Earnings Call: Q4 2018

Jan 31, 2019

Good afternoon, everyone, and welcome to NG Energia Chile's 4th Quarter 2018 Results Conference Call. If you need a copy of the press release issued yesterday, it is available on the company's website at www. Dotng energia.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 company's 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 Energy at Chile's PR department I will now turn the call over to Mr. Eduardo Milligan. Please go ahead, sir. Thank you. Good afternoon and thank you for attending this call. Today, we are Marita Infante, Head of Finance Marcela Munoz, Head of Investor Relations, and I am very pleased to be once again with you and present our full year results for 2018. So now let's start, and please move directly to Page number 7. Before we jump into the key messages, we want to share I just want to highlight and recall this page because here, we described back in January 2018 the main drivers of our growth during these 2 years. 1st, new regulated PPA that started back in January 2018. This PPA allowed DCL to become an active player in the central system and show an additional 65% growth in our EBITDA by the end of 2019 compared to 2017. 2nd, the importance of the interconnection for the Chilean system, its role to increase the overall efficiency of the system and also the sound execution of this project, which was delivered on time, budget and performance. And first, what I want to highlight here, the new investments associated with the new regulated PPAs, which experienced some months ago which experienced some months of delay compared to the initial schedule, but still on budget and probably even below the estimated initial CapEx that we communicated before. And after this initial introduction, please turn to Page 9, in which we summarize our progress during 2018 with 4 key messages. 1st, in 2018, we reached solid results, meeting the high end of the guidance we provided 1 year ago. Our EBITDA reached BRL 376,000,000, which is a 36% year on year growth. And our recurring net income reached $161,000,000 which represents an 80 6% year on year growth. With these results, we need to recognize the importance of the new regulated PPA, which started last January That became the main driver of our growth and results in 2018. But we are also pleased to mention that besides the new regulated PPA, we signed new contracts with several free clients in different industries for almost 7.50 gigawatts hour that together have a duration close to 10 years. 2nd, back in April, we closed the renegotiation of almost 3 terawatts hour of contracted PPAs with some of our main clients, implementing together with them a win win scheme that will create value for both our clients and us. This renegotiation, as you know, triggered also the possibility to request the CME closure of 2 coal plants in Toquepilla. And also, this new plant triggered the reconversion of part of our thermal portfolio to renewable technologies. 3rd, our development and construction teams have been really busy during the last 3 years. And for their pleasure, they will continue very busy in the coming years to finalize the synchronization of IEM project, finalize the construction of the new transmission lines this year was awarded back in 2018 auctions. And finally, and in line with our transformation plan, start as best time to market the construction of new renewable technologies in the system. And 4th, we continue to keep a sound and flexible capital structure with a strong cash generation that will allow Isidore to benefit from attractive conditions to finance our transformation plan. Now let's skip Page number 10, in which we present the main industry and company events during the year, but we will cover most of them in the next pages. I am now on Page 11. In this new page, we intend to give you a clear picture of 2018 achievements, which in other words will become the base for ICL long term growth under an improved risk profile. Our contracted demand reached almost 10 terawatts hour under a well balanced portfolio between free and regulated clients. As I mentioned before, we are now operating in an interconnected market, up to 900 megawatts of power transported by stem that also allows to release the trapped solar PV production and hopefully, the interconnection will be fully completed in this first half of twenty nineteen. While on the supply side, as you know, we signed new gas supply agreements to run our combined cycle plants that have become an important stop loss limit mechanism for the overall system, considering the higher intermittency when operating more and more with renewables. Then our construction team is completing the synchronization of I'm which started operating in test mode back in October and that will be completed by the end of this quarter. As I mentioned before, we have had some months of delay in this final phase, but we are on track to reach the COD as fast as possible. And finally, back in 2017, we decided to implement what we call rich PPA agreements with other generation companies to reduce volatility and basically implement a financial hedge for our margin, given the delay in the full interconnection of the system. All these actions allowed to reduce risks, volatility and secured our EBITDA and net recurring income growth in this 2 year period. And now