Conference Call Codensa and Emgesa FY 2015 February 29, 2016

Transcription

1 Conference Call Codensa and Emgesa FY 2015 February 29, 2016 Good Morning Everyone. Thank you very much 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 2015 full year results. We have divided our presentation into three chapters: first, we will go over the highlights of the full year 2015, second we will discuss the operational and financial results of 2015, 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. Let s start with 2015 relevant events: Operational revenues for Emgesa and Codensa showed significant growth compared to 2014, but at EBITDA level, results were impacted by the 2015 wealth tax, pursuant to the IFRS adoption last year for the first time. During 2015, Colombia continued to be the first Latin American contributor to the ENEL Group's EBITDA. Aggregated CAPEX of both companies in 2015 grew by 4% compared to the previous year, reaching a total of USD$410 million dollars. Emgesa s CAPEX focused mainly on El Quimbo and maintenance of existing plants, while Codensa's CAPEX was destined to massive connections in the urban area, quality improvement plans, the Telecontrol project, the update of public lighting and the revamping of high tension assets, such as the Bacata Substation. On November 17, 2015 El Quimbo entered into operation. El Quimbo is Emgesa s new hydro plant located in the Magdalena River with a 400MW of installed capacity and an estimated average generation of GWh per year. El Quimbo will generate about 5% of Colombia s electricity supply and will increase Emgesa s installed capacity by 13%, becoming the country s largest infrastructure asset built by a private agent in Colombia up to date. Only after one month into operation, on December 16th 2015, El Quimbo was obliged to suspend its generation due to legal decisions from the Constitutional Court. This court had been reviewing the legality of the Presidential Decree that allowed the beginning of operations in El Quimbo, in spite of the existence of a legal decision from a regional court that prevented generation until certain environmental requests had been fulfilled. Following, the decision of the Constitutional Court, El Quimbo remained shut down until January 10th, 2016, when another legal decision from a criminal court of the city of Neiva, ordered the temporary opening of the plant to support total generation of the national system amid extreme dry conditions. The generation from El Quimbo will remain in place unless otherwise notified by the authorities.

2 El Niño Phenomenon, which causes lower water precipitation in Colombia, begun by the end of 2014, and became stronger during Its intensity increased drastically in the last quarter of 2015 and is expected to continue strong until the end of the first quarter of As a consequence, energy spot prices have reached a peak at historical maximums, while national electricity demand overshot above the government s high scenario, and thermal generation requirements increased to supply about 50% of total national demand. As some pure thermal generation companies begun facing financial distress, the regulatory authority was forced to intervene the market constantly during the last quarter of the year. These interventions will be discussed further ahead in the presentation in more detail. Finally, the regulator defined the retailing tariff for Codensa with a 15% reduction compared to the current level, effective as of January In addition, the regulator published the final calculation methodology for the remuneration WACC rate to be used in the distribution business. Neither the final WACC rate for the distribution business nor the asset base or the revenue cap remuneration methodology proposal, had been resolved until today. Therefore, the distribution tariff continues unchanged. Now please join me in slide 6 to present the operational and financial results for In terms of generation output, from January to December, 2015, Emgesa generated 13,741 GWh, with its 13 generation plants, a 0.8% increase compared to previous year, representing nearly 21% of the system s generation. About 89% of total generation came from hydro plants and 11% from thermal ones, evidencing a nearly 4% increase in the share of thermal generation compared to the same period of the previous year, due to El Niño Phenomenon during Energy sales in 2015 presented a 7.1% increase compared to the previous year, resulting in 16,886 GWh. The average spot price for the market during 2015 stood at about USD$124/MWh, which was 10.4% higher than the average spot price during the same period of the previous year. Emgesa sold about 74% of its energy through contracts and 26% in the spot market. Despite Emgesa s higher generation output, spot sales decreased by 8.8% as compared to the previous year. Contract sales rose by 14%, mainly as a result of new non regulated clients of Emgesa that used to be supplied by another retailing company that went out of business in 2014 and increased sales to non regulated clients. In slide 7 we will now discuss, the operational results of the distribution business. During the last twelve months as of December 31, 2015, national electricity demand grew by 4.09%, mainly driven by water irrigation districts due to draughts and the residential sector, due to higher temperatures, and to inelastic electricity demand from the low income population, due to subsidized electricity prices. In turn, electricity demand in Codensa s area of operation grew by almost 2.2%, still below national demand. In the last twelve months ending on December 31 st, 2015, Codensa added almost 104,000 new clients, reaching 2.9 million clients, that accounted for 23% of national demand. Codensa s losses index stood relatively stable at 7.26% by the end of 2015.

