Colbun SA

SGO:COLBUN

Earnings Call Transcript 2021-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Colbún Fourth Quarter 2021 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 2021 Earnings Review Call. My name is Sebastián Moraga. I am the company's CFO. And joining me today is Miguel Alarcón, our Deputy CFO; 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 in our website.

Agenda for today on Slide 3 is as follows: We will begin talking about the highlights of this year, then to 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 #5 and #6 to review the highlights of this year. Regarding the COVID-19 pandemic contingency, the company's power plants continued operating normally, and Colbún continues to take actions considering 2 priority focuses: first, to protect and health of personnel, collaborators, suppliers, and our surrounding communities; and second, to ensure the continuity and security of the energy supply. Within the framework of an agreement signed with Goldman Sachs IDB Invest on Alliance during the first half of 2021, Colbún sold accounts receivables originated by the energy price stabilization mechanism to regulated clients for a total face value of $96 million. The difference between the nominal amount of the balances sold and the purchase price was recorded as other losses for the year. The agreement contemplates carrying out successive sales of the accounts receivable that originate by virtue of the aforementioned law.

On September 30, the sale of all the shares of Colbún Transmission to Alfa Desarrollo was executed. The final sales price was $1,185 million, with -- which the effect on income before taxes amounted to $830 million approximately. As a result of the extraordinary income received from the sale of Colbún Transmission on the company's liquidity position, on October 12, the company distributed dividends for $1,000 million. This payment is comprised of a provisional dividend for $250 million charged to 2021 profits and an eventual dividend charged to the profits of previous fiscal years for an amount of $750 million.

Regarding the progress in the development of our projects during the year, the following stand out: Diego de Almagro Sur PV projects 1 and 2 for 232 megawatts. It presents progress of 93% according to budget. As of December '21, the project is progressively injecting energy into the system. The commissioning of the entire part is scheduled for the first quarter of 2022. The investment approved for this project reached $147 million. Horizonte wind project, which on September 21, the Board of Directors approved this construction, which began during the last quarter of 2021. Investment for this project amounts to $850 million, and we estimate it will start injecting energy to the system in the fourth quarter of 2023, and the entry into operation of the last wind turbine is estimated towards the last quarter of 2024. Jardin Solar PV project, on September 21, its environmental qualification resolution was updated. This project has not yet received Board approval to begin construction.

Colbún has other renewable projects in its portfolio for more than 1,800 megas in various stages of development. On October 14, Colbún issued its first green bond in international markets for $600 million with a 10-year maturity obtaining a coupon rate of 3,15% with a yield of 3,17%. The funds will be used to finance renewable energy projects eligible in accordance with our green financing framework.

Colbún was selected to list for the sixth consecutive year in the Dow Jones Sustainability Index Chile, and for the fifth year in the Dow Jones Pacific Alliance Index. Also, it obtained the second place for its 2020 integrated annual report by the Informe Reporta, which evaluates the information flow that companies give to them annually.

In November, 2021 and in the context of the annual review of provisions in order to assess the application of impairments in accordance with IFRS standards, an impairment provision was recorded on certain assets for an amount net of deferred taxes for an approximate value of $102 million. These include a provision for impairment of approximately $100 million for the San Pedro Hydro project, which continues with its environmental processing process. On December 30, 2021, Colbún sold its full participation in Transmisora Eléctrica de Quillota to APG Energy and Infra Investments Chile and Celeo Redes Chile expansions. The sale price for the 50% associated to Colbún's participation in the company was $14 million. The sale generated a profit before taxes for Colbún of approximately $12 million.

Now please go to Slide #6 to review the subsequent highlights. In December '21, Colbún announced the total prepayment of its outstanding bonds in the local debt capital markets, Series F and I, which was executed on January 24, 2022. The total current notional amount of those bonds amounted to UF 4.6 million. As of December 21, a provision was recorded for the accounting costs associated with the prepayment, which had an effect net of taxes on the year's result of $13 million.

Now please go to Slide #7 to review the main consolidated figures of the company. Consolidated EBITDA for this year reached $520 million, decreasing 24% compared to the $683 million EBITDA in 2020. The decrease is mainly explained by a significantly lower hydro generation, as a consequence of the extreme drought that affects Chile, which was replaced by higher gas generation, increasing the company's variable costs and higher purchases in the spot market, given higher system marginal costs driven by higher fossil fuel prices on international markets.

