Conference Call Codensa and Emgesa 1Q2017 April 27 nd, Good morning and thank you for joining us today in our investor conference call.

Transcription

1 Conference Call Codensa and Emgesa 1Q2017 April 27 nd, 2017 Good morning and thank you for joining us today in our investor conference call. My name is Daniele Caprini, I am the CFO of Emgesa and Codensa, and today I will present to you the financial and operating results for the first quarter of As usual, let me remind you that we have converted figures in this presentation into US Dollars (USD) for your convenience, using average and end-of-period FX rates. However, percent variations of financial figures are calculated in Colombian Pesos (COP), in order to have consistency with the explanations of operating and financial performance data, thus excluding the FX effect. This presentation can also be downloaded from our websites. As always, we will have a Q&A session at the end of this presentation. Now, please join me in slide 3 (three) to go over the main highlights of the year In slide 3 we will now discuss the main highlights of the year Now let s start the first quarter 2017 highlights: Total Net Income generated by Emgesa and Codensa increased by 10,5% compared to the first quarter of 2016 as a result of a combination of positive and negative effects, including: - Higher distribution margin, mainly driven by the consolidation of EEC s figures pursuant to the merger into Codensa that took place in October 2016; - Lower generation margin due to lower spot prices in 2017 when compared to prices observed during El Niño phenomena last year, - Increased depreciation due to a higher asset base following investments carried out over the last year, - A decrease in total net financial expenses associated to lower CPI levels; and, - A lower effective tax rate pursuant to the tax reform passed by Congress at the end of During the first quarter of 2017 aggregated CAPEX increased by 14% compared to the same period of the previous year, reaching a total of USD 58,4 million dollars. Codensa represented 77% of total investments, and is based on an ambitious investment plan to modernize and strengthen the networks through projects such as remote control, new substations, public lighting and smart metering. During March 2017 Codensa successfully placed a bond in the local capital markets. Codensa issued a bond in COP for an equivalent to USD$145 million dollars at an average fixed rate of 7.26% in two tranches of 2 and 5 years of tenor.

2 The issuance was 2.5 times oversubscribed. Proceeds from the bond issuance were mainly destined to refinance bond maturities and marginally to fund the company s capex plan. During the first quarter of the year, CREG and other energy authorities have published several documents regarding distribution and generation regulation. Lets start with distribution. CREG published resolution 019 of 2017, opening to consultation a new version of the proposed methodology of remuneration of the electricity distribution activity. The resolution defines relevant topics, out of which stand out an improvement to the initial Regulatory Asset Base, as well as to the WACC rate for distribution asset of 13.1% compared to the 12.1% proposed in resolution 176 of The final regulation is expected to be enacted during the second half of The Colombian National Planning Department issued the 281 decree regarding sanctions for the agents of the energy business in Colombia. The document defines the criteria to impose fines where the Superintendence of Public Services will be in charge. On the Generation business, the Ministry of Mines and Energy released Resolution whereby it adopted the Natural Gas Supply Plan, which is necessary to start the allocation process of those projects that guarantee the natural gas supply and reliability in the short term for Colombia. Among the projects that would benefit from this resolution are the Pacific regasification plant and the connection of several pipelines of the country. Finally, the Ministry of Mines and Energy issued decree 281 regarding energy self-generation and smart metering. The document seeks to promote an efficient energy management where the surpluses in energy self generation could be trade in the system, while states the first guidelines of smart metering systems in Colombia. Let s continue with the highlights of the operating results for our companies in slide 5 In the generation business, installed capacity at the end of march 2017 totaled MW and remained unchanged compared to December Net production increased by 15,6% during the first quarter 2017 if we compared to the same figures of 2016, reaching GWh as a result of higher hydro generation, since in the first quarter 2016 water reserves had been affected by El Niño phenomenon, and so Emgesa s thermal plants had to generate almost 20% of the total energy delivered by the company to the system then. As a result, Emgesa s market share in terms of installed capacity in the first quarter of 2017 stood at 21%, and at 23,5% in terms of net production, becoming the largest company in the country in terms of generation in the period.

