Aguas Andinas S.A. (AGUASA) Earnings Call Transcript & Summary

[Audio Gap] in this case to anticipate somehow and doing remote working, like around 800 people started doing remote working. And there's also importance in the management of infrastructure, over 700 people who were also kept isolated. We've done our lockdown. We've sent them to hotels. We allowed them to spend the night within our infrastructure in order to avoid infections. This has allowed to maintain a continuous operation throughout this year since the pandemic. We've also done permanent surveys to people about their health conditions. We have daily surveys about the symptoms to know what is it that is going on with our employees. And this is very important. Also psychological support, surveillance. And talking about some figures, we have practically 90% of our workers that are nowadays vaccinated. So this mitigates somehow the risk associated to infections. We've also took over [ 686 ] PCR tests to the essentials -- those who are considered essential workers. And this is what has to do with COVID. The most relevant thing and we cannot fail as a company in relation to maintaining a permanent service given the sanitary crisis of the country, another relevant topic is what has to do with the challenge due to climate change, the impact of water availability is something that is a major concern for the country and for the company itself. In that sense, we've been working towards this. And when we see the different phenomena and what's going on, for instance, the flow of rivers -- rivers are the source that allows us to supply water to Santiago, both River Maipo and River Mapocho are main the sources of supply. In that sense, when you see throughout history and you see that the historical average is in the case of River Maipo were almost 100 cubic meters per second, this has dropped in the last year, 55%, reaching almost 44 cubic meters per second. That's a lot of water, but much less flow that allows for the supply to Santiago. We also talk about the Mapocho flow. This is much more critical. There is 67% of the 5.2 cubic meter per second, which is 1.7 now in 2020. When you see this, we have less water and more customers. Therefore, the challenge is permanent. This is when we look at the flows. And then if we see the rainfall, in this sense, rainfall, well, during this period since '18 rainfall to date, you can see that the trend is downward almost permanently. And the historical average of around 100 millimeters in Santiago is not going on today. In last year, only 137 millimeters drop. And when you see the decades, in the last decade, you have an average of around 200 millimeters. So you see that this continues on a downward trend. So our concern continues to be permanent. That's why it's very relevant how we manage this water scarcity with our dams and how we also try to maintain a more robust supply for whenever we have a downward trend of the flows in the river. When we see an Embalse el Yeso dam or Embalse el Yeso, you can see the dam that goes between 184 hectometers as a capacity this last year is 173 hectometers today. This allows us to have a safer and a calmer winter with the flow that we have. This doesn't mean that more water has fallen, but this is a base to management on the part of the company. Today, we have some contracts allowing us to ensure those flows until March 2022, and also be able to maintain the level of service for our customers. Now we continue to find new climate conditions and the atmospheric river meteorological events surprised us during the summer. In last summer by the end of January and beginning of February, we found this phenomenon of the atmospheric river large masses of water that in over 4,200 meters of height, you have a very strong intensity. They went down, having -- over 100 millimeters fell in San Diego with 10 millimeters per hour intensity. So there have been 3 events of this kind in last 100 years. This generates a lot of turbidity in the rivers, which has not allowed us to have plants operating normally. In turn, that adds to the snow fallen and high temperatures after that. So this event prolongs very significantly for almost 7 days. Ultimately, this leaves us in a very critical situation in terms of operating our plants. But somehow, the resilient infrastructure that we started to build upon in order to give robustness to our systems, our tanks that have 1.5 hectometers, this allowed us to somehow save us from this atmospheric river event. In that sense, these sort of events that are being generated we've been working on the sanitary infrastructure for a long time. This is not made overnight. Since 2013, we started working and conducting a series of investments in order to have a more robust system. We built wells in 2013 because we had the first years of turbidity. We did an interconnection through Embalse el Yeso and also bring water from [indiscernible], also an intermediate phase, which also allowed us to build more wells. And also the construction of [ Sam ] tanks and phase 2, that allowed us to build Pirque. Pirque gives us greater autonomy beyond the -- going from 11 hours to 34 hours, that exist today. But this goes on, the climate situation continues to affect us. We don't need a greater autonomy. I think that we need to have a much more resilient company. So we need higher levels of investment in that sense. Today, we've invested in terms of climate change over $130 million. And this year, what's our plan? Well, we have the modernization of [indiscernible] plant, implying almost CLP 18 billion in investment, which will allow us to have 1 more cubic meter in order to provide more security to the system. Also the [indiscernible] wells, over 13 wells with over 300 meters of depth. Today, taking the water from the underground is much more expensive and we have to drill more deeply. This implies like CLP 32 billion investment. And talking about the Manzano-Pirque project, which will allow us to reach a higher autonomy, we've already committed with the superintendence of Sanitary Authority to take it to 48 hours, which will enable us to supply the city of San Diego with no inconveniences at all. And apart from that, this autonomy in the city of San Diego that might reach months, which is almost the capacity of Embalse el Yeso, that will allow us to supply water in times of turbidity. We believe that challenges in this sense are quite relevant for the company given the crisis, the water crisis that we currently have.

