Earnings Call: Q1 2021

May 28, 2021

Good day, ladies and gentlemen, and welcome to the Koban First Quarter 2021 Earnings Event. At this time, all participants are in a listen only mode, It is now my pleasure to turn the floor over to your host, Sebastian Moraga. Sir, the floor is yours. Hello to everyone, and welcome to Colbun's Q1 2021 earnings review call. My name is Sebastian Muraga. I am the company's CFO. And joining me today is Carolla Pozechel and Isiodora Saltibar 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 of our website. Agenda for today on Slide 3 is as follows. We will begin talking about the highlights of this quarter to then analyze in detail this quarter 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 and A session. Now please go to Slide number 4 to review the highlights of this quarter. Regarding the COVID-nineteen pandemic contingency, the company's power plants continue operating normally and Colbun has continued to take actions considering 2 priority focuses. 1st, to protect the health of workers, collaborators, suppliers and our surrounding communities and second, to ensure the continuity and security of the energy supply. Regarding the impact of COVID-nineteen on energy demand, it is worth mentioning that in Chile, it has decreased approximately 0.1% during the Q1 compared to 0.6% up to the Q1 of 2020 during the last 12 months. While in Peru, there was an increase of approximately 2.5% in the Q1 of 2021 and a decrease of 6% during the last 12 months. On February 6, Colbun sold to Chile Electricity PEC the 1st group of accounts receivables associated to the energy price stabilization mechanism. On April 1, the sale of the 2nd group of accounts receivable was completed. As a whole, these sales comprise accounts receivable for a nominal value of $84,000,000 It should be noted that differential between the nominal amount of the accounts receivable sold and the purchase price will be recorded as financial cost in other losses for fiscal year 2021. In the Q1 of 2021, dollars 14,000,000 were recorded for this concept associated with the first sale of accounts receivables. On March 11, Colbun was included for the first time in the sustainability yearbook 2021, a yearbook that group gathered the 15% of the companies in each industry with the best score in the Dow Jones Sustainability Index and groups the companies with the best evaluation in sustainability matters, including economic, social and environmental management as well as corporate governance aspects of these companies. On March 30, Quebrun announced the sale of its subsidiary, Colbun Transmision, to Alfa Des Jaroyo SPA, 80% controlled by APG Energy and Infra Investments and 20% by Ceuleo Reyes. The closing of the transaction and the transfer of the shares are subject to certain usual conditions for this type of operation. The sale price reached BRL 1295,000,000, which may experience provisions due to the application of the adjustments stipulated in the respective contract, which are usual for this type of transactions. On May 12, dividends were paid for a total of BRL 246,000,000. This payment is made of a definite dividend of BRL 81,000,000 and an eventual dividend charged to the profits of previous years for BRL 164,000,000. Dollars Based on the award and considering the 81,000,000 paid in December 2020 as a provisional dividend, the total distribution of dividends reached EUR327,000,000. Now please go to Slide 5 to review the main consolidated figures of the company. Consolidated EBITDA for this quarter reached $137,000,000 decreasing 20% compared to the $172,000,000 in the Q1 of 2020, mainly explained by the higher raw materials and consumables used, mainly due to higher generation with diesel and purchases in the spot market at a marginal cost higher than the Q1 of 2020, explained by lower hydro generation and less gas availability. Lower operating income recorded during the period and higher personnel expenses in U. S. Dollars as a result of the appreciation of exchange rate compared to the Q1 of last year. The company recorded a consolidated loss of 41,000,000 compared to the BRL 41,000,000 in profits in the same quarter of last year, mainly explained by higher tax expenses, which are explained by a deferred tax recognition of BRL 65,000,000 associated with the Colvun transmission sale announcement and to the lower gross profit explained by higher raw materials and consumables used in lower operating income recorded during this quarter. Now I will turn to Carrola, who will speak about the main drivers of this quarter's results. Thank you, Christian, and hello to everyone. Now please continue to Slide 7 for our physical sales and generation balance analysis in Chile. Total generation of the period decreased 19% compared to Q1, reaching 2.4 terawatt hours, mainly explained by: 1st, lower gas generation driven by lower LNG import and lower availability of Argentinian gas compared to Q1 2020. And second, a lower hydro generation explained by less favorable hydrological conditions compared to Q1 2020. Ethicam sales during the quarter reached 2.5 terawatt hours, 13% lower than Q1 2020. Due to the lower sales in the spot market, explained by the lower gas and hydroelectric generation registered. Spot market balance during Q1 2021 recorded net purchases of 76 gigawatt hours compared with the net sales for 400 gigawatt hours recorded in Q1 2020. The difference is mainly explained by the lower generation during the quarter. 