AES GENER JUNE 2017 RESULTS AES Gener achieved its highest ever LTM EBITDA US$813 million in the twelve months ended June 30, 2017. Year-to-date EBITDA reached US$380 million, 10% higher compared to the EBITDA recorded in the first half of 2016. AES Gener recorded an EBITDA of US$191 million during the second quarter of 2017, 2% higher compared to the EBITDA recorded in the same period in 2016. Year-to-date Net Income Attributable to Parent ( Net Income ) reached US$88 million, down 19%. AES Gener continues as Chile s largest electric generator, producing 36.5TWh during the first half of 2017, 30% of total gross energy generation. 2017 YEAR TO DATE HIGHLIGHTS AES Gener S.A. (hereinafter referred to as AES Gener, Gener, or the Company) continues to maintain its lead position as the largest energy producer in Chile during the first half of 2017, 30% of the total generation on the SIC and SING grids. The 550 MW Cochrane plant is fully contracted and operational since October 2016, making strong EBITDA contributions in 2017 YTD. AES Gener has reached a new agreement with ENEL to ensure revenue contributions in 2018 from Nueva Renca through a gas tolling arrangement. Since January, 2017, Nueva Renca has been operating a similar tolling agreement with ENEL signed in 2016. AES Gener continues to improve its credit profile, through debt prepayments. Since January 2016, the company has prepaid US$127 million and expects to continue reducing its debt to improve credit metrics. In April, the Company declared dividends of US$261 million payable in 2017, equal to 100% of Net Income in 2016. US$146 million distributed in May 2017 In June the Company launched AES Gener Energía Distribuida a new business line to provide solar-based distributed generation solutions to industrial customers. Four solar projects under development. During 2016 and 2017, our equity method investee, Guacolda, signed 1,200 GWh/y in contracts with industrial off takers with three to seven-year tenors, increasing the medium-term contracted level of the company. 1
AES Gener has consolidated an important part of its 1256 MW second phase expansion program, with a portfolio of projects of power generation of diverse technology for a total of 1,256 MW, employing more than 7,500 people directly. During 2016, 573 MW of the second-phase projects came online, with the only remaining project, the 531 MW Alto Maipo hydro project, at 54.5% completion as of June, 30, 2017. Since February 2016, AES Gener has started the commercialization of energy from SING to SADI through its InterAndes transmission line. Approximately 35 GWh were exported in 2017 year-to-date. Argentina s Secretariat of Energy issued Resolution 19/2017 in February 2017. The new regulation improved the Energía Base program s energy and power tariffs, which are now set in US Dollars, and eliminated the retention of payments. For TermoAndes, the power and energy not committed under the Energía Plus contracts will be sold according to this resolution. For a second year in a row, Gener will be part of the Dow Jones Sustainability Index for Chile. The 2014 Chilean tax reform incorporated a new tax on air emissions. In the case of CO2, the tax is US$5 per ton of C02 emitted from stationary sources larger than 50MW. The first payment of this tax will take place in April 2018 on the emissions produced in 2017. Accrual of the green taxes, payable in 2018, began in 2017 and is accounted for on the Other Cost of Sales line of the Income Statement. CONSOLIDATED FINANCIAL SUMMARY It is worthy to note that going forward AES Gener will report both quarterly and year-todate information in order to provide better tools for the analysis of the operational and economic performance of the Company. The period in question will be clearly noted in both the tables and analysis of this report. Also, numbers presented in the analysis are rounded to millions; therefore differences may arise with the financial statements. Financial Summary (ThUS$) YTD YTD Var. 2Q 2Q Var. 2017 2016 % 2017 2016 % Revenue 1,155,958 1,099,234 5% 598,849 543,613 10% Gross Profit 291,086 271,737 7% 145,054 150,422-4% EBITDA (1) 379,889 344,679 10% 190,975 187,076 2% Net Income 88,138 108,315-19% 41,406 67,282-38% Net Operating Cash 93,148 128,895-28% -47,396 30,905 --- Earnings per share 0.010 0.013 0.005 0.008 [1] EBITDA is calculated as the sum of gross profit plus administrative expenses, depreciation and other minor adjustments. 2
ALTO MAIPO UPDATE AES Gener has consolidated an important part of its second phase of expansion, with a portfolio of projects of power generation of diverse technology for a total of 1104 MW, employing more than 7,500 people directly. During 2016, 573 MW worth of projects came online as part of this expansion program, and the 531 MW Alto Maipo project is currently under construction. Project Capacity Technology Completion % 06-30-2017 Alto Maipo 531 Mw Run of river 54.5% COD 1 half 2019 As of June 30, 2017, completion of the project stood a 54.5%. Alto Maipo SpA ( Alto Maipo ) underwent a restructuring process in March: o AES Gener acquired the entirety of Minera los Pelambres ( MLP ) stake o Strabag, the project s main contractor became a minority shareholder with an approximate 7% stake o Modifications were made to the PPA between Alto Maipo and MLP o The terms and conditions of the Project s senior debt were modified Alto Maipo terminated its contract with Constuctora Nuevo Maipo ( CNM ) in June o The contract was terminated due to breaches of contract by CNM o Alto Maipo took control of the works in order to continue progress o Alto Maipo has drawn on US$73mn of Letters of Credit posted by CNM o CNM and Alto Maipo entered into judicial and arbitration proceedings The contract termination triggered a technical default o Project Finance disbursements stopped until a CNM replacement is found o Alto Maipo s financial debt, US$613million, must be reported as a current liability on the balance sheet as long as the technical default state persists Alto Maipo is currently in negotiations with several potential contractors to: o Find a replacement for CNM o Restructure one of the project s main construction contracts to provide greater certainty regarding total costs and delivery date o These negotiations could lead to additional costs which have not yet been quantified In light of the technical default announcement on August 1, the three credit rating agencies issued statements: o S&P Global indicated that its BBB- rating for AES Gener would not be immediately affected and maintained its stable outlook o Moody s reaffirmed its Baa3 rating but lowered its outlook from stable to negative o Fitch Ratings confirmed its BBB- rating of AES Gener but put AES Gener and its subsidiaries Eléctrica Angamos S.A., Guacolda Energía S.A. y Sociedad Eléctrica Santiago SpA on Negative Rating Watch 3
