Edited Transcript of CELSIA.BG earnings conference call or presentation 21-Feb-20 1:00pm GMT

Now I would like to talk about the facts or milestones in 2019 for the company. For the first semester, we announced that our subsidiary, Celsia Colombia, acquired the assets of distribution and the commercialization business of power in Tolima for COP 1.68 trillion, which had a coverage of the distribution business to 1,001,000 clients. This operation was funded in a structural manner through the emission of ordinary bills for COP 1.1 trillion, the private emissions of actions of Celsia Colombia for COP 460 billion, which has the support of Celsia and of our shareholders, Emcali and CVC.

And also another relevant section was the constitution of Caoba Inversiones, which is the medium that we have created in order to have an important development in the transmission system and mid and high tension in — voltage in Colombia, which has allowed us to have fresh assets for COP 1.18 trillion. We clearly adjusted for the operation of Zona, we have an increase of the EBITDA per client from 30% to 45%. Currently, it’s COP 346,000 but the idea is to get close to an EBITDA per client of COP 541,000, which is similar to the one that we have in Valle del Cauca. This is achieved with an excellent work in investments, in improving the service, which is the mantra that we have now at Celsia for our clients in Tolima.

Also, we have achieved the approval of the new rate logs of the [Resolution 015] recognizing the COP 240 billion operations in the base of assets compared to those that have been estimated at the time that drives the EBITDA of this market above COP 210 billion, which is a

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represent an increase of [40%] compared to (inaudible). Last year, we also announced [megawatts] has assignations (inaudible) firm power for 1.16 gigawatts per year for term 20 years, that are non-conventional, which in this way, a healthy balance between firm energy and medium energy of 1.1 folds.

The Zona Franca Central was created in excess of firm energy in our portfolio. Therefore, we decided to look for a new investor whose strategy would be aligned to the provision of service of reliability. In the third quarter, we sold that plant to the firm Prime Energy for an amount of $420 million. This transaction generated a profit of COP 250 billion. And with the resources obtained, we diminished the consolidated debt by COP 1.1 trillion.

On the other hand, we materialized the alliance with Cubico Sustainable Investments and we structured 2 very important vehicles to develop the solar projects at medium- and large-scale as well as the transmission of energy in Colombia. This solar energy platform accelerates the growth of our solar farms, with which we expect to overcome the initial objective of 200 megawatts and to be able to reach 350 megawatts quickly together with our ally. At year closure, we created Caoba Inversiones plataforma with which we transferred the operational assets related to Plan5Caribe, the project in development of Toluviejo in terms of transmissions and the assets with voltage levels 3 and 4 and the national transmission system of Tolima, as well as the commitment of investment that we have in this levels of voltage in this region.

So we have created a very interesting vehicle for transmission with a sub-class that was not seen in Colombia. Cubico subscribed in December shares equivalent to 49% of the platform. We at Celsia will keep a share of 51% in Caoba, and we will provide the commercial representation of the assets as well as all the other services, operation and maintenance as well the decision planning and identification of the businesses in which we will tender for the coming years.

Given the government mechanisms that have been agreed with the new partner, Celsia will not consolidate the financial status of Caoba. This way, the platform will optimize its capital structure according to the characteristics of the business that it has, also featured by long-term range and predictable and stable income.

The business model structure with Caoba, added to the deleveraging achieved with the resources received, allows the company to keep the same contribution of net profit, as it had been the owner of 100% of the assets. This is very important because, basically, it is a platform created to develop and empower our presence in the transmission business in Colombia.

And the financial optimization these people can achieve by having these type of trends or profit is very interesting, and it will allow to clearly have a competitive sector or a competitive position in this transmission sector or field. We other — we also had other important achievements in the auction of renewable energies from working with the national government. We have an award that makes feasible the projects of the company by ensuring long-term incomes in this auction. Celsia was the operator that won, and we were given 768 gigawatts per year for the projects, yearly projects located in La Guajira, each one of them must have capacity of 80 megawatts and 250 megawatts, accordingly. These projects will be contracted for 15 years as of January 2022. It’s very important, and this enables the development of these projects, yearly projects that we have been working for about 4 years.

Also, in order to address the demand of the clients regulated in Valle and Tolima, we participated in that same auction as buyers of energy, and we were awarded 264 gigawatts average per year in contracts of 15 years, which are equivalent to almost 10% of the needs of energy of our clients. For our shareholders and investors, the progress obtained in 2019 in the execution of the strategy were very positive, actually.