So moving on in line with what Alejandro was just mentioning, and we have to face different conditions that were inexistent in the past. And added to all of the efforts that the company has been doing for a longtime already, all of that is really important. To combine it with this idea, you can see here in the slide that maybe you're already familiar with. The fact that, in fact, in Chile, particularly the metropolitan region where Aguas Andinas operates, you have one of the cheapest rates of the OECD, not only in absolute terms, but also in terms of parity in purchasing power. In that sense, this is a "fair comparison" because we should also consider that in this comparison, we do not include for the Chilean case any type of subsidy, unlike some other countries where drinking water rates or sanitation rates do have some kind of subsidy. And also, where there are some countries where, as you can see here, you can see a blue square, which is drinking water and the average of storage water is something that is still pending to be developed, which is not really the Chilean case. Here, you can also see in the next few slides, what I've just mentioned, you can see the different rankings and studies that were conducted that also highlight that the metropolitan region has one of the integrated rates of drinking water and sanitation, which is one of the cheapest ones in the developed world, also compared to some other countries in the region, and we are somehow in line in terms of freight, but well above in terms of quality of service and coverage of service. Today, we have standards at European or developed country standards with prices that could be compared with the Latin American reality. Also, it is very important to consider that even if it surprises us, there are very few places in the world where it is really reliable to have tap water -- to drink tap water [ today ]. And we should highlight that in the metropolitan region, we have one of the cheapest integrated rates. This is also reliable drinking water, only comparable to the countries that you can see here in blue, as you can see on this chart. In general, they belong to the developed world. And on the right, you can see the countries in red, where it's not really reliable to drink tap water, and this represents most of realities worldwide. Last, we mentioned drinking water, but the Chilean reality is also remarkable, not only in the metropolitan region, but also in the urban areas in Chile overall, we are one of the world leaders in wastewater treatment. You can see here this comparison, and this is -- this can be taken from the OECD web page. You can appreciate that Chile is ranking first compared to countries such as the Netherlands, Luxembourg, Germany, in terms of coverage and quality of sanitation. So all of these, we believe, is really very important to mention them today, to enhance them. I would like to conclude this -- my part. And now I give the floor to Didac Borras so that we can develop the financial aspects and the results obtained during the first quarter.