The company recorded a profit of $540 million compared to the loss of $90 million in 2020, mainly explained by the extraordinary effect on results of Colbún Transmission sales. The sale price amounted to $1,185 million, with which the effect on results before taxes of this transaction amounted to $830 million. This effect was partially offset by the provisions for impairment recorded, previously explained. As of December 31, the company holds $1,400 million of cash and net debt-to-EBITDA ratio is at 1.7x.

Now I will turn to Isidora, who will speak about the main drivers of fourth quarter 2021 results.

[Isidora Zaldívar, executive]

Thank you, Sebastián, and hello to everyone. Now please continue to Slide #9. For physical sales and generation balance analysis in Chile. Total generation of the period increased 3% compared to last quarter, mainly explained by higher gas and diesel generation due to a higher economic dispatch and system recovery. Variable renewable energy generation also increased, mainly driven by the entry into force of an energy purchase agreement with Total SunPower in August 2021. The effects were partially offset by lower hydroelectric generation, mainly due to the drier hydrological conditions during this quarter.

Physical sales during the quarter reached 2.6 terawatt hours, 4% lower than last quarter, mainly explained by lower sales to unregulated clients, given the expiration of Anglo American contract last year, partially offset by higher sales to the spot market.

Good market balance during this quarter, recorded net sales of 74 gigawatt hours compared to the net purchases of 206 -- 246 gigawatt hour recorded last quarter. The variation is mainly explained by the higher generation during the quarter.

Now please continue to Slide #10. To analyze the EBITDA from the generation balance in Chile for the quarter. EBITDA of the generation business in Chile reached $146 million in this quarter, decreasing 4% compared to last quarter. The variation is mainly explained by higher gas and diesel consumption costs due to a higher generation with those fields; two, a higher coal consumption driven by a higher average purchase rate of the fuel; and three, higher other expenses by nature, associated with the lower comparative base considering that the last quarter, third-party services, training, travel, among others, were mostly suspended as a result of the pandemic.

Now please continue to Slide #11 for physical sales and generation balance in Peru. Total generation of the period decreased 6% compared to last quarter, reaching 0.9 terawatt hours, mainly driven by the lower economic dispatch and funds availability. Physical sales during this quarter reached 0.9 terawatt hours, decreasing 6% compared to last year, mainly explained by lower sales to the spot market as a result of a lower economic dispatch of gas power plants in the Peruvian system, and in a more sense, the lower availability of the plant during the quarter. This effect were partially offset by higher sales to unregulated clients due to new contract signed in this segment. Spot market balance during this quarter recorded net sales of 0.4 terawatt hours compared to 0.5 terawatt hours during the same quarter of the previous year due to the lower generation recorded during this quarter.

Now please continue to Slide #12 to analyze the EBITDA in Peru for this quarter. EBITDA in Peru reached $18 million this quarter, 12% higher than the EBITDA of $16 million recorded last year, mainly due to: one, of the higher operating income explained by higher sales in the spot market as a result of a higher average sales price; and two, lower business induction because during the last quarter, [indiscernible] generated with that fuel, while PGP, [indiscernible] that restricted the dispatch of gas.

Now please continue to Slide #13 to the consolidated non-operating income and net income analysis. Non-operating income this quarter recorded losses of $182 million compared to the losses of $207 million in the last quarter. The lower losses are mainly explained by a lower impairment provision recorded on individual assets. During this quarter, provisions were recorded for an amount net of deferred taxes of $102 million for this concept, of which $100 million corresponds to the San Pedro hydroelectric projects. This project continued with the environmental assessment process.

On the other hand, during the last year, an accounting impairment provision was recorded in Fenix Power in Peru for an amount net of the deferred taxes of $127 million. The company recorded a loss of $52 million compared to the loss of $63 million last year, mainly explained by the lower impairment provisions recorded.

Now continuing with this conference call, please go to Slide #15 for an update on the schedule of our growth opportunities. Regarding our growth opportunities in Chile, we have focused our growth in renewables, hydro, solar, and wind, based on 3 pillars. The first one is developing a pipeline of project. Regarding the incorporation of renewable energy from variable service, after this date, Colbún has been able to complete a portfolio of locations for wind and solar projects, which are in different stages of the studies and development. On the construction stage, the first one is Horizonte, a wind farm of 778 megawatts located in Atacama Region. The second one is Diego de Almagro Sur I and II, 2 PV projects of an overall capacity of 230-megawatt hour located in Atacama Region. And the last one is Machicura, a PV project of 9-megawatt hours located in Maule Region.

