Colbun SA

SGO:COLBUN

Earnings Call Analysis

Colbún's 2023 Results Reflect Diverse Challenges

In 2023, Colbún experienced operational and commercial highs and lows. The company sustained operational setbacks with extended maintenance at Fenix Power and a fire at Nehuenco Complex Unit 1, yet effectively managed adverse weather impacts. Dividend payouts amounted to $223 million for 2022 and $170 million provisional for 2023. Notably, $116 million was gained from closing the sale of Colbún Transmisión S.A. The company secured significant energy sales contracts in Chile and Peru, totaling notable gigawatts over multi-year periods. Financially, EBITDA fell by 6% to $714 million due to lower spot market sales in Chile and increased raw material costs in Peru, despite a year-over-year profit rise from $311 million to $404 million, buoyed by the sale of Colbún Transmisión. The firm closed with robust cash reserves and a net debt-to-EBITDA ratio of 1.5x.

Fourth Quarter 2023 Earnings Summary

During the fourth quarter earnings call of Colbún, CFO Miguel Alarcon led the discussion, which focused on a detailed analysis of the year's performance and an update on growth opportunities. The company saw a significant decrease in EBITDA to $714 million, a 6% drop compared to the previous year, primarily due to lower energy and capacity sales in the Chilean spot market and higher costs in Peru.

Dividend Distribution and Sales Contracts

Colbún confirmed dividend distributions of $139 million, which is consistent with its policy of distributing 50% of profits. In terms of sales contracts, the company signed considerable agreements in Chile and Peru expected to boost future growth, notably a supply contract with Compañía Minera Doña Inés de Collahuasi for 650 gigawatt hours per year for 12 years starting in 2024, and in Peru, a significant contract with Compañía Minera Volcan for 114 megawatts per year for 10 years starting from February 2024.

Operational Challenges and Maintenance Overviews

Operational challenges such as a fire at the Nehuenco Complex and various weather events in Chile have affected production. However, the company has managed to navigate these effectively. Fenix Power underwent a 70-day scheduled maintenance, and Unit 1 of the Nehuenco Complex has resumed operations following maintenance work due to a fire.

Investments in Renewable Energy

Colbún is actively investing in renewable energy projects, such as the Horizonte wind project, which reached 76% progress by the end of the year. The company also aims to install a battery storage system in the Diego de Almagro power plant to improve operational efficiency. In Peru, the company's portfolio includes a planned renewable energy capacity of around 900 megawatts by 2030, indicating a strategic commitment to green energy.

Outlook and Future Guidance

Although the company does not provide specific future guidance, they have indicated that they do not expect any significant operational issues with power plants in Chile and Peru in the near term. The company expects both plants to run efficiently throughout 2024. Additionally, executives dismissed concerns about an increase in fossil fuel costs as a nonrecurring item, suggesting more stable costs moving forward. As for CapEx, significant investments are expected in the development of the Horizonte wind farm, totaling around $900 million, of which $600 million has already been utilized.

Earnings Call Transcript 2023-Q4

[Miguel Alarcón, executive]

Hello to everyone, and welcome to Colbún's Fourth Quarter 2023 Earnings Review Call. My name is Miguel Alarcon, I am the company's CFO. Joining me today are Soledad Errázuriz, [Finance 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 from the Investors section of our website.

The agenda for today on Slide 3 is as follows: We will begin talking about the highlights of this year to then analyze in detail this quarter'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 to review the highlights of this year. First, regarding the operation of our power plants. During the second quarter, Fenix Power carried out its scheduled major maintenance, which extended for 70 days.

On January 20, 2024, Unit 1 of the Nehuenco Complex restarted operations after the unit's fire on August 4, 2023, while it was undergoing major maintenance.

Throughout 2023, the company's operations in Chile faced various weather events, that affected the entire country. However, the effective communication and the timely and constant engagement strategy with the different public entities and respective communities allowed mitigating these contingencies effects.

Second, with respect to the dividend distribution during the year. On May 12, a dividend payment of $139 million was recorded. This payment is comprised of (1) a definitive dividend of $64 million, which, together with the provisional dividend paid in December 2022, amounting to $84 million, reached $148 million, equivalent to 50% of the profit according to the group's policy. And (2) an additional dividend, charged to the previous fiscal year profits of $75 million. The total dividends distribution charged to the 2022 fiscal year amounted to $223 million. On December 15, a payment of provisional dividend of $170 million was recorded, charged to the profit for the year.

