Earnings Call: Q4 2019

Jan 31, 2020

Ladies and gentlemen, hello, and thank you all for joining today's Coal Boon Fourth Quarter 2019 Earnings Conference. All participants are in a listen only mode and instructions on how you can ask a question will be shared following today's prepared remarks. And now to get us started with opening remarks and introductions, I am pleased to turn the floor over to Deputy CFO of Colburn, Mr. Miguel Alarcon. You may begin, sir. Please go ahead. Hello to everyone, and welcome to Colbun's 4th quarter 2019 earnings review call. My name is Miguel Alarcon. I'm the Deputy CFO of the company and joining me today are Soliadar Rasburis and Isora Salvia from the Investor Relations team. I hope that you have received our earnings report and an earnings review presentation that you 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 progresses to then analyze in detail this year 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 strategic agenda progresses. During 2019, Colbun achieved important progresses in its strategic agenda, which focuses on 5 main pillars: 1, to increase annualized client segment market share 2, massive incorporation of cost efficient projects of renewable energy from variable sources 3, to continue with the fixed cost efficiency plan implementation initiated last year 4, to progress in the digitalization and automatization program at our facilities and 5, to strengthen our transmission business. Regarding commercial strategy, in October 2019, Colbun was awarded a renewable energy supply contract for 3,000 gigawatt hour year with BHP for Scondria 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 new projects, especially of the Risante wind farm. Considering this agreement, during 2019, the company has contracted approximately 3.5 terawatt hour year of its generation with new and regulated 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 project Horizonte was concluded. 2nd, Diego Almagro Solar Projects environmental qualification resolution was approved. And 3rd, the environmental impact declarations of the solar projects, Cardin Solar and Machibura began their formula through our process. Additionally, during the year, Colbun continued looking for renewal 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 renewable generation equivalent to a total of 4,000 megawatts by the end of 2,030. Regarding the fixed costs efficiency plan implemented last year, it can be highlighted that Colbun implemented operational efficiencies that reduced its fixed cost structure, achieving relevant savings compared to last year. Regarding to Corboon'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, plants, remote control among others. During 2019, important progresses were made in digitalizing and integrating the management of the 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 of 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 $50,000,000 Colfume Transmission recorded an EBITDA of 72,000,000 dollars during 2019. Now please go to Slide number 5 to review the main consolidated figures of the company. Consolidated EBITDA for this year reached $697,000,000 increasing 2% compared to a $684,000,000 EBITDA for 2018, mainly explained by the efficiency plan implemented in 2018 2019, 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 $202,000,000 12% lower than the $230,000,000 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 $797,000,000 and net debt to EBITDA ratio is at 1.3 times. The average long term financial debt interest rate in U. S. Dollars is 4.5%. Colbun has a total installed capacity of 3,811 Megawatts, comprised of 2,100 and 88 megawatts in thermal units, 1614 Megas in hydraulic units and 9 megawatts from the photovoltaic power plant over here. In terms of transmission assets, it owns 9 37 Kilometers of Transmission Lines and 31 substations. Now I will turn to Isidora, who will speak about the main drivers of 2019's results. 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 a higher gas and wind generation. Physical sales during the year reached 12.2 terawatt hour, 5% lower than the previous year, mainly explained by lower sales to 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 for 7.35 gigawatt hours compared with a net sales of 12 18 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 Interior for the year. EBITDA of the generation business in Chile reached $555,000,000 in 2019, decreasing 5% compared to 2018. Lower EBITDA of the year is mainly explained by a decrease in the operating income recorded during the period, partially offset by lower expenses as a result of efficiency program and lower raw materials and consumable use. Now please continue to Slide 9 to analyze the EBITDA from the transmission business for this year. EBITDA of the transmission business reached $72,000,000 this year, increasing 9% compared to 2018, mainly explained by an increase in the revenue from solar transmission assets due to the release of the 6 gs decrease in October 2018, which modified the pricing of those vessels. Now please continue to Slide 10 for physical sales and generation balance analysis in Peru. Total generation of the previous 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 turbine on October 29. As a result of the failure, the plant operated in 1 by 1 mode at 50% capacity, which are gas turbine and steam turbine for the rest of the quarter. It is estimated that the plant will start its operation on the 1st day of February in 1 by 1 mode after 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 for 7.56 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 $7,000,000 in 20.19, 96.5 percent higher than the EBITDA of the $36,000,000 recorded last year, mainly due to first, the recognition of the gas distribution contract with Calida as a financial lease from January 2019 onwards 2nd, higher revenue sales received during the period. And 3rd, a nonrecurring income of $6,200,000 derived from the arbitration work, which demand in CALIDAS the compensation payment for the income that FENICS is 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 $176,000,000 49 percent higher than the losses of $118,000,000 last year. The higher losses are mainly explained by 1, higher impairment provision of individual assets recorded. Although, it is worth mentioning that the impairment of total $48,000,000 of the San Pedro and Guajquilio Melado hydro projects in order to reflect the impact of lower projected electricity prices on the book value of those projects and second, higher financial expenses due to the recognition of the gas distribution contract with Caridad as financial leases previously explained. These effects were partially offset by the positive effect of the variation of the exchange rate, PLP dollar, on temporary balance, sheet items in local currency during the period. The company recorded in 2019 profit of $202,000,000 12 percent lower than the $230,000,000 CapEx last year. The lower CapEx is mainly explained by impairment provisions previously explained. Now continuing with the conference call, please go to Slide number 14, where Miguel will give you an update on the status of our growth opportunities. Thank you, Silvara. Regarding our growth opportunities in Chile, we have focused our growth in renewables, meaning hydro, solar and wind based on 3 pillars. 