Earnings Call: Q1 2018

Apr 26, 2018

Good afternoon, everyone, and welcome to the ENGIE Energia Chile's First Quarter 2018 Results Conference Call. If you need a copy of the press release issued yesterday, it is available at the company's website, www.engienergia. Cl. Before we begin, I would like to remind you that this call is being recorded and the 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, I would now like to turn the call over to Mr. Eduardo Milligan. Please go ahead, sir. Thank you, and good afternoon. We are very glad to welcome you to the presentation of our Q1 results. Thank you for attending this conference. As I said, we are very pleased with Bernardo De Infante, Head of Finance and Marcela Munoz, Investor Relations Officer, to present our Q1 results. I have to say, we are proud to communicate during this session some important achievements together with the confirmation of our guidance for 2018. So let's move directly to the main key messages today we want to share with you. Let's start. Please turn to Page number 9. First, we confirm we are in line with the guidance we provided for 2018. The new regulated PPA started in January 2018 and will become our growth engine in the next 2 years. 2nd, we recently announced 2 important elements as part of our transformation plan and our ambition of becoming a leader in the energy transition of Chile. We finalized the negotiation of some important PPAs with part of our main clients, and we announced our intention to start closure of co units 12 and 13 in Tacopedia sites. We will jump to the details in a few minutes. 3rd, we continued with the development of our renewable portfolio, mainly comprised by wind and solar projects. Our next goal is to bring most of these projects to a ready to build stage and launch the construction at best time to market conditions. And 4th, following the successful execution of projects under construction and the materialization of an important growth in our operating results, our capital structure is ready to support a new investment program and start our transformation plan. So now please let's move to Page number 10. Before showing some figures, we want to share some recent events. For the industry, 1st, the interconnection began operations last November, giving birth to the Chilean National Electricity System, known as SEN. After more than 4 months of operations, the interconnection has proven to be key to optimize the operation of the system, allowing to reduce by almost 80% the trapped solar PV capacity in the central system. The solar production is flowing northwise to meet demand in the north. Currently, the interconnection is limited to around 700 megawatts. We expect the line will run at its full capacity once the final section of the interconnection in the south is finished. 2nd, following the announcement of last January in which the main generation companies jointly announced not to develop new coal units, A roundtable was recently implemented to discuss together with the authorities the future options to start a gradual decarbonization of the system. This work group will analyze this ambition taking into consideration impacts from different perspectives like social, economic, regulatory, the systems reliability among other relevant conditions. Finally, in March, 6 companies presented offers to build and operate international transmission projects for an aggregate of $200,000,000 This is part of the international bidding process launched by the CEN. And the results of the first auction will be known by the end of May, well May 24 to be more precise. Now from a company perspective, on April, we signed amendments to Codelco and Glencore PPAs to start a gradual decarbonization of these PPAs together with an important extension of the contract. We will explain these changes in a few minutes. We also requested to the CME authorization to disconnect Unit 1213. We expect conditions required to disconnect both units will be fulfilled in the next 12 months. As you know, the new regulated PPAs started in January and demand is moving in line with our estimates and guidance. In this same line in 2017, we signed bridge PPAs to hedge our exposure in the central system until the full interconnection is ready. These bridge PPAs are already in force until the end of 2018 for around 60% of the expected demand. In relation to the remaining 2 projects under construction, the port is already in the final commissioning phase and IEM is just starting the commissioning phase. We expect the second project to reach COD during the Q3 of this year. Now please turn to Page 11. In these snapshots, we are summarizing our Q1 results compared to previous year. Total revenues increased by 17%, EBITDA by 39% and recurring net result by 100% compared to the same quarter of previous year. These results are mainly driven by the new regulated PPAs and other smaller PPAs we signed in 2017. As you can see in the last row, physical energy sales increased 11%, while at the same time our spot energy purchases increased 13% compared to the same quarter. This means during the Q1, we supplied our clients with almost 39% of spot purchases, keeping a very similar ratio as in 2017, but considering a larger base of energy sales. So in this line, our 1 our first quarter EBITDA reached a record figure for ECL of almost $92,000,000 Let's turn to Page 12 to discuss some details behind these figures. We mentioned in the title of this page, demand was supplied with own generation, spot purchases and bridge contracts. What is interesting to see in this graph is that first, spot purchases continue to become an important source of supply for our contracts and at a lower average price than previous quarters. So we have a positive impact there. 