Conference Call Codensa and Emgesa
1Q 2015
May 29, 2015
Good morning to all. Thank you for being with us today in our quarterly conference on the
CODENSA and EMGESA financial and operational results. My name is Leonardo López and I will be
leading this telephone conference as Finances and Insurance Manager of the companies in
Colombia.
For me and for my team it is a pleasure to today present the 2015 first-quarter results for our
companies.
We have divided our agenda into four main sections: first, we will review the most relevant facts
of Q1 2015; second, we will discuss the Q1 operational and financial results; third, we will look at
the effects of adopting the Financial Information International Norms (NIIF) in our financial
statements; we will finally have some closing comments. At the end we will have a Q&A session.
Let's first go to slide 3, in which we will clarify the standards used to consolidate our figures for Q1
2015.
First, I should mention that figures in the March 2015 financial statements used in this
presentation were prepared in Colombian pesos, according to the Financial Information
International Norms (NIIF), officially applied in Colombia since January 2015. Due to the effects of
the transfer to NIIF during 2015, quarterly values will be subject to ongoing changes and
adjustments, as set forth by the law. The March 2014 income statements and the December 2014
general balance sheet, used to calculate changes with respect to March 2015, were prepared
according to the ENEL group NIIF standards, which could vary in some items compared to the NIIF
standards adopted in Colombia, which are not representative. Changes in the main items of these
two financial statements are only presented for information purposes and for convenience of
those reading them.
Let's go now to the second slide to analyze the main relevant facts of the first quarter of this year.
Regarding the first quarter relevant facts, the Codensa and EMGESA operational revenues showed
significant growth compared to 2014, so that our consolidated EBITDA for Q1 2015 grew by 3.6%
compared to 2014. During Q1 2015, Colombia was the first contributor to the ENEL Group's
EBITDA in Latin America, with 32% of the region's EBITDA.
The consolidated Codensa and EMGESA CAPEX as of March 2015 grew 58% compared to the
previous year, reaching a total of COP $286,425 million. The EMGESA CAPEX focused mainly on the
EL Quimbo project, on Codensa's massive connections in the urban area, on quality improvement
plans, on the Telecontrol project, and on modernizing public lighting. Regarding this last project,
significant progress was achieved this quarter, including installation of more than 4,350 LED
lighting fixtures in approximately 85 km in several city major streets.
We achieved an 89% physical progress in the El Quimbo project at the end of March 2015; there
are three aspects we should highlight.
1. The precautionary measure declared by the Huila Administrative Court suspending the EL
Quimbo reservoir filling until a minimum flow is met for the Betania fish growers. In view
of this, EMGESA filed an appeal for reversal and an appeal, as well as a precautionary
measure request, before the Huila Administrative Court. The Court rejected the appeal for
reversal and granted the appeal, indicating that the State Council is responsible for the
appeal resolution. The National Aquaculture and Fishing Authority issued a technical
opinion indicating that a 300-400 m³/sec flow is not required for the filling process.
Consequently, EMGESA has filed a new application to have the precautionary measure
lifted and/or adjusted based on such clarification. The company is considering possible
negotiations with the region's fish growers.
2. Preparation of the civil works required to fill the reservoir and initiation of resettlements
in Llanos de la Virgen, Montea, and San Jose de Belén.
3. A project budget increase has been approved for US $114 million, reaching US $1,231
million including contingencies. This increase is the result of greater costs in civil works for
US $49 million, greater costs of social-environmental management plans for US $56
million, and indirect engineering and supervision costs for US $10 million.
Regarding investments in the distribution business, the Bacata Substation expansion was
concluded, this being the largest in the country, which is connected to the National Transmission
System (STN for its Spanish acronym) at 500 kV with 900 MVA, improving the quality of the
service, reducing technical losses, and increasing reliability in Cundinamarca and Bogota. In
addition, such expansion allowed Codensa to include a new energy import possibility from the STN
and ensure the necessary capacity to respond to the growing demand towards the eastern area.
