Earnings Call: Q2 2018

Aug 2, 2018

Afternoon, everyone, and welcome to NG Energy Chile's Second 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.ng.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 N. G. Energia, Chile's PR department for details. I will now turn the call over to Mr. Eduardo Milligan. Please go ahead, sir. Thank you very much. Good afternoon, and thank you for attending this call. Today, Marcela Munoz, Head of Investor Relations, and I are very pleased to be here with you and present Ityel results for the first half of this year. I will start with the presentation with the key messages, the status of our main projects under and of course, we'll discuss some of the main events in our industry and for the company during this semester. Then Marcela will present our details on the financial results and financial plan. So to be concrete, please let's move directly to the main key messages and turn to Page number 9 of our presentation. First, we are glad to mention Italo has delivered another strong quarter and continues to deliver progress towards our objectives for this year. So we confirm that we are in line with the guidance we provided early this year. The new PPAs, which started last January, will become the main source of growth during the next 2 years. 2nd, during the Q1, we announced an important event for ATL, which will drive our strategy and main development efforts in the future. As you know, we finalized the negotiation of some key PPAs, which will also trigger the possibility to start a gradual transformation of our thermal portfolio from basically coal to renewables. 3rd, during this year, we continued with the development of our renewable portfolio. And our next goal, as we mentioned in our previous call, is to put this project into a ready to build stage very soon. Then the construction phase will be launched at best time to market conditions. Another important point, for us this year, ETL won 3 options to build new transmission lines of the process launched by the CMT in relation to the National Transmission Expansion Plan. We will present these 3 projects in a few minutes. And 4th, in relation to our capital structure, we are in the final phase of our CapEx plan. And due to the strong cash generation and delivery of projects under construction on budget, in fact, below budget, We do not expect any additional debt needs in the upcoming months to finalize, for example, IEM projects. In fact, we put a portion of the outstanding short term debt during last month. So now let's move to Page number 10. And let's take a look into the main industry and company events during this first half. Let's start with the industry. As you know, the interconnection began operations last November. So we think the interconnection has proven to be important for our system, allowing to reduce 75% 80% of the trapped solar PV capacity in the central system. But now, as you know, currently, the interconnection is not working at its full capacity and it's limited to around half of it or the equivalent of approx 700 megawatts. We expect the line will run and will be operated at its full capacity once the final section of interconnection in the southern is finished. Now the official date provided by the developer of the line has moved to the end of 2018. So this is something that we are closely monitoring to see when this line is going to be finalized because it will also impact the condition that we have to the commission, the 2 units we already also announced some months ago that will be closed in April 'nineteen. Well, 2nd, last January, the main generation company jointly announced not to develop new coal units, and a roundtable was implemented during the Q2 to discuss with all the major shareholders and future options to start a global decarbonization of the Chilean system. This is where Google analyzed this vision taking into consideration all impacts from different perspectives, social, regulatory, economic, the systems reliability, etcetera. Finally, as recently mentioned, the CME conducted these public options to award new transmission projects under the annual national transmission expansion plan. The aggregate referential investment value was BRL 300,000,000. And as I mentioned, we are glad to announce that 13% of these were awarded to ICL through 3 projects, which we will discuss in a few minutes also. Now from a company perspective, the main events during the 1st 6 months were 1 April, we signed amendments with Codelco and Glencore to start the global decarbonization of these PPAs together with an important extension of this contract. This is what we already announced at the end of the Q1. Following this announcement, ETL requested authorization to disconnect Unit 1213 in Tokopilla, which dates April 19. Now the authorization was granted during the Q2 by the CME and both units could be disconnected subject to one condition, which is in practice that the full interconnection of both systems should be ready. Then as we know, the most important event for each year is the start of the new regulated PPA. Besides there were and there are still some concerns about the total demand. We can mention that the