2nd, bridge contracts represent almost 60% of the regulated demand in the center. In summary, the average price of these contracts is aligned with the average spot price trend that we foresee in the center region. And 3rd, Unit 1213 have been displaced to the last positions in the dispatch ranking. This situation will be even worse once IEM starts commercial operations in the Q3 of this year. And this is why we requested on April 4 authorization to disconnect these units in 12 months. Now let's move to Page 13 to present other important actions we want to highlight. Before we jump into the graph, 2 years ago, in 2016, ENGIE established a very clear goal to make the group a leader in the new energy landscape. The new energy landscape is being structured by 2 important trends. The first one is the strong willingness of our clients to invest in improvements of the energy usage And the second trend is the strong willingness of the countries to invest in clean energy production. So these 2 megatrends have been possible, as you know, by technological evolution and changes in the mindset of people towards a clear consumption of energy. In Mendoque Energia Chile, ECL, we understood the importance of these trends 2 years ago, and we started conversations with our main clients by the end of 2016 to see what alternatives and solutions we can create together to help our clients to improve their energy usage and produce cleaner energy. For a company like ICL with an important portfolio of thermal assets, this task, as you may realize, is not easy. So then together with our clients, we found some instruments that created value for both of us. Our main goal in this journey is to adapt our company and move together with our clients. You can see we finally adjusted this graph with some changes. It's not easy to update this graph every quarter, but finally, we can present a new snapshot in this line. But we are certainly working for that, and our idea is to bring additional news in the future. So as a result of these agreements, the average life of our PPA portfolio increased to around 13 years compared to the previous figure of around 11. Now let's move to Page 14. In this page and in this chart, we translated the changes explained in the relevant notes published on early April. In this chart, we included the 2 PPAs we mentioned in the notes, and we are also including the Lauda PPA, which is also part of this first phase. As you know, contractual prices are not public in our market, but we try to explain in these blocks the different stages for each contract. In summary, there are 3 different phases for Glencore and Codelco. A first phase in which we agreed a short term discount in the PPAs, a second phase in which we agreed an additional discount together with what we call the decarbonization of these contracts, which in simple words means to change the indexation from current formula that includes core indexation to only CPI. And third, a new contract based on current market conditions applicable for such important clients like Codelco and Glencore. In the specific case of El Abra, we can summarize these changes in 2 phases: a price discount until 2020 and then a decarbonization of the indexation from it. Well, you may ask why are these agreements important for both and represent a win win relationship. Well, the answer is because our clients will benefit from a lower tariff, will become more competitive, will reduce their carbon footprint, and we will continue looking for other solutions to improve their energy consumption. While for ENGIE, we will increase the average life of our portfolio of PPAs with these important clients leaving behind the price indexation to coal and therefore allowing us to invest in renewables to gradually replace our coke. So on Page 15, we present on a different format our total portfolio of contracts, our view of the contracted demand and its current evolution through 2030. Our ambition, of course, is to continue growing adding new clients to this graph. I want to highlight that from our existing contracting portfolio, which may reach around 12 terawatt hour in 2019, half of this energy is supplied to our regulated clients, the blue area in the graph, and the other half to our free clients, the green and brown areas in this graph. As you can see, almost half of the free clients' demand was decarbonized in this new agreement. What happened with the remaining free clients? Well, we have a close relationship with our clients, and we will analyze together what options we can structure for the future. But as of today, we do not have concrete news yet to share with you. Other important consequence of what we just explained is that since 2021, the green area in this graph will be as we say, decarbonize, index to CPI. Therefore, as part of our transformation plan and as we explained during 2017, we were focusing on renewals, specifically wind and solar, where growth may come by way of greenfield projects or through acquisitions together with the development of La Sarcilia CCGT project. Now that we announced these new agreements, the whole picture is aligned to meet the demand from our clients seeking to reduce their carbon footprint and breaking the tie between energy prices and fuel prices. I am now on Page 16, in which we are showing the regions in which we are currently developing different renewable projects. Our Kalama wind farms has environmental approval, and we are negotiating to gain purchase. This project may become one of the first to move into a construction phase. We are also analyzing the feasibility of acquiring wind capacity in different locations to achieve a greater geographic diversification. Then in the case of solar capacity, we recently completed the acquisition of around 400 megawatts in projects under development from Solar Direct. I want to highlight in this context the important decision of ENGIE to do not renew the joint development agreement with Solar Direct. The decision is to develop all future electricity projects inside ENGIE Energia Chile balance sheet. So these solar projects that were in development phase have been acquired by ICL. In parallel, we will continue studying