3 Electricity sales grew by 3.2% during the first three months of 2017, reaching 4,243 GWh, driven by a 7.4% growth of volume sales in the spot market and a 1,8% increase in contracts volume. The average spot price for the market during the first quarter 2017 was USD$43/MWh, which was 81% lower than the average spot price of the same period of the previous year as a result of the normalization of hydrological conditions. Continuing with the operating results on the distribution business, total electricity distributed by Codensa decreased by 0.5% during the first three months 2017 compared to the previous year, due to lower regulated and commercial demand in the Codensa s influence area, as consumption habits moderated following the National Government's energy-saving campaign during 2016, and a lower industrial activity registered during the analyzed period. Codensa added organically almost 20,000 new clients over the first quarter of It is important to recall that in October Codensa incorporated about clients from EEC as a result of the merger. Consequently, the company s client base by the end of march 2017 reached a total of 3.3 million customers, including those formerly serviced by EEC, which represent nearly 22% of national electricity demand. Please Join us In slide 6 for a snapshot of our financial and operating results Emgesa s gross margin decreased by 12.7% compared to the first quarter of 2016 to the effect of a 27.9% fall in revenues explained by significantly lower energy prices in the spot market compared to the first quarter of 2016, which more than offset the increase in volume sales. The drop in spot prices is explained by the persistence of El Niño phenomenon during the first quarter of EBITDA fell by 11.8% in pesos due to the aforementioned results, but also reflected a better performance on its costs of sales due to lower fuel consumption compared to the first quarter of Despite the relevant decrease at EBITDA level, Net Income decreased by only 1.5% in pesos reaching USD$74 million dollars, thanks to a 22.2% decrease in net financial expenses driven by a lower average CPI Index levels during the first three months of 2017 compared to the same period of 2016 at which a significant portion of Emgesa s outstanding debt coupons are indexed to, and to a lower effective tax rate as a result of the tax reform passed by Congress at the end of Finally, Net Debt increased 3.5% with respect to December 2016 amounting USD$1.27 billion dollars as a result of capex execution and the payment of the last installment of dividends on 2015 net income, which took place in January this year. Total gross debt, however, decreased in 2.8% during the first three months of 2017.

4 We will now review the financial highlights of Codensa in slide 7 Turning to Codensa s results, gross margin increased by 17.6% in pesos mainly because of an increase in the distribution and retailing components of the regulated tariff thanks to increased PPI to which they are indexed to, whereas the cost of electricity dropped as compared to the first quarter of 2016 when El Niño phenomena spiked spot prices. In addition, expenses capitalized on fixed assets showed an increased compared to the same period As a result, EBITDA grew by 20.0% compared to the same period of the previous year. Net income increased even further, by 32.7% in local currency, due to the positive effect of a lower effective rate compared to the same period of the previous year following the 2016 tax reform, which was partially offset by a 3.6% increase in net financial expenses due to higher average debt balances. Net debt as of March 2017 increased by 17.6% with respect to December 2016, mainly because of investments made over the quarter and the payment of the last installment of dividends on 2015 net income that took place in January We will now summarize Colombia s financial results in slide 8 Cash flow generation for Colombia shows that Colombia s aggregated EBITDA did not vary significantly in the first quarter of 2017 with respect to the same quarter in 2016, while net income increased by 10.5% mainly due positive impact of net financial expenses which fell by 18.1% and a lower effective tax rate. Cash flow generation of Emgesa shows that Emgesa s EBITDA amounted USD$163 million dollars. Net working capital reduced cash by USD$62 million dollars, taxes by USD$23 million dollars and net financial expenses by USD$49 million dollars. As a result, funds from operations were USD$29 million dollars. Once maintenance CAPEX of USD$13 million dollars was paid, Free Cash Flow reached USD$16 million dollars. Growth CAPEX was not significant during the first quarter 2017 and net dividends paid totaled USD$68 million dollars. In sum, Emgesa s net free cash flow for the first three months of 2017 was negative by USD$52 million dollars. Now let s go over Codensa s cash flow generation During the first quarter of 2017 Codensa s EBITDA amounted USD$127 million dollars. Net working capital substracted cash by USD$65 million dollars, taxes reduced it by USD$24 million dollars and net financial expenses by USD$11 million dollars. As a result, funds from operations were positive by USD$27 million dollars. Since Maintenance CAPEX amounted USD$17 million dollars, Free Cash Flow totaled USD$10 million dollars. Growth CAPEX was USD$28 million dollars and net dividends paid were USD$40 million dollars, resulting in a negative net free cash flow of USD$59 million dollars.