REVIEW OF OPERATIONS BY MARKET AES Gener operates in four independent markets in Chile, Colombia, and Argentina. In Chile, AES Gener operates on the nation s two largest interconnected electric systems, with 2,744 MW of coal, natural gas, diesel and hydro capacity on the central grid and 1406 MW of coal and solar on the northern grid. The Central Interconnected System or SIC, supplies a wide range of customer types, including Chile s main population centers, industry and mining operations, with a diverse generation park including thermo, hydro and renewables. The SIC runs from the southern part of Region II to Region X. The Greater Northern Interconnected System or SING, primarily supplies mining operations in Northern Chile with a predominantly thermo based generation park and a small but increasing amount of solar based renewables. The SING encompasses Region I and Region XV, as well as part of Region II. AES Gener s Colombian subsidiary, AES Chivor, operates 1020MW of hydro capacity and is one of the principal electric generators in the Colombian National Interconnected System or SIN, a predominantly hydro based system. The Argentine Interconnected System or SADI is the main power grid in Argentina and is supplied primarily by natural gas fired thermo plants, in addition to hydro, coal and nuclear power plants. AES Gener s affiliate, TermoAndes operates a 643MW gas fired plant selling electricity to the Argentine market and is also connected to the SING market in Chile via the InterAndes transmission line. External Factors Annual Inflation Rate in 2Q 2017 Exchange Rate as of June 30, 2017 and 2016: Electricity Consumption YoY 2017 2016 Var. Growth Chile -0.1% Chile 664.3 661.4 0% Chile - SIC 0.0% Colombia 0.8% Colombia 3038.3 2916.2 4% Chile- SING -2.6% Argentina 0.1 Argentina 16.6 15.0 11% Colombia- SIN -1.1% Argentina- SADI 12.2% The following section explains the different market conditions and variations in gross profit, separated by market. Central Interconnected Grid (SIC), Chile During the first half of 2017 poor hydrological conditions caused reservoir levels to drop compared to the same period in 2016. Lower hydro generation coupled with an increase in fuel prices caused average spot prices on the SIC to increase 1.7%. These factors were offset by relatively flat demand growth in the first half of the year. In the second quarter of 2017, average spot prices fell 0.9% with demand falling 1.8% on the SIC. AES Gener in conjunction with Guacolda produced 24% of gross generation on the SIC in the first half of 2017. 4
SIC YTD YTD 2Q 2Q 2017 2016 2017 2016 Demand growth (%) 0.0 4.2 (1.8) 5.8 Average monthly consumption Average spot price (Quillota 220 kv) (GWh) 4,302 4,156 4,255 4,029 US$/MWh 66.8 65.7 70.5 71.2 In the second quarter, SIC contract sales to regulated and unregulated customers rose US$39 million, up 22% compared to the second quarter of 2016, while sales volume increased 103 GWh. The increase in contract sales on the SIC was attributed to increased demand as a result of new contracts in 2017 and better results from the Nueva Renca tolling agreement. SIC Spot market sales fell US$32 million, down 75%, as a result of a 387 GWh decrease in spot sales volumes attributed to the lack of sales under the agreement with ENAP which took place in 2016. It s also worthy to note that maintenance activities at the Ventanas complex in the second quarter of 2017 contributed to the reduction in the amount of AES Gener s efficient generation on the SIC. AES Gener reported a US$22 million increase in Other Operating Revenue from the SIC in the second quarter of 2017, which includes coal sales, both intercompany and to third parties, transmission revenue and revenue from services, provided primarily to related companies. The increase was mainly due to an increase in coal sales which in terms of Gross Profit, was counterbalanced by a US$23 million escalation in fuel sales costs. The increase in coal sales revenue was offset by a reduction in transmission revenue. Fuel Costs remained relatively unchanged comparing the second quarters of 2017 and 2016. The reduction in thermo output and lower gas prices under the ENAP contract in 2016 were offset by an increase in coal prices and higher diesel consumption. Cost associated with energy and power purchases including: spot market purchases, purchases under contracts with our Guacolda affiliate and other contract purchases, primarily with no conventional renewable energy (NCRE) generators, increased US$15 million. The 55% rise was due to the purchase of an additional 135GWh and greater ancillary service costs. Other Sales Costs grew US$12 million due to the new emissions taxes and higher costs associated with coal handling. The second quarter of 2017 saw a 29% decline in gross profit to US$52 million, mainly due to a reduction in efficient thermo and hydro generation the accrual of green taxes, and lower margins from Nueva Renca compared to the second quarter in 2016. The company s Gross Profit declined US$30 million in the first half of 2017 due to the accrual of emissions taxes, higher fuel costs which generated lower margins on contracts with distribution companies, and less generation from the company s efficient thermo and hydro plants. The lack of margins from the tolling arrangement with ENAP, which took place in 2016, also had a negative effect offset in part by better margins from the tolling agreement with ENEL in 2017. The following tables present gross profit, energy sales, purchases and generation in the SIC for both periods: 5