demand of CTO related clients is moving in line with our estimates and the guidance that we provided to you early this year. In this same context, we find what we call the bridge TPA to hedge our exposure in the central system until the full interconnection is ready. Bridge TPAs are already in force and will be enforced until the end of 2018 for around 60% of the expected demand. Now for 2019, we are analyzing if we need or not to extend a portion of these PPAs until the full interconnection is ready. In any case, we will share with you as soon as we have a better view of how to optimize this structure. In relation to the 2 projects under construction, also glad to mention our port reached commercial operation on June 30, while IEM is the final is in the final commissioning phase. We experienced some delays in this final phase. It's a general delay. It's not related to any specific event. But this delay in practice is not material, and our best estimate is that we should be ready in the Q4 of this year. Now let's go to Page 11. In this snapshot, we're summarizing our first half results compared to previous year. As I said a few weeks ago, the sales operating results were pretty in line with our expected solid growth for 2018. Total revenues increased by 14%, EBITDA by 33% and the recurring net result by 91 percent compared to the same half of the previous year. And as you know, these results are mainly driven by the new related PPAs and other smaller PPAs we signed between 2017 and this year, together with the additional important savings in OpEx. The physical energy sales increased 11%, keeping the same trend of the Q1, while at the same time, our spot energy purchases increased 13% compared to the same half of twenty seventeen. This means during the first half, we supplied our clients with almost 40% of spot purchases, keeping a very similar ratio as in 2017, considering a larger base of energy. If we add the bridge PPA, this ratio increases to almost 45% to 40 percent. So in this plan, our first half of this year reached a new record figure of $187,000,000 Let's turn to Page 12. The graph better explains how we are supplying our clients between our own generation spot purchases and the bridge PPA. 1st, spot purchases continue to become an important source of supply for our contract. 2nd, bridge contract represents slightly above 50% of the regulated demand in the center. And the 3rd unit, 2013, have been completely displaced to the last position in the dispatcher ranking, producing less than 5% during this year. As we explained before, the situation will continue once IEM commercial operations in the Q4 of 2019. And then both units required by the system, and this is why we requested to close these plants in next year. The average monomeric price of our contracted portfolio in the first half was $116 per megawatt hour, while the average supply cost, including oil charges, was close to $65 per megawatt hour. So we are pretty in line with the previous quarter. Well, on Page 13, 14 and 15, we do not have additional news compared to what we already announced during our previous conference call. But considering the main strength of TLM, the excellent portfolio of clients and the duration of the portfolio, it is worth to make that we keep an average life of more than 5 years and that we signed during the first half of twenty eighteen new PPAs for more than 500 kilowatt hours. I believe that during the next quarter, we will probably open a bit the new PPAs that we have been signing to show these additional efforts from a commercial point of view. On Page 14, we present the main changes in the PPAs, which were announced early April. In summary, these are there are 3 different phases: 1st phase in which we are doing the short term discount in the PPAs the 2nd phase in which we agreed an additional discount together with what we call the cannibalization of these contracts, which means generally the limitation from the current formula that includes coal to only PPI. And 3rd, a new contract based on current market conditions applicable for clients like Cobel Condren. So with these changes, we have increased the average life of our portfolio of PPAs, leaving behind the fixed costs. And therefore, through investments in renewables and the idea we already mentioned is to gradually replace our thermal capacity with these cleaner technologies. So on Page 15, we present our total portfolio by type. I want to highlight that from our contracted portfolio, which may reach around 12 terawatts hour in 2019, half of energy supplies to regulated clients, the blue and light blue areas and the other half to our free clients, both green and brown areas. Other important consequence of what we just explained is that since 2021, the green area in this lab will be as we say the carbonite Indexed to CPI. Therefore, as part of our transformation and as we explained during 2018, we were focusing on renewals, mainly on wind and solar technologies. In this second quarter, our development team continued working to put at least 2 projects on a ready to build stage by the end of this year. So we expect to share more details in the upcoming months on those