Earnings Call: Q1 2019

May 3, 2019

Greetings, and welcome to Goldblum's First Quarter 2019 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Miguel Alacon. Please go ahead. Hello, everyone, and welcome to Colbun's Q1 2019 earnings review call. My name is Miguel Lacom. I'm the Deputy CFO of the company. And joining me today are Soledad Aristides, Alisira Salbir 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 highlights of the quarter 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 and A session. Now please go to Slide number 4 to review the highlights of this quarter. 1st, on April 25, the ordinary shareholders meeting approved the distribution of 1st, a final dividend of $156,000,000 which added to the BRL 84,000,000 paid on December last year, will reach 100% of the distributable liquid income for the year 2018 and second, an additional dividend of BRL 100,000,000 charged to the accumulated income of the previous years. These dividends will be paid from May 7, 2019 onwards. 2nd, regarding growth, on April 25 this year, Colbun made public the acquisition of the projects Diego Almanozur 1 and 2 in connection with the company's strategy to increase the share of renewable energies from variable sources in the generation mix. These projects are located in the Dacama region, 27 kilometers south of Diego El Malo and consider an overall capacity of approximately 210 megawatts. Finally, regarding commercial strategy, during this year, the company has contracted approximately 300 gigawatt hour per year of its generation with new underdeveloped customers. Now please go to Slide number 5 to review the main consolidated figures of the company. Consolidated EBITDA for the Q1 of this year reached $162,000,000 in line with the EBITDA of $164,000,000 for the Q1 of 2018. Consolidated net income on its part reached EUR 66,000,000 3 percent higher than the Q1 of 2018. Financial investments totalized $816,000,000 and net debt to EBITDA ratio is at 1.2 times. The average long term financial debt interest rate in U. S. Dollars is 4.5%. Colbun has a total installed capacity of 3,893 Megawatts, comprised of 2,250 Megawatts in Thermal Units, 1634 Megas in Hydraulic Units and 9 Megawatts from the photovoltaic power plant of Egeria. In terms of transmission assets, it has 9 41 kilometers of transmission lines and 28 substations. Now I will turn to Solea, who will speak about the main drivers of last quarter's results. Thank you, Miguel, and hello to everyone. Now please continue to Slide 7 for our fiscal sales and generation balance analysis in Chile. Total generation for the period decreased by 3% compared to the Q1 of 2018, reaching 3.3 terawatt hour, mainly due to lower hydro and coal generation, partially offset by an increase in gas and diesel generation. Physical sales during the Q1 of 2019 reached 3.2 terawatt hour, 5% lower than the Q1 of 2018, mainly explained by lower sales to regulated customers. Spot market balance during the Q1 of 2019 recorded net sales for 6 73 gigawatt hour, higher compared with net sales for 525 Gigawatt hour in the Q1 of 2018. Now please continue to Slide 8 to analyze the EBITDA from the generation business in Chile for this quarter. EBITDA for generation business in Chile reached $129,000,000 this quarter, decreasing 6% compared to the same quarter of the previous year. The lower EBITDA per quarter mainly explained by the decrease in revenues due to lower sales to regulated customers, partially offset by higher energy and capacity sales in the spot market and to unregulated customers. The lower sales to regulated customers reflect the migration of consumption from regulated customers to free customers as a consequence of the price differential between both segments. Now please continue to Slide 9 to analyze the EBITDA from the transmission business for the Q1 of 2019. EBITDA for transmission business reached $20,000,000 in the Q1 of 2019, increasing 21% compared to the same quarter of the previous year, mainly explained by the higher operating income due to an increase in the revenues from external transmission assets. Now please continue to Slide 10 for a physical sales and generation balance analysis in Peru. Total generation of the period increased by 54% compared to the Q1 of 2018, reaching 9 32 gigawatt hours, mainly explained by the scale and on maintenance, which in 2018 was carried out during the month of January February, while in 2019, the maintenance occurred between March 19 April 19. Physical sales during this quarter reached 9.42 gigawatt hour, 6% higher than the Q1 of 2018, mainly explained by higher sales to the spot market. Spot market balance during this quarter recorded net sales for 156 gigawatt hours compared to net purchases of 154 gigawatt hours during the Q1 of 2018 due to the lag in the scale maintenance dates previously explained. Now please continue to Slide 11 to analyze the EBITDA for the generation business in Peru for the Q1 of 2019. EBITDA in Peru reached $13,000,000 this quarter, 28% higher than the EBITDA of $10,000,000 recorded in the Q1 of 2018 due to lower costs in raw materials and consumables use, mainly explained by the higher energy and capacity purchases registered in the Q1 of 2018 due to the maintenance of the power plant carried out during the month of January February, while the annual maintenance of 2019 was carried out between March April. Additionally, the marginal cost of energy purchases during the maintenance of 2018 was $29 per megawatt hour, higher than the cost of $9 per megawatt hour during the 20 nineteen's maintenance as a result of the failure in the TGP gas pipeline in February 2018. Now please continue to Slide 12 for the consolidated nonoperating income and net income analysis. Nonoperating income in the Q1 2019 presented losses of $15,000,000 10% lower than the losses of $17,000,000 in the Q1 of 2018. The lower losses are mainly explained by: 1st, a positive effect of the variation of the sold to U. S. Dollar and Chilean pesos to U. S. Dollar exchange rates on temporary items of the balance sheet in local currency during this quarter. On the other hand, in the Q1 of 2018, this effect was negative. And it is also explained by higher financial income as a result of higher investment rates of cash surpluses during the quarter, partially offset by a decreased register in the line profit loss of companies accounting for using the equity method as a result of revaluations of land owned by Ibraicen during the Q1 of 2018 due to its accounting