3 Please join me in slide 8 to present an update on the industry s regulation. In June 2015, the local regulator published Resolutions No. 095, defining the calculation methodology for the remuneration WACC for the transmission and distribution of electricity. Some of the most important issues introduced by these resolutions are: - The increase in the effective tax rate used, as a result of the 2014 tax reform; - The use of public sources to determine the cost of debt, instead of the individual information from each distribution company, with a 5 year or longer preferential rates for commercial loans benchmark; - The use of market capitalization instead of book value to deleverage the beta - The increase of the historical period to estimate the variables used to calculate the WACC from 90 days to one year. - The recognition of a premium for the differences between the regulatory frameworks in Colombia and the USA market used as reference to formulate the methodology. Up to now, the regulatory authority has not published the final resolutions defining the premium for the electricity transmission and distribution nor the WACC rate applicable to these activities. However, this resolution is expected to be published during the first quarter of Let me remind you that on February, 2015, the regulatory authority published Resolution No. 180, which lowered the retailing component of the tariff for all distribution companies. Later, during the third quarter of the year, the regulatory authority published resolution number 120 of 2015, which established the basis of retailing costs for Codensa. This resolution acknowledged the risk of past due accounts of clients within the retailing costs but excluded the recognition of losses control costs, which according to the local regulator, will be paid for in the distribution component. As a result, the retailing component of the tariff is 15% below the former recognized costs. The aggregated estimated impact of this resolution for Codensa is a 6.5% decrease in retailing revenues. Let s look now at the generation business regulatory update in slide 9. Amid extraordinary dry conditions due to the strengthening of El Niño phenomenon in the fourth quarter of 2015, the Ministry of Mines and Energy enacted Decree 2108 to empower the local regulator to take temporary measures to ensure the stability and quality of the electricity supply on a national level during extreme, temporary and critical weather conditions at any given time, which could result in difficulties to serve electricity demand. Among several resolutions published during the last quarter of 2015, three of them stand out: First, Resolution No. 170, which aimed at producers and retailers of gas to declare all of their production availability for sale in order to increase gas supply for thermal generators. Second, Resolution N. 172 to cap the offer price of agents in the spot market at 75% of the cost of electricity rationing, which resulted in a cap for the spot price at COP$810/KWh.

4 And third, Resolution No. 178, which offered and option for thermal generators to increase the scarcity price level to COP$470 /KWh, under certain conditions of surveillance from the regulator. This former measure, aimed at reducing the financial losses from thermal generator with higher variable costs than the scarcity price when they were dispatched by the system s administrator. All of the measures adopted are temporary and will be in place initially for 6 months. However, the extension or not of the measures is subject to the regulator s opinion. In slide 10 we present the most relevant financial highlights for Emgesa. The operating revenues in 2015 were more than USD$1 billion dollars, a 23.8% increase in local currency compared to the same period of the previous year. The main reasons for this result include, a significant increase in energy sales through contracts at higher prices and a superior average Producer Price Index (PPI) level during 2015, which increased the revenues from contracts to the wholesale market. Operating costs reached about USD$492 million dollars, 74.7% up compared to the same period of the previous year. This rise was caused by a 50% increase in the volume of 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, both as a result of the dryer conditions explained before. Consequently, the operating margin increased by 2.7% compared to previous year. Other costs increased by 41.1% to about USD$70 million dollars, largely due to the wealth tax applicable in 2015, which is now computed as a fixed cost in the EBITDA as a result of IFRS adoption last year, in contrast to the equity account treatment that was permitted under Colombian GAAP. As a consequence, EBITDA decreased by 0.3% compared to the same period of the previous year, reaching a total of USD$629 million dollars, which represented a 52.8% margin over operating revenues. In line with these results, EBIT decreased by 0.9% totaling USD$569 million dollars. As you will see in slide eleven, net financial expenses in 2015 amounted to USD$61 million dollars, increasing by 38.1% with respect to On the one hand, financial expenses reached USD$129 million dollars, 19% up compared to 2014, mainly due to a higher average CPI Index levels during 2015, at which 59% of Emgesa s outstanding debt is indexed to. Nevertheless, as a strategy to reduce financial expenses, Emgesa took debt only when needed and kept low cash-balances. In February 2015, Emgesa paid USD$79 million dollars in a local bond maturity with cash-on-hand and throughout the second quarter of the year the company financed working capital needs and investments in El Quimbo with short-term peso loans from banks. On the other hand, financial expenditure capitalized increased by 5.8% (five point eight percent) compared to 2014, due to higher levels of El Quimbo s debt. This financial expenditure capitalized

