Conference Call Codensa and Emgesa 1Q 2016 May 13, 2016

Transcription

1 Conference Call Codensa and Emgesa 1Q 2016 May 13, 2016 Good Morning Everyone. Thank you for joining us today, and welcome to our quarterly investor conference call. My name is Leonardo López and it is a pleasure for me, and my team, to present Emgesa and Codensa's first quarter 2016 results. We have divided our presentation into four chapters: first, we will go over the highlights for the first quarter of 2016; second, we will discuss the operational and financial results of the first quarter of this year, and finally we will present some closing remarks. At the end, we will open the conference call for a Q&A session. Please join me in slide 4 to get started. Now let s start the first quarter 2016 highlights: Operational revenues and EBITDA of Emgesa and Codensa grew significantly compared to the first quarter of 2015 mainly due to higher prices of electricity sales, as a result of higher PPI and El Niño Phenomenon. During the first quarter of 2016 aggregated CAPEX for both companies decreased by 55% compared to the same period of the previous year, reaching a total of USD 49.6 million dollars. This result is mainly driven by the beginning of operation of El Quimbo in November 2015, after completing most of the investments in the civil works and the social and environmental program. In turn, Codensa's CAPEX increased considerably compared to the first quarter of 2015, due to investments in the remote control project, new substations, connections for new clients, the increase of installed capacity in medium tension assets and update of public lighting. As you may remember from our previous conference call, a regional court ordered Emgesa to suspend its generation in El Quimbo. However, in January 10 th, 2016, another legal decision from a regional court of the city of Neiva ordered the temporary and immediate reopening of the plant to support national power generation amid extreme dry conditions, which menaced the stability of the national electricity system. Afterwards, in February, the regional court, which had previously ordered the suspension of operations, lifted its suspension order for a six month period while a project to recover the oxygen level at the dam is put in place. Soon after this, in April, 2016 Emgesa was fined by the Colombian Environmental Authority, known as ANLA, for an amount equivalent in pesos to dollars, claiming a breach of obligations relating to the removal of the biological material from the bottom of the reservoir of El Quimbo and a potential effect on the quality of the water downstream. Emgesa will appeal this decision, which will result in a suspension of the obligation of payment of the sanction. Nonetheless, it is important to remember that Emgesa has invested more than 50 million dollars to remove all the biological

2 material from the reservoir and has comply with the obligation to maintain certain oxygen levels of the water. Amid one of the strongest El Niño Phenomenon in more than 50 years, two additional unfortunate events including the suspension of operations in Guatapé and Termoflores, increased the risk of a potential blackout in the country during the first quarter of the year. Their suspension put additional pressure on reservoir level and energy spot prices, in a moment in which national electricity demand overshot above the government s high scenario, driving thermal generation to supply about 50% of total national demand. This, together with pure thermal generation companies facing financial distress under this scenario, led the government and the regulator to intervene the market constantly over the past six months. One of these interventions, aimed to avoid the potential blackout, was a national electricity saving initiative launched in March by the government to reduce energy consumption, which affected Codensa s energy demand growth in March. These interventions will be discussed further ahead in the presentation in more detail. Now please join me in slide six to present the operational and financial results for the first three months of this year. In terms of generation output, between January and March, 2016, Emgesa generated 3,271 GWh, with its 13 generation plants, a 2.3% increase compared to the same period of the previous year, representing nearly 20% of the system s generation. About 80% of total generation came from hydro plants and 20% from thermal ones, evidencing a nearly 11% increase in the share of thermal generation compared to the same period of the previous year due to El Niño Phenomenon. Energy sales grew by 10.7% in the first quarter of 2016 compared to the same period of the previous year, resulting in 4,113 GWh. The average spot price for the market for the first three months of 2016 stood at about USD$208/MWh, which was 264% higher than the average spot price of the same period of the previous year. Emgesa sold about 75% of its energy through contracts and 25% in the spot market. Due to El Niño Phenomenon, spot sales decreased by 12.4% as compared to the first quarter of the previous year and contract sales rose by 21%, mainly as a result of renegotiations with non regulated clients to increase the amounts of energy under contracts. Emgesa has a diversified asset portfolio with three different river basins and the support of two thermal plants. These characteristics allowed Emgesa to meet all of its firm energy obligations during the first quarter of 2016, in spite of the strength of El Niño Phenomenon. As of March 2016, the rain levels of Emgesa represented 15 GWh/day, equivalent to 24% of the national system, while Emgesa s reserves reached 1,1 TWh, equivalent to 25% of the national system. In slide 7 we will now discuss, the operational results of the distribution business. National electricity demand grew by 4.1% on an annual basis. However, this growth has not been homogenous among all regions, since electricity demand was higher in the northern part of the