We are continuing with the electric mobility initiative. In March 2015, Codensa and EMGESA under an alliance with BMW, Nissan, Renault, ByD, and Ciudadela Comercial Unicentro commissioned in Bogotá the first public recharge station for private electric vehicles in the
country. This station will be able to serve 280 vehicles each month with a universal recharge
system, this being a significant step towards generalizing the use of electric vehicles in the city.
Finally, we would like to share with you the World Award we received in 2015, an English
publication addressed to international investors and analysts, recognizing our company as the one
with the best corporate governance in Colombia, which shows our major commitment and
significant efforts to maintain quality standards and information transparency for all publics of
interest.
We will now go to the section relating to the Q1 2015 main operational and financial results.
Regarding the generation business results during Q1 2015, we can report a 6.9% growth in
generation, compared to 2014. 91% of all electrical power was water-resource generated, 9% with
steam sources, showing an increase in the steam component participation compared to the same
period the previous year, due to the added Termozipa generation (coal driven). Our plants'
availability level for the same period was 83.4% lower than the 89.4% of Q1 2014, due to
maintenance done to the Cartagena Station and the Pagua chain.
Regarding electric power sales, there was a 1% growth in Q1 2015 compared to 2014. Regarding
the behavior of the market pool price, we saw an average of COP$186/KWh during Q1 2015,
12.2% higher than the average price recorded during 2014. This increase is the result of to the mild
rain season experienced during the first 3 months of 2015, compared to 2014.
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69% of our sales were made under contracts, especially to the wholesale market which provides
us with better predictability regarding revenues and margins.
Let's now look at slide 6, in which we explain the operational results of our distribution business.
In the distribution business, Codensa covered 22% of the national electric power demand during
Q1 2015. Additionally, during the 12 months ending in March 2015 we added 86,027 new clients
to our commercial base, compared to March 2014, showing the significant organic growth of
Bogotá and Cundinamarca and the support provided by Codensa with respect to the growing
demand.
Electric power trading by Codensa grew 1% compared to Q1 2014, as a result of the demand
growth in the Codensa area of influence. The loss index remained at 7.08%.
Regarding regulatory advances in the energy sector in Colombia, as we mentioned in our results
conference as of December 2014, in February of this year Resolutions No. 180 and No. 199 were
approved regarding the distribution remuneration. The new regulation reduced the margin on
efficient trading costs from 15% to only 2.73%, however on a higher base. This change was also
offset by recognizing the portfolio risk and the financial costs of subsidies transferred by the
government. The loss management recognition in the trading component has not yet been
defined.
Resolution No. 179 of 2015 from CREG regarding the distribution component remuneration was
also issued for comments; the final version is not yet known.
Regarding regulatory activities related to the gas business in Colombia, during this year CREG has
made progress in two significant areas:
1. Various public audiences were held during Q1 2015 among representatives of regional
distributors to provide opinions regarding the methodology proposed by the regulator. A
new resolution should be published for comments during Q3 2015 as a result of these
workshops.
2. The inter-business group process, spearheaded by CREG, continues; its purpose is
providing consensus between the natural gas offer and demand in order to define a new
natural gas price index.
We will now look at slide 9 regarding the EMGESA financial results for Q1 2015.
The EMGESA operational revenues during Q1 2015 were COP $621,072 million, a 13.3% growth
compared to 2014. The main factors explaining this are the 1.6% increase in pool volumes sold at a
greater average price compared to the previous year, the greater own generation, and the
favorable effect of the PPI, metric most energy sale contracts are indexed to in the wholesale
market, as compared to Q1 2014.
On the other hand, the supplies and services operational costs during Q1 2015 were COP $168,089
million, a 3.2% increase compared to 2014, as a result of greater steam generation costs. Other
costs, such as personnel expenses and fixed exploitation costs - which amounted to COP $67,062
million during Q1 2015 - include the effect of the 2015 wealth tax according to NIIF. This tax is
calculated on net profits as of January 1 of 2015, with a 1.15% rate.
