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Edited Transcript of COLBUN.SN earnings conference call or presentation 31-Jan-20 3:00pm GMT

Q4 2019 Colbun SA Earnings Call

Santiago Feb 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Colbun SA earnings conference call or presentation Friday, January 31, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Isidora Zaldívar

Colbún S.A. - Member of IR Team

* Miguel Alarcón;Deputy CFO

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Conference Call Participants

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* Alejandra Andrade Carrillo

JP Morgan Chase & Co, Research Division - Analyst

* Andrew J. McCarthy

Citigroup Inc, Research Division - Deputy Manager of Studies

* Murilo Riccini

Santander Investment Securities Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, hello, and thank you all for joining today's Colbún Fourth Quarter 2019 Earnings Conference. (Operator Instructions)

And now to get us started with opening remarks and introductions, I am pleased to turn the floor over to Deputy CFO of Colbun, Mr. Miguel Alarcon. You may begin, sir. Please go ahead.

Just one moment, ladies and gentlemen, I believe we may have a difficulty with the presenter location, just a moment, please.

(technical difficulty)

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Miguel Alarcón;Deputy CFO, [2]

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Hello to everyone, and welcome to Colbun's Fourth Quarter 2019 Earnings Review Call. My name is Miguel Alarcon, I'm the deputy CFO of the company. And joining me today are Soledad Errázuriz and Isidora Zaldivar from the Investor Relations team.

I hope that you have received our earnings report and an earnings review presentation that we are 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 strategic agenda provisions to then analyze in detail 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 to review the strategic agenda progresses. During 2019, Colbún achieved important progresses in its strategic agenda, which focuses on 5 main pillars: one, to increase unregulated client segment market share; two, massive incorporation of cost-efficient projects of low energy from variable services; three, to continue with the fixed cost efficiency plan implementation initiated last year; four, to progress in the digitalization and automatization program at our facilities; and five, to strengthen our transmission business.

Regarding commercial strategy in October 2019, Colbún was awarded a renewal energy supply contract for 3,000 gigawatt hour a year with BHP for Escondida and Spence mine sites. The contract starts in January 2022 for a 10-year period. The agreement will allow the development of our portfolio for renewal projects, especially of the Horizonte wind farm. Considering this agreement, during 2019, the company has contracted approximately 3.5 terawatt hour a year of its generation with new unregulated customers.

Regarding the incorporation of renewable energies from variable sources, during 2019, important advances were made in the wind and solar projects pipeline.

First, the feasibility stage of the wind farm with Horizonte was concluded. Second, Diego de Almagro solar projects environmental qualification resolution was approved; and third, the environmental impact declarations of the solar projects, Jardin Solar and Machicura, began their formal work process. Additionally, during the year, Colbún continued looking for annual projects throughout the country with a target of consolidating a robust and diversified product portfolio, in line with the goal of doubling our current installed capacity, incorporating renewal regeneration equivalent to a total of 4,000 megawatts by the end of 2030.

Regarding the fixed costs efficiency plan implemented last year, it can be highlighted that Colbún implemented operational efficiencies that reduced its fixed cost structure, achieving relevant savings compared to last year.

Regarding to Colbún's digitalization and automatization, it consists in an operational administrative and maintenance process review in order to simplify them and increase the efficiency and competitiveness of the company. These initiatives include, for example, predictive maintenance techniques adoption, online operation processes monitoring, plant's remote control, among others. During 2019, important progresses were made in digitalizing and integrating the management of the company's commercial cycle, as well as incorporation of a higher level of technology, administrative processes in the supply, contract and travel management areas. Also, the scope of telemonitoring coverage for our facilities increased.

Regarding the period of strengthening our transmission business, during 2019 we continued with the progress in the expansion and normalization projects of the company's current transmission assets, whose total investment value awarded reached $50 million. Colbún transmission recorded an EBITDA of $72 million during 2019.