3 country in line with higher temperatures and the increase in AC and refrigeration equipments, and lower in the Central and Western regions of the country. In addition, the national campaign to reduce energy consumption during March, resulted in a national saving rate of 4.97%. Electricity demand in Codensa s area of operation grew by 1.9% on an annual basis, below national demand, mainly explained by the national campaign previously explained, which resulted in a 6.8% saving rate in energy consumption in Codensa s area of influence during march. However, in overall during the first quarter of 2016 energy demand in Codensa s area of influence increased by 1.9%. In the first three months of 2016, Codensa added over 27,000 new clients, reaching 2.9 million clients, that accounted for 22.5% of national demand of electricity. Electricity retailing from Codensa increased by 2.2% reaching GWh. Codensa s losses index decreased to 6.98% for the last twelve months ended March, 2016, mainly due to further efforts to better control energy theft. Please join me in slide 8 to present an update on the industry s regulation. In February 2016, the local regulator published Resolution No. 024, containing a new draft of the calculation methodology for the remuneration of electricity distribution. As previously explained, the main changes include: a change in the business model from a price cap to a revenue cap based model, a potential reduction in the initial asset base due to a new classification of assets according to its remaining average life and a five year payback period for investment plans with the possibility to modify the plan twice in that period, with an 8% limit of the net asset base and a maximum 3% cost variation. However, the new resolution includes the following additional changes: a recognition of investment from its operational date and a monthly recognition of the annuity with a discount factor, lower administration and maintenance costs, excluding extralegal personnel benefits and losses control, a WACC rate that recognizes the tax reform from 2014 with a gradual increase in taxes, compensation for quality of service based on the electricity delivered to clients and long-term targets in terms of number and length of interruptions. Amid an imminent blackout in March 2016, the government announced an initiative to save electricity through Resolutions No.039 and 049, which were in place for one month. These resolutions established monetary incentives for residential, commercial and industrial clients to save electricity setting an individual target of savings in terms of GWh based on the consumption invoiced as of March 6th, If clients met the target they will receive a discount in their invoices and if, not the difference between the target and the actual consumption will be charged with double the price of the electricity. The result of this initiative was a 4.97% savings rate on a national level and a 6,8% savings rate in Codensa s area.

4 Finally, since January 2016 Codensa is applying the new Retailing tariff, which acknowledges the risk of past due accounts of clients within the retailing costs, but reduces the retailing revenues of Codensa by 6.5%. Let s look now at the regulatory update for the generation business in slide 9. Amid extraordinary low reservoir levels due to El Niño phenomenon and the problems in Guatapé, in March, 2016 the regulatory authority published Resolution No. 040, which put in place a temporary procedure to calculate the capacity of generation of all hydroelectric plants in order to maximize the supply of power in a moment of crisis. On a practical basis, this resolution resulted in the loss of control to manage the reservoir levels for those agents with high reserves of water in their reservoirs prior to March In slide 10 we present the most relevant financial highlights for Emgesa. Operating revenues in the first quarter of 2016 were USD 340 million, a 77.9% increase in local currency compared to the same period of the previous year. The main reasons for this result include, an increase in energy sales through contracts at higher prices and a superior average Producer Price Index (PPI) level compared to the first quarter of 2015, at which most contracts are indexed. Additional generation from the restarting of operations from El Quimbo increased the revenues from contracts to the wholesale market. Operating costs reached about USD$152 million, 194.6% up compared to the same period of the previous year. This rise was caused by an increase in the volume of energy purchases in the spot market at a higher spot price and higher thermal power generation with fuel oil in the Cartagena power plant and coal in the Termozipa power plant. Consequently, the operating margin increased by 34.6% compared to the same period of the previous year. Other costs increased by 4.5% reaching USD$52 million dollars, mainly due to salary adjustment and an increased in insurance premiums. As a consequence, EBITDA increased by 39.8% compared to the same period of the previous year, reaching a total of USD$166 million, which represented a 50.1% margin over operating revenues. In line with these results, EBIT increased by 40.3% totaling US$150 million dollars. As you will see in slide eleven, net financial expenses in the first quarter of 2016 amounted USD$34 million, increasing by 240.5% with respect to the first quarter of Financial expenses reached USD$36 million dollars, 49.6% up compared to the 1Q This result is explained by the combination of three factors: first, interests on debt raised to finance the project are no longer capitalized following the start of operation of El Quimbo in the last quarter of 2015, second,