projects, and the idea is to have them ready in case time to market is good to beat, let's say, in order to proceed next year. On Page 16, we show the regions in which we are developing those renewable projects. Our Kalama wind farm has the environmental approval, and we are negotiating the turbine agreement to pay at this stage. This project may become one of the first or will become one of the first to move into a construction phase. But as I said before, the decision will depend on market conditions. And also considering the investment costs could change over time based on market conditions, change in interest rates, demand for those turbines, but also impacted by new improvements in the technologies behind this type of turbine. Now to continue, please let's move to Page 17. In this page, we are summarizing the results of EPL participation in the recent transmission options. We are participating in this project, and we know that the total investment between the 3 of them will be close to $40,000,000 will require around 2 years of extraction, and the AVI will be close to 1,500,000 per year. Now these projects are interesting for ICL. 1st, because the reserve is good. It's a regulated return for this type of business. 2nd, because these projects are, let's say, strategic for us, these projects are located in areas in which we have presence, and therefore, we'll be able to create some synergies. And in this line, these projects are linked to our renewable portfolio under development. So it was important for Ityto to secure this project. And these projects, let's say, since they are linked to our existing projects and their development, could have an impact in the total return of the renewables in case we can find a better match than, let's say, waiting for others to do projects in a different way. This means that we were able to capture around 13% of the total investment value, which was auctioned so far in 2018. And besides what we expect in the future, we will continue participating in these discussions if they comply with the conditions I already mentioned. So we also want to highlight the commercial operation of our new port, Cortlandino. This project required a total investment of approximately $120,000,000 This is a mechanized port with the ability to receive capesized carriers or in practical terms, ships that can transport more than 180 1,000 deadweight tons. The picture on the right shows the 1st Capesize carrier that arrived in Puerto Cardino some weeks ago. The benefit, of course, is related to economies of scale, higher unloading speeds, lower the newest cost and therefore, lower cost for this year. But as you can imagine, the full capacity of this port will not be used for coal and loading considering this port was also designed for the potential needs of a second coal project similar to I'm Well, in fact, the name of this project was IEM 2. Therefore, we are currently negotiating and looking for different alternatives in Parral to optimize this asset. We believe the overall additional income we can create with this type of new port like Puerto Milano could be close to around $5,000,000 So as you can imagine, we have appointed a development team to chase all these alternatives during the next years. Also, considering that there are several mining projects around this facility, so we can provide not only energy, but an integrated solutions through the whole, let's say, port fully commissioned and entering into the final phase of IEM, our fixed mix will be declining in the short term. And that's on Page 19, we can see how since this is the 2nd semester, we will lease an important capacity to fund new investment. We may be able to finance at least additional $700,000,000 to $800,000,000 of new investments through additional debt and keeping our leverage ratios under control. This means starting to understand, financing capacity for our transformation plan will be released. The company will be in excellent condition to finance on balance sheet these new investments. Finally, to conclude with these key messages, please move to Page 19. Here, we are pleased to confirm that the ETL delivering strong results expected. And therefore, the guidance we provided earlier this year for 2018 and 2019 is confirmed. On Page 18, we highlighted the main KPIs to be followed to monitor this guidance for 'eighteen and 'nineteen. In relation to our PPA portfolio, there are 2 effects: the positive impact of the new regulated PPAs a temporary negative impact related to the share term discounts. In terms of demand, the client regulation from regulated supply continues to impact the overall demand of regulated PPAs. Recently, we saw some new projections from the CIM, which we could expect an additional negative impact from the value creation. However, in the specific case of Ityel, we were already considering most of these downside case assumptions as part of our guidance. So we do not expect an important adjustment from our side in relation to these specific events or new projections. Fuel prices are negatively affecting our results in '18. Coal prices have increased and also the additional cycling of gas units is creating higher diesel