Dow Jones Pacific Alliance ranking. In addition, the company led to the Informe Reporta ranking, standing out as a company that best reports information to the market.

Regarding the company's transmission assets. In September, the Board of Directors agreed to carry out a process that involves the 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 all the shares of its subsidiary, Colbún Transmission. To date, the mentioned process continues to progress in accordance with the time line estimated by the company.

On January 21 of this year, Colbún reached an agreement with Goldman Sachs, pursuant to which the company will gradually sell the accounts receivables generated by the tariff stabilization mechanism under the Law Number 21,185 for a total amount of approximately $95 million. Additionally, Colbún also reached an agreement with the IDB Bank, pursuant to incorporate the mentioned institution in the financing of the acquisition for $42 million of the aforementioned accounts receivables.

Now please go to Slide #6 to review the main consolidated figures of the company. Consolidated EBITDA for this year reached $683 million, decreasing 2% compared to the $697 million in 2019, mainly explained by the lower operating income recorded during the period, which was offset mainly due to the lower gas consumptions in Chile. Controller's profit reached $163 million compared with the $203 million profits in 2019, mainly explained by an accounting record of an impairment provision at the Fenix subsidiary in Peru for a net of deferred taxes amount of $127 million.

This was to reflect the lower recoverable amount compared to the asset's book value due to the lower marginal costs and energy prices observed during the last years, driven by lower-than-expected growth rates, explained by a slowdown in economic activity, delays in regulatory matters and exogenous events such as political and natural disasters. These conditions intensified during 2020 as a result of the COVID-19 impact, resulting in a 7% decrease in energy demand compared to the year 2019. This has deepened an oversupply situation in the energy market. And it is likely that restoring the balance between supply and demand will take more time than previously considered. It is worth mentioning that considering Colbún's share in Fenix of 51%, the impact of the mentioned provision on the profits attributable to the owners of the parent company amounts to $65 million.

Financial investments totalized $967 million, and our net debt-to-EBITDA ratio is at 1.2x. The average long-term financial debt interest rate in U.S. dollars is 4%.

Colbún has a total installed capacity of 3,800 megawatts comprised of almost 2,200 megawatts in thermal units, 1,600 in hybrid units, and 9 megas from one PV unit. In terms of transmission assets, it owns almost 900 kilometers of transmission lines and 27 substations.

Now I will turn to Isidora, who will speak about the main drivers of 2020 results.

[Isidora Zaldívar, executive]

Thank you, Sebastián, and hello to everyone. Now please continue to Slide 8 for physical sales and generation balance analysis in Chile. Total generation of the period increased 1% compared to 2019, reaching 12.1 terawatt hours, mainly explained by higher hydro generation as a result of improved hydrological conditions and to a higher coal generation, mainly due to the unavailability of Santa Maria thermoelectric power plant during last year. These effects were partially offset by a lower gas and wind generation. Physical sales during 2020 reached 12.2 terawatt hours, 1% lower than last year due to lower sales to regulated clients, mainly explained by, one, the expiration of the contract with SAESA; and two, a lower energy demand driven by the State of Emergency. These effects were partially offset by higher sales to unregulated clients and to the spot market. Spot market balance during this year recorded net sales for 1.5 terawatt hours, increasing 81% compared to 2019, mainly explained by the higher generation of the year.

Now please continue to Slide 9 to analyze the EBITDA from the generation business in Chile for the year. EBITDA of the generation business in Chile reached $551 million in 2020, in line with the EBITDA recorded as of December 2019.

Now please continue to Slide 10 to analyze the EBITDA from the transmission business for this year. EBITDA of the transmission business reached $67 million this year, decreasing 7% compared to the $72 million EBITDA recorded last year, driven by the lower income recorded compared to last year, mainly explained by, one, the change in the discount rate that began to apply as of January '20, which changed from 10% before taxes to 7% after taxes; and two, the reclassification of some zonal assets announced by the regulators.

Now please continue to Slide 11 for physical sales and generation balance analysis in Peru. Total generation of the period decreased 23% compared to 2019, reaching 2.9 terawatt hours due to, one, the COES request to stop operating during part of the second and third quarter; and two, the GT12 gas turbine repair and its maintenance performed during the first and the third quarter of this year.