let's move to next page to talk about the future and our decarbonization strategy. Well, in ICL, we are certainly aligned with the market, stakeholders and society expectations towards the necessity for a clear, cleaner and more efficient system. We know that the decarbonization of the energy matrix is vital, gradual and also a responsible path. And this is why in the recent years, we took some early steps, which are aligned with this decarbonization, developing 10 projects and deciding not to build any new coal plants besides IEM, which was contractually committed since 2014 as part of the regulated PPA awarded to ICL. Then back in April 2018, ICL was a first mover by announcing the renegotiation of around 3 terawatt hour of PPAs that triggers the possibility to request closure of 2 coal units in Cocopilla, totaling almost 170 megawatts. But more important, this agreement also triggered the plan to develop and build almost 1 gigawatt of renewable capacity in the upcoming years, which will require all our efforts and resources considering this new capacity will demand an investment close to $1,000,000,000 In this line, during 2018, ICL actively participated also in a roundtable organized and leaded by the Ministry of Energy to work together in the design of a more efficient system by gradually start replacing thermal generation with the most efficient technologies that will certainly be available in the next years. So now please let's see some numbers. I'm now on Page 13. Here, we summarize ICL financial performance. There are no bad surprises here. Our results and performance are well aligned with the guidance we provided 1 year ago. As I mentioned before, EBITDA reached 3 $76,000,000 a $100,000,000 increase compared to 2017, while the recurring net income increased to BRL 161,000,000, which after the impairment accounting recognition of Units 1213 almost reached the same net income of 2017. Now let's move to the next page to see our supply and demand balance during the year. Our total demand, as you can see, reached almost 10 terawatts hour, which was supplied from 2 main sources: our own production and the 2nd source, energy purchases from the spot market. In summary, we supplied our demand in 50% with our own generation and almost 50% with spot purchases, including the supply agreements with other generation companies that I mentioned before, we're trying to reduce volatility in the spot market basically. As you can see in the graph, Unit 2013 only produced 2%. And with the entrance of IEM together with a full interconnection, these two units will be completed, displaced in the dispatch ranking, allowing its final closure. Now on Page 15, we can see the duration of our portfolio. As you can see, we keep a 12 year average remaining life, and we are working to increase the duration by signing new contracts or discussing options with our existing clients to increase the duration of existing PPAs. Next Page 16, I believe was explained in detail in our 3 previous quarters, and we are ready to say goodbye to this page until we might be ready to bring new developments on this important matter. While on Page 17, a different way to show our main strength and our vision through 2030, you can see that the green area has become wider and this is because in 2018, ICL was awarded with additional 7.50 gigawatts hour of contracted demand with a 10 year duration. So our commercial B2B team is also delivering tangible results. Now let's turn to Page 18, please. We showed this map a couple of quarters ago To conceptually explain our development plan and to gradually replace aging coal plants. We mentioned that we are planning to develop a 20 fourseven renewal portfolio by combining solar PV and wind technologies in different regions of the country, while at the same time keeping several options in parallel and deciding construction and type of technology at best time to market conditions. In this line, we have 2 projects reaching ready to build stage, which may become the first 2 renewable projects to be launched as part of the transformation plan that we launched last year. 1st, Calama Wind Farm in Antofarasta with approximately 150 megawatts of installed capacity and second, Capricornio Solar PV with around 90 megawatts. At the same time, we continue to build 3 new transmission lines, which were awarded back in 2018, which are described on next Page 19. They will require around 2 years of construction, and the AVI will be close to EUR 1,500,000 per year. And as we explained in the previous quarter, these projects were interesting for ICL because, first, they are located in the areas in which we can create synergies with our existing operations second, they are linked to our renewal portfolio under development and third, they will contribute to increase our regulated revenue. So now on Page 20, we also want to highlight the commercial operation of our new port, Puerto Andino. This project requires a total investment of BRL 120,000,000. This is a mechanized port with the ability to receive a Capesize carrier. The picture on the right shows the 1st Capesize that arrived to Puerto Andino. And as we explained before, the benefit is related to economies of scale, higher and loading speeds, lower demurrage cost and therefore lower cost for ICL. But as we also mentioned a couple of quarters ago, the full capacity