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 €104,000,000 in Q1 of 2021, decreasing 23% compared to Q1 2020. This variation is mainly explained by: 1, higher raw materials and consumables cost used and 2, higher personnel expenses and other expenses by nature due to the appreciation of the exchange rate compared to Q1 2020. Now please continue to Slide 9 to analyze the EBITDA from the transmission business for this year. EBITDA for the transmission business reached €70,000,000 this quarter, decreasing 10% compared to Q1 2020 due to the low operating income recorded explained by: 1st, lower income from national assets driven by 2018 reassessment recorded in Q1 2020 2nd, lower income from Sonal Assets due to the reclassification of some assets from this segment announced by the regulator and third, lower income from the dedicated segment explained by other adjustments in this segment contract. Now please continue to Slide 10 for physical sales and generation balance analysis in Peru. Total generation of the period increased 52% compared to Q1 2020, reaching 5 21 gigawatt hours, mainly explained by, 1st, the preventive maintenance of the CP12 gas turbine carried out during Q1 2020 and second, the court's request to stop operating as a result of the decrease in demand we have shifted in Peru after the state of emergency decree in March 2020 in order to face the COVID-nineteen pandemic. Physical sales during this quarter reached 561 gigawatt hours, increasing 9% compared to Q1 2020, mainly due to the same reasons that explain the generation increase. Spot market balance during Q1 2021 recorded net purchases of 6 gigawatt hours compared to 186 gigawatt hours during the same quarter of the previous year. Due to the higher generation recorded in the period for the same reasons explained above. Now please continue to Slide 11 to analyze the EBITDA in Peru for Q1 2021. EBITDA in Peru reached $70,000,000 in Q1, 14% lower than the EBITDA of $20,000,000 recorded during the Q1 2020, mainly due to the higher gas consumption driven by the higher generation recorded during the quarter. Now please continue to Slide 12 for the consolidated non operating income and net income analysis. Non operating income in Q1 2021 presented losses of EUR 44,000,000 lower than the losses of EUR 49,000,000 in Q1 2020. The lower losses are mainly explained by higher hour losses recorded in Q1 2020 associated to the premium paid for the prepayment of the 2024 bond maturing in 2024 of €70,000,000 This effect was partially offset by the recording of financial costs on other losses related to the selling of the first group of accounts receivables generated by the energy price stabilization mechanism of $14,000,000 The company recorded a consolidated loss of $41,000,000 compared with the $41,000,000 in profits in Q1 'twenty, mainly explained by higher tax expenses in 1st quarter, mainly explained by deferred tax recognition of $65,000,000 associated with the Colvun transmission, sale announcement and second, the lower gross profit explained by higher raw materials and consumables used and lower operating income recorded during this quarter. Now continuing with this conference call, please go to Slide number 14, where Sebastian will give you an update on the status of our growth opportunities. Thank you, Carolla. Regarding our growth opportunities in Chile, we have focused our growth in renewable space on 3 pillars: developing a pipeline of projects regarding the corporation of renewable energy from variable sources. Up to this date, Parvun 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 approximately 780 megawatts located in the Atacama region Diego del Magro Sur 12, which are PV projects with an overall capacity of approximately 230 megawatts located in the Atacama region in Tipacha, a PV project of approximately 486 Megas located in Antofagasta region Jardim Solar, a PV project of approximately 5 37 Megas located in the Tarapaca region Matikura, a PV project of 9 megawatts located in the Maule region Los Conquillos, a wind farm of approximately 3 60 megas located in the Diopio region. Additionally, at the end of this quarter, Colbun 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. 2nd, the company does not rule out the purchase of renewable assets in operation. And finally, 3rd pillar of our growth in renewables is also acquiring energy from 3rd 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. This concludes Corvone's Q1 2021 results review. Thanks for listening. And now we are open to answer your questions. Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Marilo Raccini. Your line is live. Hello guys. Good morning. Thanks for the call. Actually, I have some questions for you. Given the higher generational costs of the Q1 of this year, how are you looking at the generation cost of the system in the coming quarters, given that the spot prices remains at unusual high level so far? And the second one, what are the plans for the cash that you have now after the sale of the transmission assets? And finally, if you could give us an update on the regulatory situation regarding the gas in Peru? Thank you. So hi, Murillo. This is Miguel. How are you? Regarding your first question, yes, of course, the Q1 showed higher than before in terms of generation costs. The reason for that, of course, to some extent, poor hydrology and, of course, lack of Argentinian gas, which, as you know, is extremely competitive. Going forward, what we have planned as a company, as we have done before, is to contract our available position of gas available to operate both of our combined cycles throughout the Q3 of this year and complement that with, of course, the base load provided by coal and, of course, the relevant high growth, which we expect to have starting at this time of the year. Hello, this is Sebastian. Regarding your second question and the use of funds, well, it is no doubt that the proceed from the transaction from the sale of the transmission business will represent an important liquidity flow for the company. And it also should be noted that even without these resources, Colbun today enjoys a very good liquidity level, a very robust and healthy cash generation and a level of debt in accordance with the investment grade we have always aimed to be, which by the way is also structured in the long term. And all of these allows us to adequately address our growth plan that we have been informing to the market during the last 3 years. Now the decision about the use of these additional resources from the sale of the transmission business, which by the way is the sovereign decision of the shareholders, will be based on a very simple and basic principle. They will go where they generate the most value for our shareholders. And, Moira, I think your third question was about the gas price situation, is that correct? Yes. Actually, regarding the inflexibility gas in Peru, I understand that we had some news there. Is that right? So yes, basically what has happened and of course, this has been going on for a wide increase, but recently, at the beginning of this month, actually, May 3, of similar means finally published the final version of the technical procedure, which is number 31, that regulates how the company is going forward. We need to reflect the gas circulation and actually to incorporate the total gas that before only incorporated the supply base of the equation. With that, we, of course, had some relevant discussions among the market participants. We expect a much more, I would say, normalized situation, more balanced situation in terms of how the gas is being declared and how costly the gas will actually reflect the market value of that type of fleet. I cannot comment on how do we expect in terms of specific numbers or figures, But of course, we expect that the situation for films in particular will improve as it generates the discus and still sells a relevant portion of its production, 40%, 20% to the spot market that should be more normalized as it was before some 6 years ago. That was very clear. Thanks, Sebastien. Thank you, Miguel. Okay. Sure. Thank you. Your next question is coming from Luis Serrano. Your line is live. Hi, guys. Thank you for the call. I just want to ask if you could please talk about your current views on the strategic importance of Phoenix in Peru? And is there anything that has changed since you took that write down in Q4 'twenty, which was quite meaningful? And related to that, your views on the upcoming election there in Peru, if there's any outcome out of that election, like a Castillo win that would make you reconsider your strategy in Peru and specifically towards Phoenix? I would say this is the elegance here. I would say that first of all Fenics, the investment thesis behind Fenics remains the same that we had in mind when we acquired the company in December of 2015, which is to grow the company because we still believe that the market fundamentals in the power sector remains very strong. But it still represents a significant it still represents a much lower consumption in terms of energy per capita compared to Chile and other countries in the region. And because of that and the need to electrify different parts of the population and industries, we still see again relevant potential and upside in that industry. So the fundamentals and our interest in growing that company and make a larger footprint in the sector remains the same. Having said that, of course, that we acknowledge that there is some volatility and some, I would say, market noise because of the recent election and the upcoming election. But we still believe that we need to wait and see, and we strongly believe that distributions in Peru are very strong. The regulation is also very strong as it's taken from the example in Chile. And because of that, again, the investment thesis and our desire to be part of the industry remains the same. Okay, that's helpful. Thank you. Thank you. Your next question is coming from Andrew McCarthy. Your line is live. Your next question is coming from Rodrigo Mora. Your line is live. Hello, everyone. Thank you for the presentation. So then I would like to ask you if you could add some update more information about the Horizonte Wind Power project. Reading the press release, the company updated the capacity of the project and also the generation expected. Please, could you give us some more details about the project, the