SIC YTD YTD Var. 2 Q 2 Q Var. Gross Profit (ThUS$) 2017 2016 % 2017 2016 % Operating Revenue Regulated customer sales 270,972 235,709 15% 127,591 115,851 10% Unregulated customer sales 156,931 123,726 27% 87,689 60,517 45% Spot sales 12,025 68,665 (82%) 10,802 42,746 (75%) Other operating revenues 207,153 182,094 14% 110,281 88,247 25% Total Operating Revenue 647,081 610,194 6% 336,363 307,361 9% Cost of Sales Fuel consumption -112,786-120,656 (7%) -63,719-63,638 0% Energy and capacity -77,856-55,202-40,637-26,143 purchases 41% 55% Transmission tolls -39,474-40,779 (3%) -18,612-19,488 (4%) Fuel cost of sales -161,142-133,344 21% -89,473-66,521 35% Depreciation and amortization -55,691-55,038 1% -28,088-27,140 3% Other cost of sales -85,675-60,668 41% -43,791-31,348 40% Total Cost of Sales -532,624-465,687 14% -284,320-234,278 21% Total Gross Profit 114,457 144,507 (21%) 52,043 73,083 (29%) SIC YTD YTD Var. 2 Q 2 Q Var. Energy Sales (GWh) 2017 2016 % 2017 2016 % Distribution Companies 2,381 2,532 (6%) 1,110 1,214 (9%) Other Customers 1,852 1,476 25% 958 751 28% Spot 133 806 (83%) 124 511 (76%) Intercompany Sales 1,860 2,584 (28%) 1,038 1,447 (28%) Total Energy Sales 6,226 7,398 (16%) 3,230 3,923 (18%) SIC YTD YTD Var. 2 Q 2 Q Var. Energy Purchases (GWh) 2017 2016 % 2017 2016 % Other generators 795 515 54% 390 255 53% Spot 34 - ---- - - ---- Intercompany 1,860 2,584 (28%) 1,038 1,447 (28%) Total Energy Purchases 2,689 3,099 (13%) 1,428 1,702 (16%) SIC YTD YTD Var. YTD YTD Var. Net Generation (GWh) 2017 2016 % 2017 2016 % Hydro 725 751 (3%) 266 277 (4%) Coal 2,676 2,907 (8%) 1,420 1,521 (7%) LNG 9 531 (98%) 2 428 --- Diesel 118 122 (3%) 116 1 --- Biomass 19 13 46% 9 7 29% Total 3,547 4,324 (18%) 1,813 2,234 (19%) 6
Greater North Interconnected Grid (SING) The average spot price increased by 2.9% while demand growth fell to negative 2.6% in the first half of 2017 compared to the same period of the previous year. SING market demand was significantly affected by the strike of Minera Escondida activities in the First quarter of 2017. If you compare the second quarter of 2017 with the same period of 2016, there is a 21.2% drop in average spot prices while demand growth rebounded in the quarter to 5.2%. In the first half of 2017 AES Gener Group generated 48% of the net energy produced of the SING. The table below shows the main variables of the SING at the end of June 2017 and 2016. SING YTD YTD 2Q 2Q 2017 2016 2017 2016 Demand growth (%) (2.6) 6.1 5.2 4.3 Average monthly consumption Average spot price (Crucero 220 kv) (GWh) 1,418 1,422 1,553 1,427 US$/MWh 58.1 59.8 55.4 70.3 The company s generation on the SING increased significantly (21% or 366 GWh) due to the start-up of Units 1 and 2 of Cochrane in the second half of 2017 and, to a lesser extent, the start-up of the Andes Solar photovoltaic power plant. Second quarter SING Operating Revenue reached 208 million a 36% increase as a result of the additional capacity, which helped boost spot sales revenue 227% while spot sale volumes rose 244GWh, up 66%. The increased capacity helped generated greater power capacity revenues and eliminated the need for spot purchases to cover contract sales. The increase in SING revenues was also attributable to revenue from 2016 readjustments. Fuel cost increased US$42 million due to an increase in generation and higher coal prices. Other Sales Costs grew US$12 million as a result of higher costs associated with plant maintenance and the new emissions taxes. Gross profits increased 60% to US$51 million mainly attributable to the margin generated by the two Cochrane units, which came online in the second half of 2017, and to a lesser extent the Andes Solar plant. The increased capacity increased margins on contract sales, and more than doubled spot sales while eliminating the need for spot market purchases. This positive effect was offset by lower margins in older contracts of Norgener, the increase in fuel costs and the effects associated with the accrual of the emissions tax which took effect in 2017. In the first half of 2017, Gross Profits rose US$27 million, up 40%, in line with trends driving the growth in the second quarter. The following tables present gross profit, energy sales, purchases and generation in the SING for both periods: 7
SING YTD YTD Var 2Q 2Q Var Gross Profit (ThUS$) 2017 2016 % 2017 2016 % Operating Revenue Unregulated customer sales 293,319 272,473 8% 154,195 135,141 14% Spot sales 88,323 22,956 285% 47,049 14,387 227% Other operating revenues 9,513 5,385 77% 6,619 2,963 123% Total Operating Revenue 391,155 300,814 30% 207,863 152,491 36% Cost of Sales Fuel consumption -151,750-75,861 100% -80,739-38,860 108% Energy and capacity purchases -11,715-75,729 (85%) -7,729-39,864 (81%) Transmission tolls -11,225-5,351 110% -7,690-3,646 111% Fuel cost of sales -14 0 --- -14 - --- Depreciation and amortization -65,039-42,443 53% -32,599-21,543 51% Other cost of sales -58,045-34,567 68% -28,100-16,801 67% Total Cost of Sales -297,788-233,951 27% -156,871-120,714 30% Total Gross Profit 93,367 66,863 40% 50,992 31,777 60% SING YTD YTD Var. 2Q 2Q Var. Energy Sales (GWh) 2017 2016 % 2017 2016 % Unregulated customers 2,641 3,501 (25%) 1,486 1,765 (16%) Spot 210 412 (49%) 156 278 (44%) Spot Re-Routing portion 1,027 177 480% 460 94 389% Total Energy Sales 3,878 4,090 (5%) 2,102 2,137 (2%) SING YTD YTD Var. 2Q 2Q Var. Energy Purchases (GWh) 2017 2016 % 2017 2016 % Spot - 868 --- - 389 --- Total Energy Purchases - 868 --- - 389 --- SING YTD YTD Var. 2Q 2Q Var. Net Generation (GWh) 2017 2016 % 2017 2016 % Coal 3,881 3,254 19% 2,109 1,756 20% Solar 29 - --- 13 - --- Total 3,910 3,254 20% 2,122 1,756 21% 8