Physical sales during 2020 reached 3.3 terawatt hours, decreasing 17% compared to last year. The decrease is mainly explained by, one, lower physical sales to customer under contracts, explained by the State of Emergency decreed by the Peruvian Government due to the COVID-19 pandemic; and two, lower sales to the spot market due to the lower generation during the year, driven by the COES request to stop operating during part of the second and third quarter, and two, the GT12 gas turbine repair and the maintenances performed during the first and third quarter of this year.

Spot market balance during 2020 recorded net sales of 307 gigawatt hours, compared to the net sales of 756 gigawatt hour during last year due to the lower generation of the period.

Now please continue to Slide 12 to analyze the EBITDA in Peru for this year. EBITDA in Peru reached $65 million, 7% lower than the $70 million recorded last year, mainly explained by the lower operating income recorded during the year, considering that last year included a nonrecurring income of $6 million. This was partially offset by lower raw materials and consumables used cost.

Now please continue to Slide 13 for the consolidated nonoperating income and net income analysis. Nonoperating income in 2020 presented losses of $304 million, higher than the losses of $176 million last year. The higher losses are mainly explained by, one, an accounting record of an impairment provision at Fenix previously explained; and two, the lower financial income earned driven by the lower investment rate of cash surpluses at local and international level. The company recorded in 2020 a controller's profit of $163 million, 20% lower than the $203 million profit of last year. The lower profit is mainly explained by the impairment provision at Fenix previously explained.

Now continuing with this conference call, please go to Slide #15, where Sebastián will give you an update on the status of growth opportunities.

[Sebastián Moraga, executive]

Thank you, Isidora. Regarding our growth opportunities in Chile, we have focused our growth in renewables, solar, wind and hydro based on 3 pillars. First, developing a pipeline of projects. Regarding the incorporation of renewables energy from variable sources, up to this date, Colbún has been able to complete a portfolio of locations for wind and solar projects, which are in different stages of studies and development. Horizonte, a wind farm of 607 megawatts located in the Atacama Region; Diego de Almagro Sur I and II, which are PV projects of an overall capacity of 230 megas located in the Atacama Region; Machicura, the PV project of 9 megas located in the Maule region; Inti Pacha, a PV project of 486 mega located in Antofagasta region; Jardín Solar, a PV project of 537 megas located in the Tarapacá region; Los Junquillos, a wind farm of 265 megas located in Biobío region.

Additionally, at the end of quarter, Colbún holds a portfolio of locations for our wind and solar projects, which are in early stages of development. For more details on this slide, you can refer to the latest earnings reports available at our website.

Second, the company does not rule out the purchase of renewable assets in operation. Finally, the third pillar of our growth in renewables is acquiring energy from third parties.

Regarding our 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 $84 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 fourth quarter of 2020 results review. Thanks for listening, and now we are open to answer your questions.

[Operator]

[Operator Instructions] We do have a question coming from Tomás Laymuns.

[Tomás Laymuns, analyst]

This is Tomás from Barings. I wanted to ask about the impairment on Fenix. Just trying to understand if the implicit support that you give Fenix will change given this impairment that you're doing?

[Miguel Alarcón, executive]

Tomás, Miguel. We don't expect any change in the support we are providing from Colbún or the other shareholders to Fenix because of the impairment. As I'm sure you know, the impairment, it's basically an accounting issue due to IFRS 36, in which you have to run a test and because of the test and the difference between the carrying value and this year calculation, that leads to a potential impairment. But again, we don't expect any changes in the support we've been showing so far to that affiliate company.

[Tomás Laymuns, analyst]

That's great. And can you also remind me what's the -- like the credit line that you have given to Fenix? And how -- for how many years of debt service is that -- is it will cover?

[Miguel Alarcón, executive]

It's a cash support agreement that basically covers a 3-year period of debt payments, capital and interest in the -- let's say, the approximate amount is close to $110 million, in total.

[Operator]

[Operator Instructions] We currently have no questions in the queue. Thank you. Do you have any closing comments you'd like to finish with?

[Sebastián Moraga, executive]

Yes. Hello, everyone. This is Sebastián Moraga. So if there are no further questions, I would like to thank everyone for joining this conference call. And we hope to see everyone again in the next quarter review. So again, thanks. And for those who are going out on vacation, especially in Chile, I wish you all very happy holidays. So goodbye, everyone. Take care.

[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.