of this port will not be used for coal unloading, considering that this port was designed for the potential needs of a second coal project that we decided not to deal. Therefore, we are currently negotiating and looking to different alternatives in parallel to optimize these assets. We believe the overall additional income we can create could be close $5,000,000 by using the unused capacity. Let's talk a bit about IBM synchronization. The plant was successfully synchronized on October 29 and reached the 1st base load on mid November. As of December 2018, the overall progress is close to 100% from a physical point of view, And we are currently finalizing all required tests to reach the commercial operation as soon as possible. The completion date of this project was rescheduled for the end of Q1 of this year. And as I mentioned before, the project is on budget and on performance. Now please turn to Page 22. Since we are in the last phase of IAM's commissioning and Puerto Andino's originations, our CapEx financing needs have considerably decreased, releasing on balance sheet financing capacity. We believe that we may be able to finance at least EUR 700,000,000 of new investments in renewal capacity through additional debt, while keeping our leverage ratios under control, considering our forecasted cash flow generation in the coming years. In terms of guidance, please move to Page 23. As mentioned before, ICL delivered solid results in 2018, reaching the high end of 2018 guidance. Well, in fact, results were better than the high end, but let's move forward and keep our focus in 2019, which is the 2nd year of an important ramp up period. For 2019, we maintained the guidance provided early this year with only a minor adjustment in our expected EBITDA, mainly explained by the delay in the full interconnection. To the left side of this slide, we show the main variables that may impact our results depending on their behavior. For example, in relation to our PPA portfolio, there are 2 effects: a positive impact of the new regulated and non regulated PPAs and the negative impact related to the short term discounts we may apply in any future or existing negotiation. In terms of spot prices and increasing coal prices, our dryer hydrology would have, of course, a negative impact in our EBITDA. In terms of supply, what we can mention is that further delays in the full interconnection and also IAM's COD could have a negative impact since we will continue to rely on spot purchases to meet the demand under our contract. However, the closure of Unit 2013 would have a positive effect on operating costs, while the power supply agreements with other generation companies provide a reasonable hedge against spot price risk and volatility. In terms of demand, we are closely following up the migration of clients from the regulated to the unregulated segment. To prepare our guidance here, we already used some conservative assumptions. But in real life, these conservative assumptions have materialized. So I think we are very aligned with what happened in real life. We are also monitoring longer term demand trends in terms of demand from the mining industry and the development of electric mobility. And finally, regulatory changes such as green taxes or changes in ancillary services can always have an impact in our results. Well, you may have noticed also that we have modified our guidance to 1 year, and this is because our intention back in early 2018 was to give us strong visibility of the structural transformation during these 2 years. Once again, we are glad to confirm that our guidance has been met, and we remain committed to deliver positive results going forward and meet the 2019 guidance. We'll now move let's move to the next section. So I will let Bernardo Dita to give you more details on our financial results for 2018. Well, thank you, Eduardo, and hello, everyone. Please turn to Slide 25. As Eduardo just said, we are proud to confirm that our actual results were even better than the high end of the guidance range. Our EBITDA grew by 39% to 3 76,000,000 that is a $100,000,000 increase. The main reasons for the EBITDA improvement are the following. The most important reason is the new PPA with distribution companies, which contributed physical sales of more than 1.6 terawatt hour, just in line with the volume we had anticipated and represented 100 and 73,000,000 in additional revenue. As expected, we did report a decrease in physical sales to 3 clients, mainly due to the end of the Brasovir Atomic PPA in August 2017, which was partly offset by higher demand from other mining clients and also sales to new clients. All in all, lower physical sales to 3 clients had a negative $9,000,000 effect on EBITDA. Now in terms of contract prices, we reported a positive $12,000,000 net impact, which resulted from movements in different directions. The PPA renegotiations closed since late last year had a negative impact in the surroundings of $24,000,000 But this figure was offset by other factors such as differentials in sufficiency capacity provisions, onetime payments agreed to in the context of the CPA renegotiations and the most relevant one, the tariff indexation resulting from the increase in inflation and fuel prices, which had a $26,000,000 positive effect on revenues. In next place, given the significant sales