Now please go to Slide #5 to review the main consolidated figures of the company. Consolidated EBITDA for this year reached $697 million, increasing 2% compared to a $684 million EBITDA for 2018, mainly explained by the efficiency plan implemented in 2018 and '19, partially offset by a decrease in hydro generation as a result of a more severe drought and to the lower income during the period.

Consolidated profit reached $202 million, 12% lower than the $230 million in profits in the previous year, mainly explained by higher provisions for impairment of individual assets, partially compensated by the lower EBITDA recording during the period. Financial investments totalized $797 million, and net debt-to-EBITDA ratio is at 1.3x.

The average long-term financial net interest rate in U.S. dollars is 4.5%. Colbún has a total installed capacity of 3,811 megawatts comprised of 2,188 megawatt in thermal units, 1,614 megawatts in hydraulic units and 9 megawatts from the photovoltaic power plant, Ovejería. In terms of transmission assets, it owns 937 kilometers of transmission lines and 31 substations.

Now I will turn to Isidora, who will speak about the many drivers of 2019's results.

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Isidora Zaldívar, Colbún S.A. - Member of IR Team [3]

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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 previous decreased 8% compared to the previous year, reaching 11.9 terawatt hour, mainly due to a lower hydro, coal and diesel generation, partially offset by higher gas and wind generation.

Physical sales during the year reached 12.2 terawatt hours, 5% lower than the previous year, mainly explained by lower sales through the regulated clients and to the spot market, partially offset by higher sales to the unregulated clients.

Spot market balance during 2019 recorded net sales of 735 gigawatt hours compared with net sales of 1,218 gigawatt hours in 2018 as a result of the lower generation of the year.

Now please continue to Slide 8 to analyze the EBITDA from the generation business in Chile for the year. EBITDA of the generation business in Chile reached EUR 555 million in 2019, decreasing 5% compared to 2018. Lower EBITDA of the year is mainly explained by a decreasing the operating income recorded during the period, partially offset by lower expenses as a result of the efficiency program and lower raw materials and consumable used.

Now please continue to Slide 9 to analyze the EBITDA from the transmission business for this year. EBITDA of the transmission business, which is $72 million this year, increased 9% compared to 2018 mainly explained by an increase in the revenue from zonal transmission assets due to the release of the 6T decree in October 2018, which modified the pricing of those assets.

Now please continue to Slide 10 for physical sales and innovation balance analysis in Peru. Total generation of the period decreased 4% compared to 2018, reaching 3.8 terawatt hours, mainly explained by the lower availability of the plant driven by a failure in one of the plant's gas turbines on October 29. As a result of the failure, the plant operated in one-by-one mode at 50% capacity, which are gas turbine and steam turbine for the rest of the quarter. It's estimated that the plant will start its operation on the first day of February in one-by-one mode at repairing the failure in this turbine.

Physical sales during this year reached 3.9 terawatt hours, decreasing 3% compared to the previous year. The decrease is explained by the lower generation of the year as a result of the previous mentioned failure.

Spot market during 2019 recorded net sales of 756 gigawatt hours, decreasing 9% compared to the previous year as a result of the lower generation of the year.

Now please continue to Slide 11 to analyze the EBITDA in Peru for 2019. EBITDA in Peru reached $7 (sic) [$70] million in 2019, 96% higher than the EBITDA of the $36 million recorded last year. Mainly due to: first, the recognition of the gas distribution contract with Calidda as a financial lease from January 2019 onwards; second, higher revenue sales received during the period; and third, a nonrecurring income of $6.2 million derived from the arbitration award, which demanded Calidda the compensation payments for the income that Fenix ceased to receive due to the breach of the framework agreement between both companies.

Now please continue to Slide 12 for the consolidated nonoperating income and net income analysis. Nonoperating income in 2019 presented losses of $176 million, 49% higher than the losses of $118 million last year. The higher losses are mainly explained by: one, higher impairment provisions of individual assets recorded, although it is worth mentioning that the impairment of total $48 million of the San Pedro and

Guaiquivilo Melado hydro projects in order to reflect the impact of lower projected electricity supply prices on the book value of those projects; and second, higher financial expenses due to the recognition of the gas distribution contract with Calidda as financial leasing, previously explained. These effects were partially offset by the positive effect of the variation of the exchange rate CLP/dollar on temporary balance sheet items in local currency during the period.