Third, on April 24, the company received $116 million from Alfa Desarrollo SpA corresponding to the final price adjustment associated with the Colbún Transmisión S.A.

Finally, regarding our commercial strategy. During 2023, energy sales contracts were signed in Chile with 76 clients for an annual total of 1,448 gigawatts hour. Among the main contracts signed, are the 100% renewable supply contract for Compañía Minera Doña Inés de Collahuasi, for a total of up to 650 gigawatts hours per year for 12 years starting from January 2024 onwards and the supply contract for Aguas Pacifico, for a total of up to 280 gigawatts hour per year for 10 years starting from January 2024.

In Peru, we were awarded supply contract with 2 clients for 36e megawatts per year. The supply contract with Compañía Minera Volcan stands out, providing up to a total of 114 megawatts per year for 10 years starting from February 2024 onwards. Additionally, it is worth noting the commencement of the supply contract with Generadora Eléctrica Inland for 121 megawatts for the period January to December 2023.

Now please go to Slide #5 to review the main consolidated figures of the year. Consolidated EBITDA for 2023 reached $714 million, decreasing 6% compared to $763 million EBITDA during 2022. Due to, first, lower EBITDA in Chile, primarily explained by a decline in operating income resulting from lower energy and capacity sales in the spot market, partially offset by a decrease in diesel and gas consumption due to a lower generation with these fuels. And second, higher raw material has suffered huge costs in Peru, mainly due to the increase in energy and capacity purchases in the spot market, primarily due to the lower generation throughout the year and the entry into force of new contracts with unregulated clients.

The company reported a profit for the year of $404 million compared to $311 million profit recorded in 2022, mainly due to the final price adjustment associated with the Colbún with the sale of Colbún Transmisió S.A. As of December 31, the company holds $1,031 million of cash and net debt-to-EBITDA ratio is 1.5x.

Now I will turn to Soledad, who will speak about the main guidance of the results for the fourth quarter of 2023.

[Soledad Errázuriz, 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 for the quarter decreased 19% compared to the fourth quarter of 2022, mainly due to the lower thermal generation, primarily explained by the fire at Unit 1 of the Nehuenco Complex. This effect was partially offset by the higher hydroelectric generation of the quarter given the improved hydrological conditions.

Physical sales during the quarter reached 2.9 gigawatt hours, lower than the fourth quarter of 2022 mainly due to sales, lower sales in the spot market, explained by the lower generation during the quarter; and second, lower sales to unregulated clients, primarily explained by the reduction in consumption of mining clients. You can say it was partially offset by an increase in physical sales to regulated clients, explained by the expiration contract between other generating companies and distribution companies, resulting in a higher pro-rata for those contracts still in force.

Spot marking balance during the fourth quarter of 2023 recorded net positive of 141 gigawatt hours compared to the net sales of 448 gigawatt hours in the fourth quarter 2022. This variation is mainly explained by the lower generation previously mentioned.

Now please continue to Slide 8 to analyze the EBITDA in Chile for the quarter. EBITDA in Chile reached $137 million this quarter, decreasing by 40% compared to EBITDA of $226 million in the same quarter of the previous year, primarily due to the lower operating income, explained by first, lower sales to unregulated clients, mainly due to the lower average sales price and to the lower demand from mining clients; and second, lower sales in the spot market, mainly explained by a lower thermal generation.

The lower operating income was partially offset by lower raw materials and consumables used costs, mainly driven by the decrease in gas consumption costs associated with the lower generation from these fuel source.

Now please continue to Slide 9 for our physical sales and generation balance in Peru. Total generation of the period decreased 25% compared to the fourth quarter of 2022, reaching 900 gigawatt hours. This lower generation is mainly explained to, first, the lower economic dispatch explained by lower market prices due to an improvement in hydrology and second, the corrective maintenance of one of the turbines of the power plant, which meant it was out of service for approximately 5 days during the quarter.

Physical sales in this quarter reached 987 gigawatt hours, decreasing by 16% compared to the fourth quarter 2022 primarily due to lower physical sales in the spot market, explained by the lower generation of Fenix power plant. This was partially offset by higher sales to unregulated clients, meaning due to increase in the number of customers in this segment compared to the previous year.