5 Please join me in slide 11 to review the country s gross debt breakdown As of March 2017, Emgesa s gross debt amounted almost USD$1.5 billion dollars, 1.8% lower compared to December 2016 in local currency. This reduction resulted as Emgesa serviced a USD 59 million bond maturity, where it only refinanced USD 35 million with a 1-year tenor bank loan, and the rest was repaid with cash on hand. The average cost of debt in the generation business decreased from 10.5% to 8.2%, due to lower interest rates as a consequence of a downturn in CPI levels at which 64% of the outstanding debt as of march 2017 is indexed to, and a reduction in the Withholding Tax applicable to Emgesa s international bond issuance. Moving forward to Codensa s financial debt, as of March 2017 gross debt totaled USD$ 574 million dollars, a 1,8% increased compared to the closing balance of 2016, as it raised additional debt in March 2016 to fund a portion of its capex plan for Codensa is expected to raise its total debt during the next years in order to meet the investment strategy planned in the business plan of the company. Codensa s average cost of debt decreased from 11.3% to 9.2%, also as a consequence of lower inflation levels at which 39% of its total debt was linked to, and to the new bond issued in March which had a significantly lower fixed rate than the average cost of the previously outstanding debt of the Company. Total liquidity in Emgesa and Codensa reached US$ 1.6 billion dollars, summing cash balances, uncommitted and reallocating credit lines with local and international banks. Please join me in slide 12 for the closing remarks As you have seen throughout the presentation, Emgesa and Codensa achieved positive results during the first three months of 2017, based on a efficient cost management and a decrease in financial expenses and tax rate applicable as of January 1 st 2017, and reflecting the merger of EEC s business into Codensa. For the first time in more than a decade, national energy demand has declined, explained by the consumption habits implemented in the Governent s apagar paga energy saving campaign, accompanied by signs of slowdown in the domestic industry, facing signs of deceleration of the Colombian economy. With the entrance into operation of El Quimbo in 2015, CAPEX execution has been targeted to projects in the distribution business, including the construction of new power substations to strengthen the network, the telecontrol project, and the installation of smart metering equipments. 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.

6 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. The transcript of the conference call and the Q&A session will be available in our web pages in the following days. Operator: thank you. We will now begin the Q&A section, if you have a question please press start and then 1 on your touchtone phone. If you wish to be remove from the kill please press of the phone sound or the ask quit. If you are you seen ask come you have need you before pressing the numbers. Once again if you have a question please press start and then 1 on your touchtone phone We have a question from Mark Kain, from BTG Pactual BTG Pactual: Hi guys. Thank you for your presentation I just have a couple of questions about Emgesa. The first one is how much Capex is going to be destined for the next couple of years? and the second question is if you have any maintenance plan on hydro and thermo plants during the year? and the third one I just want to know how you guys are seen the current low price environment in the spot market right now and how do you expected to behave during next couple of quarters. Thank you very much. Daniele Caprini: I take the three questions, the three answer. The both Capex. At the moment Emgesa not have grown Capex plan, this is because we are just finish the begin investment in the Quimbo and now we are looking at the different opportunities in the market, so what we have now on our plan is just maintenance Capex. Maintenance Capex as in the Hydro business more or less 25 Million euros and now we are doing investing of the Termozipa plant that is we are maked investment to reduce the emission over future and this is the main investment the our business, thermo business in generation business, let me say. The other question is about the low prices, what we have seen at low prices quit low in the market now but our generation almost 80% our generation is with the CPI contract. BTG Pactual: All right, How are you expecting the future behavior of the spot market, I mean do you expect like a federing increasing the prices given a higher dry hydrology environment or is it more like stable behavior in the spot market? Daniele Caprini: what do you see usually in the market with the energy in the summer period in Colombia the prices should be higher, this is what will expect now. BTG Pactual: OK. Thank you guys. Operator: If someone have any question please press start 1. At this moment we show notrather question. I will like to tend the call back with Mr Caprini for any closing remark. Daniele Caprini: Thank you for the questions and thank you for attended the presentation. We are not any other demand.