The company recorded in 2019 profit of $202 million, 12% lower than the $230 million profit last year. The lower profit is mainly explained by the impairment provision previously explained.

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

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Miguel Alarcón;Deputy CFO, [4]

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Thank you, Isidora. Regarding our growth opportunities in Chile, we have focused our growth in renewals, meaning hydro, solar and wind, based on 3 pillars. First, developing a pipeline of projects. Regarding the incorporation of renewable energy from variable sources, up to the state, Colbún has been able to complete our 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 Sul, I and II, which are 2 photovoltaic projects of an overall capacity of 200 megawatts located also in the Atacama Region. Inti Pacha, a photovoltaic project of 430 megawatts located in Antofagasta region. Jardin Solar, a photovoltaic project of 450 megawatts located in the Tarapaca region; Machicura, a photovoltaic project of 10 megawatts located in the Maule Region.

In addition, at the end of the fourth quarter of this year, Colbún holds a portfolio of locations 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.

Second, the company does not call out the purchase of renewal assets in operation. And finally, the third pillar of our growth in renewals 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. We have a total awarded investment value of approximately $50 million. In addition, the company is also participating in regulated adoptions for the expansion of the national transmission system.

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 2019 results review. Thank you for listening. And now we're open to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Murilo Riccini with Santander.

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Murilo Riccini, Santander Investment Securities Inc., Research Division - Research Analyst [2]

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Miguel and Isidora. Congratulations for the results. My question is related to regulated volumes. What are you expecting regarding regulated volumes in Chile? And are you seeing more reductions to migration during 2020?

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Miguel Alarcón;Deputy CFO, [3]

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Murilo, this is Miguel. Thank you for your question. I would say, as we have said in previous calls, that we believe that most of the migration, because of the change in regulation, already occurred in 2018 and especially 2019. We don't foresee a relevant volume migrating from the current contract under the liquidity thresholds. So no, no further relevant migration.

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Operator [4]

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We'll move next to Alejandra Andrade with JPMorgan.

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Alejandra Andrade Carrillo, JP Morgan Chase & Co, Research Division - Analyst [5]

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I was wondering, the impact of the stabilization fund this quarter, if you could share how much had you accumulated in terms of receivables and then your expectations for 2020.

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Miguel Alarcón;Deputy CFO, [6]

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Alejandra, yes, this is Miguel again. So as we've said before, we expect for the company for the whole period to accumulate an amount that would be between $130 million to $150 million for the whole duration up until 2026. Up to this quarter, that figure is still not material. And because of that, we cannot disclose that at this moment.

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Operator [7]

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(Operator Instructions) We'll go next to Edgar Castro with Credit Corp.

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Unidentified Analyst, [8]

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I have 2 questions. The first one is related to the program operation. I know that you will operate 50% of your capacity since February. Perhaps you can comment as about what was the cost to return to that 50% of operational level, and how much time do you think would be necessary to get the operation to full capacity?

And my second question relates to the drop in Chile. What is your view on that? Are you expecting this weather phenomenon to be temporary or perhaps a new normal?

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Miguel Alarcón;Deputy CFO, [9]

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Miguel here. Thank you for your 2 questions. So regarding the first one, the first gas turbine will be online within the next few days during the first week of February, in which, as you mentioned, we will operate at 50% of our capacity. The second turbine is being inspected. We did a preventive stop just to inspect the machine and prevent potential issues there. We expect that review will take approximately 45 days. But again, depending on the actual results and findings, we will then decide on the actual stoppage for that second unit, and hence, the complete back to operation, 100% of capacity.

Cost involved, I cannot disclose at this moment. I do can say that, of course, we have insurance committed that covers both physical damage and business interruption, if any.

