Colbún S.A. (COLBUN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Colbun's First Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Miguel Alarcón. Sir, the floor is yours.

Hello to everyone, and welcome to Colbun's First Quarter 2022 Earnings for Recall. My name is Miguel Alarcón, I am the company's Deputy CFO, and joining me today is Sebastian Moraga, company's CFO; Soledad Errázuriz, Isidora Zaldívar from Investor Relations team. I hope that you have received our earnings report and an earnings review presentation that we have prepared to complement the analysis of our figures. Otherwise, you can download them at the Investors section of our website. Agenda for today on Slide 3 is as follows: We will begin talking about the highlights of this quarter to then analyze in detail this quarter's results. After that, we will provide an update on our growth opportunities. Following the presentation, there will be time to participate in a Q&A session. Now please go to Slide 4 to review the highlights of this year. Number one, on January 24, 2022, Colbun prepaid 100% of its local bonds that was [indiscernible]; the outstanding notional amount of those bonds was $181 million. Number two, in February, Colbun was included for the second time in the Sustainability Yearbook 2022. A year book that goes together, the company is going in the top of 15% of each industry in the Dow Jones Sustainability Index, which selects the companies with the best valuation in sustainability matters, including economic, social and environmental management as well as corporate governance. Number three, in March, Colbun sold to Chile Electricity Pec SpA, the fourth group of accounts receivables associated to the energy price stabilization mechanism (Law 21,185) for a nominal value of $12.9 million. Number four, on March 30, 2022, the Board of Directors agreed to propose to the ordinary shareholders' meeting to distribute a total dividend of $72.6 million, which consists of: [indiscernible], which added to $250 million paid in October of 2021, represents 50% of the distributable net income for the year 2021. And number two, an [indiscernible]. Number five, regarding the status of the Diego de Almagro project, as of the first quarter of 2022, progress on the ground is 99%, in line with the budget. Since 12/09/2021, the project has been injecting broadly energy into a system, weatherly and training. Number six, on 04/04/2022, the Board of Directors accepted the resignation of Mr. Thomas Keller Lippold from the position of CEO, which will become effective on 05/16/2022. Thomas will continue to be associated with the company as a Director of the subsidiary Fenix and Peruvian company Electrogas, and as adviser to the CEO in matters associated with the execution of investment projects. The Board of Directors agreed to appoint Mr. Jose Ignacio Escobar as the new CEO, starting on May 16, 2022. Now please go to Slide 5 to review the main consolidated figures of the company. Consolidated EBITDA in the first quarter of 2022 reached $146 million, increasing 6% compared to $127 million EBITDA in the first quarter of 2021. The increase is mainly explained by the higher operating income driven by: first, higher sales to integrated clients in Chile; and second, higher energy price and talacity sales, both in Chile and Peru, given the higher generation of the quarter. This effect was partially offset by higher raw materials and consumables used, mainly driven by higher gas consumption given the higher generation of the quarter with Dot. It is important to note that this increase was achieved despite the Colbun Transmission [indiscernible] is no longer consolidated after a sale in the fourth quarter of 2021. The company recorded profits of $56 million, compared to the loss of $41 million in the first quarter of 2021, mainly due to first, the lower tax expenses, mainly explained by a deferred tax recognition of $65 million during the first quarter of 2021 associated with Colbun Transmission S.A. sales and management. Second, the lower nonoperational loss driven by the lower sales of receivables generated by the energy price stabilization mechanism compared to the first quarter of last year; and third, the higher operational result previously mentioned. As of March 31, the company holds $1,199 million of cash and net debt-to-EBITDA ratio is at 1.8x. Now I will turn to Isidora, who will speak about the main drivers of this quarter results.