increase, we naturally reported higher energy procurement costs. These higher costs amounted to BRL 72,000,000 in 2018. On the one hand, fuel costs decreased 10% despite the increase in fuel prices through most of the year, and this was due to the decrease in our own generation and also due to our efforts in reducing logistics costs related to our emission reduction processes. As discussed earlier, our generation has decreased due to the entrance of lower cost producers, including renewables and also due to energy flows coming from the interconnection. On the other hand, we reported much higher energy purchase costs to counter the decrease in our own generation and to supply the new contract with distribution companies. Our physical energy purchases increased by almost 1.9 terawatt hour, including purchases on the stock market and purchases under bridge supply agreements with other generation companies, which contributed to soften the volatility in spot prices. So the increase in energy purchase costs, combined with the drop in fuel costs, explains this $72,000,000 impact on EBITDA. Now the contribution of other businesses, including transmission and gas sales, decreased by $9,000,000 compared to last year. The main effect was related to positive re liquidations reported the year before. Finally, other positive effects on EBITDA included BRL 5,000,000 related to our 50% share intense net income, which we compute in our EBITDA calculation. There was also BRL 4,000,000 insurance recovery for business interruption related to a past loss at our CMP 3 plant and a $4,000,000 net reduction in operating costs. In sum, a very positive period with a 14% increase in physical sales and a 36% increase in EBITDA, which, as Eduardo mentioned, exceeded our guidance. Now please turn to the following Slide 26. The interesting part of this slide is the highlighted area in the center that shows the evolution of net recurring income. Net recurring income almost doubled and reached BRL 160,000,000 in 2018. This was mostly because of a stronger operating performance as EBITDA increased by $78,000,000 on an after tax basis. There were other smaller effects, including a small reduction in net interest expense. This was because of higher interest income and the continued interest capitalization in the IEM and Puerto Andino projects. Now if we look at the bars falling out of the highlighted area at the center, we can observe significant nonrecurring items affecting net income in both years. The difference is that in 2017, the nonrecurring effects were positive, while in 2018, they were negative. In 2017, we had insurance recoveries as well as a deferred tax reversal explained by the tax reform in Argentina. These two items taken together cost a $15,000,000 after tax increase in net income in 2017. In 2018, we had the opposite situation. Although we had BRL 4,000,000 in insurance recoveries, we reported a BRL 62,000,000 after tax effect from asset impairments and write offs, notably the impairment of the 2 coal fired units, 1213 in Tacopilla, which we plan to close sometime in 2019. Even after considering these significant nonrecurring effects, net income increased 1% to BRL 102,600,000. Now please move to Slide 27. Our net debt increased 9% or by $71,000,000 from the beginning of the year, reaching $842,000,000 as of the end of December. This evolution is better understood when looking at our cash flows. So let's first look at the 4 main uses of cash in 2018. First, capital expenditures reached BRL 187,000,000 mainly related to the IEM project. Please note that this number does not include interest during construction. 2nd, dividend payments amounted to $71,000,000 including the $30,000,000 final dividend on account of ENGIE's $217,000,000 net income, which we paid in May and $14,000,000 paid to our partner in CTH throughout the year. We also paid a $26,000,000 provisional dividend on account of our $218,000,000 net income last October. First, we had income tax payments for $39,000,000 and 4th, although it doesn't show clearly in any column in the slide, we repaid debt. So our short term debt decreased by $10,000,000 reaching a new total of $90,000,000 with Scotiabank and Banco Estao. The main sources of cash, which we use to finance these 4 main cash uses were the following: 1, by far, the most important source was net operating cash flow, which reached BRL 313,000,000 dollars 2, we received a $20,000,000 debt repayment from TEN in October. TEN achieved project completion as defined in its loan agreement and was entitled to make a first cash distribution to its shareholders. And 3, we used our available cash as our cash balances decreased by $17,000,000 during the year. So the increase in our gross financial debt is mainly explained by the 20 year tolling agreement signed with TEN for the use of dedicated transmission systems connecting our power plants in Mexiones with the National Grid. The agreement has a present value of approximately $60,000,000 and considers annual term payments of approximately 7,000,000 dollars At the end of the 20 year period, ICL will become the owner of the asset. So from an accounting perspective, this is a financial lease and is thus considered financial debt. Now Slide 28 has not changed significantly from the previous quarters. It provides details of our liquidity and debt