Colombian National Grid (SIN) A reversal from El Niño conditions that affected 2016 to normal hydrology in 2017 caused a significant drop in spot market prices in Colombia, from an average of US$141/MWh in the first half of 2016 to US$36/MWh in the first half of 2017. On a quarterly basis, average spot prices fell from US$73/MWh in the second quarter of 2016 to US$27/MWh due to higher rainfalls lowering the cost of hydro generation. During the second quarter of 2017, the AES Chivor supplied 4.7% of the demand on Colombia s SIN grid, demand which grew 0.2% on a quarterly basis, compared to the negative growth of 1.1% for the first half. SIN YTD YTD 2Q 2Q 2017 2016 2017 2016 Demand growth (%) (1.1) 2.3 0.2 0.1 Average monthly consumption (GWh) 5,429 5,490 5,453 5,443 Average marginal cost US$/MWh 36.0 141.1 27.1 72.9 In the second quarter, AES Chivor s contract sales revenue customers rose US$16 million, up 33% compared to the second quarter of 2016. The revenue growth was attributed to a 3.5% increase in average contract prices, to US$57/MWh and a 272 GWh increase in contract sales volume. The increase in contract sales helped offset a US$33 million decline in spot sales revenue, due to a 489GWh decline in sales volumes and the previously mentioned drop in spot prices from the remarkably high prices in 2016. It should be noted that the increase in revenues associated with the depreciation of the Colombian Peso (COP) against the USD was partially offset by the exchange rate hedges executed for these purposes, which are reflected in the Exchange Differences line. Costs associated with energy and power purchases declined US$17 million. The lower spot prices in 2017 were responsible for the 46% drop in cost, despite a 133GWh increase in spot market purchases. Other Sales Costs grew US$4 million due to higher transmission and distribution costs associated with contract sales to non-regulated customers, and an increase in maintenance costs. Gross Profits remained relatively unchanged at US$44 million despite a 14% decrease in Colombian revenues. The 46% reduction in AES Chivor energy purchase costs helped offset the decline in revenue caused by a drop in spot sales revenue. Gross Profits of the first half of 2017 increased US$26 million as a result of increased generation in the first half of 2017, driving up contract sales volume and reducing spot purchase volumes. The reduction of the exchange rate also had a positive impact of Chivor s gross profit. The following tables present gross profit, energy sales, purchases and generation in Colombia for both periods: 9
SIN YTD YTD Var 2Q 2Q Var Gross Profit (ThUS$) 2017 2016 % 2017 2016 % Operating Revenue Contract sales 117,346 87,113 35% 63,484 47,778 33% Spot sales 27,550 121,186 (77%) 11,604 44,438 (74%) Other operating revenues 9,390 1,092 760% 4,803 269 --- Total Operating Revenue 154,286 209,391 (26%) 79,891 92,485 (14%) Cost of Sales Energy and capacity purchases -36,798-129,965 (72%) -20,398-37,650 (46%) Depreciation and amortization -6,176-4,998 24% -3,069-2,616 17% Other cost of sales -25,732-14,889 73% -12,592-8,335 51% Total Cost of Sales -68,706-149,852 (54%) -36,059-48,601 (26%) Total Gross Profit 85,580 59,539 44% 43,832 43,884 (0%) SIN YTD YTD Var. 2Q 2Q Var. Energy Sales (GWh) 2017 2016 % 2017 2016 % Contracts 1,971 1,478 33% 1,064 792 34% Spot 852 1,401 (39%) 389 878 (56%) Total Energy Sales 2,823 2,879 (2%) 1,453 1,670 (13%) SIN YTD YTD Var. 2Q 2Q Var. Energy Purchases (GWh) 2017 2016 % 2017 2016 % Spot 1,053 1,251 (16%) 716 583 23% Total Energy Purchases 1,053 1,251 (16%) 716 583 23% SIN YTD YTD Var. 2Q 2Q Var. Net Generation (GWh) 2017 2016 % 2017 2016 % Hydro 1,727 1,661 4% 768 1,132 (32%) Total 1,727 1,661 4% 768 1,132 (32%) 10
Interconnected Argentine Grid (SADI) During the second quarter of 2017, the output of TermoAndes supplied 3.3 % of the demand on Argentina s SADI grid, demand which grew 10.4% on a quarterly basis, and 12.2% the first half on 2017. Argentina s Secretariat of Energy issued Resolution 19/2017 in February 2017. The new regulation improved the Energía Base program s energy and power tariffs, which are now set in US Dollars, and eliminated the retention of payments. For TermoAndes, the power and energy not committed under the Energía Plus contracts will be sold according to this resolution. SADI YTD YTD 2Q 2Q 2017 2016 2017 2016 Demand growth (%) 12.2 3.6 10.4 3.5 Average monthly consumption (GWh) 11,381 10,147 10,892 9,862 Average marginal cost US$/MWh 18.3 11.2 15.3 12.4 Second quarter revenue from Argentina contract sales increased US$4 million, up 28% as a result of an additional 67GWh in contract sales at better prices, compared to the same quarter of 2016. The increase in contract sales revenue was offset by a 19% decline in spot sales volume, result of an increase in maintenance which reduced generation by 128GWh. The effect of the decline in physical spot sales was reduced thanks to the improved pricing framework stemming from Resolution 19/2017. Profits from Argentina decreased US$3 million to a Gross Loss of US$1.5 million. The decrease in profits was due mainly to higher fuel, transmission and maintenance costs in the second quarter of 2017. The negative impact of the increase in cost was diminished in part due to previously mentioned increase in contract sales and higher prices under the Resolution 19/2017 framework. The following tables present gross profit, energy sales, purchases and generation in Argentina for both periods: 11
SADI YTD YTD Var 2Q 2Q Var Gross Profit (ThUS$) 2017 2016 % 2017 2016 % Operating Revenue Contract sales 36,329 30,560 19% 19,020 14,909 28% Spot sales 25,758 21,804 18% 11,602 12,953 (10%) Total Operating Revenue 62,087 52,364 19% 30,622 27,862 10% Cost of Sales Fuel consumption -40,929-31,121 32% -19,425-16,592 17% Energy and capacity purchases -571-98 483% -582-115 406% Transmission tolls -240-199 21% -193-113 71% Depreciation and amortization -13,296-13,574 (2%) -6,996-6,324 11% Other cost of sales -9,038-6,544 38% -4,908-3,040 61% Total Cost of Sales -64,074-51,536 24% -32,104-26,184 23% Total Gross Profit -1,987 828 --- -1,482 1,678 --- SADI YTD YTD Var. 2Q 2Q Var. Energy Sales (GWh) 2017 2016 % 2017 2016 % Customers 491 423 16% 269 202 33% Spot 1,541 1,817 (15%) 808 1,003 (19%) Total Energy Sales 2,032 2,240 (9%) 1,077 1,205 (11%) SADI YTD YTD Var. 2Q 2Q Var. Net Generation (GWh) 2017 2016 % 2017 2016 % Natural Gas 2,032 2,240 (9%) 1,077 1,205 (11%) Total 2,032 2,240 (9%) 1,077 1,205 (11%) 12