energy storage solutions like the battery pilot we are implementing in ARIKA. Our key objective is to develop new sources to gradually replace cogeneration. As I mentioned before, we are also working in the Las Arcillas natural gas project, and we are pleased to mention that some days ago, the project received its environmental approval. Last but not least, you will find that we are getting more and more active in optimizing our existing assets and diversify our energy solutions offer. This includes energy infrastructure projects such as transmission as well as port services, water and also desalination. And now to continue with the story we want to share with you today, please let's move to Page 17. So in this graph, we want to show the following. First, the important CapEx plan we are just finalizing this year with almost $2,000,000,000 between TEN IEM and the port of which we consolidate half of such amount in our balance sheet considering 10 is the consolidated. As we mentioned in this graph, 2018 represents the end of our CapEx intensive phase. 2nd, since the Q4 of 2018, our free cash flow starts to become positive. It means starting 2019, financing capacity for our transformation plan will be released. The company will be in excellent conditions to finance on balance sheet the renewable portfolio that I just mentioned. In this graph, we are just showing the sensitivity following our 2019 guidance in which at 3 times debt to EBITDA, our debt capacity could be increased from current €800,000,000 to almost €1,500,000,000 You may be interested to know when we are going to start investing in this new renewable project. The answer today is not straightforward yet because we do not need to rush and this is one of the messages that we want to share with you. Considering market conditions and the number of months required to execute the construction of our renewal project, we need to optimize this decision at best time to market conditions. So please be patient. We will update our plans in the upcoming quarters and we'll share with you our future progress. What we can anticipate so far is that the carbonized PPAs since 2021 would represent around 1,000 megawatts of required renewable capacity to reach a perfect match between the PPAs and the assets. But again, we need to be flexible and be ready for the best time to market conditions. Finally, to conclude with these key messages, please move to Pages 1819. We confirm our guidance for 2018 2019. The agreements we just closed with our clients are already included in the guidance that we provided early this year. We realized that this type of negotiations took several months. So that's why we already included the impact in the guidance that we provided early this year. On Page 18 and as requested by some of you, we are providing some KPIs we should follow and take into consideration to monitor our guidance for 2018 2019 and the subsequent years. First, in relation to our PPA portfolio, there are 2 effects: a positive impact of the new regulated PPAs and a temporary negative impact of the new agreement we just announced. Rulatives will continue to be negative. In terms of demand, the client migration from regulated to free clients continue to impact the overall demand of regulated PPAs. Our guidance is already considering this impact. On the other hand, current commodity prices, which may drive new investments in mining projects and future electric demand, may help to mitigate the migration. Then, of course, higher coal prices and drier hydrologic conditions may have a negative impact in our margin. Then the entrance of IEM will be relevant for 2019. On the other hand, the closure of whole units 12 and 13 will bring savings in O and M and CapEx compared to their capacity revenues. Please note that these units will be dismantled and the cost is not material. The site will continue to be used since it is part of the Topopoeia thermoelectric complex in which other units will continue to be operated like our natural gas combined cycle. Then in relation to Unit 1213, I also want to highlight that we are finalizing the accounting impact of their closure. Bear in mind that in the recent years, we did some investments to reduce emissions, which are not fully depreciated as of today. So we will probably communicate this negative accounting impact on our net results or in other words, impairment in the next quarter. Finally, the interconnection is not currently at its full capacity. An additional delay in the southern part of interconnection could have a negative impact in our margin in 2019. That will depend again on the spot price hydrologic conditions, of course. But we expect the project should be ready before next year. And we also can continue applying the same strategy as last year. In that case, we could close new bridge PPAs for a portion of the demand in the center that we will have in 2019. So in general, and the message we want to give to you is that we confirm our guidance and that first quarter results are very in line with our expectations. So now let's move to next section. Bernadette will provide us some additional details about the evolution of our financial results. Okay. Thank you, Eduardo. Good afternoon, everyone. We'll now talk about our financial performance in the Q1. So let's move to Slide 21, please. In our guidance for the year, as Eduardo said, we stated that EBITDA would reach between EUR 350,000,000 EUR 370,000,000. Dollars Well, in the Q1, we recorded EUR 92,000,000 which is in line with this forecast and represents a $26,000,000 or 39% improvement compared to last year. The main reason behind this improvement is, as Eduardo already said, the new PPA with distribution companies, which contributed an additional 4 41 gigawatt hour of sales. These increased physical sales to regulated companies caused a $46,000,000 increase in EBITDA. This largely offset the $7,000,000 decrease in unregulated revenues, mainly explained by the end of the Vadomiro Tomic PPA last August. The resulting net increase in physical sales was naturally accompanied by an increase in energy supply costs. 