Earnings Call: Q2 2019

Aug 1, 2019

Good afternoon, everyone, and welcome to the NG Energia Chile's Second Quarter 2019 Results Conference Call. If you need a copy of the press release issued yesterday, it is available on the company's website at www. Ngenergia. Cl. Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed note in the press release regarding forward looking statements. We would like to advise participants that this call is dedicated to investors and market analysts, not for the press. We ask all journalists to contact NG Energia's Chile's PR department for details. I would now like to turn the conference call over to Mr. Eduardo Milligan. Please go ahead, sir. Thank you very much. Good afternoon and thank you for attending our quarterly call. Today, Marcelo Munoz, Head of Investor Relations, Bernita El Fonte, Head of Corporate Finance, and I are very pleased to be here with you and present our first half results. So let's start and please go to Page number 6. Here, just to identify in the map a couple of changes in our asset base. First, we are showing in this map that recently, we acquired 2 solar plants, Los Larios and Decoyo, with combined peak capacity of 55 megawatts. 2nd, Tokopilla Co Unit 12 and 13 with a combined bulk capacity of 171 megawatts are not anymore in the map since both units were recently disconnected from the system. And third, I'm unit is now in full operation. So this unit is not anymore in the commissioning phase. Now let's jump directly to Page 8 to discuss about the future and our decarbonization strategy. There are 3 main events to discuss. First, and as part of the asset rotation plan we started back in 2018, Units 12 and 13 were finally decommissioned during the Q2 of this year. And this was possible considering the full interconnection of the Chilean system. 2nd, we signed a binding agreement with the government in which we committed to close core Units 14 and 15 in Tagopilla. Following this commitment, we requested authorization to the market coordinator to disconnect both units by the end of 20 21. This is an important step for us towards the transformation of the company. Hence, we have fully committed to close 4 39 megawatts of coal units in the site of Tagopilla. Also, as part of this agreement, we are also committing to participate every 5 years in a roundtable with the authorities and generation companies to evaluate additional actions in line with the country's ambition and challenge to become carbon neutral by 2,050. Now let's go over the most recent events and turn to Page 10 to first give you an update on the systems interconnection. So the full interconnection of the Chilean system was reached on May 29. This is a key milestone for the system and is mainly contributing in 3 key aspects. 1st, the full interconnection reduced the volatility of the system's marginal cost. We can see this positive effect in both graphs below, showing the marginal cost in the north and south center sand during the month of June 2018 2019. The green line represents the marginal cost in June 2018 while the red during this year after the full interconnection. I believe both graphs are very clear and show how the marginal price is less volatile after the full interconnection. 2nd, the interconnection also helps to reduce a bit the marginal cost of the system. Well, the interconnection is not the only factor. Also need we also need to consider the lower coal prices, which are basically determining the system's marginal cost and also the additional gas coming from Argentina in the center side. 3rd, we have seen after the interconnection a more frequent coupling of the marginal cost at both systems, which is also very relevant to yield differences between both systems. And this is adding, of course, more competition and therefore, benefiting the overall systems efficiency. Then on next page 11, we are basically explaining the decarbonization announcement mentioned before. On June 4, President Pinera announced an agreement with 4 generation companies to phase out some specific core units from the Chilean system. In summary, the announcement includes the binding commitment by ENGIE and 2 additional companies to close 8 core units during the next 6 years. These 8 units have a combined installed capacity of approx 1 gigawatt. Now this agreement also includes our commitment to reassess every 5 years the feasibility of further actions to reduce CO2 emissions. As you can see in the chart between 2018 2019, we have basically committed to close 4 39 megawatts of coal units located in the site of Tecopina. The closure of these units also triggered an impairment of $116,000,000 Then as a consequence of these actions, and here comes the transformation and growth story for the company, we are planning to build up to 1 gigawatt of renewables to replace the units we are closing. In this line, we started with the acquisition of 2 solar plants with a combined capacity of 55 megawatts peak, and we will start with the first 3 greenfield projects of our portfolio of renewables. These are the Palama