timetable or maybe if you can give us some idea about the investment cost? Thank you. Rodrigo, well, regarding Horizonte, we continue moving forward with this project. We have been negotiating the supply contracts, mostly with the wind turbine assembly, everything related with the bidding processes of the civil works and the electrical balance of plants. We are also working to elaborate the 2nd day at Dendum. And as you mentioned, obviously, it's important the fact that we have increased the installed capacity up to approximately 780 Megawatts. And that was basically driven because of the, I would say, advancement of technology of the wind turbines and the amounts of the wind turbines. So now we're talking approximately of 144 wind turbines and each with a size of 5.5 mega. As we have been informing, there are no relevant delays in this project regarding everything given the COVID scenario. So I think, Rodrigo, I could certainly say that we are still on track, and there have been no major, major delays. Do you have any idea approximately how much could reach the total investment of this project and maybe when if all the environmental licenses will be approved, when the company could or the Board could make a decision about this project? Obviously, timeframes given the scenario the scenario that the world is living with COVID today, Rodrigo, given certainty of exact dates, it's difficult. But I would say that we are probably looking forward to bring the final investment decision, I would say, during this year. So we are in the middle of the year because technically, next week is June. And I would say we are in some way targeting that we should have all the data and the permits advancement to go and take, I would say, the decision moving forward to the Board of Directors in Colborne this year. So has Colvun signed a kind of agreement with the supplier of wind turbine. I was seeing that in Brazil, AS Brazil signed a huge supply agreement with Enercon, the German wind producer. I'm sorry, Rodrigo, but I'm not probably understanding your question. You can do it in Spanish. I don't have no problem. Okay. So we already selected we already selected Enercon 2 years ago or approximately 2 years ago, and we are working with them. And actually, when I mentioned that we are targeting the 144 wind turbines with the installed capacity that I just mentioned, it is Enercon Technology. Perfect. Okay. Thank you. Your next question is coming from Andrew McCarthy. Your line is live. Good morning, everyone. Good morning, Silas, Diego and the rest of the team. Thanks very much for the call. My first question, I just wanted to follow-up a little bit on investment project outlook in Chile that Rodrigo was asking about. Just a bit more sort of generally wondering about given the results of the election on May 16, how you're seeing the outlook now in particular? Or generally your thoughts on that result for Cobourne and the industry? And how that might be now playing into your calculus on your investment decisions and when you take those investment decisions over the next 12 months? Any color you can provide on that would be really helpful. Andrew, well, doing business carries always risks. And I would say our philosophy is that companies need to take into account risk, adjust anything necessary to tolerate any new risk if it's out there and basically move on. We are on an industry that is essential No matter what the outcome of the Convencion Continuiente or the outcome of the presidential elections will be. I can agree that we all have certainty that more energy will be needed in this country, more green energy will be needed in this country. So I would say, given the nature of the industry we work in, you have for sure that the country will need all this energy. So yes, I would say as any company out there, we are obviously looking at the political situation in Chile. We are also looking at the political situation in Peru. But as I mentioned, I would say on my first statement, risks are everywhere and it's the nature of doing business. It's not only political risk, it's environmental risk, credit risk, financial risk. So we are a company which is used to working with risks. We have a very solid, I would say, risk area. I would say we have a very savvy Board of Directors, very I would say, very savvy also management team. So to your answer, LIFO goes on. Very, very clear. Thanks, Subhakti. And I just wanted also to ask a follow-up on the transmission business sale process. I was wondering if you could give any more color on the expected timing of the completion of the deal already announced on March 30. And is it possible to give some kind of quantification to the adjustments that could occur that you're referring to the overall price of $1,295,000,000 Any kind of order of magnitude you can give there to have an idea? And just sort of finally on the in terms of the use of proceeds, Sebastian, you mentioned that the shareholders would consider there the use that would generate most value for shareholders. Is there any more color you can give on how that thought process would work and what options are being considered? Any metrics in particular that the shareholders will be taking into account in that decision making process? That will be really helpful. Thank