Spot market balance during this quarter recorded net sales of 39 gigawatt hours compared to net sales of 556 gigawatt hours during the fourth quarter of '22 due to the lower generation of the power plant previously mentioned and to an increase in consumption by unregulated clients given the entry into force of new supply contracts.

Now please continue to Slide 10 to analyze the EBITDA in Peru for the fourth quarter of 2023. EBITDA in Peru reached $24 million in the fourth quarter of 2023, decreasing by 28% compared to EBITDA of $34 million recorded in the same quarter of the previous year, mainly due to a decrease in operating income, explained by lower sales in the spot market as a result of the lower generation of the period. This effect was partially offset by lower raw materials and consumables used, mainly due to lower purchases in the spot market, explained by the lower average purchase price, despite the increase in physical purchases during the quarter.

Now please continue to Slide 11 for the consolidated non-operating income and net income analysis. Non-operating income this quarter recorded a loss of $28 million, which compares to a loss of $22 million during the fourth quarter of 2022, mainly associated with losses from exchange rate differences in Chile, due to the Chilean peso to exchange rate variation impact on temporary balance sheet items in the local currency during the quarter. Conversely, this effect was positive during the fourth quarter of 2022.

The company recorded a profit of $56 million in the fourth quarter of 2023 compared to a $136 million profit obtained in the same quarter of the previous year, primarily due to a lower EBITDA explained by a decrease in sales in the spot market in both Chile and Peru and lower sales to unregulated clients in Chile. These effects were partially offset by a lower gad consumption in Chile stemming from the lower generation using this fuel source.

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

[Miguel Alarcón, executive]

Regarding our growth opportunities in Chile, relevant updates for this quarter are as follows: Horizonte, as of December 31, the company has achieved 76% progress on the Horizonte wind project, reaching mechanical completion of 44 wind turbines by the end of the quarter. The construction of foundations has been completed and the work on internal roads and turbine platform is still in progress, with an overall progress of 96% in civil works, substations, transmission lines and medium voltage networks, as well as 87% progress in electrical works. In total, 535 main components have been unloaded at the wind turbines sites. It is worth mentioning that by the end of December 2023, an improvement in the frequency of wind turbine component transport has been achieved following the implementation of private escort for certain sections of the transport route.

Diego de Almagro BESS. As of December 31, the Diego de Almagro power plant's battery storage system has conducted real-time signal testing, which was essential for its certification and commercial operation. Currently, the plant is performing daily charging and energy injection operations, awaiting the commercial operation approval from the National Electrical Coordinator. Additionally, during this quarter, a letter of relevance was submitted to Environmental Assessment Service, aiming to determine the type of environmental permit required for the installation of 1,000-megawatt hour storage system. For more information regarding our pipeline of projects, please review our earnings report.

This concludes Colbún's Fourth Quarter of 2023 results review. Thanks for listening, and now we are open to answer your questions.

[Operator]

Thank you. So we will now move to the question-and-answer section. [Operator Instructions] So our first question comes from Alejandra Andrade from JPMorgan.

[Alejandra Andrade Carrillo, analyst]

I had 2 questions actually. First, I wanted to ask in Chile in terms of your costs. I see a big spike in fuel cost per megawatt hour. So just wondering if that was because of the use of expensive inventory? And then secondly, if you could provide a little bit more context on CapEx guidance for 2024. That would be great.

[Miguel Alarcón, executive]

Okay. Great. So regarding your first question, yes, there was an increase in the cost of usage of fossil fuels, especially gas and coal. And actually, this has to do mainly with onetime nonrecurring FX charges that we have to record specifically in the fourth quarter of last year. These are, again, nonrecurring onetime effects that affected the calculation of the variable cost per megawatt hour of both fuels, but that is something that you shouldn't expect going forward.

[Alejandra Andrade Carrillo, analyst]

What was it specifically?

[Miguel Alarcón, executive]

So again, as you may know, typically, you have to record specific charges to account in the P&A line. And this is something that we have to register. Specifically some things had to do with coal consumption linked to, as you mentioned, higher cost of inventory while specifically for gas, this is basically the way this contract operates. I cannot unfortunately comment further on, apart from saying again that this is something that is a nonrecurring onetime charge that we should not expect going forward.

[Alejandra Andrade Carrillo, analyst]

Okay. So just to clarify that in 2024, you would not have this charge at all? Or would you still have it at the end in the fourth quarter of '24?