Thank you, Miguel, and hello to everyone. Now please continue to Slide 7 for physical sales and generation bank analysis in Chile. Total generation of the period increased 34% compared to the same quarter of last year, mainly explained by: one, higher gas generation as a result of the higher Argentinian gas and [indiscernible]. Two, a high solar generation given the start of energy injection of Diego de Almagro projects. The estimated COD for the project is for the next quarter. The raise effects would partially offset by a lower hydroelectric generation. Physical sales during the quarter reached 3.2 terawatt hours, 26% higher than the same quarter of last year, mainly explained by higher physical sales to [indiscernible], driven by the entry into force of BHP contract in January 2022. This effect was partially offset by the expiration of CGE contracts in December '21, but market balance during the first quarter of 2022, recorded net sales of 238 gigawatt hours compared to the net purchases of 93 gigawatt hours recorded in the same quarter of last year. The variation is mainly explained by the higher generation during the quarter. Now please continue to Slide 8 to analyze the EBITDA in Chile for this quarter. EBITDA in Chile reached $121 million this quarter, increasing 16% compared to the first quarter of '21. This variation is mainly explained by the high operating income recorded during the period. This effect was partially offset by higher raw materials and consumable yields, mainly due to the higher generation with the gas during the quarter. Now please continue to Slide 9 for physical sales and generation balance analysts in Peru. Total generation of the period increased 97% compared to the same quarter of last year, reaching 1 terawatt hours, mainly driven by the higher power trans availability during the quarter given that during the first quarter of last year and major maintenance took place. Physical sales during this quarter reached 1 terawatt hours, increasing 79% compared to the same quarter of '21, mainly explained by: one, higher sales in the spot market due to the higher generation of the quarter; and two, higher sales to regulated clients associated mainly to the demand recovery compared to 2021 depressed levels affected by the pandemic. Both market balance during the first quarter of this year recorded net sales of 385 gigawatt hours compared to the net purchases of 6 gigawatt hours during the same quarter of the previous year due to the higher generation recorded during this quarter. Now please continue to Slide 10 to analyze the EBITDA in Peru for this quarter. EBITDA in Peru reached $25 million, 45% higher than the EBITDA of $17 million recorded in the first quarter of '21, mainly due to the higher sales to regulated clients and the spot market due to the higher generation of the quarter. Now please continue to Slide 11 for the consolidated non-operated income and net income analysis. Non-operated income in this quarter recorded losses of $31 million compared to the losses of $44 million in the same quarter of last year. The lower losses are explained by the lower sales of receivables generated by the energy price stabilization mechanism. The effect in the last year was $14 million, while in this quarter was $4 million. The company recorded a profit of $56 million compared to the loss of $41 million at the same quarter of last year, mainly explained by, one, the lower tax expenses to a lower net operating loss; and three, the higher operational results. Now continuing with this conference call, please go to Slide 16, where Miguel will give you an update on the status of our growth opportunities.

Regarding our growth opportunities in Chile, update for this quarter is as follows: Horizon, In the first quarter of 2022, a 9% progress was achieved in line with budget. The installation of fiber optics for communications was completed and the construction of the camp for 1,200 people and interior roads began. The first supplies have arrived in the country corresponding to 14 baskets of boats that are part of the foundations of the wind turbines. Regarding Diego de Almagro, as of the first quarter of 2022, progress in the food is now 9%, in line with the banquet. Since December 9, the project has been progressively injecting energy into the system. As of March, the 46 transformation stations equivalent 211 megawatts were energized. The project is in the process of preparing sustained costs with the CEM. About loss contingency during January and April of 2022, every citizen participations were carried out with good results. The first draft of their environmental impact approval was concluded for internal review, which is expected to be processed in mid of this year. For more information regarding our pattern of projects, please review our earnings report. This concludes Colbun's First Quarter of 2022 results review. Thanks for listening. And now we're open to answer your questions.

[Operator Instructions] Your first question is coming from Ezequiel Fernández from Balanz.

This is Ezequiel Fernández from Balanz. Thank you very much for the materials, and it was great to see resilient results in this difficult market configuration. So I have 3 questions, and I would like to go one by one, if you do not mind. The first one is related to the marginal coal costs in Chile. It remains quite low in terms of dollar per megawatt hour versus the coal international benchmarks. Should we expect them to converge to levels more aligned with $200 or $300 per ton that we are seeing now for coal or maybe not for some reason?

Ezequiel, Miguel here; great talking to you. As you know, we have an option process in which we try to purchase our coal needs in advance around twice a year, so 2 times a year. For this time during the first quarter of this year, the coal that we used in Santa Maria corresponds to the auction we performed by mid-last year around July. And because of that, of course, it's a lower level than the one we have. I wouldn't give you specific values, but I would say that, yes, in some way, it needs to converge following international prices.