5 finished when El Quimbo started operations by mid November, therefore, 2016 results will show a significant increase in the financial expenses. Finally, financial income decreased by 31.6% to USD$5 million dollars, due to lower average cash balances during 2015 compared to the previous year, as a result of the maturity of local bonds with cash-on-hand and the investment in El Quimbo. Consequently, earnings before taxes decreased by 4.2% to USD$508 million dollars. Income tax increased by about 15.8% due to the higher income tax rate introduced by the 2014 tax reform. Resulting from all of the above, Emgesa's net income for 2015 reached USD$323 million dollars, decreasing 12.8% from the previous year, and representing a net margin of 27.9% over revenues. Now please turn to slide twelve to discuss Codensa s financial results. Codensa s operating revenues from January to December 2015 reached nearly USD$1.3 billion dollars, up by 7.8% compared to the previous year. This was the result of two main reasons: first, a higher Producer s Price Index (PPI) level in 2015, to which regulated tariffs are indexed to; and second, a larger client base in Codensa s area of operation, specially from the residential sector. Operating costs were USD$766 million dollars, showing an 8.9% increase compared to the previous year, as a result of higher purchases in the spot market at higher prices due to hydrological conditions explained before and higher prices of energy purchased through contracts resulting from an increase in PPI. Other costs amounted to USD$136 million dollars, an 11.1% increase with respect to 2014, due to the recognition of the wealth tax of 2015 under IFRS, as previously explained for Emgesa. Consequently, EBITDA totaled USD$451 million dollars, a 4.9% increase compared to the same period of the previous year, which represented a 33.4% margin over operating revenues. Meanwhile, EBIT reached USD$360 million dollars, resulting in a 7.7% increase compared to In slide thirteen you will see that net financial expenses for 2015 were USD$42 million dollars, a 23.6% increase compared to Financial expenses increased by 22%, totaling USD$53 million dollars, as a result of significant higher average inflation during 2015 compared to the same period of 2014, at which 100% of Codensa s outstanding debt is indexed to, and to a higher average debt stock in 2015 compared to the previous year due to the issuance of local bonds in pesos in the last quarter of 2014 equivalent to USD$59 million dollars. Financial income reached USD$ 10 million dollars, up by 7.8% compared to 2014, due to higher average interest rates. Income tax for 2015 rose by 25% as a result of higher EBT and higher income tax rate introduced by 2014 s tax reform.