We have options of growth, recreation of value and strategic alliances that allow us to have alternatives for funding and leveraging that are very competitive.

To continue, I would like to make a summary of the operational results obtained in Colombia. In the distribution business, our indicator SAIDI, which was of interruptions was of 13 hours in Valle del Cauca. We improved 4.3% compared to 2019, and we achieved 2.2 hours in Tulua, positioning ourselves as one of the best indicators in the country. In the SAIFI indicator, which is of interruption, is 9.45x getting to an improvement of 10.8% and [2.7% times] in Tulua. The reliability of the networks of distribution in Valle was above 99.7%, and the energy losses in 9.2%, improving the goals set.

In Tolima, we made investments in the 7 months that we were there for COP 82.5 billion, with which we improved the service, or and we are improving the service in the department. The SAIDI indicator was positioned at [56.9] hours, and SAIFI achieved 43.1 folds, which were positive results in 130% and 107%, respectively, compared to the estimate. The reliability of the distribution network was 99.7%, and the losses reached 50.9%.

We see our results are in line with the business plan, so we can continue with a very big operational challenge for our distribution. We are today, the best operators in terms of networks in Valle, but the assets that were received in Tolima in June last year still have some levels of service that are not the ideal ones. We clearly have a bad service for our clients there, but with the investment plan and with the motivation that we have at Celsia in order to improve the service in Tolima, we expect to change very quickly that trend.

Now Esteban will tell us about the operational and financial results of the company. It is important to consider that the results of this quarter reflect the effect of the sale of Zona Franca and the incorporation for a whole order of all the distribution and commercialization of Tolima. So we made a special work in order to show you the figures in such a way that you could compare them. Please, Esteban, go ahead.

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [3]

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Thanks, Ricardo. The details of the general context of the industry and the results can be seen in the reports published in the website of the investors. So I will refer to the most important points that where we wanted to make a double click.

The consolidated income of the quarter achieved COP 967 billion, an increase of 7% compared to what was presented last year. In total, in the year, the income achieved COP 3.7 trillion, 9% above the — in previous year in Colombia. 84% of those income and the total consolidated in Central America was 16% in the generation system. Let’s talk about Central America of this. The profit was of COP 151 billion, with an increase of 7% compared to last year, fundamentally due to the greatest — greater thermal generation registered in Colombia. The generation business for the

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income was COP 210 billion, with a diminishing of 45%.

Here, the de-consolidation of the results of Zona Franca had a very important impact in that variation and it explains almost all (inaudible). When we made the extra results generation income in Colombia, well, actually 80%; 425% explained mainly by the operation of the assets of Tolima for COP 50 billion, and above all, for a record that we made or register that we made of the retroactive that we can charge in the coming month, the incorporation or approval of resolution of charges for both markets, which represents almost COP 48 billion. Also, we have the incorporation of full assets of Plan5Caribe, which account for COP 90 billion.

The assets of commercialization in quarter increased 48%, recording more than COP 21 billion favored also — COP 421 billion, sorry, favored for the COP 101 billion that the business in Tolima contributed with. If we exclude Tolima, the increases is of 3.5% in the commercialization business. And in the other operational income, we increased by 58%, getting to COP 26 billion, of which Tolima contributed with COP 4.4 billion. The increase in this line is of 90% are considering the new business in Tolima, and this is seen, thanks to the dynamics that we have had with our innovation of products and services, the cost of consolidated sales during the quarter was 591 — 9 — or sorry, COP 599 billion, if you were to — 3%. If we exclude Tolima and normalize the cost without Zona Franca, the cost, our sales grew by 10.3%, especially by that share of the fuels in Panama.

Throughout this year, the cost of consolidated sales reached COP 2.58 trillion, 7% above last year’s. And we can say that, well, even in Tolima and Zona Franca, it grew by 12%. In administrative expenses, it was COP 83 billion in the quarter, with a growth of 44%, which is explained basically by the incorporation of Tolima, which had an administrative expense of COP 5.5 billion that projects of growth, which also generated expenses for COP 6 billion and more depreciation that amounted COP 6.6 billion, and a provision of portfolio, which is according to the NIIF 15. Since our income is growing in the commercialization business, well, that NIIF 15 becomes very representative.

Throughout this year, the administrative expense was up COP 296 billion with an increase of 33%. In Colombia, this expense, particularly, is leading the increase by 36%, reflecting the operation of Tolima, all expenses associated to the purchase of Tolima and the disinvestment of Zona Franca Celsia and Caoba as well.