5 a significantly higher average CPI Index levels during 2016 at which 59% of Emgesa s outstanding debt is indexed to, and third, an increase in average debt balances with respect to the same quarter of last year. Finally, financial income increased by 117.6% to USD$3 million dollars, due to higher average cash balances during 2016 compared to the previous year, and higher interest rates recognized in the financial system for all deposits. Consequently, earnings before taxes increased by 20% to USD$117 million dollars. Income tax increased by about 29.9% as a result of a higher taxable base and an increase of one percentage point in income tax rate, leaving it at 40% for this year, following the 2014 tax reform. Resulting from all of the above, Emgesa's net income for the first quarter of 2016 reached USD$67 million dollars, increasing 13.6% from the previous year, and representing a net margin of 19.6% over revenues. Now please turn to slide twelve to discuss Codensa s financial results. Codensa s operating revenues from January to March 2016 reached nearly USD$312 million dollars, up by 16.7% compared to the same period of the previous year. This was the result of two main reasons: first, a higher Producer s Price Index (PPI) level in 2016 to which regulated tariffs are indexed to; and second, a larger client base in Codensa s area of operation, specially from the residential sector. Restrictions of the system have also increased considerably increasing the cost of electricity for clients but the revenues associated to this item are a pass-through for Codensa. Operating costs were USD$187 million dollars, showing a 26.4% increase compared to the previous year, as a result of higher prices of energy purchased through contracts, due to a higher last twelve months PPI and larger purchases in the spot market at higher prices due to hydrological conditions. Other costs amounted USD$30 million dollars, an 10.2% saving with respect to 2015, due to less maintenance costs and a decrease in the tax rate for 2015 wealth tax. Consequently, EBITDA totaled USD$95 million dollars, a 10.5% increase compared to the same period of the previous year, which represented a 32.9% margin over operating revenues. Meanwhile, EBIT reached USD$76 million dollars, resulting in a 11.6% increase compared to the first quarter of In slide thirteen you will see that net financial expenses for Codensa during the first quarter of 2016 were USD$11 million dollars, a 30.7% increase compared to the same period of Financial expenses increased by 30.1%, totaling USD$14 million dollars, as a result of significant higher average CPI during 2016 compared to the same period of 2015 at which 84% of Codensa s outstanding debt is indexed to. Also, this year the company had a higher average debt stock compared to the previous year.

