ONLINE AND TELECONFERENCE RESULTS PRESENTATION THIRD QUARTER 2015

Transcription

1 QUESTIONS AND ANSWERS DATE: ONLINE AND TELECONFERENCE RESULTS PRESENTATION THIRD QUARTER My questions are related to two topics: The first was partially answered by what Mr. Rico said at the end of the call regarding the topic of the Termocentro Power Plant generation starting on January first, associated with the 50% liquid fuel and 50% gas operated. So, I would like to know the percentage in which the costs related to ISAGEN fuels will increase. The second issue has to do with the progress of the environmental licensing of projects, such as the geothermal and Cañafisto projects, which could have a new outlook in view of all the changes proposed by the regulator through Resolution 109. As regards the process in which the majority shareholder of ISAGEN is going through, is there any type of restrictions for moving forward in the development of the licensing of these projects? I will start with the second question: as you know, we are taking the steps for the licensing of the geothermal project, the Piedra del Sol and Cañafisto project. The small wind farm already has a license. In the case of the Geothermal project, the last action was when the National Authority of Environmental Licenses (ANLA, for the Spanish original) transferred the environmental license process to CORPOCALDAS, on the grounds that the generation that was going to be produced there was less than 100 MWh in the first stage and therefore, it was the responsibility of that corporation. We are going to talk to the ANLA because we do not think this is advisable, but in any case, if it is confirmed, we will continue with the process with CORPOCALDAS. As regards Piedra del Sol, the project has currently set the date for the public hearing, which is required as part of the application, for December 11. We will attend the public hearing and, form there, we will wait for the process to continue and obtain the license. Finally, in the case of Cañafisto, last Friday we received a notice from the ANLA denying the license. We are working with the corresponding resource because we believe that the arguments based on which the license was denied have no technical, environmental or social grounds, that is to say, we are going to carry on with the procedure. As you know, up to now the Colombian Government has not set the final timetable for the sale. However, there is a definition by the Board of Directors stating that all strategies and jobs for new ISAGEN projects will not be stopped, regardless of the sale process. As regards the first question related to the costs of Termocentro in the operation of liquids, the costs we have today will increase approximately 2.5 times, which would be the 50% liquid - 50% gas combination. We have continued working on the part of attaining gas, which is possible. Up to now, we have not given up on the idea of getting gas for the first quarter, and in this case, we would be in a better situation. In any case, if

2 there is the liquid and gas combination, the combined cost would be covered by the reference scarcity price defined by the regulator, that is to say, about COP What is the outlook after the El Niño weather conditions? How much longer is it going to be? According to the probabilities presented, can it go on to July next year? Is there a probability of 50% after that? What are your perspectives concerning the gas market situation? About having Termocentro as a backup plant? What are your ideas in this regard? What we expect and what the forecasts have indicated is that as of May - June 2016, we are going to have a rainfall around the historical average. The important thing is how we are going to arrive or how depleted we will be at that time. We believe that if all the possible thermal power generation enters the system, we are certainly going to have a difficult year, because the results are sure to be lower than those of this year, but we will be able to recover in the second half. 3. I have three questions: The first is, considering the dynamics that certain thermal agents are going through, could the Company consider increasing its installed capacity in this technology? If so, with what type of fuel? The second is about the system: Do you think coal could gain weight in the generation matrix in Colombia? And third, the explanation given by Mr. Rico is not very clear. Given the allocation of the reliability charge on November 20, could we expect less thermal power plants to be allocated for the periods up to 2019? As regards the possibility of thermal technologies, we are working on it. In fact, for several years, we have been working with geothermal energy, which is a technology, as I have mentioned several times, that is ideal for the Colombian market because it is a thermal energy with the opportunity cost of water, in the sense that part of the operation would perform excellently and we have continued to move forward in those studies. We are also looking at coal options. As I mentioned, In Resolution 109, the CREG called for a new generation, when it says that the new generation should have prices or variable costs less than or equal to 80% of the scarcity price. In other words, and in terms of the current fuel cost situation, it is saying, "bring me hydroelectric or coal-fired power plants." These plants are the ones that could provide those costs; therefore, there is a sign to encourage coal. The problem with coal is (which is a discussion that has to take place in the country now that it has committed to the reduction of greenhouse gases) that it is a major producer of greenhouse gases, but whether or not there will be new coal-fired generation is something that has to be discussed in the country. I think it will be done and coal-fired generation will be promoted. We have been working on another issue which is coal gasificiation. Up to now, in research conducted with COLCIENCIAS and four universities, we have managed to produce synthesis gas from coal, which would allow that generation. This work is more experimental and advanced, but it the long term, it would be the solution for a country like Colombia, which is rich in coal and can use this technology that has the great advantage that it allows the capture of CO 2 and, therefore, does not emit as much