Got you. Perfect. The second one is related to Peru. We've seen results improving greatly after the change in gas declaration prices. That is great. What I want to know is, going forward, the gas purchases for power generators for Fenix or any power generator in Peru for that matter are indexed to inflation or to international benchmarks. And if that is the case, if the PPAs that you have signed contain also indexation clauses that would protect your margins and how that roughly works.

Miguel again, Ezequiel. So first of all, on the supply side, it's a regulated price that in some way follows, I would say, a more local reality. It has some index sailors, but again, it's a fixed regulated price. On the [indiscernible], we do have a couple of indicators that I think we've discussed before. One is linked to an industrial CVI. That's the main component and the other in some way, reflects the cost that we get for getting the gas supply cost. So yes, as in some way, the cost of supply moves, we are able to pass through a relevant portion of those costs into our PPAs.

Okay. That's great. And finally, I have a question more related to the Chilean power system and where it should go in the future. In the latest auctions with distribution components, we have seen some players bidding $20, $25, $30 per megawatt hour project starting 2023, '24, and so on. In this market configuration, where we have high spot prices much higher than we thought before and probably more structural fashion transmission congestion, decoupling of nodal prices. Do you think some of these projects could be canceled and maybe not be commissioned?

Ezequiel, this is Sebastian talking to you. Well, as in previous calls, really, we don't comment on our competitors' prices or strategies, but given the fact that you mentioned, yes, from the outside, it clearly shows that at least it's a different scenario with the costs going up. But specifically, we don't comment on their pricing strategy.

Okay. That's great. And if I may add a final one, we know that the government and power generators have been discussing as of late the issue with the receivables for the realization fund, which you sell in June, so I was wondering if you could provide any details on how this situation could move forward, if we should see an expansion of the limit, maybe some or some other mechanism at play?

Ezequiel, Hi. Miguel. So first of all, if you look at different reports, you will see that according to different parties, we are about to reach the limit for the cap that was established in the first loan PEG one? So with that, we should expect probably at some point this year in the second semester, probably, whether an increase in energy prices or a different mechanism to adjust and maintain prices as it was the case in PEG one. At the same time, and this relates to your previous question, we are now in a different scenario compared to PEG one in the sense that we are as generators facing a really challenging scenario in the sense of poor hydrology, high commodity prices and because of that higher supply costs. If you look at certain reports, there's one in particular that was issued a couple of weeks ago that says that there should be around $2 billion of additional costs in terms of hydrological fuel prices that in some way would need to accommodate into this new products reality or to be adjusted along the time in the new contracts. So I cannot give you an opinion on what's going to happen. I do know that discussions are happening among Gencos and with the different counterparties on the government to try to tackle the situation. But of course, the result is something that is at this point unknown. And because of that, not knowing the mechanism, we cannot give you a bit on the specifics. We need to wait and see what will happen again probably later this year.

Your next question is coming from Andrew McCarthy from CrediCorp Capital.

Firstly, I wanted to ask about the gas supply strategy for the rest of 2022. You've got, obviously, the Argentinian gas coming until at the end of this month and you have the supply agreement with an app to enable you to have the operation of the combined cycles during the first half of the year. So just trying to understand how you're seeing the supply evolving as you move into the second half of the year? That will be my first question. Maybe we could take that first.

Sure. Andrew, Miguel is here. So as you correctly point out, we have secured Argentinian Gas up until April. On top of that, for the first half of this year, we also have the enough contract for up to 2 combined cycles. And then as usually happens at this time of the year, we're still evaluating what we need to be our position from July to September. And I mean July to September, because after that in October, October to December, we expect to continue having Argentinian Gas available and securing that type of fuel in order to serve our contracts and used in a wet complex. So from the light of September, we are evaluating contradicts we are assessing the possibility of getting additional gas and the cost of that. But as we've discussed before, we need to be really careful about this because in some way, this is a replacement for poor hydrology. So we are in the process of that. And once we have news, we'll certainly share with you on the rest of the market.

Got it. And then looking at the unitary costs of the fuels in the first quarter, they came in quite low. I know you've talked a little bit about the part of the reason behind that on the coal side, given the auction in July last year, we were able to look in lower prices. But I just wanted to understand if there are any other dynamics, maybe some hedging that's being taken out there that's also helped. And if so, if you could understand that, how that works a little bit better and until when those hedges may be in place? Any color around that would be really helpful.