And regarding your second question, I would have to say that in terms of hydrology, as I'm sure you're aware, 2019 was a really dry year. It's some of the driest in our history in Chile. We cannot comment and give a forecast for 2020. We never do that. I do can say that preventing similar conditions, as we always do, we have a pretty strict hedging policy in which, in this case, translates into securing sufficient LNG to cover most of the operations in our combined cycles for the first semester of this year, which is the case.

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Unidentified Analyst, [10]

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Okay. Perhaps I can make a follow-up questions regarding the first point. You mentioned that you will need 45 days to implement that second turbine. I was wondering these 45 days when it starts. Since the beginning of February? Or I don't know. I'm just trying to get an idea on the timing that you will reach the 100%.

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Miguel Alarcón;Deputy CFO, [11]

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Yes. So we think -- sure. So just to clarify that, the second unit was stopped in January, I would say, the first days of January. So we expect to have more detailed information at some point, I would say, mid-March. But again, that of course will depend on the actual findings on the turbine, if any.

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Operator [12]

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(Operator Instructions) We'll go next to Pinebridge Investments, and I do apologize if I mispronounce your name, [Gabriela Bahachille]. Please go ahead.

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Unidentified Analyst, [13]

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Yes. My question is regarding some comments you made on your fourth quarter highlights about the regulatory environment in Chile that you're expecting some laws that are being currently discussed and that could eventually be implemented, and that -- so I was wondering if you could elaborate a little bit more about it. I understand that our 3 laws, 1 for transmissions. The other 1 is, if I understood correctly, to modify the dispatch from the generators to the distributors. And the third one, please, if you could give us a little bit more color on that.

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Miguel Alarcón;Deputy CFO, [14]

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Sorry, I'm having some connection issues. If you can please make your question again, Gabriela.

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Unidentified Analyst, [15]

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Sure. So on your fourth quarter report, I saw that you made some comments about the potentially regulatory changes in Chile. I understand that there are 3 laws, 1 for the transmission companies, I think, the other 1 about I think it could change the route of dispatch from generators to distributor companies, and the third law that I cannot remember right now. So I was wondering if you could please elaborate a little bit more about these comments you made and the potential implications of these.

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Miguel Alarcón;Deputy CFO, [16]

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Yes. So now I got it. Thank you. So yes, actually, on our earnings report, we did comment -- we did some comments about potential changes in regulation. The first one is a change in the distribution law, what we call the new distribution law, which is something that has been discussing for some time here in Chile. And basically, this has to do with updating a law and a regulation that has been there for, I would say, more than 30 years. So just as happened in generation before, we believe we've been seeing some discussions to try to, in some way, address some of the issues regarding, for example, quality of service, promote investments and to plan in advance more than the current litigation contemplates. That would be the first point.

Regarding flexibility, which is also a point we've discussed before is, in some ways, try to remunerate what we believe would be a positive measure to, in some way, provide incentives for certain types of technologies that can complement more easily with renewals, for example, attributes to reduce and take charge and to accommodate this ramp up and ramp downs that comes with intermittency. And I think those are the 2 main issues addressed in our earnings reports regarding potential changes in regulation.

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Unidentified Analyst, [17]

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Sorry. As a follow-up to my question, regarding the new distribution law that is being discussed, I was wondering if that new distribution law contemplates potential changes in the order that generators are dispatched to the distribution. Can you clarify on that, please?

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Miguel Alarcón;Deputy CFO, [18]

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Yes. So not to my aware, Gabriela, not to my aware. No.

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Operator [19]

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Moving forward, we'll take our next question from Andrew McCarthy at Citi. Please go ahead.

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Andrew J. McCarthy, Citigroup Inc, Research Division - Deputy Manager of Studies [20]

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My first one is a follow-up on the stabilization mechanism. I got cut off very briefly, so apologies if I'm reasking a question already made. But I just wanted to understand to what extent you are able to perhaps monetize the accounts receivable that you will generate from this tariff stabilization mechanism. And also what potential tax implications you may see, for example, would you perhaps see some tax benefits from having lower cash inflows in the short to medium term? That would be my first question.