and liquidation value. Tax expenses amounted to $20,000,000 this quarter, 15% lower than the tax expenses of $24,000,000 in the Q1 of 2018. The lower expenses are mainly due to, 1st, a tax profit registered this quarter in Peru, driven by the appreciation of the Beruyasol during the period, given that the tax accounting of Fenics is carried in Peru in Soles. And second, a lower profit before taxes recording during the Q1 of 2019 compared to the Q2 of the previous year. The company recorded in the Q1 of 2019 a net income of $66,000,000 higher than the net income of $64,000,000 in the same quarter of the previous year. The increase is mainly explained by the lower tax expenses. Now continuing with this conference call, please go to Slide 14, where Miguel will give you an update on the status of our growth opportunities. Regarding our growth opportunities in Chile, we have focused our growth in renewables, meaning hydro, solar and wind based on 3 pillars. First, developing a pipeline of projects. Regarding incorporation of renewable energy from variable sources, Colvun has been able to complete 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 Megawatts located in the Atacama region Diego Almayro Sur 12, which are 2 photovoltaic projects of an overall capacity of 2 10 Megawatts located in the Takama region Solve Terabaka, a photovoltaic project of 200 Megawatts located in Tarabaca region. And additionally, at the end of this quarter, Colbu has completed a portfolio of locations for another 4 wind and solar projects, which total capacity of approximately 800 megawatts. These projects are in early stages of development. For more details on this slide, you can see the list of our current portfolio of projects or please 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, the 3rd pillar of our growth in renewables is acquiring energy from 3rd parties. Regarding the transmission business, Colbund has several projects for the expansion and enhancement of the company's current transmission assets, which are total investment value approximately $50,000,000 In terms of our international expansion strategy, as we have mentioned before, we continue searching for group opportunities in Peru, Colombia and Argentina in order to maintain a leading position in the power generation business and to diversify our sources of income. With this, we conclude Colvul's Q1 2019 results review. Thank you for listening, and now we're open to answer your questions. Thank you. Our first question comes from the line of Ezekiel Fernandez with Credicorp. Please proceed with your question. Hi, good day guys. Thank you for the presentation. I have four questions. I would like to go 1 by 1, if you don't mind. The first one is related to the gas output. If I'm right, you generated 1.4 terawatt during the quarter. And I wanted to get an idea of how much of that is Argentinean gas, how much of that is through your usual local agreements or if that includes also some LNG, some owned LNG vessel? So here, this is Miguel. Hi. Can you please also ask your second question and then we'll answer those 1 by 1? Okay. It's 4 questions actually. But okay, I'll go with the 4. No worries. The first one, so, was related to the gas supply. The second one is related to the regulated sales. They dropped 23% year on year. I wanted to know if there is any contract maturing in that period or if it's entirely related to customer migrations and the sort of over auctioning process by the CNE? 3rd question is related to overall OpEx or SG and A. Any costs that are not related to fuel, emission taxes, LNG, transmission overhead? I mean, it's down materially year over year and quarter over quarter. I wanted to know if you are engaged in some sort of cost cutting initiative? And the last question is related to the new 0.3 gigawatt in sorry, kilowatt in contracts that you closed this quarter, if those are new customers or renegotiations? And what is the average duration for those new contracts? Thank you. It's Miguel. Miguel here. So thank you for all those questions. So the first question related to glass. So the Argentinian portion, it's only 50 gigawatts hour throughout the quarter. And the reason for that is that basically, as you know, we try to contract in advance enough supply for the Q1 of this year, in which we typically know it's the end of the melting season. And because of that, we need to rely on full certainty about availability of the gas. And because of that, as mentioned, we only have a smaller percentage of gas coming from Argentina in the quarter. The second question regarding the decrease in related sales, It's basically, as you mentioned, has to do with a 23% reduction compared to the previous quarter of last year. Those are around 300 gigawatt hour. And there's actually two reasons within that reduction. The first one is that you have to write that as a system, there were new contracts that were tender in 2014 that become available starting this year and that's one effect. And the other, as you mentioned on your question, is the migration of clients due to the new legislation that they can opt to be free customers or unrelated depending on their own consumption. Going forward, to your question, there was no maturity in any of those contracts within the period. Your third question regarding SG and A, as I think we've mentioned before, and I think we did this in our earnings report in the end of last year, we are in the process of optimization of some of our cost structures regarding SG and A. That has to do with maintenance, operations and other contracts. And because of that, we reduced actually our SG and A amount last year of about EUR 40,000,000, I think, compared to 2017. And finally, regarding customers, the increase in the volume sales to the Free segment is 100% new customers, no renegotiation of existing contracts. Okay. That's great. Two small follow ups on the gas supply. You said 50 gigawatts coming from Argentina. The rest is part of your agreement with ENAP? Or do you have any LNG cargo that came in? No. Both with Enap and Metrogas, the local suppliers. Okay, perfect. Yes, that's all from my side. Greatly appreciate it, guys. You're welcome. Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to management for closing remarks. Okay. So thank you, everyone, for attending, for joining this conference call, and I hope to see you again for the next quarter review. Have a great weekend, and bye bye. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.