costs, which were not foreseen in our base scenarios. For example, units are still slightly low on a daily basis. And these additional costs are not compensated by the system. While on the same line, hydrology conditions are not helping this year to offset the high crude prices. Hydrologic conditions this year continue to be in the P close to the P90. The entrance of then the entrance of IEM will be relevant for 2019. On the other hand, the closure of coal Unit 2013 will bring savings in O and M and CapEx compared to their capacity revenues, and this is why we're closing this unit. And finally, the interconnection is not currently at its full capacity. So an additional delay in the southern part of interconnection could have a negative impact in our margin in 'nineteen. But as I explained before, one of our top priorities is to monitor this project and take the measures from a portfolio management point of view to mitigate any negative impact of this delay. So we are very glad to confirm that the guidance and first half results are in line with the expectations, and we are proud of the operational and commercial efforts of our teams to meet these targets during this first half. We are fully committed to deliver the same performance in the second half of this year. So now to move to next section. Marcela will give you more details on the evolution of our financial results. Thank you, Giovanni. Hello, everyone. Please turn to Slide 23. I'm happy to say that our results continue to be in line with our guidance for the year. We said that EBITDA would reach between BRL350,000,000 BRL370,000,000 this year. And in the first half, we report BRL 187,000,000. In addition, to be in line with our forecast, this represents a $46,000,000 EBITDA increase or a 33% improvement compared to last year. The main driver for these results were: 1st and above all, the new PPA with distribution companies will contribute additional physical sales of 8.46 gigawatt hour. Energy sales under this new contract cost a $90,000,000 increase in net sales. 2nd, we report a decrease in physical sales to unregulated clients, mainly due to the end of the random neurotonic PPA in August 2017, which was, however, partly offset by higher demand from other mining Lower physical sales to free had a negative $10,000,000 effect on EBITDA. We also decreased in spot energy sales, which had a negative effect on $9,000,000 on EBITDA. Moreover, in 2017, we had reported $6,000,000 corresponding to capacity verification and provisions, and these revenues were absent in 2018. 4, fuel prices, especially coal prices increased during the first half of each year. This has an effect on energy prices, but also put pressure on our cost. This is one of the reasons why our fuel cost remained at similar level than last year despite the decrease in our generation. The other reason is that our gas unit were more frequently dispatched to cope with the intermittent of renewable generation, which led to a higher cost fuel mix. 5th, we report higher energy purchases cost to supply the new contract with distribution companies. The 2nd quarter, spot prices increased because of dry weather condition in Central Chile, but our bridge CPA with other generation companies mitigate these effects. Finally, we have 2 positive effects. 1st, our 50% share in term net income, which we compute in our EBITDA calculation increased by $4,000,000 And second, we report a $3,000,000 insurance recovery for business interruption related to a pass loss at our CPM pre plant. In sum, a very positive semester with an 11% increase in physical sales and a 30 3% increase in EBITDA with our projection. Please turn to Slide 24 and look at the highlighted area in the center of the slide that shows the evolution of net recurring income. Net recurring income increased by 91% to $83,600,000 primarily because of the stronger operating performance. Interest expense decreased a little as we have been capitalizing interest in our I'm and portfolio. Now as communicated last month in a material event notice, we report a $52,000,000 nonrecurring after tax loss related to the impairment of the 2 coal fired units, which we have been of policy to close in 2019. We also have some nonrecurring insurance recovery in both periods. In the first half of twenty seventeen, we report a positive $8,000,000 after tax impact related to property damage at the Unit 16. While in the first half of this year, we report $5,000,000 in asset tax insurance recoveries related to property damage at Munich 16, CPM3 and the Elagula PV plant. When including all of these nonrecurring effects, net income dropped by 31% to $35,000,000 Let's move to slide 25. Our net debt increased 80% to $830,000,000 in the first half of twenty eighteen. Our main uses of cash were: 1, capital expenditure of 170,000,000 mainly related to the IEM project 2, dividend of $31,000,000 including BRL 2,000,000 paid to our partner in TPS. And 3, income tax payment for $6,000,000 These cash uses were fine with operating cash flow, which reached 191,000,000 after paying green taxes of 35,000,000 last April. Our gross debt increased basically due to things. 