Thank you, [ Denise ]. Thanks, everybody, for joining our presentation of the results in the first quarter of 2021. And before we move on to the figures of the company, I would like to put this in context. Adding 2 points, which I consider are relevant for the analysis. First, here, we are comparing and this will be the last time probably. We are comparing a pre-pandemic period first quarter of 2020 versus a quarter fully affected by the pandemic factors. And the second point that I would like to mention is that this Chilean summer in Santiago city, in particular, has been especially atypical. In order to give you some examples, the temperatures of the summers were 1.5 degrees below the historical marks. And as my colleagues mentioned, we even had extraordinary climatic events that have the net impact on the company's figures. So we can see that the revenues are CLP 136,000,000, this shows a 3.1% fall compared to the previous quarter. But there is an impact in the loss of volume here that we could attribute to these 2 impacts that I mentioned before. But there is a strong impact from the pandemic, as you may imagine. The consumption from nonresidential services went down 12% compared to the same period last year. And EBITDA that is around CLP 81 million, this represents 9% below the previous year. But we also consider the effect. And if we discount the effects of the pandemic, we are in line with the same period last year. The net earnings, as you can see, in the millions and 69% below the same period last year. The main impact that we will analyze in detail later on could be summarized in lower consumptions, around 5.2% compared to the previous period. Some morosity, as we could also say, a period that is not affected by COVID with a period fully affected by COVID. So we had a morosity of 1.5% in the previous time, now it's 2.5%. And if we focus on CapEx, there has been an increase compared to last year. And as we said at the very beginning of our presentation, for us, the investment plan is very important in order to guarantee the water resource on the one hand, which is key to the company and also to ensure the supply to our customers, particularly in adverse weather events. So this is translated into an ambitious investment plan that we are implementing, particularly for the first quarter, amounting to [ $32 million ]. So we see that the net debt is stabilized at CLP 900 billion. Even though our inflation was a little bit high, the debt correction related to the UFs, despite that, we've been able to maintain the debt level quite stable. If we zoom the screen in the generation of income and the differences compared to the same period last year, we see the impact on the volume. A reduction of 8 cubic hectometers. So the same period compared to the same period last year. We see that the impact is mainly focused on nonresidential clients with a reduction of 12%. The revenues or the rates revenues, we see the impact based on March 2020 was offset with the revenues that we've had this year so far. In March 2021, we have reindexed our rates. And additionally, we have the impact on the rates due to the Pirque commissioning. So compared to March 2020, this event plays to our favor. Finally, there has been progress in nonregulated revenues, there is a relevant impact of CLP 1.5 billion, mainly associated to certain partnerships and agreements showing a good trend in nonregulated revenues. There is also a lagging aspect here. Many of these works could not be completed in 2020. So in the first quarter of 2021, with a little opening in the economy, we were able to complete or resume certain construction works. In relation to the [ reading ] effectiveness rate, this is a very important indicator for us. So we are recovering the pre-pandemic levels around 91%. So as you can see on the chart, we got to levels of 57%. So this recovery of the [ reading ] effective rate is very important to us in order to ensure the revenues flow into the company. If we consider the progress of the EBITDA, many of the impacts were already assessed. But I would like to focus your attention on the COVID impact. By this, we mean our EBITDA in the first quarter. So we quantify this impact at CLP 7 billion, of which much of it was caused by the volume effect, as I mentioned, and we also have the effect of the morosity rate, which is in 2.5% in the first quarter of 2021 versus 1.5% in the same period last year. So here, there is a positive trend in the first quarter, as you can see on the chart. Remember that we come from a rate at the end of 2020 of 4.2. So in this first quarter, the evolution has been positive. However, evidently the uncertainties related to the pandemic, to the opening up of the economy and to the expansion of the Basic Services Act that prohibits the cuts of electricity, so on and so forth, also have an impact on how this rate will evolve. For the time being, the trend is positive, but we need to keep a close eye on this indicator because it has an impact on the figures of the company. However, compared to the same period last year, we have a negative impact, but a positive trend compared to the end of 2020. Then we have direct expenditures associated to COVID, CLP 2 million approximately. In order to secure the operations of the company, we need to spend resources in transportation, health care, insurance, in order to secure our operations in a safe environment. And the last point, which I think is relevant and is related to what Alejandro mentioned in his presentation. During this first quarter and also in line with the company's strategy to secure water resource for the rest of the year, we purchased raw water in important volumes in January 2021 in order to fill and increase the resource in the infrastructure. It is also important to share with you this comparison. Well, EBITDA with the same period last year has already been made. But let's take a look at this comparison with the last quarter, Q4 of 2020. It is true that in Q1 of 2021, we could have some [ stationality ] in our income, they go up in CLP 7 billion anyways. But there's also a steadiness effect and we should not forget that the first quarter 2021 has not been a good year in terms of consumption. So we should see what part of it is related to seasonality or, let's say, steadiness versus the organic increase or decrease. So this seems to be the results of the company's operations. So our cost volume is going down a little bit. And this means an improvement in our EBITDA compared to Q4 2020, which is very important. We can quantify it in CLP 10 billion approximately. If we take a look at the capacity collection for the company, at the end of March, we had 2.5 in terms of morosity rate. And it is true that there has been a steadiness in the morosity rate. But if we consider with the past, there is an increase. This means a higher volume of CLP 1.2 billion. And if we analyze the debt portfolio, there has been an increase by CLP 13 billion. We see this increase in the debt of less than 3 months here, in particular. So this is the stability effect or higher activity also means a higher debt for these customers in the first quarter, in particular. And we also see the efforts of the company in order to sign old debt agreements. So these would be transformed into payment agreements. This is facilitating the cash flow generation to be very positive in this first quarter of the year. And to show you the trends in terms of percentages, we see here that, in general, in the first months of the year, as this trend goes up, morosity goes up a little bit, and then it starts stabilizing and even recovering a little bit at the end of the year. So historically, this has been around 1%. Last year, with the COVID effect, it went up to 4.2%, as you can see at the end of the year. This year, we should see how this 2.5% will evolve in the coming months. As I said before, there are very relevant factors that will have an impact on the evolution of this curve, and we really need to follow it in order to see how the company operates. If we consider the effects below EBITDA, we see the financial statements. As you know, the inflation in the first quarter of the year has been high. And this means that our debt associated to UF could be up and also our financial cost. Another impact or effect that offset this factor is reduction in the effective tax rate considering the monetary correction. So the inflation is high, so our effective tax rate goes down. And this creates a positive result in the net worth. If we take a look at the evolution of the debt and the cash flow generation of the company, as I said, the debt is stabilized at around $9 billion. Our stability in cash flow also allows us to finance our CapEx. As I said, it is very important for us to be able to develop our investment plan to finance our debt and pay the financial costs. And of course, the company succeeds. It must be noted that a company is succeeding in controlling the debt despite the fact that the monetary cost of the debt is going up due to high inflation. There is an impact of $10 billion of debt just because of the monetary correction. So investments, accrued investments in the first quarter, $32 billion, mainly focused on 2 main lines. On the one hand, security and safety, backup, infrastructure and also the securitization of the water resource. That takes almost 50% of our investments. Also, the network, it is very important to invest to keep the networks in the cities. And then there is a set of aspects related to IT, digitalization aspects, modernization of our systems that finally complete this loop of $32 billion in investments in the first quarter. If we consider the company ratios of the company, that prove the robustness and resilience of the company despite the complicated times that we are going through, a leverage stabilized around 158, a profitability on capital of 6%, profitability on assets around 9% and liquidity of 1.31 today. It must be noted that in late March, that company had around CLP 185 billion in cash in order to deal with the potential impacts of the pandemic and all the operational challenges that we could even face in the months ahead. So at balance level, the company is very sound, very attractive as a result of the income. And so we must enhance and underscore the robustness of Aguas Andinas. Now I give the floor to Camilo, he is going to talk about regulatory aspects.