Wind Farm and Capricornio and Termayas solar plants, all located in the north and that represent a combined installed capacity of 3 62 Megawatts and an investment that should be close to the $300,000,000 We will give you an update in some minutes on the status of these projects. Let's turn to next Page 12, other important recent events for our business. First, our clients. During this first half, we concluded other important PPA negotiations with Antecoya, part of the Antofas Acasta Mila group with Molycorp and some additional clients that in total represent 0.5 terawatt hour of annual contracted demand. The conceptual agreement of these renegotiations is the same applied to previous PPAs. I mean, an initial discount in the short term, a further discount afterwards, together with the change in the indexation formula moving to 100% inflation and finally, an extension of the PPA at latest market conditions. We also signed new PPAs with 3 clients in the North and South Center regions for almost 0.5 terawatt hour of additional annual contracted demand. Then for our assets, 2 relevant events, the acquisition of 2 PV plants and the full commercial operation of IEM, both during the second quarter. In relation to our ratings, we also have 2 positive uptakes. First, Fitch reaffirmed our international BBB rating and changed the outlook from stable to positive. And second, our local rating was upgraded by seller to AA minus. Finally, during the first half of twenty nineteen, we distributed the final dividend for 2018, and we also distributed the provisional dividend for the present year. In total, we distributed $72,000,000 during the first half of twenty nineteen. So now let's move to the key messages of this first half on Page 14. So first, we are glad to mention Ityo has delivered another strong quarter and continues to deliver solid progress towards our objectives for this year. So we can confirm that we may be in the upper limits of the guidance we provided for this year. We may also be able to beat the guidance if market conditions are favorable during the second half of this year. So we will see. 2nd and third, we continue building a strong portfolio of clients and at the same time, leveraging on them to start the transformation of our portfolio of generation assets. I will explain in a few minutes where we are in relation to our investment plan. And 4th, we have reached a sound and flexible capital structure with a strong cash generation that will definitely allow ICL to benefit from attractive conditions to refinance our existing bank and create, of course, attractive returns for our shareholders. So now let's see our performance in the next two pages. I am now on Page 15. As you can see in this summary, we reached during the first half of twenty nineteen total sales for 5.4 terawatt hours compared to 4.4 terawatt hours back in 2017 during the same period. This means a 24% growth in physical sales, which are mainly explained by the newly related PPA, which triggered the construction of IAM. As a consequence, our EBITDA almost doubled between 2017 2019, while the net recurring income increased from $44,000,000 to $145,000,000 Of course, these figures are very impressive, but we need to consider that we invested almost $1,000,000,000 in the IEM project. Now on Page 18, we can see the variation between 2019 2018. Our revenues increased in 27%, EBITDA in 53% and recurring net income in 66%, while our physical energy sales increased in 11%. The 53% increase is mainly explained by higher related sales with the tuition companies in the Southern Central region. There is also a positive impact coming from the recognition of liquidated damages paid by our EPC contractor due to the delay of startup of IEM project that will do in Arista explain in a few minutes. Let's move to Page 17, please. In this graph, we are showing how we supplied our contracted demand. Basically, what we are saying in this stage is that between IEM, CPA, CTH and the spot market, we are covering most of our contracts, adding natural gas combined cycles to stabilize the marginal cost you will pick out. As you can see, the production coming from Vuelix in Tecobili is marginal, for CPM1 and CPM2 units continue to be acquired by the system by in less extent than in previous quarters. We need to consider in this graph that IEM was only in full operation during May June. So that's why we will see a reduction in spot purchases during the next quarter. So basically, IEM will start operating in full, and then we will see a higher, let's say, physical hedge for our contracted demand. Now Pages 18, 19 20 are well known and describe our main strength, which is the quality and duration of our portfolio, which currently which is 12 years and probably represent 1 of the longest in the market, and we continue adding new clients and contracts. But now let's talk about our projects under development and where we are with them. Let's go to Page 21. So our development team has been very busy, focused on the first 3 renewable projects of what we call the asset rotation