Earnings Call: Q1 2018

May 4, 2018

Greetings, and welcome to the Golbun First Quarter 2018 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, Sebastian Moraga, CFO. Please go ahead. Hello, everyone, and welcome to Bolbon's Q1 2018 earnings review. My name is Artiom Moraga. I am the CFO of the company, and joining me today are Miguel Adarcon, our Deputy CFO and Veronica Pubil and Solaire Rasulis, members of the Investor Relations team. I hope that you have received our Q1 2018 earnings support and 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 2 is as follows. We will begin talking about the highlights of the quarter to then analyze in detail the 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 3 to review the key facts of the quarter. First, in terms of growth activities. In March 2018, Colbun reached an agreement with First Solar to acquire a PV solar energy project under development, which is part of the company's strategy to increase the share of renewable energy projects from variable sources in its generation mix. The project acquired corresponds to the photovoltaic park Sol de Tarabaca located in Pozo El Montez municipality, Tarapaca region, which considers a nominal power of 150 Megawatts. On April 27, 2018, our shareholders meeting approved a total dividend of 271,000,000 amounting a distribution of 100 percent of the net income for 2017. Now please go to Slide number 4 to review the main consolidated figures of the company. Consolidated EBITDA last 12 months for this quarter reached $701,000,000 and net income reached $293,000,000 As of March 2018, financial investments totaled 881,000,000 dollars increasing 9% compared to the balance as of December 2017, mainly explained by cash inflows from our operational activities. On its part, net debt to EBITDA ratio decreased from 1.2 to 1.1x, closing in March 2018. And the average long term financial debt interest rate is today 5%. Now I will turn to Veronica, who will speak about the main drivers of last year results. Thank you, Sebastian, and hello to everyone. Please move to Slide 6 for a review of the main figures of the year, starting with our physical sales and generation balance analysis in Chile. Total generation of the period increased by 8% compared to Q1 2017, reaching 3.5 terawatt hours, mainly explained by the higher hydrologic generation, partially offset by a decrease in natural gas and diesel generation. Physical sales during the quarter reached 3.4 terawatt hours, increasing by 10% compared to the same period of the previous year, mainly explained by higher sales to unregulated customers and sales in the spot market, partially offset by lower withdrawals from regulated customers. Stock market balance during the quarter recorded net sales for 525 Kiowatt hour compared with net sales for 3.56 Kiowatt hours in the Q1 of 2017. During the quarter, 100 percent of the company's commercial commitments were supplied with cost efficient baseload generation. Now please continue to Slide 7 to analyze Tires EBITDA for the quarter. First, revenue for this quarter reached $354,000,000 increasing 6% compared to the Q1 of the previous year, mainly explained by higher, 1st, sales to unregulated customers 2nd, energy and capacity sales in the spot market and third, hydro generation. The higher revenues were partially offset by lower sales to regular customers and lower revenues from transmission tolls due to the change in methodology in the collection of these tolls, which as of January 2018 are paid directly to the owner of the transmission facilities. Raw materials and consumables used increased by 4% in the quarter, mainly explained by higher cost of gas and coal consumption. The higher cost of the quarter were partially offset by lower diesel consumption. We saw EBITDA increased by 7%, reaching $154,000,000 as of March 2018. Now please continue to Slide 8 for a review of the main financial figures of Fenics, starting with our physical sales and generation balance analysis. FENICS thermal gas power generation reached 605 gigawatt hours during the quarter, decreasing by 15% compared to 7 15 kilowatt hours in the same period of the previous year. The lower generation is mainly explained by the lower availability of the power plant, mainly due to a lower annual maintenance. Physical withdrawals from customers under contract during this quarter reached 7 54 gigawatt hours, 13% higher compared to the Q1 of the previous year, mainly due to the beginning of bilateral supply contracts and higher withdrawals of customers under contract. Spot market balance recorded net purchases of 154 gigawatt hours in the quarter versus net sales for 26 gigawatt hours in the same quarter from the previous year. Now please continue to Slide 9 to analyze Fenics Care EBITDA for the period. First, revenues during the quarter reached EUR 53,000,000 increasing by 11% compared to the previous year, mainly explained by higher sales to unregulated customers due to the beginning of bilateral supply contracts, partially offset by lower sales to regular customers. Raw materials and consumables used increased 19% compared to same quarter from the previous year, mainly explained by the increase in energy and capacity purchases in the spot market as a result of the extended major annual maintenance compared to the Q1 2017 at a higher marginal cost due to the failure occurred in the TGP gas pipeline in February 2018. And second, other operating costs resulting from a payment component that was previously recorded as energy and capacity purchases and 3rd, as of January 2018 due to the regulatory changes is recorded as other operating costs. The higher costs were partially offset by lower gas consumption due to the lower generation on the quarter. We saw PEMEX EBITDA totalized 10,000,000 dollars lower than the EBITDA of $11,000,000 recorded last year. Now let's move to Slide number 10 for the consolidated nonoperating income and net income analysis. Nonoperating income recorded losses of $17,000,000 which compares positively with the loss of $21,000,000 in the Q1 of 2017. The lower loss in the quarter is mainly explained by spreads, an increase registered in the line of profit of