Good afternoon, ladies and gentlemen. First of all, I will make reference to the questions that you could make later on. And I will talk about the relationship between the rights of water and the sanitation company. In the context of the constitutional reform convention for the new constitution, we could say that there is a convergence between the rights of water and the water company itself. Now the most important point and the most recurring point as regards the constitution of aspects and what they claim to do in relation to a constitution is a matter related to the water code, the water resource, that they do not mention anything about the companies and the businesses. And there are some studies that have made this analysis and many talk about the rights of the water, there are 103 people who mentioned this and only one makes reference to the sanitation company or the water company. So it is very important to establish this difference. What are we talking about when we talk about the right of water. We talk about the amendment of the water code. We talk about the water resource as a natural resource. We are talking about improving the hierarchy of water in the constitution. It is part of the constitution. So we do agree that this will take place without affecting the company. So currently, the constitution establishes that there is protection of the right to water as an asset. So if this changes and the right to water in the constitution are established as a public use, then this will mean that there will be no recognition as such, but just the recognition in the sense of an administrative use. So we have many public uses of roads, of the houses, so on and so forth. And there's always an authority that establishes it and manages it. So the licenses that are granted are part of the net worth of the people and the companies. So the same for the water. It is a national public good that has a license and according to the current constitution, they are of public domain. But in the future, probably it will be of administrative use. So this will be part of patrimony and being considered as such and not as a domain, does not consider or does not affect the other category. So there is not an impact on the, let's say, patrimony in itself going from public domain to administrative rights. But beyond considering the fact that the waters are, let's say, the waters, which are goods related to a license for privatized companies or for mixed companies as this one, in particular, because we have state capital as well, we cannot do anything with the right to water unless there is an agreement from the state. So the right to water should remain as such, as is actually as part of the company in the future after any constitutional reform. But the issue of a constitutional reform in this regard, in regards to the right to water, also entails very favorable aspects. We talk about the preference for human consumption. This is something conceptual, but has not yet been established on the constitution and on the legal aspect. So that could be very convenient, considering the granting of new rights and also most important as well in the case that -- and the constitution, the right to water for people, for human beings will be preferential. And the other concept established as regards the constitution in terms of water resources that will be discussed is the human right to water. So the human right to water is a part of the creation of rights under the United Nations, that actually has been developed for the last 20 years. And it establishes that the state must be concerned so that each country has access to water in an adequate manner. So there should be access to water in sufficient quantities, 100 liters per second per person; healthy water, quality water, clean water that is accessible, so that in the end, that it is affordable, financially speaking, not making it for free but not going over 3% of the monthly income of people. So this is fully complied with in Chile, at least in the urban sector. This is absolutely the case in Chile in terms of quality, cleanliness of the water, affordability and accessibility of the water. In terms of affordability, which is so important, it accounts for less than 2% of people's salary. So this is something that the companies comply with very well, perhaps other sectors such as services in the rural area, where there are some flaws, the media has announced several problems in those areas, and they are aware of conflicts over water for human consumption in rural areas and other uses of water, for the mining or agricultural purposes. But this is not the case of the sanitary services. In the rural area, the service is given by other entities. However, there are some common points. So we don't see that there is a problem in this constitutional discussion, at least with what is being said by constitutional members currently in relation to our company. Now to sum up. This has already been said. This is a mixed company. And what we do is we render the water service. We don't sell water. This is a service of drinking water, storage system and sanitation. This is, on the one hand, in relation to specify what we can discuss in this constitutional convention according to the statements of the members elected. Now we move on to a different topic, which is the law of basic services. I think that all of you more or less are familiar with it. It has established an extension of debt. One last amendment published in May that establishes an extension until December 31, and there is proportionality in 48 installments. And this somehow changed the environmental beneficiaries. In the past, it was 60% of vulnerable households, and now it's 80%, that in relation to the law mentioned by Didac. And this is the regulatory aspect, and I'm willing to answer any questions that you may have further on.