3 greenhouse gases. So, we are working on it, but obviously, the development of this type of projects takes years (4 or 5 years); before that, there would be no plants to be able to serve those purposes. As regards the allocation expected by the CREG, the plants on the market today are going to continue working. Perhaps, the main thing is that starting in December 2016, the regasification plant on the coast will start up, with the advantage that we will have that flexible gas for the thermal power plants and improve the situation we are going through now. Being able to import liquefied natural gas is a very important strategy for the current situation of the Colombian market, especially to get through the 4 to 5-year rut until new plants start up with competitive operating costs or prices, but what the CREG said was: There will be no problem in the allocation from now until the period; after that, the current plants will carry on with the allocations, of course with the processes that will be carried out, but it does not seem like they will be shut down. 4. As regards whether you are considering increasing projection in the thermal energy issue, I would also like to know whether you have looked at it from the standpoint of the acquisition of projects that are already underway? Not until now, no. We have not considered it and we have not been offered any opportunity involving thermal projects underway. 5. I would like to know about the combined cost of the COP 470 you mentioned in the first question. What is the price level of the gas contracts that you need to be able to reach that price below COP 470? The market price of gas even allows generation around the scarcity price that we have, with the entire plant generating on gas. If we go into liquid, as I said, the cost would increase by 2.5 times, but in the combination, we could be a little below the COP 470 allowed by the regulation. 6. You mentioned that the gas contracts are currently around USD 3 to 8-9. What gas contract price level would you have to agree to, in order to achieve the costs you mentioned? In what range would they be possible? There are prices of USD 5; there have even been auctions closing at USD 18, but with gas prices, assuming a normal situation, USD 6 to 7 at this time would be the numbers for that combined generation. 7. I would like to talk about two things: The first is the regulatory issue, Regulations 172 and 173 in particular. My question is, could you explain a little more why these two Resolutions (at least 172 is final) for now have placed the reasonable management of your reservoir levels at risk? Because I thought this resolution was putting a price cap on the bids made by agents on the market, but they are not flexible at all, and proposing a certain quantity of energy to be dispatched and this way, make the management of the reservoirs more reasonable. The other issue would be more regarding the long term, about the contract prices. Could you give us a little more information about the current situation from the commercial standpoint for the

4 contracts? And what range of contract prices do you predict for the next two or three years? We expect Resolution 173 to be made final to be able to manage our reservoirs better. The logic of the price cap placed by the regulator through Resolution 172 is precisely to try to reduce the losses suffered by thermal power generators when they cannot generate; that is to say, if they do not fulfill their firm energy obligations, they would have to pay up to the spot market price; if the spot market price stays at COP 2,000-1,500, the losses would be enormous and, ultimately, it is a transfer between generators. That is why the regulator put the price cap on, to limit the losses that would be suffered by thermal energy generators running on liquid fuel. The problem is that it prevents us from handling the reservoir; that is why we hope Resolution 173 is made final, so that it allows us to have better management of the reservoir, because now, even if we bid at COP 1,500 to 2,000 the market manager caps it at COP 800 and raffles the dispatch, and we have to adhere to the result of the raffle. In relation to the contracts, we have to isolate it from the El Niño weather situation, because they are two different problems. The price of the contracts is affected because right now, the offer of contracts, which is fundamentally the water supply, is lower than the demand for contracts. That makes the price go up, given that we, as hydroelectricity generators, if we do not manage to generate the quantity of energy to which we have committed with contracts, we will have to buy it on the market; the replacement price in effect now, is the price of the liquids, which is very high, so that leads us to keep on contracting only our firm energy or assuming some risk, but by increasing the contract price. That is the increase that we expect, which in the order of magnitude, we are talking about contracts appearing on the market between COP 180 and 200, while we had levels between COP 150 and 160 just a year ago. That is the impact and it is going to stay at that point for the next 4 or 5 years. That is why the CREG was calling for a new generation, in order for a more competitive "cheap" generation, which may be coal-fired or water-based, to start up as soon as possible. In relation to daily dispatching, don't you have any flexibility in the quantity of energy you offer? It is not clear to me. I understand that flexibility, due to the price, is lost with the resolution but, why is there no flexibility now in the quantity of energy you can offer? The regulation does not allow us to decrease the availability of plants and that is why we are waiting for Resolution 173. This resolution would allow us to say: I am not offering all the energy, but rather just my firm energy obligation to be able to get through the summer. But now, I have to offer the energy of the next day without being able to predict the evolution of the reservoir and what the end of the critical period is going to be like; that is to say, the availability is declared, but no bid is made. That is why we are hoping for Resolution 173 because it will allow us to handle the reservoir better. In the present circumstances, we do not have much of a margin. That is why our reservoirs, mainly the Miel Reservoir, is stuck as low as 20% to 25% and Sogamoso at 40%, while in normal conditions, at November 30, we would expect the Sogamoso Reservoir to be at 80%, like the Miel Reservoir.