1st, our energy purchases on both the stock market and through bridge PPAs had a $9,000,000 adverse effect. 2nd, even though we reported a slight increase in our generation, coal and oil prices increased contributing to explain the $5,000,000 increase in the fuel cost item. But these effects were small in comparison with the positive effect of the volume increase. Also, the higher price of the new PPA with distribution companies, coupled with the increase in fuel prices, translated into higher energy prices, which had an $8,000,000 positive impact on EBITDA. There are other effects that included a MXN 5,000,000 operational cost increase, mostly explained by the effect of a stronger Chilean peso over our local currency costs. Other businesses like transmission reported decreased margins, mainly because they included positive re liquidations the year before. Finally, our 50% share in 10th net income, which we compute in our EBITDA calculation, contributed another $2,000,000 in sum, a very positive quarter. Now regarding Slide 22, there is little to add. Net income virtually doubled and reached $39,000,000 all explained by the stronger operating performance we just talked about. Interest expense decreased a little as we have been capitalizing interest in our IEM and port projects. This was offset by $1,000,000 in negative foreign exchange and tax rate effects. So let's move to Slide 23, our net debt evolution, which gives also a picture of our cash flows during the Q1. Our main uses of cash were capital expenditures of $68,000,000 mainly related to the IEM project and also tax payments for 8,000,000 dollars These cash uses as well as a $2,000,000 dividend payment to our partner in CTH were financed with operating cash flow, which reached $78,000,000 Our net debt increased by $68,000,000 basically due to 2 things. 1, our cash balances decreased by $19,000,000 as we paid a similar amount of interest on our 144A bonds last January And 2, we signed a 20 year tolling agreement with them for the use of dedicated transmission system connecting our power plants in Mexillones with the National Grid. The agreement has a present value of approximately $60,000,000 and considers annual tolling payments of approximately $7,000,000 At the end of the 20 year period, ICL will become the only assets. So accounting wise, this is a financial lease and is thus considered financial debt. Slide 24 gives details of our liquidity and debt structure. Net debt to EBITDA remained at 2.8 times despite the increase in net debt, and this was due to the EBITDA improvement with last 12 months EBITDA of $300,000,000 up from $276,000,000 reported in 2017. We do not expect this ratio to exceed 3.5x at any time during the coming quarters as EBITDA should continue strengthening, and debt should not increase by more than 130,000,000 dollars from the levels reported at the end of March. We have the backing of our $270,000,000 committed revolving bank facility, which $200,000,000 starting May 4, which to $200,000,000 starting May 4, which we think is still a good backup level for our liquidity. We have taken 1 year debt with BCI, Banco de Credito del Peru and Scotiabank at a lower cost than if we had drawn our liquidity facility. In April, after our Q1 books were closed, we drew a $50,000,000 1 year loan from Scotiabank under similar conditions. This will allow us to complete the financing of our current CapEx program at a lower cost while preserving our liquidity cushion. As discussed in our last call, our credit ratings have been confirmed at BBB stable on the international scale by both S and P and Fitch. On the national scale, failure rate has confirmed ICL's A plus rating and changed the outlook from stable to positive last December. Finally, on Slide 25, we can find information on our dividend policy, market capitalization and stock price evolution. Our dividend policy, as you know, 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. Last Tuesday, in our Annual Shareholders Meeting, a $30,000,000 dividend corresponding to 30% of 20 seventeen's net income was approved. We will pay this dividend on May 22. The dividend payout ratio might change going forward depending on the company's cash requirements and cash availability. At the end of March, our market cap reached almost 2,300,000,000 a 9% increase over the last 12 months. So this is all on my side. And now I'll leave you with Eduardo to wrap up the presentation. Thank you, Bernadrita. Well, to conclude this presentation, I want to highlight in 2017, we mentioned several times it was a year of transition. Now we are very pleased to confirm the agreement reached with our clients. We also are very pleased to confirm our guidance. First quarter results are in line with expectations. 2018 will be a solid year with a strong EBITDA organic growth, and we are working to continue delivering what we committed to our shareholders. Our strategy is, in fact, starting to pay off with a clear determination to transform our company with a stronger relationship with our clients and with a clear ambition to become a leader in the NRE transition of Chile and at the same time creating value for our clients and shareholders. So we hope this presentation was interesting to you. Thank you for your attention as always, and we are ready for any questions you may have. Thank you. The floor is now open for And there look to be no questions. So this will conclude our Q and A session. At this time, I would like to turn the floor back to ENGIE Energia Chile for any closing remarks. Well, again, thank you very much for your participation. And as always, if you have any questions or comments during the next weeks, our team is available for you. Thank you very much. Thank you. Thank you. This concludes today's presentation. You may now disconnect your lines. Have a nice day.