you. Absolutely, Andrew. So I have if I understood well, you had 3 questions. So I will address them in order. Well, as we announced when we published the Etchocencial, the closing of this transaction obviously is subject to the approval of the Fiscalia Nacional Economica, okay? The transaction documentation was presented to the Fiscalia Nacional Economica approximately mid May. And given our experience in other transactions that we have seen in the market regarding how much time does the fiscal year Nacional Economica take to review these kinds of transaction, I would say a good guess could be that the authority should give a pronouncement in the following 2 to 4 months, somewhere in between that range, Andrew, being 2, probably a very, I would say, speed up process and up to 4, a slower one. So I would probably stick in the middle. Regarding the what you mentioned regarding the valuation of the last transmission asset valuation that we were informed a couple of weeks ago. First of all, I would like to probably let you know that Colvun Transmision is part of the Gray Mill Association of the transmission companies and we have participated together with the rest of the transmission companies representing our concern in the ongoing process of valuation of these kinds of assets. Now regarding what could be the impact on the price that we announced in the material fact that we published on late March. Well, in that material fact, we said that as it is customary on these types of transactions, the sale agreement considers price adjustments. Now it should be noted that the main source of income in our transmission business is dedicated assets, which if you see our 2020 figures, represents approximately 60% of our revenues. And as you may be aware, Andrew, the dedicated assets were not modified by the ongoing Tradicion de Proceso Palifario. So obviously, I cannot give you more details exactly on how are we potentially assessing the impact, but I'm probably giving you some color that most of the revenues generated by our Colvula transmission affiliate were not subject to this ongoing process. And your last question, Andrew, well, I am guessing you are trying to read between the lines, but the message I was trying to convey regarding the use of funds is that today, Colbun has been in some way highlighting all our expansion strategy with wind and solar projects. We have been, I would say, very generous in giving you the timeframes, the investment amounts. We have a position of liquidity, which we feel is very good. We have a healthy cash generation. And we have in no means any problem regarding debt constraints or pressure. Actually, we have we think we have a very well structured debt in the long term. So given that potentially we will receive, if the fiscal year approves this transaction, obviously, an important liquidity flow for the company, that's where again, it is not our decision, but the shareholders for sure will see the position the liquidity position of the company, the debt, the CapEx program and they will again take the decision on where to put this liquidity flow, where it will generate most value for them. And again, in Finance 1.0, we were taught that the capital structure of the company needs to be an adequate capital structure. Very helpful. Thank you so much, Sebastian. Okay. Thank you. There are no further questions in the queue at this time. Your next question is coming from Andrew McCarthy. Your line is live. Thank you so much for letting me have a follow-up question. Just wanted to finally ask about the decarbonization process in Chile. In Congress in the last couple of days, we've seen that this bill that's aiming to withdraw all coal plants by 2025 appears to be advancing. I think there are still several steps that it needs to go through, but continues to advance. So I was wondering if you could give us any idea about what your thoughts are on that bill. And if it were to pass what potential implications you're seeing for the coal board in particular thinking about the Santa Maria coal plant and the contract with the PPAs with Codoco? Thanks very much. Hi, Andrew. Meir here. I'm going to talk to you. First, I would say that I don't think we've said this in the past that as a general idea, we agree with the concerns and the arguments that was presented before by the Minister of Energy and Environment, by the CME, by the coordinator, even by some senior experts in defense of the potential impact of having this idea of moving forward the digitization and the phasing out of coal in the entire country. We cannot, of course, comment about the specifics in terms of potential consequences or impacts for Colborne and the commercial policy you referred to. But of course, you have to be you have to remember that back in 2019, we already committed as the generation generation companies did to sign this voluntary agreement to completely pay site coal and not to build new more coal facilities. So we, of course, complied with whatever comes out of Congress, and we are taking every potential measure to try to accommodate the company in that sense. 1, of course, obvious section we are taking is to moving ahead with our renewables CapEx program as we have already explained. Sure. Thank you. There are no further questions in the queue at this time.