5 8. My question has to do with the tax issue. I would like to understand the difference between the 17% effective rate of the previous quarter in 2014 against the 42% of this quarter. I would like to have a little more information about why there is such a big difference between the two quarters. At the end of the quarter, the tax impact was the highest because the entire wealth tax was recorded in accounting. The effect of income tax and the CREE tax has been recorded the entire time, but most of it in the first quarter is the impact of recording the wealth tax for COP 30 billion. 9. My question goes beyond this quarter (the third quarter of this year against the third quarter of 2014). In 2014, there was an effective tax rate of 17%. This third quarter, there is an effective rate of 42% and I don't know to what point is this in line with the wealth tax? At the third quarter last year, we had several things: on one hand, we still had the 30% deduction of the investments being made in Sogamoso, which made the tax lower. In addition, the revenue this year is much higher than last year, and this year, the CREE surcharge appeared, which reached 9% due to the effect of the tax reform, which is taking a big toll on the results of To have orders of magnitude in our head, you could say, "What is the approximate percentage of the costs that would have an impact on the reliability charge you mentioned? Could we associate that the cost could be the percentage of the total costs of the Company? We would be glad to look at the accounts, but I do not have a number to give you at this time. 11. My question is in reference to the debt in US dollars again. I would like to understand the 8% you mentioned regarding the percentage of the total debt and perhaps you could give us a little more information about the coverage strategy you have. You also said you had cash in US dollars, but I would like to know if there is anything more to cover this portion of the debt in US dollars? There is USD 100 million of the total debt that now amounts to COP 3.6 trillion, which is a proportion of 8%. Remember that the OPIC loan, which was originally in US dollars, is indexed in Colombian pesos, so we are covered. Our strategy is to have enough US dollars to pay the debt service each year. The amount this year of approximately USD 11 million, we have in that currency and it has been paid, so there has been no impact on cash. 12. I would like the details about what you mentioned regarding the reliability charge and the component in US dollars. I wanted to confirm whether what you charge customers as a reliability charge month by month is based on the real exchange rate and not what was projected when the contract was signed, is that right?

6 When the contract is signed, there is a projection of how the US dollar is going to behave. The contract price is set depending on that project, but it is set in Colombian pesos. We are taking that exchange risk and we are not transferring it to the customer. Therefore, if there is a revaluation, we will have a benefit; if there is a devaluation, we will not. As I said, in 2014 and previous years we were talking about the US dollar at a price of approximately COP 2,000 and it was projected to stay the same in the long term, that is to say the contracts are not indexed at the exchange rate. The negative effect takes place when we generate more than the firm energy obligations at the reliability charge, and we return the charge that we are not responsible for and it is returned at the exchange rate of each month. That is the negative impact on the commercial operation. 13. Would it be correct to think that the component of just energy at the prices excluding the reliability charge made by ISAGEN in 2015 measured in Colombian pesos is higher than in 2014? Is there some kind of positive repricing of energy? Yes, that is correct. 14. As regards the contracts, since we expect a significant increase in the contracts signed today, could the government refuse to allow the prices of the contracts to increase that much? Because that is ultimately what pays for the demand, given that this cost, which also increases energy by 33%, could have a significant impact on the inflation rate. This may have that impact on the costs of energy, but we do not think that the government is going to intervene in this regard. Precisely what the government and the regulator are doing is trying to have a quick auction to have a more competitive supply. What that means is that the relatively high prices will stay the same for the next 4 or 5 years. After that period, and especially when projects start up, such as Ituango, prices will tend to balance the supply and demand. That is to say, the supply of contracts will be sufficient for the demand for contracts and prices will go back to their normal course. In other words, what we could have is like a small exchange that rises. If you picture the line of contract prices, it rises naturally and in 4 years, there would be a slight increase that would later be adjusted when the supply and demand are equal. Have any contracts been signed at that price (COP 200) at this time? There have been contracts at that price on the market; they are a little high.