6 Therefore, Codensa reported a net income of USD$188 million dollars for 2015, down 4.4% compared to 2014, equivalent to a 14% net margin over revenues. In slide fourteen we present the evolution of the EBITDA for Emgesa and Codensa. Colombia s aggregated EBITDA for 2015 increased by 1.8% in local currency as compared to the same period of the previous year, as a consequence of a 0.3% decrease in Emgesa s EBITDA and a 4.9% increase in Codensa s EBITDA. The generation business accounted for about 58% of the Country s total EBITDA in 2015, while the distribution business represented nearly 42% of our aggregated EBITDA. In slide 15 we present Emgesa s cash flow for Cash flow from operations amounted to USD$615 million dollars. After paying for maintenance CAPEX for USD$44 million dollars, expansion CAPEX for USD$230 million dollars and taxes for $217 million dollars, Free Cash Flow was USD$124 million dollars. Net Financial expenses paid amounted to USD$110 million dollars, and dividends paid in 2015 reached USD$381 million dollars. In consequence, Emgesa s net free cash flow for 2015 was negative by USD$367 million dollars. As for Codensa, in slide sixteen you can see that cash flow from operations amounted USD$479 million dollars. CAPEX totaled USD$196 million dollars and taxes paid were USD$127 million dollars, resulting in a free cash flow of USD$157 million dollars. Net financial expenses paid amounted to USD$35 million dollars, dividends paid were USD$201 million dollars and extraordinary operations added up to $11 million dollars. These extraordinary operations are mainly associated to the collection and transfer of payments, resulting from a contract between Codensa and Colpatria Scotiabank, whereby Codensa bills and collects the payments of the consumer loans granted to Codensa s clients by Colpatria and then transfers payments to Colpatria. In the end, the net free cash flow of Codensa for 2015 was negative in USD$91 million dollars. Finally, let s go to slide seventeen to discuss the main financial indicators of Emgesa and Codensa. Regarding the average cost of gross debt, for Codensa at the end of 2015 was 9.6% and the cost for Emgesa was 9.37%. As of December 31, 2015, average residual maturity was about 3.6 years for Codensa and 5.4 years for Emgesa. As for average residual maturity, in this same period, Codensa s net debt totaled USD$271 million dollars, increasing almost 44% in local currency as compared to the closing of the previous year, mainly due to lower cash balances.

7 Emgesa s Net Debt, as of December 31, 2015 reached almost USD$1,2 billion dollars, increasing by 37.7% in local currency as compared to December 2014, mainly due to higher interest rates and a lower cash balances resulting mainly from CAPEX in El Quimbo. Codensa s Net Debt was USD$247 million dollars, a 32% rise in pesos due to lower cash balances during Finally, in the lower right hand graph, you can see that Codensa had no fixed rate debt since all of outstanding debt is indexed to CPI. Meanwhile, 27% of Emgesa s debt was in fixed rate, basically represented by the global peso bond issued in January 2011 and some short-term loans with local and international banks disbursed during the last quarter of Please join me in slide nineteen to go over the closing remarks of this presentation. As you have seen throughout the presentation, Emgesa achieved positive operational results, resulting from higher energy sales through contracts, and higher PPI levels during However, the wealth tax offset these results and consequently, the EBITDA level, since under IFRS this tax is considered an operational cost. Codensa also obtained positive operational results, due to higher PPI levels and the addition of over 104,000 new clients to reach more than 2,9 million clients. El Niño Phenomenon has affected significantly the spot price, as reservoirs are at lower levels on a national basis and higher thermal generation has been needed to serve national demand which had forced the regulator to intervene in order to keep electricity stability in the country. We maintained our efforts on the investment front, completing important projects, such as El Quimbo, which will ensure the energy supply, the reliability and the stability of the electricity service on a national level. Finally, the net income of our companies in Colombia was affected by two events: first, the tax reform passed in December 2014, which increased the effective tax rates, and second by higher financial expenses due to a higher average CPI levels, at which 68% of our aggregated outstanding debt is indexed to. 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. 1. How much do you feel comfortable to face the final stage of El Niño Phenomenon even considering Guatape s problem and the impact in the system?

8 About how comfortable Emgesa feels about the last stage of El Niño phenomenon we can say that the last energetic analysis do not show any energy cuts including Guatape incident and EPM has shown a plan to reinsert the plant by stages, starting in May 1 st, then June 1 st, July 1 st and the last two units in September What can we expect in terms of capex for 2016 in Emgesa and Codensa? About the second question our corporate position does not give any forecast for the present year. Even though we cannot provide forecast because it is our corporate governance practice we can tell you that of course we are completing El Quimbo so investments in Emgesa should be lower than 2015 because the investments we are making in El Quimbo are lower than before and in Codensa we will continue with our efforts to improve quality in services and modernize the network and that will mean and additional effort on Codensa s side.