Alejandro, [ Denise ], Didac and Camilo for your presentation. Now we will continue with the Q&A segment. As I said before, please feel free to type in your questions in the Q&A box on the bottom part of your screen, and I will convey them to the rest of the team. Meanwhile, I will begin with the first question. Camilo, we are talking about the constitutional debate. Clearly, there is an important debate common in Chile. So first of all, how is the company management? How do you consider the outlook today? And besides right to water, what do you think is another key element for Aguas Andinas during this process?

Well, the analysis that we've made about the feedback of the elected members, let me insist on this, they aim at concerns in the country about water resources in relation to the water code, but not in relation to sanitary companies or at least there are very few people who talk about sanitary companies, just one. Or if they talk about licenses or public utilities, it's a few more, but this is very little. Of course, this is not rigid. And it might change in the future, but that is set within a context, the context of countries that we've discussed about the right of -- right to water. We discussed about premise of these rights for human consumption due to the rural drinking water, as I mentioned before, when there have been problems with mining industry or problems with the agricultural sector, but in the discussion, there is no issue whatsoever between sanitation companies and others in terms of water, right? And in that sense, I'm sorry, Andrew, we could say that another concept that is also being discussed is that of human right to water. And 81 constitutional members point that, that should also be set constitutionally. And the company has no problem whatsoever would that been the case. We believe that is something that is recognized also. And we are the best reference, we believe, in the world of how the human right to water is broadly met in a country. There is 100% of drinking water coverage, storage systems and sanitations as in the rest of developed countries. We are the ones that has the highest standards in terms of compliance. So we believe we comply with the UN requirement of human right to water. Another important thing is what has to do with water resources. When I mentioned that there is something that has to do with the preference of human consumption, there is something that's going to favor us, the fact that right to water is being established, we believe that this is something very reasonable. There are some other things that could also be discussed. For instance, that right to water not undefined in time or maybe the most important thing and the most relevant debate might be that right to water can have an expiration date for those who don't use. And of course, that won't impact our company. Our company uses the right to water completely. So there is no risk of [ expiracy ] for us. So there is a whole underlying discussion in the country that will frame this constitutional analysis because right to water has been along for many years, like 7 or 8 years with discussions in Congress. And I -- I mean, this is in the different chambers, and there's progress made in order to modify the code of water. Senator proposal said that one of the things that they would really make sure would happen during this second term at the Senate, would be passed in the Senate is a final text of code of water. And that is -- it has passed all stages. We already have an agreement on the text. And basically, what we do there is define for new rights to water, the fact of the temporary scope and also be expirable for lack of use. Something that does not affect sanitation company, I mean if they have it in a domain or in a real estate.