As a result of the above, we achieved an EBITDA of COP $385,920 million, an 8.1% growth. This
result represented an EBITDA margin of 66%. Upon deducting depreciation and amortization, we
reached an EBIT (exploitation result) of COP $348,413 million.
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Slide 10 shows the net financial expense, the income tax, and the net EMGESA profits.
The net financial expense had a 2.4% increase during Q1 2015 compared to 2014, reaching COP
$30,982 million. During this quarter, the financial expense dropped 5.5%, for a total of COP
$34,840 million, as a result of the amortization generated by the COP $250,000 million third bond
issuance in February 2015, which helped offsetting the effect of a greater CPI, which the interests
of most of the company's financial debt is indexed to.
Financial revenues dropped 41.6% compared to Q1 2014, as a result of lower cash balances during
Q1 2015 due to the January dividend payment, the amortization with no refinancing of the bond
maturity for COP $250,000 million, and the execution of the El Quimbo project.
Finally, thanks to the above operational and financial results EMGESA reported profits before
taxes - or EBT - of COP $317,476 million in Q1 2015, an 8.8% increase compared to 2014. However,
net profits dropped 3.1% compared to Q1 2014, for a total of COP $192,945 million, as a result of
the CREE surcharge. This result represents a net margin of 37.5%.
Please join me now in slide 11 showing the Codensa financial results for Q1 2015.
The Codensa operational results as of March 2015 had reached COP $869,893 million, an 8.9%
increase compared to the previous year. This result is explained mainly by the greater PPI,
compared to Q1 2014, and the greater demand of the Codensa area of influence. Operational
costs, today called supplies and services, were COP $480,704 million, a 10.2% increase compared
to the previous year, mainly due to the effect of the greater PPI of energy purchases under
contracts.
Other costs, such as personnel expenses and fixed exploitation expenses, were COP $108,680
million during Q1 2015, which include the wealth tax corresponding to 2015 under NIIF.
These results allowed Codensa to achieve an EBITDA of COP $280,509 million, 2.7% below the
March 2014 results, with an EBITDA margin of 33%. We achieved an exploitation result - or EBIT of COP $221,559 million after deducting depreciation and amortization.
To conclude with the analysis of the Codensa financial results, please now join me in slide 12,
where we will make emphasis in the Codensa net financial expense, the income tax, and its net
profits.
The net financial expense during Q1 2014 increased 15.5% compared to the previous year,
reaching COP $28,148 million. Financial expenses grew 11.4%, for a total of COP $34,396, million
as a result of greater inflation during 2015 and the greater debt compared to March 2014,
resulting from the COP $185,000 bond issuance in September 2014. Financial revenues
experienced a slight reduction compared to 2014, ending at COP $6,248 million.
As a result of this, Codensa reported profits before taxes - or EBT - of COP $193,412 million, 5.2%
lower than in Q1 2014. However, considering the effects of the CREE surcharge the company
reported a 21% reduction in net profits, for a total of COP $105,273 million during Q1 2015.
In slide 13 you will see the EBITDA evolution between Q1 2014 and Q1 2015.
The EMGESA and Codensa accumulated EBITDA during Q1 2015 increased 3.3% compared to the
previous year, an 8.1% increase in EMGESA and a 2.7% reduction in Codensa. The accumulated
EBITDA during Q1 2015 reached COP $666,429 million, of which 58% was provided by the
generation business and the remaining 42% by the distribution business.
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As we mentioned, the increase in the EMGESA EBITDA is mainly the result of greater operational
revenues, explained by the increase in pool sales made at higher average prices compared to the
previous year, greater own generation, and the favorable effect of the PPI in contract prices.
However, this increase was offset by accounting the 2015 wealth tax as a fixed exploitation cost.
The Codensa EBITDA reduction is mainly the result of greater energy purchase costs compared to
Q1 2014 and the effect of accounting for the wealth tax in 2015.
Let's now look at the EMGESA cash flow evolution for the first quarter of this year.