plan, and they are today in the process of finalizing some key milestones to start construction very soon. I already talked about our acquisition of the Los Lourdes and the Pollo Solar Plants, which will contribute 55 megawatts of renewable capacity. But now let's talk about the upcoming new projects. We have 3 projects in a ready to build stage. The Kalama wind farm will meet around 36 turbines of 4.2 Megawatts capacity each, which means a total of 151 Megawatts. To give you an idea, the hub height of each turbine is close to 90 meters and the radio is close to 145 meters. We are finalizing the detailed engineering, and we expect to give the notice to proceed to the contractors around next October. This would imply to reach commercial operation date around the first half of twenty twenty one. We will, of course, update these figures once we reach, let's say, the construction stage. Now for Calricornio EV project, we will require around 250,000 high efficiency panels to reach a total capacity of 97 Megawatts peak. The design includes trackers, and the project is also finalizing the digital engineering to start work around September. The plan is to reach commercial operation dates during the second half of twenty twenty. Finally, for Tamaya PV project, we are finalizing the design to reach 114 megawatts peak. So we will probably have further news and details on the design and dates in which we will start construction during the next quarter or the following. These three projects that will bring 3 62 megawatts of renewables to our portfolio will require total investment that will be close to BRL300 1,000,000 and that will be financed inside our balance sheet. So we will continue developing a 20 fourseven renewal portfolio by combining solar PV and wind technologies in different regions of the country together with our existing gas capacity. Our idea is to keep several open options in parallel and deciding construction and type of technology at best time to market conditions. Now in addition, on Page 22, we show 3 transmission projects awarded back in 2018, which are under construction. They will require around 2 years for construction, and the ABI will be close to 1,500,000 per year. As we mentioned before, these projects are interesting for us because they are locating in areas in which we can have some synergies. And second, they are linked to our renewal portfolio. Now on Pages 2324, we describe the main characteristics of IEM and the port considering we reached the commercial operation date of IEM a couple of months ago. The plan on the port are performing as expected. You know that the project was within budget and now in commercial operation. This new project will allow ICL to basically reduce our generation with the oldest coal plants. We also replaced part of our hospital chases. And third, we lowered our average energy supply cost. So this is the end of a successful project that has become now part of the Ity oil production fleet. Despite the delay of some months in the commercial operation date, the project team and the contractor did an excellent job to reach the required performance and very important within budget. So our congratulations to both teams. Now let's continue and please turn to Page 25, where we show that our CapEx financing needs have considerably decreased, releasing on balance sheet financing capacity for our asset rotation plan. We will be able to finance our investment in renewables through a mix of operating cash flow and additional debt while keeping our leverage ratios under control. We have added in this version our best estimate on development CapEx for the full year that includes investments in renewables and transmission products. Now in terms of guidance and before Bernardo Vitta explains in detail our financials, please move to Page 26. Italo delivered solid results in 2018, reaching the high end of our guidance. Now for 2019, which is the 2nd year of an important ramp up period for us, we are keeping the guidance provided last year. You can realize that if you multiply the first half EBITDA times 2, it seems that we will beat by far this guidance. However, you need to consider that there is a one shot impact related to the penalties the contractor of IAM paid in the first half of twenty nineteen, which includes a portion of the revenues I'm project was not able to generate back in 2018. This is something Bernadita will explain in a few minutes. Said that, we do believe that we may be able to reach the high end of the guidance. And if market conditions are favorable, we could beat this limit following the completion of the southern segment of the inter Chile line and also lower coal prices that should contribute to lower spot energy prices during the rest of the year. Well, now let's move to the next section. So I'll let Bernardo Dita to give you more details on our financial results. Well, thank you, Eduardo. Hello, everyone. Please turn to Slide 28, please. Our EBITDA climbed to BRL 285,000,000 in the first half of twenty nineteen, a $98,000,000 improvement compared to the first half of last year. This was mainly a result of the increased volume sales to distribution companies. But let's give a closer look to the bars of this chart. We'll start with a green representing positive EBITDA variation. In 1st place, sales under the new PPA with distribution companies, which had a ramp up beginning 2019, reached almost 1.6 terawatt hours and $206,000,000 in the first half of the year. Principal sales under this contract grew by 86% compared to the first half of twenty eighteen and had a positive $76,000,000 impact on revenue. 