REVIEW OF FINANCIAL RESULTS Income Statement Income Statement (ThUS$) YTD YTD Var. 2Q 2Q Var. 2017 2016 % 2017 2016 % Operating Revenue 1,155,958 1,099,234 5% 598,849 543,613 10% Cost of Sales -864,872-827,497 5% -453,795-393,191 15% Gross Profit 291,086 271,737 7% 145,054 150,422 (4%) Other Operating Revenues 230 1,926 (88%) -40 1,518 (103%) Selling, general and administrative Expenses -53,018-46,888 13% -25,371-23,536 8% Other Operating Expenses -923-1,042 (11%) -585-407 44% Other Income / (Loss) -6,125-195 --- -6,863 1,025 --- Financial Income 3,841 4,566 (16%) 2,222 1,604 39% Financial Expense -90,547-69,824 30% -44,971-36,027 25% Equity Participation in Net Income of Associates 3,894 5,901 (34%) 1,966 3,349 (41%) Foreign Currency Exchange Differences -7,028-12,259 (43%) 2,906-1,107 --- Net Income (Loss) before Taxes 141,410 153,922 (8%) 74,318 96,841 (23%) Income Tax Income (Expense) -47,324-47,568 (1%) -30,340-30,512 (1%) Net Income (Loss) 94,086 106,354 (12%) 43,978 66,329 (34%) Income Attributable to Shareholders of Parent 88,138 108,315 (19%) 41,406 67,282 (38%) Income (Loss) Attributable to Non-Controlling Interests 5,948-1,961 --- 2,572-953 --- Net Income (Loss) 94,086 106,354 (12%) 43,978 66,329 (34%) Total EBITDA 379,889 344,679 10% 190,975 187,076 2% Operating Revenue Operating Revenue grew 5% in the first half and 10% in the second quarter of 2017, compared to the same periods in 2016, reaching US$1.2 billion and US$599 million respectively. The growth was driven by higher Operating Revenue contributions from operations on the SIC and SING grids in Chile and to a lesser extent the SADI in Argentina. Revenue growth was offset by offset by a decline in revenues from Colombia due to lower spot sales revenue. Cost of Sales Cost of Sales rose in line with revenue growth, increasing 5% in the first half and 15% in the quarter. Higher fuel costs, the accrual of Chilean emission taxes, which began in 2017, and an increase in depreciation as a result of Cochrane coming online, were the main contributing factors. A reduction in energy and power purchase costs helped offset the rise in Cost of Sales. 13
Gross Profit From an operational standpoint, Gross Profit in the first half increased 7% to US$291 million, while declining 4% to US$145 million in the second quarter, when compared to the respective period of the previous year. The positive variation is mainly explained by improved operating results in the SING in Chile and SIN in Colombia, partially offset by poorer results in the SIC in Chile and SADI in Argentina both on a quarterly and year-to-date basis. YTD YTD Var. 2Q 2Q Var. Gross Profit (ThUS$) 2017 2016 % 2017 2016 % Operating Revenue SIC 647,081 610,194 6% 336,363 307,361 9% SING 391,155 300,814 30% 207,863 152,491 36% SADI 62,087 52,364 19% 30,622 27,862 10% SIN 154,286 209,391 (26%) 79,891 92,485 (14%) Consolidation adjustments -98,651-73,529 34% -55,890-36,586 53% Total Operating Revenue 1,155,958 1,099,234 5% 598,849 543,613 10% Cost of Sales SIC -532,624-465,687 14% -284,320-234,278 21% SING -297,788-233,951 27% -156,871-120,714 30% SADI -64,074-51,536 24% -32,104-26,184 23% SIN -68,706-149,852 (54%) -36,059-48,601 (26%) Consolidation adjustments 98,320 73,529 34% 55,559 36,586 52% Total costs of sales -864,872-827,497 5% -453,795-393,191 15% Total Gross Profit 291,086 271,737 7% 145,054 150,422 (4%) The Consolidation Adjustment line mainly accounts for intercompany coal sales from AES Gener to Eléctrica Angamos and Eléctrica Cochrane in the SING, offset by an increase in cost. In SIC's revenues, these sales are included as "Other Ordinary Income". 14
EBITDA AES Gener achieved US$380mn in EBITDA in the first half and US$191 million in the three months ended June 30, 2017, a 10% and 2% increases respectively. The EBITDA growth was driven by higher Gross Profits from the SING, and to a lesser extent, the SIN and an increase in Depreciation as a result of the start of operations of Cochrane. YTD YTD Var. 2Q 2Q Var. EBITDA by Market (ThUS$) 2017 2016 % 2017 2016 % SIC 134,836 171,240 (21%) 62,844 87,079 (28%) SING 152,174 106,362 43% 80,486 51,600 56% SIN 84,399 55,457 52% 43,403 42,040 3% SADI 8,480 11,620 (27%) 4,242 6,357 (33%) Total EBITDA 379,889 344,679 10% 190,975 187,076 2% Non-Operating Expenses Positive EBITDA growth was offset by a 22% increase in net Non-Operating expense for the first half of 2017. Financial Expenses rose US$21 million primarily due to the lower capitalization of financial interests tied to Cochrane s start of operations. Administrative expenses increased by US$6 million caused by higher maintenance and Cochrane related insurance costs. Other Losses was US$6 million higher as a result of the positive impact the Angamos debt refinancing had on Other Gains in 2016, and higher fixed asset retirement and contract early closing costs, partially offset by lower costs in 2017 associated with tax credit write-offs. A US$5 million decline in currency exchange losses helped offset the negative impact of the previously mentioned factors. Net Non-Operating expenses increased 25% in the second quarter of 2017, compared to the second quarter of 2016, following the same trends driving the variance in the first half. 15
YTD YTD Var. 2Q 2Q Var. Financial Results (ThUS$) 2017 2016 % 2017 2016 % Other income / (loss) -6,125-195 --- -6,863 1,025 --- Financial income 3,841 4,566 (16%) 2,222 1,604 39% Financial expense -90,547-69,824 30% -44,971-36,027 25% Equity in earnings of associates 3,894 5,901 (34%) 1,966 3,349 (41%) Foreign currency exchange differences -7,028-12,259 (43%) 2,906-1,107 --- Income Tax Income tax expense decreased slightly (1%) in the first half of the year to US$47 million, with a similar variation registered in the second quarter as well. The decrease in pre-tax income from operations in Chile was offset by an increase in pretax income from AES Chivor in Colombia. It s worthy to note that income tax rate in Chile in 2017 was 25.5% while the tax rate was 40% in Colombia Net Income AES Gener reported US$41m in Net Income for the quarter and US$88 million year-todate, down 38% compared to the second quarter of 2016 while representing a 19% decrease from the first half of the previous year. Cash Flow The ending balance of cash and cash equivalents as of June 30, 2017, was US$356 million, 23% less than on the same date in 2016. AES Gener s total net cash flow year-to-date was a negative flow of US$112 million, compared with the positive flow of US$187 million at the end of June 2016. Cash Flow (ThUS$) YTD YTD Var. 2Q 2Q Var. 2017 2016 % 2017 2016 % Net cash from operating activities 93,148 128,895 (28%) -47,396 30,905 --- Net cash from investing activities -378,780-281,879 34% -263,320-165,884 59% Net cash from financing activities 173,643 339,792 (49%) 162,881 325,295 (50%) Total Net Cash Flow for the Period -111,989 186,808-147,835 190,316 before exchange variations --- --- Effects of Foreign Exchange -2,020 4,999-3,299 2,456 Variations --- --- Total Net Cash Flow for the Period -114,009 191,807 --- -151,134 192,772 --- Cash at the beginning of the period 469,560 267,233 76% --- --- --- Total Cash at the End of the Period 355,551 459,040 (23%) -151,134 192,772 --- 16