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Miguel Alarcón;Deputy CFO, [21]

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So Andrew, thank you for both of your questions. The first one, I would say that yes, we, of course, as the rest of the generators within the system, have of course the intention in finding ways to fund this collectible accounts. In that sense, we're already engaged in discussions with some financial institutions to find the ways to accommodate this. I do have to say, and this also connects to my next answer, that we're still working based on a draft. So the final considerations in the explanation are still being discussed. And because of that, we are still discussing again with these financial partners the actual way and, of course, the embedded cost that this type of funding might have. But again, since this law has sector-wide implications, I am pretty confident that attractive solutions to fund this will be available in the upcoming months.

And then regarding your second point, I think, again, it's too soon to tell whether or not there would be any tax consequences or tax implications because of this change in the way we've been doing this collection before. I don't foresee them at this point. But again, we can clarify that once we have the final version of the legislation.

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Andrew J. McCarthy, Citigroup Inc, Research Division - Deputy Manager of Studies [22]

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Got it. And in those conversations you've been having with the financial institutions, how are they or how is the issue around the exchange rate assumption being thought about? Is that something that really complicates this ability to monetize the receivables? Or is it not so much of an issue?

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Miguel Alarcón;Deputy CFO, [23]

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No. Again, at this point, that should not be a major issue because once we register their account, you can then find ways to trespass that right to a financial institution. So no, the points discussed at again the executive title, that's behind the collectible amounts.

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Andrew J. McCarthy, Citigroup Inc, Research Division - Deputy Manager of Studies [24]

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Got it. And just one final question, if I may. You mentioned on the call that you were looking to participate in transmission or regulated transmission business auctions during the course of 2020. I was wondering, what about for regulated auctions in the generation space. Are you looking at participating in those?

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Miguel Alarcón;Deputy CFO, [25]

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Yes, Andrew, we are also contemplating participating in those auctions as we've done, I would say, always in the past. Having said that, I will have to say that the company has made a clear statement in which what type of customers we are most focused on, and why is that, right? But in terms of going forward, we do expect to participate in the revenue reductions as well as the ones for unregulated clients.

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Operator [26]

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(Operator Instructions) We have a follow-up coming from Andrew McCarthy. Please go ahead, sir.

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Andrew J. McCarthy, Citigroup Inc, Research Division - Deputy Manager of Studies [27]

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Just taking the opportunity. So just in 2019, you were obviously long in the spot market. And since the full interconnection has occurred from midway through last year, spot prices have clearly come down. I know you don't want to give any -- probably don't want to give any sort of forecast on where you think spot prices are going to be for this year. But could you talk a little bit about what the key factors are that you're seeing for this year that could affect where spot market prices are?

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Miguel Alarcón;Deputy CFO, [28]

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As you actually mentioned in your question, Andrew, we cannot provide forecast on prices. And in this case, on the marginal cost. I do have to say that the integration between both older systems has had a particular effect in the sense of stabilizing and, to some extent, also reducing the marginal cost in the integrated system despite of poor hydrology. In our case, we still believe in the same commercial policy we've done in the past years in the sense of trying to be out in the spot market, or in the case of a surplus, only when we can margin in our power plants. So having said that, I don't foresee anything materially different in 2020 from 2019, if that helps.

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Operator [29]

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And to our leadership team, we have no signals pending from the audience. I'll turn it back to you for any additional or closing remarks.

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Miguel Alarcón;Deputy CFO, [30]

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Okay. So thank you, everyone, for joining this conference call. Hope to see you again in the next quarter review, and have a great weekend and bye-bye.

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Operator [31]

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Ladies and gentlemen, this does conclude today's announcement. We thank you all for your participation. And as our moderator had stated, we hope you enjoy your weekend. You may now disconnect your lines.