2nd, we reported an increase in average realized prices, mainly due to the greater weight of the higher price regulated contracts and also due to higher fuel prices used in the tariff indices, particularly in the Q1, which reflected the cold price high observed in the last quarter of 2018. Higher average real life prices had a $7,000,000 positive impact on EBITDA. 3rd, our generation decreased 16% due, among other reasons, to the increased penetration of renewables in the system, plant maintenance schedules and the frequent dispatch of coal plants at lower load factor. Coal generation, in particular, dropped by 31% as compared to the first half of last year, and it was affected by the delayed start up of the IEM project. In contrast, gas generation increased by 25% due to an increase in gas supply, particularly towards the end of the second quarter and because gas generation is better suited than coal to cope with the intermittency of renewable generation. The decrease in generation, coupled with a decrease in international coal prices through the first half of the year, resulted in a $45,000,000 decrease in the fuel cost item in the first half of twenty nineteen. Fuel cost could have decreased even further had it not been for the number of plant start ups to cope with the systems intermittency, which requires higher consumption of diesel. We would like to note the increase in renewable generation following the acquisition of Villa Los Flores and Andacollo PV Plants in April, which contributed 20 kilowatt hour in 3 months. In 4th place, we had a $3,000,000 we had $3,000,000 in net operating cost savings. Now last but not least, among the positive factors, I'd like to comment on the last green column labeled other operating income. As discussed earlier, the IEM project, whose construction was committed to supply distribution companies, reported delays. IEM was initially expected to begin commercial operations in July 2018, but it did not start commercial operations until May 16, 2019. On the one hand, this meant that I'm failed to receive capacity payments over such periods. And on the other, ECL's energy supply costs were higher than those it would have reported had IEM been in cost in operation. This is because IEM is the lowest cost plant of our terminal fleet. So the customary protection against the risk of project delays is, as you know, the liquidated damages included in the construction contract with the main contractor. Delayed liquidated damages are intended to compensate for lost income similar to the concept of business interruption or luprotesante in Spanish, which is normally used in the insurance industry. In this specific case, the IEM and DC contractors paid liquidated damages, of which BRL 74,900,000 went to our income statement. This amount is considered recurring operating income because it compensates for recurring operating income, which our company fails to proceed during the delay period. In other words, it is a kind of phasing or timing effect in the recognition of operating results. So we recognized $75,000,000 in one shot in the 2nd quarter, while we should have recognized roughly $30,000,000 in the second half of twenty eighteen and $45,000,000 in the first half of twenty nineteen. In the same bar, we also included the regulation with other insurance compensation for business interruption, which resulted in a $3,000,000 in liquidated damages plus the negative variation in insurance compensation resulted in a $72,000,000 net positive impact on EBIT. We may now comment briefly on the gray bars, which correspond to the effect that put our electricity margin under pressure. First of all, given the significant sales increase, which coincided with a decrease in our own generation, we reported higher physical energy purchases, which represented a $55,000,000 cost increase. 