Operating Cash Flow decreased by US$36 million, mainly due to greater dividend payments offset in part by better margins, driven by Cochrane, and higher collections at TermoAndes. Lower collections than those recorded at the beginning of 2016 from Chivor as a result of the extraordinary generation of the month of December of 2015, also had a negative effect on Operating Cash Flow. Cash Flow from Investment Activities fell US$97 million compared to the same period in 2016 as a result of an increase in purchase of property plant and equipment related to the Alto Maipo Project. Cash Flow from Financing Activities in the first half of 2017 fell US$166 million, compared to the same period in 2016. This was due to US$309 million decrease in loan disbursements associated primarily with Cochrane, Alto Maipo, and Angamos, the latter due to the refinancing carried out in the second quarter of 2016. These negative variations were counteracted by a US$130 million reduction in loan payment outflows related to the previously mentioned Angamos refinancing. Total net cash flow for the second quarter of 2017 was a negative flow of US$148 million, compared with the positive flow of US$190 million for the same period of at the end of 2016, due to primarily the same factors as in the first half. Balance Sheet As of June 30, 2017 Assets totaled US$8,049 million, higher than the US$7,849 million at the end of December 2016, due primarily to a US$244 million increase in non-current assets, offset by US$44 million decrease in current assets. Total equity and liabilities grew by US$200 million as a result of an US$826 million increase in current liabilities and US$122 million in shareholders' equity, and a decrease in non-current liabilities of US$748 million. Balance (ThUS$) June 30 December 31 Var. 2017 2016 % Current Assets 1,016,896 1,060,382 (4%) Non-Current Assets 7,032,308 6,788,522 4% Total Assets 8,049,304 7,848,904 3% Current Liabilities 1,504,539 678,296 124% Non-Current Liabilities 3,863,938 4,612,015 (16%) Total Net Equity 2,680,827 2,558,593 4% Total Liabilities and Equity 8,049,304 7,848,904 3% 17
Current assets decreased by US$43 million, mainly due to a US$114 million decrease in cash and cash equivalents in part by a US$26 million increase in inventory and an additional US$39 million in balances for commercial debtors and other accounts receivables. Non-current assets increased by US$244 million since December 2016, with an increase of US$233 million in property, plant and equipment, mainly associated with the construction of the Alto Maipo hydroelectric project. Current liabilities increased US$826 million since December 31, 2016, with a US$655 million increase in other financial liabilities and an additional US$164 million in current accounts payable to affiliated entities. The increase is mainly driven by the reclassification of Alto Maipo's non-current bank obligations as current liabilities as a result of the technical default event of this subsidiary, as well as the US$48 million increase in accounts payable of the projects under construction. These effects were partially offset by a US$30 million decrease in current tax liabilities related 2016 income tax, as well as a US$10 million decrease in non-financial liabilities associated with the payment of personnel bonuses. Non-current liabilities decreased by US$748 million, mainly due to the US$509 million decrease in financial liabilities associated with the previously mentioned reclassification of Alto Maipo s bank liabilities, as well as the US$241 million decrease in accounts payable to affiliated entities, as a result of the restructuring agreement between AES Gener and Minera Los Pelambres, which resulted in the latter selling its ownership stake in Alto Maipo. Shareholders' equity increased by US$122 million. The equity increase was attributed to the US$287 million increase in Other Reserves as a result of AES Gener's acquisition of Minera Los Pelambres stake in Alto Maipo, valuation of derivatives and the variation in the foreign currency translation reserve. These increases in equity were partially offset by a US$173 million decrease in retained earnings. Financial Debt As of June 30, 2017, approximately 93% of AES Gener s debt is at fixed rate, including a significant portion of the debt held by the subsidiaries Eléctrica Cochrane and Alto Maipo for which interest rate swap agreements have been executed. The remaining portion of the Company s debt is subject to variable interest rates. As of June 30, 2017, approximately 98% of AES Gener s debt was denominated in USD, including the CLF denominated bond issued in December 2007 for which a crosscurrency swap was executed. Of the remaining debt, 0.9% was denominated in CLF (Eléctrica Santiago s bond) and 1.5% in Colombian pesos (the leasing executed by AES Chivor to finance the Tunjita Project). In April 2016, Eléctrica Angamos partially refinanced a portion of its US$800 million bond through a tender process, buying back US$199 million. The Company refinanced this debt with syndicated loans under the same terms and conditions with local bank facilities at a lower average interest rate of 4.50%. In January 2017, AES Gener partially executed a buy back on its 2025 bonds for a total amount of US$2 million, (financed with cash from operation). As of March 31, 2017, the 18