In Environmental, duly approved we have Inti Pacha 1, 2 and 3, a PV project of 250-megawatt hours per day located in Antofagasta region; and Jardin Solar, a PV project of 540-megawatt hours located in Tarapaca.

In feasibility stage, we have the Los Junquillos, a wind farm of 360 megawatts located in the Biobío Region. Then we have Celda Solar, a PV project of 156 megawatts located in Arica Region. Additionally, at the end of this quarter, Colbún has all portfolio application for 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.

The second pillar is that 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. 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.

These concludes Colbún's fourth quarter 2021 results review. Thank you for listening. And now we are open to answer your questions.

[Operator]

[Operator Instructions] Your first question is coming from Alejandra Andrade from JPMorgan.

[Alejandra Andrade Carrillo, analyst]

I had two questions actually. First, I don't know if you can give a little bit more color on the write-off given that this was a write-off mainly on a project that hadn't even began construction. So I'm just wondering what happened there? And then also, I don't know if you have CapEx guidance for 2022 or if you could just give us a little bit more color on your expectations for CapEx in '22. And that's it for me.

[Miguel Alarcón, executive]

Alejandra, this is Miguel. Thank you for your questions. So regarding your first question, the write-off, it's a typical process we are complied to run according to IFRS standards. Because of that, we compare the current value -- book value of our -- all of our assets on our -- also our projects against an NPV, taking into account, future cash flows, both in terms of investment or CapEx, and of course, the expected revenues within those projects or the units. And in that process, in this case, we had an investment amount, especially for the San Pedro project, which we believed in some way did not reflect the NPV value -- the adjusted NPV value once taken into account, again, additional investments and future cash flows. And for that reason, again, this is actually an accounting test, we decided to perform that impairment provision. It is a provision because then, you could restore it if things were to change in the following years.

You must also recall that this project, it has a long date, a long history in Colbún. It began in 2008. We built it for about 2 years and then stopped construction. So we actually -- what we impaired the whole amount is the amount invested within those 2 years from '08 to '10.

Yes. And regarding your second question, I would say that on one side, you have, of course, the recurring maintenance CapEx. And we've always said that, that's a stable but it's close to, rough number to $60 million on average along the years. And basically, all we have for this year up to this point is mainly Horizonte, which you know it's already approved. It was approved last year in the third quarter. And for this year, that takes us close to $170 million, roughly speaking, of course.

And there's, of course, the final portion of the Diego de Almagro project, which we expect to commissioned in this quarter, first quarter of 2022. And that's another, let's say, $25 million. So all in all, I would say, a rough estimate of $200 million for those 2 projects in addition to the maintenance CapEx.

[Operator]

Your next question is coming from Andrew McCarthy from Credicorp Capital.

[Alexander Varschavsky Páez, analyst]

My first question, I just wanted to follow up a little bit there on Alejandra's question regarding the CapEx, but it's more broadly trying to think about sort of the, sort of the capital allocation decisions you might be looking to make during this year. Can you give us the...

[Miguel Alarcón, executive]

Andrew, sorry to interrupt. But we have noise problem, hearing you. Can you speak louder, please, if possible?

[Alexander Varschavsky Páez, analyst]

Yes, certainly. Let me try and speak louder. Thanks, Miguel.

[Miguel Alarcón, executive]

That's better.

[Alexander Varschavsky Páez, analyst]

Is that better? Great. Okay, fantastic. So as I was saying, I just wanted to follow up on the question on the CapEx budget for 2022. You talked there about -- I count it as a $260 million approx of CapEx for this year. Just trying to get a sense for how to think about that with your -- how you think about indebtedness and where you feel comfortable and where you wouldn't feel comfortable maybe in terms of not crossing a certain net debt-to-EBITDA threshold.

And then just trying to tie that back into the decisions you might be looking into in terms of dividend payments this year. Any color you can help us out with there would be really helpful. That will be my first question. Maybe we can go out first.

[Miguel Alarcón, executive]

Okay. Okay, Andrew. Thank you. So I would say the following. First of all, you do recall that during the last 3 months, I would say, were gone to decisions affecting our debt and cash balance. On one side, we issued $600 million in international markets, just to, I would say, prefund a part of the expansion CapEx we are now discussing. On the other side, within those $600 million, we took $200 million to prepay local debt, which we believe was in some way inefficient in terms of duration, and comparatively it had a higher interest rate that the rest of the debt we currently hold.