6 Financial income reached USD$ 2 million dollars, up by 22.3% compared to 2015, due to higher average interest rates. Income tax for the first quarter of 2016 rose by 3.6% as a result of higher EBT and higher income tax rate introduced by 2014 tax reform. Therefore, Codensa reported a net income of USD$36 million dollars for the first quarter 2016, up by 12.3% compared to the same period of 2015, equivalent to a 13.7% net margin over revenues. In slide fourteen we present the evolution of the EBITDA for Emgesa and Codensa. Colombia s aggregated EBITDA for the first quarter of 2016 increased by 27% in local currency as compared to the same period of the previous year, as a consequence of a 40% increase in Emgesa s EBITDA and a 10% increase in Codensa s EBITDA. The generation business accounted for about 64% of the Country s total EBITDA in the first quarter of 2016, while the distribution business represented nearly 36% of our aggregated EBITDA. In slide 15 we present Emgesa s cash flow for the first quarter of As we just explained, EBITDA amounted to USD$166 million dollars. After paying for changes in net working capital for USD$44 million dollars, taxes for USD$ 23 million dollars and financial expenses for USD$48 million million dollars, funds from operations were USD$51 million dollars. Once maintenance CAPEX for USD$6 million dollars was paid for, the Free Cash Flow reached USD$45 million dollars. Growth CAPEX was USD$2 million dollars and net dividends were USD$58 million million dollars. In sum, Emgesa s cash Flow for the first quarter of 2016 was negative by USD$15 million dollars. As for Codensa, in slide sixteen you can see that EBITDA amounted to USD$94 million dollars. After changes in net working capital for USD$79 million dollars, taxes for USD$15 million dollars and financial expenses for USD$10 million dollars, funds from operations were negative by USD$10 million dollars. Maintenance CAPEX was USD$21 million dollars, thus the Free Cash Flow was negative by USD$31 million dollars. Growth CAPEX was USD$18 million dollars and net dividends were USD$24 million dollars, resulting in a negative cash flow of USD$73 million dollars for the first quarter of Finally, let s go to slide 17 to discuss the main financial indicators of Emgesa and Codensa. The average costs of gross debt for the quarter was 12.11% for Codensa and 10.28% for Emgesa. As of March 31, 2016, average residual maturity was about 3.7 years for Codensa and 5.3 years for Emgesa. In this same period, Codensa s net debt totaled USD$300 million dollars, increasing almost 22% in local currency as compared to the closing of the previous year, mainly due to increased capex incurred over the period and the payment of the last installment of dividends from 2014 net income.

7 As of March, 2016 Emgesa s Net Debt reached about USD$1,25 billion dollars, increasing by 12.5% in local currency as compared to December 2015, as a result of capex payments incurred over the period largely related to the latest investments in El Quimbo, and also to the payment of the last installment of dividends from 2014 net income. Finally, in the lower right hand graph, you can see that 16% of Codensa s debt was in fixed rate represented in the 3 year loan with Bank of Tokyo disbursed in March, which was mainly destined to refinance local bond maturities indexed to CPI. Meanwhile, 24% of Emgesa s debt was in fixed rate, basically represented by the global peso bond issued in January 2011 and loans with local and international banks disbursed during the last quarter of As you have seen throughout the presentation, the intensity of El Niño Phenomenon in 2015 and the first quarter of 2016 and extraordinary events that diminished the country s installed capacity for electricity generation, put the national electricity system to the test, affecting the spot price, as reservoirs were at its lowest levels and higher thermal generation was needed to serve national demand, forcing the regulator to intervene constantly in order to keep stability of the system. Amid this context, Emgesa achieved positive operational results, from higher energy sales through contracts, higher PPI levels in comparison to the same period of 2015 and the operation of El Quimbo. Nonetheless, a material increase in the operational costs due to higher energy purchase prices and higher costs from thermal generation impacted the EBITDA margin. Albeit legal issues, since the restarting of commercial operations in January 2016, El Quimbo has supported the stability and reliability of the national electricity system when it was most needed, serving almost 5% of national demand. Furthermore, the diversified asset portfolio, high availability of thermal plants and the positive performance of Emgesa s reservoirs compared to the national level, allowed the company to meet all of its firm energy obligations during a very challenging period. Codensa also obtained positive operational results, due to higher PPI levels, positive demand growth and the addition of over 27,000 clients to reach 2,9 million clients. Finally, the net income of both companies was affected mainly by higher financial expenses due to higher average CPI levels, at which 60% of aggregated debt is indexed to. In the case of Emgesa, the entrance into operation of El Quimbo also meant the conclusion of the capitalization of the financial expenditure of the debt associated to the project. This ends our presentation for today, thank you very much for your attention, and do not hesitate to contact me or the Investor Relations team at anytime if you need any further information. We will now open the call for the Q&A session. We will have representatives from other areas of the company joining us for the Q&A session, therefore we will answer the questions in Spanish. However, please feel free to make your questions either in English or Spanish. The transcript of the conference call and the Q&A session will be available in our web pages in both languages.

8 Operator: Mr Lopez at this moment I see no questions at the phone. Ok, thank you very much, see you next quarter.