companies accounted for using the equity method as a result of revaluations of lands owned by Hydro Sam due to its accounting and liquidation value and second, higher financial income due to a greater balance in cash and cash equivalents and higher rates of return on investments on these cash flow pluses. These effects were partially offset by the negative impact on the valuation of the Chilean peso to U. S. Dollar exchange rate over temporary balance accounts in local currency during the quarter. Tax expenses amounted to $24,000,000 which compares with the tax expense of $14,000,000 in Q1 of 2017. The higher tax expense is mainly explained by: 1st, the higher profit before tax of the quarter in Chile second, the increase in the income tax rate from 25.5 percent to 27% in Chile and third, the profit registered in Q1 2017 in Peru as a result of the appreciation of the Peruvian salt during the period and an effect that does not occur in Q1 2019. The company recorded in Q1 2018 a net income of $64,000,000 higher than the net income of $61,000,000 of Q1 2017. The higher profit is mainly explained by the increase in EBITDA recorded during the quarter. Now continuing with this conference call, please go to Slide number 12, where Sebastian will give you an update on the status of our growth opportunity. Thank you, Veronica. As we have mentioned before, we continue searching for growth opportunities in Chile, Peru, Colombia and Argentina in order to maintain a leading position in the power generation business and to diversify our sources of income. Regarding our growth opportunities in Chile, we have focused our growth in renewables, that's hydro, solar and wind, based on 3 pillars. 1st, developing a pipeline of projects. Although the power market is balanced in terms of efficient supply and demand, in a scenario of low growth in power demand and a significant pipeline of renewable projects, our goal is to maintain a relevant position in the sector for which it is very important to have a diversified portfolio of projects, both in terms of technology and location. For more details on this slide, you can see the list of our current portfolio of projects, so please refer to the latest earnings report available at our website. 2, acquiring energy from third parties. In this context, we have signed contracts with Axione for 95 gigawatt hour year and with total SunPower for 500 gigawatt hour year. 3rd, finally, as a third pillar, the company does not rule out the purchase of renewable assets in operation. With this, we are concluding Corboon's Q1 2018 results review. Thank you for listening. And now we are open to answer your questions. Thank you. At this time, we will be conducting a question and answer Our first question comes from the line of Joe Cogan with Scotiabank. Please proceed with your question. Thank you very much for hosting the call. I was hoping you could talk some about the direction happening with spot prices because I know they had hit lows about a year ago, but I understand have been coming up since. And then in both countries, both Chile and Peru, I'd love some more information about the rates at which you've been able to renew longer term contracts. I imagine you can't talk about individual contracts, but any comfort you could provide with regards to the prices of those contracts relative to spot prices would be helpful. Hi, Joe. This is Miguel speaking. How are you? Thank you for your question. Regarding the first part of the question about the Peruvian market, I think it's a combination of numerous factors being a higher better hydrology throughout the year and last year, reentrants of significant new capacity also in 2017. And finally, because of that and also we've got a decrease in demand that has had its effect on marginal costs being around $10 That of course and also the delay on some of the major investments in the mining sector, It's pushing price downwards and because of that we see prices in the level I just mentioned. Regarding Chile, as Ju kay mentioned, we cannot comment on actual specific prices. What we can say and this has been publicly disclosed is that throughout the last year, we have been able to close new agreements PPAs with non distribution companies, whether free clients that has been, I would say, in better conditions to the prices we saw in the previous two regulatory reductions. These are contracts of 6 years on average, mainly in the industrial sector and a relevant portion of those in terms of number of clients, not necessarily volume, come from this new sector of midsized clients because of the change in regulation. All right. Thank you very much. You're more than welcome. Our next question comes from the line of Andrew McCarthy with Citigroup. Please proceed with your question. Hi, there. Good morning all. Thanks very much for the question. I saw the change in the dividend payout ratio for this year up to 100%. I was just wondering if you can comment at all on how you see that evolving going into next year and beyond, please? Hi, Andrew. This is Miguel again. Thank you for your question. So as you mentioned on the last shareholders meeting, we approved a change in the dividend policy in which we went from 30% at the, I would say, target ratio to 50% from 2018 onwards. As you may remember, during the past 2 years, we already paid the 50% of net dividends, although the policy was 30%. And for this year, we're paying, I would say, at least for the moment being a one time situation of paying 100%. I think going forward, of course, the actual payout will depend on how the results will evolve, the cash position and of course the growth opportunities to win counter going forward. I think what it's our target. It's what's been approved in the shareholders meeting, which is 50%. Our next question comes from the line of Miguel Ovale with Creso. Please proceed with your question. Hello, everyone, and thank you for taking my question. Just a couple of follow ups. Maybe if you can give us some more color regarding the Sol the Turacopao project and regarding CapEx or when do you expect the unit to begin? And the second question is regarding the Fenics unit. You mentioned that you