The operations' cash flow reached COP $375,750 million in Q1 2015, which were used to cover the
maintenance CAPEX for COP $43,318 million and expansion costs for COP $199,163 million.
Additionally, COP $74,561 million where used to pay company taxes, resulting in a free cash flow
of COP $58,708 million, after which net financial expenses for COP $128,437 million were paid, as
well as the January 2015 dividends for COP $326,354 million. With the above, EMGESA reported
negative net free cash flows of COP $396,083 million during Q1 2015.
Slide 15 shows the Codensa cash flow evolution as of March 2015.
As of March 31 of 2015, the Codensa operational cash flow was COP $287,808 million. These
resources allowed taking care of the company CAPEX for COP $134,146 million and paying COP
$92,047 million in taxes. With this, Codensa achieved a free cash flow of COP $61,613 million in Q1
2015.
Finally, after taking care of the COP $20,248 million net financial expense, dividends of COP
$200,502 million in January 2015, the last net profits payment of 2013, and transferring revenues
in December 2014 associated to the corporate cooperation agreement with Colpatria (Scotia Bank)
for COP 90,954 million, we had a negative net free cash flow of COP $250,526 million in the first
quarter of the year.
To conclude this section, we will now present the Codensa and the EMGESA financial debt
situations at the end of March 2015. As you may see in the graph in the upper left corner, as of the
end of March 2015 the average Codensa debt peso cost was 8.98%, 8.81% for EMGESA. The
average term was 4.37 years for Codensa, 7.30 years for EMGESA. The Codensa net debt was COP
$838,948 million, EMGESA's having reached almost COP $3,100 million. Regarding the debt
portion tied to a fixed rate, Codensa's entire debt is indexed to the Colombian CPI, while in
EMGESA 22% of its total debt is tied to a fixed rate.
As we mentioned at the beginning of this presentation, during 2015 companies in Colombia are
undergoing a transition process to adopt the International Financial Information Norms (NIIF). For
this reason, we have included a brief explanation on the effects - identified in our financial
statements - caused by this change in the country's accounting principles.
Let me start by reminding you that both EMGESA and Codensa belong to Group No. 1 according to
local current norms under Law 1314 of 2009, regulated by Decrees 2784 of 2014, 3023 of 2013,
and 2615 of 2014.
According to local norms, companies in Group 1 are required to fully adopt NIIF according to the
following implementation schedule:
1. The closing date of the opening balance was January 1 of 2014. Exemptions and
exceptions set forth by NIIF 1 were applied once only.
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2. The first transition general balance sheet comparison was made as of December 31 of
2014.
3. The financial statements' adoption date is December 31 of 2015.
The following slides explain the main effects on the companies' general balance sheet and income
statements after the NIIF implementation.
Slide 18 shows the main effects on the EMGESA general balance sheet, comparing results as of
December 31 of 2014 under both GAAP and NIIF.
Let's first talk of company assets as of December 31 of 2014. This item in the general balance
sheet showed a 22% reduction after adopting NIIF, going from COP $10,000 million to COP $8,200
million. The main NIIF adjustments explaining this change are the lower costs of properties, plant,
and equipment resulting from the change to the historical net cost valuation method of assets,
selected by EMGESA and Codensa according to practices adopted by the ENEL group. This method
does not consider inflation adjustments or valuations. Also, there are effects from the greater
value of the employees' credit portfolio, which after adopting NIIF will be valued at market rates,
and the reduction in intangible assets.
Liabilities as of December 31 of 2014 showed a slight 0.04% increase, mainly affecting the financial
debt and calculation of actuarial liabilities. Regarding the financial debt, under NIIF leasing
operations are accounted for in total debt, increasing their value. On the other hand, from the NIIF
implementation bond issuance costs will be recognized by reducing the principal value in the
general balance sheet, which will be offset with a higher effective rate that will be recognized in
financial expenses. Regarding actuarial liabilities, additional benefits will be recognized, such as
the employees' severance payments and five-year payments in this item.