US$mn AES GENER/ 2017 outstanding notional reached US$390 million. Afterward, the AES Gener 2025 Bonds were retired. In January 2017, AES Gener partially prepaid US$25 million on its US$100 million Credit Agreement due on December 2017. In February AES Gener paid an additional US$50 million. As of June 30, 2017 the outstanding notional reached US$25 million. The following table details AES Gener s consolidated amortization schedule for the outstanding principal of US$3.97 billion as of June 30, 2017, excluding issuance costs and including non-recourse project finance debt. Schedule of Maturities as of June 30, 2017 US$mn Avg. Rate 2017 2018 2019 2020 2021 + Fixed Rate (UF w/ swap to US$) 7.34% - 16.06 16.06 16.06 128.45 (US$) 5.25% - - - - 401.68 (US$) 7.95% - - 24.54 - - (US$) 5.00% - - - - 390.00 (US$) 8.38% - - - - 450.00 (UF) 9.15% 0.64 1.29 1.44 1.61 30.62 (US$) 4.88% - 52.28 52.28 52.28 444.12 (CLP/UF w/swap to US$) 4.50% - 17.32 17.32 17.32 147.08 (US$) 6.33% - - - - 500.18 (Col$) 3.60% - 9.87 - - - Variable Rate (US$) Libor + 1.45% - 2.10% 20.56 58.21 60.45 62.79 778.17 (US$) Libor + 3.20% - 3.50% - - - - 125.04 (Col$) IPC + 5.5% 0.56 2.42 2.74 3.02 42.69 (US$) Libor + Spread 25.00 - - - - Total 46.76 157.44 174.83 153.08 3,438.04 2,500 Amortization Schedule 2,358 2,000 1,500 1,000 500 0 558 47 157 175 153 161 173 187 2017 2018 2019 2020 2021 2022 2023 2024 2025 + Note: Amortization schedule does not include potential acceleration of Alto Maipo s debt 19
RISK ANALYSIS Market and Financial Risks Market risks include the following three categories: foreign currency risk, interest rate risk and commodity price risk. Financial Risk relates to the potential occurrence of events, which could have a negative financial impact on the Company and specifically includes credit risk and liquidity risk. Foreign Currency Risk With the exception of operations in Colombia, the Company s functional currency is the US Dollar ("USD") given that its revenue, expenses, and investments in equipment and debt are mainly denominated in or linked to the USD. In addition, the Company is authorized to file and pay its income taxes in Chile in USD. There is an exchange rate risk associated with any revenue, expenses, investments, and debt denominated in any currency other than USD. The main items denominated in Chilean pesos ("CLP") are some energy receivables and tax credits primarily associated with VAT. As of June 30, 2017, AES Gener maintained several currency forwards with banks to mitigate its exposure to foreign exchange variations associated with the collection of energy sales, given that even though most of the Company s energy supply agreements have USD denominated prices, payments are made in CLP at an exchange rate that is fixed for a specific period of time, and VAT payments. Given the Company's net asset position in CLP as of June 30, 2017, the impact of 10% devaluation in the exchange rate of the Chilean peso with respect to the USD would have resulted in a realized negative impact of approximately US$12 million in net income for AES Gener. During the six month period ended June 30, 2017 approximately 88% of operating revenue and 88% of the Company s costs of sales were denominated in USD compared to 79% of operating revenue and 90% of costs of sales during the same period of 2016. The functional currency of Chivor, the Company s Colombian subsidiary, is the Colombian peso ("COP") since the majority of its revenue, particularly contract and spot sales and operating costs are linked to the COP. For first half of 2017, sales in COP represented 12% of the Company s consolidated operating revenue, compared to 19% in 2016. Additionally, AES Chivor s dividends are determined in COP, although financial hedge instruments are used to fix the amount to be distributed in USD. Given AES Chivor's net liability position in USD as of the close of June, a 10% devaluation in the COP/USD exchange rate would have generated a negative impact of approximately US$1 million to AES Gener s net income. Spot prices in the Argentine market are denominated in USD as of February 2017. Argentine pesos ("ARS") denominated sales in Argentina accounted for 2% of the Company s consolidated operating revenue for the first half of 2016. Given TermoAndes' net asset position in ARS as of June 30, 2017, a 10% devaluation in the ARS/USD exchange rate would have generated a negative impact of approximately US$1 million in AES Gener s net income. In consolidated terms, investments in new plants and maintenance equipment are principally USD denominated. Short-term investments are also mostly held in USD. As of June 30, 2017, 87% of short-term investments and current account balances were in USD, 10% in CLP, 2% in COP and 1% in ARS. Cash balances in Argentina are subject 20
to exchange rate volatility particular to the Argentine market. The end of December, 2016, 87% of investments and balances were in USD, 12% in CLP and 1% in ARS. With regards to non USD denominated debt (bank loans and bonds), AES Gener has executed hedges in the form of cross-currency swaps to reduce the associated exchange rate risks. AES Gener executed a cross-currency swap for the Chilean UF-denominated bonds issued in 2007 for approximately US$220 million, AES Gener executed exchange rate swaps with the same amount and term of the debt. The portion corresponding to the series O of the bond maturing in 2015 was cancelled in June 2014, remaining outstanding the part associated with the series N of this bond, maturing in 2028, for a total amount of US$172 million. At the end of June 2017, 97.6% of the debt of AES Gener and its subsidiaries is USD denominated, including the previously mentioned N series bonds and the associated swap. The following table shows the composition of the debt by currency based on principal owed, as of June 30, 2017 and December 31, 2016: Currency June 30th December 31st 2017 2016 USD 97.6% 97.8% UF 0.9% 0.9% Col$ 1.5% 1.3% Interest Rate Risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company s exposure to the risk of changes in market interest rates relates primarily to the Company s long-term debt obligations with variable interest rates. AES Gener manages its interest rate risk by having an important percentage of its debt at fixed rate or with interest rate swaps, to fix it. As of June 30, 2017, AES Gener had interest rate swaps for an important part of the debt associated with subsidiaries Eléctrica Cochrane and Alto Maipo. A 10% increase in variable interest rates would not have a significant impact on net income as 93.1% of the Group's debt is at fixed rates or rate swaps. The following table shows the composition of debt by type of interest rate as of June 30, 2017 and December 31, 2016: Rate June 30th December 31st 2017 2016 Fixed or with Swap 93.1% 90.9% Variable 6.9% 9.1% 21