So with that, we ended up, I would say, our year on a net debt-to-EBITDA, CAGR close to 1.7x, I think that's the figure. And that's, I think, something that we, in some way, plan to carry in the future. In other words, I don't foresee any additional debt activity in the sense of trying to get a higher cash portion. While, at the same time, we've always cared a lot as we explained in the past for our rating. I think rating is a key consideration for thinking about debt metrics going forward. We, of course, do not have a specific target we plan to follow. But I would say that we are comfortable within the current international rating which we hold.

In terms of dividends, I cannot say a lot because you have to remember, Andrew, that we already distributed, I would say, most of the amount we are required to based on our dividend policy, which is 50% of net income. We ended up the year with a total profit close to $540 million, and we distributed against 2021 results, $250 million, which is, again, about the same figure we should distribute within the dividend policy approved. The rest is up to the shareholders' meeting later in April to this item.

[Alexander Varschavsky Páez, analyst]

That's really helpful. And then my second question, I was just trying to -- I'll just speak up a bit. I'm just trying to gauge a little bit the -- some of the -- maybe the protections you have heading into this year. Pretty difficult, obviously, operating conditions in Chile at the moment with the weak hydrology, high international fuel prices, et cetera. So just trying to gauge a little bit. In the fourth quarter, we saw the cost of gas you're importing from Argentina seemed fairly low relative to sort of international prices.

So just trying to understand a little bit how you may be expecting those prices to evolve between now and April. And then if you're seeing any potential maybe now also for additional supplies of gas from Argentina, maybe during the second quarter and the third quarter of the year.

And then the other question's sort of related to sort of protections or being a little bit shielded from the tough operating environment. We also saw -- you had quite a good impact from the backup PPAs in the fourth quarter, especially the new one with Total SunPower. Can you maybe give us a bit of an idea of how much in terms of gigawatt hours of backup PPAs we should expect you to be able to sort of buy energy from during the course of this year?

[Isidora Zaldívar, executive]

Andrew, this is Isidora. So as we have done before, I think that our best protection or our best hedge in hydrology is to have signed contracts with gas. And in terms of that, we have a term contracts for the next semester. In one side, we have signed contract with Argentinian gas until April, and we also will have our long-term contract with for the first half of the year. And together, these 2 contracts allow us to meet the need for gas for the whole generation of our gas-fired power plants.

I don't know -- do you have another question that I don't remember?

[Alexander Varschavsky Páez, analyst]

I was just trying to follow up. Sorry about that. The other question was just on the backup PPAs, whether you could provide any color there on the volumes. We saw an important rise in those in the fourth quarter, which I think was really helpful. Just trying to gauge how much we should be expecting from that from -- during 2022, please?

[Isidora Zaldívar, executive]

Yes, of course. In one side, we have the expiration of our regulated clients for around 1-terawatt hour; and in the other side, we have the entry of BHP contract in January for 3-terawatt hour per year. I think that's the main changes.

[Alexander Varschavsky Páez, analyst]

I'm sorry, the 1-terawatt hour, Isidora, was to do with what?

[Isidora Zaldívar, executive]

Regulated clients.

[Alexander Varschavsky Páez, analyst]

Okay. And just in terms of the energy that you're buying from other generators. Just trying to understand because you had the Total SunPower, I think, was about 125, 150 gigawatt hours in the fourth quarter. I think you all had some purchases from Acciona. I'm just trying to understand that total for this year.

[Isidora Zaldívar, executive]

Sorry, sorry, I understand about the total sales, not the purchase of energy. So for the next year, the figure will be very similar to the last quarter of last year because we have the Total SunPower energy purchases and also the Punta Palmeras energy purchases.

[Operator]

[Operator Instructions] Thank you. There are no further questions in the queue. I will now hand the conference back to our host for closing remarks. Please go ahead.

[Miguel Alarcón, executive]

Okay. So thank you very much for joining us. Sorry.

[Sebastián Moraga, executive]

Go Miguel, please.

[Miguel Alarcón, executive]

Thank you, Sebastián. I was just saying, thank you again for joining us for this conference call. Hopefully, we've been able to answer all of your questions, and see you soon for the first quarter results for 2022. Have a great weekend. Bye-bye.