Right. Well, that's really the same for us. As you said, you've extended the basic law -- the basic service law that it is extended till December this year. So how do you see this in the long run? And as a management, do you foresee maybe the instillation of the idea that even under circumstances of those who are not paying the bills and given the fact that access to water -- to drinking water is considered as a human right, do you see any possibility of a long run where you could eventually ban the cut of services?

Well, as I said, human right to water does not include that water is rendered free of charge, the other way around. I mean, of course, in terms of law for basic services, we see an issue that needs to be sold, which is the accrual of debt on the part of customers. And that is an institutional role that we believe is already there and needs to be solved. Why? Because at the end of this last discussion, in the amendment of the law during April, they decided to extend the law, as I explained, but we've also created a working group between the Economy Ministry at the Senate and the Public Utilities, where they will work on a solution of this debt. Because in general terms, there is a possibility that the state might increase subsidies or things of that sort. But that is yet to be discussed, and it should be discussed in the next few months. But the important thing is that the institutional road has already been formed in order to move forward and solve that situation.

Great. Now in relation to a potential change of the minimum level of capital cost rate established in the ruling law for the sanitary sector in Chile, what is the last approach you've had with the government or maybe with Congress in this regard. And if you allow me, I would also like to add 2 more things in line with this. There from the audience. Hello possible regulatory change should only impact new investments or all of the investments of the company, including the historical investments as Pirque pond, for instance? And the other question is, what discount rate should be there for continuing business in Chile?

So I'm going to try to answer all of the questions. In relation to the discount rate for the time being, and this is an important message so that all of you consider, we have the rates signed and guaranteed until 2025 as a result of the last rate process of the previous year, where we set this can grade upon assets in 7%. This 7% is in line or is quite similar to that of all utility companies in Chile. Therefore, it is a market discount rate. For the time being, I believe that there's no debate in the streets, and we don't have any confirmation that this is to be discussed nowadays. So the 7% for the time being is guaranteed until 2025. And last, which is also in line with what some of speakers of this conference have already mentioned, we do, in fact, believe that it is reasonable that if this rate is changed, it might affect future investment and not past investments because this would be like changing the rules of the games in the middle of a game. So somehow, let me clarify all of these.

Great. Thank you very much, Didac. If you allow me a second, let me complement and add to Didac's words. Let me clarify that for 2 years already, there's been no approach or conversations either from the government or Congress in relation to any kind of modification that might be done to the sanitation law or the return rate. So evidently ever since we started in Chile with this political scenario and ever since the constitutional process, considering October 2019 to date, so to set a time frame, this has not been relevant for the analysis. I'm talking about the water rate or the return rate, which is considered in the regulatory framework. This is what we've observed.

So going back to right to water. I have a couple of questions here from the audience. First from [ Diego Grunwald ], could you tell us how you count right to water in the company's balance sheet? And what would the impact be on the balance sheet, if this has changed to real estate administrative right?

Thank you very much, [ Diego ], for your question. Currently -- yes, Camilo, sorry, you were talking?

Now let me talk about the conceptual aspect and Didac might mention the figures. But conceptually speaking, there is no impact of changing from domains. We've started that in [ difficult times ] specifically. Why? Because the characteristics of that right are quite similar to your domain. That is to say, it's right to order, which is [ commerciable ]. It can be levered. You could have mortgage. So it's practically the same. Ultimately, Aguas Andinas, of course, has a sanitary license, so is an administrative realistic right. So anybody who has salt plant that's licensed, so nobody discusses that, that is legally weak, right? The domain ultimately is a bit stronger for historical reason, so to speak. But currently, in general, water rights worldwide are administrative real estate rights. Chile is the only country that has that characteristic. But this type of right has this characteristics, the fact that it can be transferable, it can be levered and should not affect whatsoever the accounting factor of the company. This is what we've studied.