It should be noted that the subordinated bond issued in December 2013 for a total of US$450 million with a 60-year tenor, is at a fixed interest rate of 8.375% for 5.5 years from the issuance. From that period onwards, the interest rate is recalculated based on the 5-year swap rate published by Bloomberg plus a margin (spread) established in the offer and subsequently recalculated, based on the same conditions, every 5 years until maturity of debt. Commodity Price Risk AES Gener is affected by the volatility of certain commodity prices. The fuels used by the Company, mainly coal, diesel and liquefied natural gas (LNG), are commodities with international prices set by market factors outside of the Company s control. In Argentina, the Company s subsidiary TermoAndes purchases natural gas at a fixed price under short-term contracts, which is reflected in the energy contract price fixation. The price of fuel is a key factor in plant dispatch and spot prices both in Chile and Colombia. Since AES Gener s portfolio has a large component of thermal generation, fuel costs represent a significant portion of the cost of sales. Currently, the majority of the Company s PPAs include indexation mechanisms that adjust prices based on variations in the price of coal in accordance with the indexes and adjustment periods specified in each contract, in order to mitigate the risk of major variations in the cost of fuel. Currently, AES Gener s contracted energy is balanced with energy generation of facilities with high probability of dispatch (efficient generation) and the remaining facilities (backup facilities) which utilize diesel or LNG are expected to generate only during periods with limited market supply, such as dry hydrological conditions in the SIC, selling energy on the spot market. Diesel and LNG purchases are not currently hedged, as spot market sales allow for variations in fuel prices to be transferred to the sale price. However, the price of fuel (particularly LNG or diesel) directly affects the spot price and plant dispatch. It is estimated that a 10% increase in the cost of diesel would have resulted in a negative impact on the Company's consolidated gross profit for the six month period ended June 30, 2017, of approximately US$3.5 million. It is worth noting that Eléctrica Santiago s Nueva Renca plant can use either diesel or LNG and acquires defined volumes of LNG volumes using short-term contracts when the LNG price is more competitive than diesel. Credit Risk Credit risk relates to the credit quality of counterparties with which AES Gener and its subsidiaries establish relationships. These risks are reflected primarily in accounts receivables and financial assets including bank and other deposits and other financial instruments. With regards to accounts receivable, AES Gener s counterparties in Chile are mainly distribution companies and industrial customers of high solvency and over 90% of these customers or their parent companies have local and/or international investment grade credit ratings. Additionally, sales by the AES Gener Group companies on the spot market must be made to other generators, members of the CDEC, in accordance with the economic dispatch determined by this entity. 22
In Colombia, AES Chivor performs risk assessments of its counterparties based on an internal credit quality evaluation, which in some cases may include guarantees. On October 11, 2016, given the difficult financial situation of Electricaribe and analyzing the risks of this company and the breaches of contract, AES Chivor decided to terminate the energy sales contracts with this client and execute the bank guarantees for COP 43 billion (~US$14 million), thus charging 100% of the amounts owed at that date. In Argentina, the principal counterparties are CAMMESA (Compañía Administradora del Mercado Mayorista Eléctrico S.A.) Argentina s wholesale electric market administrator, and large unregulated consumers with contracts under the Energía Plus program. TermoAndes carries out internal credit evaluations of its unregulated customers and therein include guarantees to secure payments. Financial investments by AES Gener and its subsidiaries such as mutual funds, time deposits and derivatives, are executed with local and foreign financial institutions, which have national and/or international credit ratings greater than or equal to A under the S&P and Fitch scale and A2 under the Moody s scale. Similarly, derivatives for financial debt are executed with first class international entities. Cash, investment and treasury policies direct the management of the Company's cash portfolio and minimize credit risk. Liquidity Risk Liquidity risk relates to the funding requirements to meet payment obligations. The Company's objective is to maintain a balance between continuity of funding and financial flexibility, through internally generated cash flows, bank loans, bonds, short-term investments, committed credit lines and uncommitted credit lines. As of June 30, 2017, AES Gener had available funds of US$356 million including cash and cash equivalents. Meanwhile, as of the end of December 2016, the balance totaled US$470 million in cash and cash equivalent. The balance of cash and cash equivalents includes cash, term deposits with expiration of less than 90 days, securities, low risk immediately available mutual funds in USD and short-term repurchase agreements and fiduciary agreements. As of June 30, 2017, AES Gener had approximately US$241 million in committed and uncommitted lines of credit and US$191 million of uncommitted and unused lines of credit. For more detail of the cash restrictions see Note 8 in the Financial Statements As a result of the previously mentioned CNM contract termination and consequential technical default of the Alto Maipo financing contracts the debt repayment schedule could be modified. For more information see Note 30 in the Financial Statements 23