Finally, the December 31 of 2014 equity shows a 45% reduction, going from COP $5,200 million to
COP $2,800 million as a result of the recognition of adjustments from having adopted NIIF in the
accumulated gains account, elimination of inflation adjustments, and equity revaluation.
Slide 19 shows the main changes in the EMGESA income statement as of December 31 of 2014 as
a result of having adopted NIIF.
In 2014 the net EMGESA profits had a slight 0.7% increase as a result of having adopted NIIF. The
main adjustments in the income statements are:
1. Upon properties, plant, and equipment having been reduced, the associated depreciation
expenses are also reduced upon not recognizing inflation adjustments.
2. One of the most significant effects is the one on taxes upon recognizing the deferred tax in
the income statement and recognizing the wealth tax in 2015, from January 1 on. The
latter is not evident in December 31 of 2014 but, as explained, does have a significant
effect on the Q1 2015 results. EMGESA and Codensa had the possibility of entering the
wealth tax off the income statement according to the local legislation; however, the
decision was made to fully adopt it.
3. Finally, there is a mild effect on account of greater personnel expenses upon recognizing
the valuation difference of benefits to employees at market rates.
Now, in slide 21 we will review the main effects on the Codensa general balance sheet from the
NIIF adoption.
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The December 31 of 2014 Codensa assets show a 17% reduction, going from COP $5,500 million to
COP $4,600 million. The main adjustments from having adopted NIIF are explained by the greater
value of the employees' portfolio upon having recognized benefits at market rates, and a
reduction of properties, plant, and equipment from the change to the net cost valuation method,
which as already mentioned does not take into account inflation adjustments or fixed asset
valuations.
The December 31 of 2014 Codensa liabilities show a slight 3% reduction as a result of recognizing
the deferred tax, which after adopting NIIF should be reported net in the general balance sheet. In
the Codensa case, the deferred tax is shown in the active portion of the general balance sheet due
to the effect of the accelerated depreciation applied in the past. On the other hand, there is a
financial debt greater value as a result of having included the operational leasing operations.
Finally, the Codensa December 31 of 2014 equity has a 32% reduction, going from COP $2,700
million to COP $1,900 million. As with EMGESA, the main reason for this change is the recognition
in equity of all adjustments made due to the conversion to NIFF norms and the elimination of the
valuation surplus and the equity revaluation.
Continuing with the effects brought to Codensa by the NIIF adoption, we will now go to slide 21 to
see the effects on company net profits.
For 2014, the Codensa net profits increased by 6.8% due to the effect of the NIIF adoption, going
from COP $507,321 million to COP $53,669 6 million. The main reason for this is lower
depreciation, which as mentioned for EMGESA, is caused by a lower base of properties, plant, and
equipment. In the Codensa case there are also the mentioned adjustments regarding the
recognition of the deferred tax and the wealth tax, as well as the recognition of personnel
expenses.
I now invite you to the conclusion section of this presentation.
I would like to close this presentation with four key issues:
1. First, the operational revenues' and the companies' growth in the generation business due
to greater own generation, better pool prices, and higher PPIs in contract prices.
2. Second, the moderate growth of the energy demand in the Codensa area of influence and
the positive behavior of the city's organic growth, maintaining its participation in the
national regulated market.
3. Third, investments for COP $286,425 million during Q1 2015 in strategic expansion
projects to guarantee the energy offer in Colombia, such as El Quimbo, and to guarantee
the system's reliability, such as the Bacata Substation expansion.
4. Fourth, despite the positive results at the operational level for the two companies in
Colombia, there were significant effects as a result of:
a. the tax reform approved by the National Government at the end of 2014, which
brought increases to the effective rate of the two companies, and
b. the adoption of international norms on financial information (NIIF) burdening the
companies' EBITDA with new taxes such as the wealth tax.
This concludes our presentation. Thank you for your participation. Both the Investors Relations
equipment and I will be available to answer your questions or clarify any doubt you may have.
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Please remember that this conference is being recorded and that the Spanish and English
transcriptions will be available at the EMGESA and Codensa webpages.
We will now open the conference to the Q&A session.
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