2nd, physical sales to 3 clients decreased 6%. In the Q1, some mining operations reported temporary stoppages due to the out Atlantic winter and environmental improvement works at smelters. The 2nd quarter was affected by the 14 day strike at Coralco's Chibicamata mine. The regulated clients in the north also reported a decrease in physical sales. All in all, the physical sales decrease had a $7,000,000 negative effect on EBITDA. In 3rd place, the growth in Central South Chile caused an increase in average spot energy prices. The average realized price at which we saw the energy was $57 per megawatt hour versus $50 in the first half of last year. These higher spot prices explain the $15,000,000 impact on EBIT. 4th, the contracted sales increase also requires higher capacity purchases. So the increase in the sufficiency capacity provisions had a $28,000,000 impact on it. Now please turn to the next slide, number 29. At the center of the slide, we can see each of the after tax variations in net recurring income, which increased 66% from BRL 87,000,000 in the first half of twenty eighteen to almost BRL 145,000,000 in the first half of 2019. The good news is that by far, the main variation is the $72,000,000 after tax increase in EBITDA, which we just explained. Other nonapplying items, mainly the variation in insurance compensation for property damage and depreciation, had a $9,000,000 net impact. We also note a $5,000,000 accounting increase in interest expense, but this is just because interest seems to be capitalized during the completion of the following the completion of the IEM project. If we look outside the box showing returns results, we see that net income was significantly impacted in both periods by the impairment of coal fired units that will or have been closed. In the first half of twenty eighteen, we booked the impairment of Units 1213 with a $52,000,000 after tax impact, while in the first half of 2019, we reported the Units 14 15 impairment with a $64,000,000 after tax impact. In Slide 30, we can appreciate a $36,000,000 net debt reduction. In terms of usage of cash, capital expenditures amounted to $77,000,000 excluding capitalized interest, most of which correspond to the final payment to the IEM project EPC contractor. In the next bar, we show the acquisition of the Los Lores and Ambacolios solar PV plants. We paid $35,000,000 for the purchase, but we presented net of the cash available at those companies at the time of the purchase. In next place, we paid $75,000,000 in dividends. This includes the $22,000,000 final dividend on 2018 earnings, which we paid last May, a $50,000,000 provisional dividend on account of 2019 paid in June and $4,000,000 in dividends paid to our partner in CTH. The next two bars correspond to factors that had a direct effect on debt balances that had no effect on cash. The first bar includes accrued interest and mark to market variations, and the second one includes accounts such as land and vehicle leases that were classified as financial leases as a result of the implementation of IFRS 16. We paid $56,000,000 in income taxes and CO2 sources included in the gray bars with negative numbers as they lead to a reduction in net debt included a $22,000,000 cash payment from 10 and $292,000,000 in operating cash flow. This last number includes an $80,000,000 dollars cash payment corresponding to the liquidated damages paid by the IEM EPC contractor. Of the 80,000,000, almost $75,000,000 went as we already commented to the income statement and the remaining $5,000,000 went to the balance sheet as a deduction from the fixed asset account. Now Slide 31 details our liquidity and debt structure, and the main changes from our last quarterly call are the following. Thanks to the EBITDA growth, the net debt to EBITDA ratio has continued decreasing and is now at 1.7x. Our gross debt decreased by $10,000,000 and pitch ratings confirmed our CAGRV flat international ratings and changed the outlook to positive. The next slide 32, we can see that in 2019, we have increased the dividends paid, including a $50,000,000 provisional dividend paid in June to recognize improved recurring income and the conclusion of our CapEx intensive phase. We are now positioning ourselves to finance the next investment phase, which will allow us to invest in renewables as we embark on our asset rotation plan. Our stock price evolution over the last 12 months shows that ICL share price increased by almost 9.8%, whereas the EBITDA fell by 4.3%. Well, thank you for your attention. This is all on my side, and I'll leave you with Eduardo to make the final remarks. Thank you, Erlodita. Well, to conclude this presentation, I just want to highlight 2 main messages. First, with the IEM commissioning and full operation, we have concluded a CapEx intensive phase, and now we are ready to start the construction of our first wave of renewals that will add around 3 62 megawatts of efficient capacity to our portfolio. And second, we are glad to confirm our guidance and operational results for this year and therefore, to also confirm a stronger cash generation phase for the company that will allow further flexibility to implement our transformation and development plan. So with these final two messages, we are concluding our Q1 presentation. Always, thank you very much for your participation, and we are ready for any questions that you may have for us. Thank you. And ladies and gentlemen, at this time, I'm showing no questions. I would like to turn the floor back over to ENGIE Energy at Chile for any closing remarks. Thank you very much to everyone for participating this time, and see you next quarter. Thank you. This concludes today's presentation. You may now disconnect your lines.