presented lower generation, lower energy generation for maintenance. Is it planned? It was planned? Or it was like something somehow unexpected? And what can we expect about the energy, the power generation for the couple of next months? And if you can give us some more color on the pipeline of other projects such as La Nina, Overhead and San Pedro, it will be helpful. Thank you. Miguel, hi. This is Miguel. Miguel Lacom speaking. I didn't get your first question, so I'm going to answer the second one and then ask you to repeat the first part. So regarding Fenics, as you mentioned in February of this year, we had our annual maintenance, which was programmed to be longer than expected. Typical maintenance would last around 22, maybe 23 days and this was about 30 days. Reason for that is that we took the time to replace the 2 main transformers of the units. We used to have Chromton Grips transformers. That's according to our own assessment needed a change. And because of that, we installed 2 brand new Toshiba units. And that's basically the reason for the longer maintenance, which was, as I mentioned, completely expected. Okay. Thank you. Please repeat the first part of your question, which I did not get. Our next question comes from the line of Sebastian Ramirez with Doceca Asset Management. Please proceed with your question. Hi, guys. Congrats on the results. I have two questions. One is regarding the Chilean market. Specifically, I want to understand how you're seeing forward the dispatch of regulated client contracts. We saw a decrease during this quarter, which is what was totally expected. But I want to understand if the current levels that we're seeing, it's what we should expect for the next for the full of the year? Are you expecting even further dilution? And what should we get from that? And secondly, I would like to understand in the Peruvian market, if you can walk us through to the contraction level that you have for 2018 to 2020 in the mid to short term? And if you can comment something about what is your expectations if the new regulation is taking in place and actually, of course, a declaration of a more real spot gas cost that would be beneficial for you or will be detrimental given that last year you contracted a lot of energy, which I think that most likely would be with the last year prices, not with a new reality of higher prices. So those two questions are from my side. So for the first part of your question, I would say that what we saw on this quarter, which is about 10% or 11% decrease in physical sales on the regulated sector is somehow what we expect for the full year. It's hard to say at this point because we're just starting the year. But at least to me, I would say most of the effect, it's already incorporated either in last year's figures or for this year. So again, with the limited information we have so far, I see no relevant changes going forward. Although that's true, that's why as you know, we've been incorporating new PPAs in our PPA portfolio in order to compensate for those lower sales on the related spectrum. Regarding your second question, so in Fenics up until I think it's the Q3 of this year, we are fully contracted in terms of our PPAs versus energy. Going forward, about 75% contracting ratio up until 2023. And basically, we're looking for new contracts to compensate what's happening 2019 onwards. Regarding the change in regulation, it's hard to comment at this point. There are some discussions and some progress being made in order to better reflect the actual cost of producing with pads. At this point, I think it's not safe to comment on how that might impact Fenics going forward. Perfect. If I may add one small question is regarding SG and A within the Chilean operation. We've seen an increase on that. I'm just wondering, given that you're working in a lot of new renewal projects, that should be the explanation for that? Or is it driven by any other thing? Can you please elaborate a bit more on what you're seeing? What specific line you're looking on the SG and A line, Asstian? Just me one second. Our administration costs plus other expenses by function. This quarter, those were $20,000,000.833 $58,600,000 dollars those two lines. And that's taking out what you already are declaring for the Peruvian side. Maybe just I can send you those numbers later. If it's just on the ramp up. Yes. What I can say, Sebastien, is we have not made relevant changes in our renewal teams or any other team in order to cope up with challenges on building these new projects. Basically, we plan to do so with our hub already in the company. Having said that, more than happy to look at the numbers in detail and give you a proper answer. Okay. Great. Thanks. We have a follow-up question from the line of Miguel Ovale with Creso. Please proceed with your question. Hi, again. Sorry, I lost the line. The first question was regarding the project sold at Tarakapat that you mentioned at the beginning of the presentation. And maybe I was wondering if you can give us some color regarding the project, the estimated CapEx. When do you expect the beginning of operations of the project? And what do you expect in terms of EBITDA or revenues or any color that you can give us? Thank you. Miguel, thank you for your question. I think it's a bit too soon to discuss specific figures. What I can say is that's a greenfield project in which we need to go through the whole environmental approval process and further studies. Because of that, at this point, I think we're going to spend most of year in that process. And after that, we're going to have a better estimate in terms of CapEx and timing for construction. I think that's all we can say at this point because once we decide on construction and have more details about the specific equipments and of course included CapEx, we'll in turn would have more information about load factors, estimated production and with that you can derive EBITDA, but I think not at this point. Okay. Thank you. That's clear. 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 this conference call and look forward to see you again for the June 30 results. And have a great weekend. Bye bye.