Okay. Yes. That is actually correct. That's the reason on top of the gas supply. So basically, we've been doing this for number of years. We have a risk turndowns policy. And based on that, we find ways to limit our exposure to fuel prices. In this case, for Brent and for gas prices, we use the real tips call options that we try to buy early in advance of the utilization of that gas supply. And because of that, we have an effect in this quarter's results that turn out positive because we were able to secure a strike prices that were significantly below the exercise price that ended up occurring towards the average of this quarter. And of course, we then analyze and have additional of these positions [indiscernible] for the rest of the year, trying to mimic our utilization of that gas supply.

Got it. Understood. And just to follow up on that, did you have any other hedges already taken out for the quarters ahead? Or is that something you're trying to get today for the second quarter going forward?

Yes. We already have some additional hedges in place for the second quarter of this year. And then depending on what happens with securing additional gas, we would take further hedges if needs.

Your next question is coming from Gabriela Bahachille from PineBridge Investments.

So my first question is a follow-up on a question that other participants already made. And it's about the potential extension of the stabilization mechanism. So I just wanted to confirm that time line. So when we should expect further news about it, about an extension of the current mobilization fund or a new mechanism to stabilize prices.

[ Gary, ] Miguel is here. So we don't have specific dates, unfortunately. This, as I mentioned before, it's a discussion that is currently happening. But since there is, I would say, a consensus that by June or around June of this year, the current limit should be reached. I think it should be pretty soon.

That's very helpful. And my second question is, could you confirm, please, how much of your total generation as of today comes from coal and your target year to phase out of coal completely.

Sorry. Sorry, all of a sudden some connection problems. So in this quarter, we produced around 640 gigawatts hour of energy with coal. As you know, we only have one coal-fired in Santa Maria that produces around 2.5 terawatt hour per year.

Sorry. Could you tell us in terms of percentage from your total generation, how much that is?

So it's around 20%, if you consider, I would say, an average peso close to 12 terawatt hour on production of 2.5 per hour.

Okay. And when your target year to completely phase out of coal, could you remind of that again, please?

Yes. So by now, we are participants of the same agreement that all Gencos reached with the government that says by 2040, all coal plants should be completely phased out. We haven't announced a specific date different than that.

And once you complete your current renewables pipeline, how much do you expect your coal generation to decline so from 20% to how much?

So that depends, right? Because you're asking about when we plan to complete our total renewables platform. We are in different stages of development. We have one plant that's already finished. That's the Diego de Almagro. We are in the process of building Horizon and then we have additional pipelines kicking in. I would say that once we complete one more platform, it should go below 10%. But again, that's a rough figure. That's the expectation.

Perfect. And one last question on my side. I was wondering if you could please talk about initiatives at Fenix power level to produce CO2 emissions.

Sorry, can you please repeat the question? I couldn't get it.

Yes, of course. So could you please talk about the initiatives at Fenix Power level to reduce CO2 emissions?

So I would have to get back to you on that, Gabriela, at least. I don't have the information here and like somebody else on the team might have.

Miguel, not on my side, Gabriela. We will note that question, and please give us some time, probably Monday, and we'll get back to you with the exact information.

That's very helpful. And one last question, going back to the Diego de Almagro. So once this plant starts operating, how much do you expect your coal generation to decline from 20% to how much?

Gabriela, so Diego de Almagro is injecting energy from December of last year, of course, entering gradually. And we expect the COD for the plan is this month. And we expect an annual generation of close to 600 gigawatt hour per year.

But it would basically reduce from, let's say, 20% to 19% because as Isidora correctly mentioned, it should have around 600 gigawatts hour per year. So generation should increase by the same amount.

Your next question is coming from Peter Bowley from Bank of America.

Could you share an update on any of the possible new initiatives you had mentioned on the previous Investor Day, like waste-to-energy, desalinization, green hydrogen? Are these projects still under analysis? And if so, what time frame should we have in mind.