structure. Despite the net debt increase we just talked about, the net debt to EBITDA ratio decreased from 2.8 at year end 2017 to 2.2x. This was obviously because of the EBITDA improvement. We expect the net debt to EBITDA ratio to decrease during the coming quarters as EBITDA should continue strengthening, and we do not expect debt to increase significantly from current levels. We have a $100,000,000 available committed revolving credit facility maturing in June 2020, which remains fully available. This supports our liquidity. And in terms of credit ratings, both S&P and Fitch have confirmed ECL's rating at BBB stable, while both Fitch and more recently, Feller Rate upgraded ECL's national scale rating to AA mines. Finally, on Slide 29, we see that in 2018, we paid $56,000,000 in dividends and that in the last 4 years, our dividends have been limited to 30% of net income to support our CapEx expansion. As you know, we paid a provisional dividend of $26,000,000 on October 25 on account of 2018 net earnings. The final dividend payout ratio for 2018 will depend on the company's cash availability and financing requirements. It will be proposed by our Board and approved at the Annual Ordinary Shareholders Meeting next April. As a result of the dividends paid in 2018, the dividend yield rose to 2.5%. Our stock price evolution on the bottom of the page generally followed the market, although in the last quarter, it decoupled from the EBITDA and recovered clearly above the market. All in all, ICL's share price decreased 4.1% in 2018, while the EBITDA fell 8.3%. Well, that's all from my side, and I'll leave you with Eduardo to wrap up the presentation. Thank you, Ronald Rita. Well, to conclude this presentation, I just want to highlight and share 3 main messages for 2018. First, in 2018, we reached solid results meeting the high end of the guidance, as we mentioned before. And we are keeping the same guidance for 2019 we also provided 1 year ago. 2nd, 2018 represents an important year for ICL transformation plan. Back in April, we implemented together with our clients a win win solution that will create value for both of us and that will trigger the development of new efficient technology. And third, a stronger cash generation phase is starting for us, which will allow further flexibility to implement our transformation and development plan. Well, with this final message, we are concluding our 2018 annual presentation. And we hope this presentation was interesting and that we met your expectations. So thank you for your participation. And as always, we are ready for any questions you may have. Thank you. Thank you. The floor is now open for questions. Our first question comes from Arturo Murura with Santander. Please go ahead. Arturo, your line is open. Is it muted on your end? Yes. Hi. Good afternoon, everyone. Congratulations for the results. I have two questions. The first one is, when you expect to start the construction of Kalama Wind Farm and Capricornio Cerra PD? And the second question is, is the growth in 2019 will be only through Renewal Energy or you also have plans in best in desalination water business? Thanks. Hello, Arturo. Thank you. Well, let's start with the first one. What we are planning is to take these 2 projects to our ready to build stage in the let's say, by the end of the first half of this year. And then the idea is to be ready to launch the construction and to give NTP, let's say, at best time to market. I will continue explaining this in this way because it will depend on when will be the best moment to start the construction. But we can't wait 3 more years. This is something that may happen in the second half of this year or could happen in the first half of next year. But the first two projects should receive an NTP, let's say, very soon, in the upcoming 12 months to 18 months. This is part of the plan. And the second question was related to where the growth is coming. And yes, the answer is, of course, we are concentrated on, let's say, developing renewables and to transform part of our thermal portfolio to these new technologies or to these technologies, but also to add potential new demand also based on renewals. So the growth could come from the transformation of our thermal portfolio to renewal, but also from potential new PPAs that we may be able to sign with industrial mining companies in the future. While in relation to other infrastructure activities, yes. The answer is we are also analyzing different projects in which we can participate in water desalination or also in electricity transmission. There could be additional options in the coming years. And as you know, the development of this type of project requires some years. So today, we have some people working on these two type of, let's say, alternatives, water desalination, transmission, renewables. So the idea is to keep pending and yet to get focused on infrastructure alternatives in the upcoming years. This concludes the question and answer section. At this time, I would like to turn the floor back to ENGIE Energy at Chile for any closing remarks. Well, thank you very much for your participation and see you around and during the next quarterly call. Thank you very much. Thank you. Have a nice day. Thank you. This concludes today's presentation. You may disconnect your lines at this time and have a nice day.