[Miguel Alarcón, executive]

No, no, no. We don't expect to have these charges in 2024 in any of the quarters.

[Soledad Errázuriz, executive]

Alejandra, regarding your second question in terms of the CapEx of the company expected to 2024. So the most relevant will be for the development of Horizonte wind farm. As we have mentioned, the total CapEx for this wind farm is around $900 million, and we have already reversed as of December, around $600 million. Additionally, there will be some CapEx if we approve the construction of other projects that are currently on our pipeline. And we also have the current maintenance CapEx of our power plants that's of around $80 million.

[Operator]

So our next question comes from Martin Arancet from Balanz Capital.

[Martin Arancet, analyst]

I had 3. First, in terms of generation, hydro came similar to in the fourth quarter -- in the third quarter, but fourth quarter, coal and gas generation was less than half compared to the previous quarter. You already mentioned that part of this was due to a failure in one of the units given the fire, but could you comment if there is any additional factor? And if we should expect something similar in the first quarter of 2024 [indiscernible] still playing?

[Macarena Güell, executive]

Macarena here, can you hear me?

[Martin Arancet, analyst]

Yes.

[Macarena Güell, executive]

Okay. So answering your question about lower thermal generation this quarter. As you must read also in our earnings report, the lower generation in terms of thermal is mainly due to in terms of [cat, i.e.,] Nehuenco fire. And also, if we talk about Nehuenco 2 and Santa Maria because of the economic dispatch they could not generate in those terms. So combining those things, that's why we have lower thermal generation, but also partially offset by higher hydro generation as you must know.

[Martin Arancet, analyst]

Okay. Could we expect then this going forward into the first half of 2024?

[Miguel Alarcón, executive]

That, Martin, depends on the evolution of the marginal cost. As you know, the variable cost of fossil fuels depend on the actual price of those imports. Both of them have already stabilized compared to the situation, especially in the first half of 2023, but it will depend on the evolution of the marginal cost. And of course, for the second quarter onwards, also the high drought. Typically, the fourth quarter tends to have lower thermal generation because of the melting inflow plus the hydro generation. So we can...

[Martin Arancet, analyst]

Okay. That's quite clear. Then my second question is, do you have any updates on the tweaking of the capacity payments formula? How could that affect each technology and Colbún in particular?

[Miguel Alarcón, executive]

No, Martin that discussion is still undergoing and nothing to comment at this point. My understanding of the regulator is trying to tackle other things with priority as, for example, stabilization mechanism might be one of those, but nothing to comment.

[Martin Arancet, analyst]

Okay. And my final question then, do you have any updates on a possible expansion plan in Peru?

[Macarena Güell, executive]

So you must know in Peru we have also renewable pipeline. As you must know, in Peru, especially mining companies are seeking for these renewable contracts. So we have a pipeline for around 900 megawatts by 2030. So the final answer, I will say yes, we are looking forward to growing in terms of renewables in Peru. But nothing official to comment here.

[Operator]

Our next question comes from Nicolás Langlois from AFP Cuprum.

[Nicolás Langlois, analyst]

I just have a question regarding the current status of power plants, both in Chile and Peru. Just want to understand how it's working Nehuenco Unit 1 after the fire, after the maintenance. Should we expect any problem in this first quarter and also in Fenix after you did a maintenance this fourth quarter. How do you see the plant the overall portfolio working in terms of the operational efficiency this first quarter 2024?

[Miguel Alarcón, executive]

Short answer would be no. We expect both plants to be up and running throughout the year. Both should have extremely high liability figures because, as you correctly point out, after the maintenance and the tests that we performed in terms of the operational performance of the plant going forward, we don't expect any issues or failures going forward as part of that. The only thing would be minor maintenances, for example, one we expect in the first quarter of this year. That should take about 2 weeks in the case of Fenix. But again, that's customary. So nothing, no relevant deviation.

[Nicolás Langlois, analyst]

Can I ask you on another topic? How do you see spot prices, marginal costs in Peru this first quarter?

[Macarena Güell, executive]

Hi, Nicolás. After the [indiscernible] operation of some hydro power plants that were out during last year and with an improvement in -- with [indiscernible] of the hydrological conditions, we expect that the marginal cost will hit at a level of around $30 per megawatt. That's what we have been seeing over the last couple of weeks.

[Operator]

Our next question comes from Martin Zetzsche from Fundamenta Capital.

[Martin Zetzsche, analyst]

Hello?