This is Sebastian. Well, as we have mentioned, we are on the feasibility phases of the studies. The 3 actually you mentioned, I would say, out of the 3, the most advanced is desalinization then followed by waste-to-energy. And I would say in the third place is hydrogen. To give exact dates, we are not there yet, but we will keep you duly informed of these 3 initiatives as we move along the year.

Your next question is coming from Tom [indiscernible] from New York Life Insurance.

So there appears to be a bill floating around the Senate and also a previous bill that is calling for fossil fuels to be eliminated in generation by 2030. And the previous bill was talking about coal in particular, by 2025. Are you aware of any of the progress of these bills? And do you have an opinion on their chances of actually being passed and approved by the new government.

Tom, yes, we are aware of those bills. They haven't moved forward. They haven't been approved. Now to have an opinion, specifically on coal, well, is the opinion that we have been expressing on the last years. Yes, Colbun believes on coal defacing, but we believe on our responsible coal defacing, that is that coal will be and we will obviously be part of moving coal out as we are able to give security to the system. Today, the system is being challenged. We are having less water than we used to have. We have commodity prices that are well above what we used to have. So therefore, this needs to be analyzed very into detail. To give a specific date or year, well, we haven't because a lot of things must converge. We need to have more renewable energy. We need to have the transmission to evacuate that energy as well. So that's where Colbun is standing. Again, we support coal defacing. But at the same time, we have always stated that time frame needs to; first of all, guarantee the security of electricity supplied to the country.

Fair enough. So if that bill does gain traction in past, you would have to shut down your gas plants by 2030. Is that something that it sounds like you're saying it's not feasible to do that? I know you don't want to put a date on it, but would you agree with that?

I'm sorry, Tom, I didn't get the full question. Could you repeat, please?

Sure. The question is it seems like if the bill does pass, you guys would be forced to shut down any gas plants in the next 8 years. Would you think going forward, that is a feasible time frame or not?

Well, that depends on many factors. Well, the first question is what technology would replace those gas facilities. And obviously, if you cannot build more coal facilities and you cannot build more gas facilities. And on the other hand, you are having less hydropower into the system. Well, probably the puzzle would be resolved with more solar, wind, and batteries. But again, also, the transmission should move accordingly to achieve and to generate all the capacity that would come out from the system in the form of combined cycles. So the answer to your question is, it depends. If we have all those things on the table, yes, it would be possible. But if we don't, it would be pretty tough to do so.

[Operator Instructions] Your next question is coming from Murilo Riccini from Santander.

How do you assess the situation of the transmission congestions in the north, maybe seeing the interest of the audience regarding the coal dispatches nowadays? Do you see less attractiveness currently on investing in solar capacity in the north due to the congestion issues or maybe construction costs? And my second question, I don't know if you already answered this, but could you give us more details about the good performance of Fenix Power, mainly regarding the energy sales and capacity payment, please?

Murilo, regarding your question of solar. Well, it is clear that the congestion is still there, and it is clear that the costs of building that technology are also going up in being into those investments. Well, you know that we have projects in that area. But again, the theory of Colbun is that we have assets tied to PPAs. And accordingly, then we see the return on constructing that technology type to our PPAs. So we look at these investments in a more holistic way, not only looking at the spot situation, but also looking with a longer-term view. Again, you see that we have projects in that area. We have any different advancements. And well, they are awaiting for the, I would say, for the opportunity to have the goal in terms of investment currently. Well, we are finishing Diego Almagro and we are in the midst of [indiscernible], which are supplier in [indiscernible] advancement up to date of 9%. Regarding the performance of Fenix, Miguel, can you take that question, please?

Yes, absolutely, Sebastian. So I would say, as you mentioned, Murilo, Fenix is performing really well. It's producing, I would say, at its maximum capacity. It's sold during the first quarter, almost one terawatt hour of a bit over one terawatt actually in terms of production, mainly to the [indiscernible]. And because of its contractual position, we were able to additionally sell [Break] we don't foresee any reason for that to change. The plant is in pretty good shape. That's it, and again, I would say.

That concludes our Q&A session. I will now hand the conference back to management for closing remarks. Please go ahead.

Well, thanks, everyone, for attending this conference call. We're very happy with the questions, and we hope we gave good insights with the answers. We hope to see you all on our next results presentation. I wish you all a very good weekend by from Colbun's team.

Ladies and gentlemen, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.