1st, developing a pipeline of projects. Regarding the incorporation of a renewable energy from variable sources, up to this date, Colhu 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 6 0 7 Megas located in the Atacama region Diego El Madro Sul 12, which are 2 photovoltaic projects of an overall capacity of 200 megawatts located also in the Tacoma region. In Tipacha, a photovoltaic project of 4 30 megawatts located in the Mertopadasta region. Jardim Solar, a photovoltaic point of 4 50 Megas, located in the Barrabaca region Machigura, a photovoltaic point of 10 Megawatts, located in the Maural region. In addition, at the end of Q4 of this year, Corbu 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 latest earnings report available at our website. 2nd, the company does not rule out the purchase of renewable assets in operation. And finally, the 3rd pillar of our growth in renewables is acquiring energy from third parties. Regarding the transmission business, Colbun has several projects for the expansion and enhancement of the company's current transmission assets, with a total awarded investment value of approximately $50,000,000 In addition, the company is also participating in regulated auctions 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 Colbun's Q4 2019 results review. Thank you for listening. And now we're open to answer your questions. We'll go first to Murillo Rensini with Santander. Please go ahead. Hello. Hi, everyone. Thanks 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 due to migration during 2020? Hi, Mauriela. 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 current threshold. So no, no further relevant migration. Thank you for your question, Mr. Ricchi. Thank you, Miguel. We'll move next to Alejandra Andrade with JPMorgan. Your line is open. Please go ahead. Hi. Thank you for taking my question. 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? Alejandra? Hi, 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 EUR 130,000,000 to $150,000,000 for the whole duration up until 2026. Up to this quarter, that figure is still not material and because of that, we cannot disclose it at this moment. Okay. Thank We'll go next to Edgar Castro with Credicorp. Hi, good morning. Thank you for taking my question. I have two questions. The first one is related to the Peruvian operations. I know that you will operate 50% of your capacity since February. Perhaps you can comment as about what was a 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 drought in Chile. What is your view on that? Are you expecting this weather phenomenon to be temporal or perhaps a new normal? Thank you. Hi, Miguel here. Thank you for your two questions. So regarding the first one, the first gas turbine will be online within the next few days during the 1st week of February, 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 backfill operation of 100 percent 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 among the driest in our C2 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 1st semester of this year, which is the case. Okay. Thank you. Perhaps I can make a follow-up question regarding the first point. You mentioned that you will need 45 days to implement the 2nd turbine. I was wondering these 45 days when start 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%. Yes. So we thank you. Sure. So just to clarify that, the second unit was stopped in January, I would say the 1st 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. Okay. Thank you. We'll go next to Pine Bridge Yes. Hi. Good afternoon. My question is regarding some comments you made on your Q4 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 there are 3 laws, one for transmissions. The other one is, if I understood correctly, the 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. Thank you. Sorry, I'm having some connection issues. If you can please make your question again, Gabriela? Sure. Yes. Hi. So on your 4th quarter report, I saw that you made some comments about the potentially regulatory changes in Chile. I understand there are 3 laws, one for the transmission companies, I think. The other one about I think it could change the rules of dispatch from generators to distributor companies and a 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. Thank you. Yes. Now I got it. Thank you. So yes, actually, in 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 that has 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 legislation contemplates. That will 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 will 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. Sorry, as a follow-up to my question, regarding the new distribution law that is being caused. I was wondering if that new distribution law contemplates potential changes in the order that generators dispatch to the distribution company? Can you clarify on that, please? Thank you. Yes. So not to my aware, Alegarilla. Not to my aware. No. Thanks. Moving forward, we'll take our next question from Andrew McCarthy at Citi. Please go ahead. Thanks very much for the presentation and the opportunity to ask questions. My first one is a follow-up on the stabilization mechanism. I got cut off very briefly, so apologies if I'm re asking 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. 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 had, of course, the intention in finding ways to fund this collectible accounts. In that sense, we were already engaged in discussions with some financial institutions to find 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 legislation 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 alternative solutions to fund this will be available in the upcoming month. And regarding your second point, I think again, it's too soon to tell whether or not there will 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. Got it. And in those conversations you've been having with the financial institutions, how are they 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? No. Again, at this point, that should not be an issue because once you register the account, you can then find ways to trespass that right to a financial institution. So no, the points discussed are again the executive title that's behind the collectible amount. 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? Yes, Andrew. We are also contemplating participating in those options as we've done, I would say always in the past. Having said that, I will also have to say that the company has made a clear statement in which what type of customers were most focused on and why is that right? But in terms of going forward, we do expect to participate in the regulatory adoption as well as the ones for unregulated clients. Got it. Very clear. Thank you very much. And we have received a signal. We have a follow-up coming from Andrew McCarthy. Please go ahead. Your line is open, sir. Thanks very much. Just take the opportunity. So just in 2019, you obviously long 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? 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. Very good. Thanks very much. 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. 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.