1, we signed a 20 year tolling agreement with 10 for the use of dedicated transmission system connecting our plants in the Fiones with the National Grid. The agreement has a present value of approximately $60,000,000 and considered annual starting payment of approximately 7,000,000 dollars 2, we took 1 year total totalizing $50,000,000 with Excocha Bank and Banco Stavo. With this, our short term debt climbed to a total of $150,000,000 at the end of June. But our cash balance increased by $56,000,000 thereby neutralizing the effect on less debt. Slide 26. This slide gives more detail of our liquidity and debt structure. Net debt decreased to 2.6x5 in net debt. This was due to the improvement. Actually, in mid July, we paid $35,000,000 of our short term debt and we reduced our total short term debt to $115,000,000 To support our liquidity, we have a commitment of the Golden Gate facility, which mature in June 2020. We have not used this facility so far, and we request the bank to reduce the commitment to 200,000,000 which we think is a good backup level. We have taken 1 year debt with Besseil, Banco de Credito del Peril, Escorte Banco Stago at a lower cost that we have drawn our liquidity facility. This will allow us to complete the financing of our CapEx program at a lower cost, while preserving our liquidity cost and keeping net debt to EBITDA below 3 times. In terms of credit rating, S and P has confirmed ECL rating at BBW on the international scale and saw this fixed last June. Fixed upgrade ETL National Scale Rating WA- last June. Finally, on Slide 20 7, we can file information on our dividend policy, market capitalization and stock price evolution. Our dividend policy is flexible and in the last 3 years, dividends have been limited to 30% of net income, the minimum allowed in Chile to support our CapEx expansion. The dividend payout ratio to be calculated on 2018 net earnings will depend on the company's cash ability and financing requirements. This is all on my side. And now I leave you with Eduardo to wrap up this presentation. Thank you, Marcela. To conclude this presentation, I want to highlight the agreements we reached our clients this year. The position to start a global transformation of our thermal portfolio and to confirm our guidance for 2018 and 2019. The first half results are pretty in line with the expectations. Hopefully, we will be able to deliver results in 2018 close to the upper limit of the guidance we provided. 2018 will be a solid year with a strong EBITDA organic growth, and we continue working to structure new and innovative solutions for our clients, which we believe will certainly create value for our shareholders. Final message, we are concluding our first half presentation. We hope the presentation was for you. Again, thank you for your participation. And as always, we are ready for any questions you may have now. Thank you. The floor is now open for Our first question will come from Andrew McCarthy of Citibank. Good afternoon, everyone. Thanks very much for the presentation and the opportunity to ask a couple of questions. My first question is with respect to the 2 projects, renewables projects that you're focusing on or trying to get to sort of ready to build status. I gathered from the presentation that one of those was Colama. Could you also provide information on which is the other project that you're prioritizing? And then my second question was on the possibility of extending a portion of the bridge PPAs into 2019. I was just wondering if you could provide any color on how you think that could impact your EBITDA and net income guidance for next year. Thanks very much. Hello, Andrew. Thank you. Well, in relation to projects under development, yes, as you see, one of them is Calama. This is one of the 2 projects that we intend to have ready next year. It's a wind project. The other project is a PV, it's a solar wind, which, again, as we explained, our intention is to combine solar with wind. So the development of 1 should come together with the development of the other. And the other project is a solar PV that we have in the north. And the idea is to also the 2nd project during next year. Then in relation to PPAs, yes, we are analyzing if we can extend a little bit the duration of these PPAs. But in fact, this bridge PPAs could be even extended for the long term. Why? Because at the end, what these PPAs are providing us is exactly it's a financial hedge, like an FX or for commodities. It's exactly the same. So what we are currently evaluating from a portfolio point of view is the duration of this type of hedges. It is something that we may be able to do for 1 additional year, for 5, for 3, and we expect to finalize this analysis during the next month. At this stage, an impact on EBITDA. We do not have ready those figures to provide some guidance on that, but give us one additional quarter and probably we'll come back with some sensitivity on that. Okay, wonderful. Thanks a lot. To turn the floor back to ENGIE Energia Chile for any closing remarks. Well, thank you very much for attending this call, and see you soon. Thank you very much. Bye bye. Thank you. Bye. Thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice day.