[Operator]

We can hear you, Martin. Can you hear us?

[Martin Zetzsche, analyst]

Yes. Sorry. Yes, my question was regarding the Codelco contract. We saw an indexation effect, as you mentioned, in the PR. I was wondering if you could maybe give us some color if this in extension going to a price around $90. That was going to be permanent or maybe that was an effect of the fourth quarter? Because, I mean, in the fourth quarter of last year, we also saw an indexation effect on that country in particular making the effective price really high. So if we analyze maybe the last 2 years, we saw that contract around $130. I don't know if that's the running price and this quarter was a one-off there, that's basically the question.

[Miguel Alarcón, executive]

Thank you for your question. So as you may know, typically in unregulated contracts, generators have the ability to agree specific indexators per contract. In this particular case, what happened during 2023 has to do basically with commodity prices and positive fuel prices which are part of the indexators for that specific contract. The situation you described for 2022 is something different linked to other type of indexators, which unfortunately are confidential that I cannot comment.

But again, what happened basically in this year is that when you compare fossil fuel prices, in particular, against the same period in 2022, you'll see a decrease, and that's part of the explanation of the reduction in price for that particular contract you are asking about.

[Martin Zetzsche, analyst]

So basically, that's the price we should see going forward if the fossil fuels, I mean, gas and coal maybe stays on these levels. That's correct?

[Miguel Alarcón, executive]

Again, only in the portion linked to those indexators, which are not the only ones affecting the contract.

[Operator]

We have another question from Cristóbal Mery BTG Pactual, Chile.

[Cristóbal Mery Larrondo, analyst]

Can you hear me well? Hello.

[Operator]

Yes, Cristóbal, we can hear you perfectly.

[Cristóbal Mery Larrondo, analyst]

Excellent. My question is regarding your new PPA with Minera Centinela. Can we expect the deployment of additional capacity in the next year in order to supply that contract? Or you plan to supply it with your existing capacity and well, considering also Horizonte?

[Soledad Errázuriz, executive]

Regarding your question, yes. So to supply the PPA from Horizonte, we have a pipeline of projects that are in later stages waiting for approval of our Board. These are wind and PV projects we have announced in our Investor Day. And regarding the Horizonte generation that is mostly committed if you see the BHP contract we signed a couple of years ago. Having said that, what we do is that we don't to apply our PPA with specific power plants. What we do is that we add up all of our generation metrics and with that as a whole with our PPAs.

[Operator]

[Operator Instructions]. So we have our next question from Kamaal of Barings, who asks -- what is your outlook for 2024 and guidance with regards to spot prices, revenues and generation?

[Miguel Alarcón, executive]

Miguel here. So unfortunately, we said this in the past that unlike our companies, we don't provide forecast or indication of the upcoming year. We do try to convey some messages in terms of expected generation and production in our Investors Day, but apart from that, unfortunately, we cannot provide forecasting figures.

[Operator]

Understood. Thank you, Miguel. [Operator Instructions] So we have one more tax question. This is from Felipe Torres at AFP Habitat. It's quite long, Miguel, so feel free to stop me, if you want at any point here.

During 2023, the marginal cost of producing with gas for the company was around $109 per megawatt hour despite the reduction in the G&L [indiscernible] prices during that year. What explains this? And what cost per megawatt hour can we expect in 2024 and 2025 from gas generation. And there are 2 other questions. Perhaps you can start with that one.

[Soledad Errázuriz, executive]

Felipe, thank you for your question. This is Soledad. So regarding your first question about the cost of supply with fuels like gas and coal. As we already mentioned that despite this quarter was due to specific accounting registering this quarter that we don't expect will repeat in the future.

In terms of your second question, we cannot give you guidance on the level of price for our new PPA. And in terms -- but something we can mention is that they should be enough to make our project profitable. And in terms of CapEx and payout policy, we should expect a leverage consistent with an investment-grade company.

[Operator]

Thank you, Soledad. So I'm not seeing any more questions. So perhaps I can hand it back to Miguel and Soledad for closing remarks.

[Miguel Alarcón, executive]

Thank you all for joining today -- okay. So sure. Thank you all for joining today. Significant participation. We appreciate that. Thank you for your questions as well. Hope you all have a great weekend and happy holidays to the colleagues, the ones in the Southern Hemisphere and see you in 3 months. So thank you, and goodbye.

[Operator]

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