The product of our operation, well, the consolidated EBITDA for the third quarter was up of COP 379 billion, which is 20% higher than the same period last year. Normalizing the effect of Tolima Zona Franca, the increase of EBITDA was up 18%. Of these, Colombia contributed with COP 344 billion, with an increase, a very important increase of 31%.

In the year 2019, EBITDA in the organization reached COP 1.16 trillion with an increase of 16% and normalized by the sale of Tolima and Zona Franca In the lines of other income of the quarter, we registered COP 341 billion, this is of which COP 335 billion correspond to the income registered due to the sales of the assets of high-voltage of Caoba Inversiones. The financial expense was COP 115 billion, exceeded by 60%, I mean, COP 43.2 billion. The other expenses are COP 113 billion for the sales of Tolima and also the other projects we registered. The other expenses registered COP 113 billion in the quarter due to the position of 2 deteriorations in the assets of BLM and Porvenir II.

In the case of BLM, given the results that this operation had throughout the year and the non-materialization of the auction of capacity and energy in the dev plan as expected, we decided to apply the method of reasonable value of assets and not of the ongoing business. For this, we contracted a technical assessments work. And when we compare it to the value of [PPE], it generated a loss of COP 83.6 billion.

For Porvenir II, given the preventionary measure imposed by this Head Counsel, we made an assessment of the project considering a delay in the initiation of the construction of 2 years difference between this value and the value of the assets gave us a COP 24 billion expense for the deterioration of the assets, the provision of taxes in the quarter was up COP 188 billion, of which COP 72 billion correspond to the tax due to the sales of the assets of transmissions to Caoba Inversiones. It is important to remember that this sale is a sale that generated ordinary range, given to — well, that a great number of these assets had over older than 2 years.

In 2019, the deferred tax registered also an expense for COP 32.7 billion compared to the income registered in the same line in the fourth quarter last year for COP 30 billion.

The tax for the income in 2019 was COP 328 million, with an increase of 80%, triggered by the taxes generated by the disinvestments in the assets, which summed up to COP 134 billion. Excluding this effect, the tax presented an increase of 6.9%, whereas the utility before the tax represented over 70%. The company registered in the quarter a net profit of COP 190 billion, with an increase of 77% compared to last year. When we discount the minority interest, there is net result attributable to the owners of the controlling company, registered an earning of COP 150 billion, superior in 81%.

In the accumulated, the net profit was up COP 603 billion, 72% above last year’s. And the attributable to the controlling company was COP 472.6 billion superior in 180%. This is the highest [fee] of changes that the company decided to focus in the business of power in 2006, and we had already completed.

On Slide 18, you have results that have been adjusted to the extraordinary operations and see it Zona Franca for 2019 and adjusted Zona Franca for 2019. The operational income grew in that context by 27.6%, and EBITDA grew by 19.6%, and the taxes by 3.5%, and net profit by 5.1%. The debt of the company closed with COP 3.8 trillion and a diminishing of COP 700 billion compared to last — or the third quarter this year, and only COP 304 billion more than December last year, despite having made an important growth operations during this year.

I want to also make an emphasis in the achievements that we have had in terms of the debt of the company. Thanks to all the deleveraging programs and the reprofiling that we executed leverage on the projects of 2019. The half-life of the consolidated debt grew by 29%, moving from 6.2 years to 8 years. The cost of the debt closed by 8%, 16 basis points below last year’s and 6.4% is the cost of the debt in dollars, 23 basis points below the figure last year. The indicator of net debt with EBITDA at close — year closure was at 2.71 folds and 3.9x to that recorded last year.

Ricardo, with this, I end my comments about the financial results. As you could see, it gathers several effects that are nonrecurring due to the strategic — or the strategy the company has applied.

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Ricardo Andrés Sierra Fernández, CELSIA S.A. E.S.P. – CEO [4]

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Thank you, Esteban. I hope that it has been as clear as possible. Today, we will propose or we will have in the city of Bogota an Investors’ Day in order to give more clarity and detail about all the effects of the nonrecurring last year and how that future or the future figures of Celsia will be seen with all the platforms and all the businesses that we’re developing.

I also want to mention that we will have a 2020 that is very interesting. We hope to have profit close to COP 3.3 trillion and this — well, we expected, gives us an EBITDA of COP 1.17 trillion and the platform of Caoba on its side, will have an EBITDA of COP 136 billion. We expect our net utility or profit close to COP 13 billion. This is very important because when you add both EBITDA, what we have between Celsia and what is a growth of 4% compared to last year’s closure. And this way, the consolidated profit that we expect to have in 2020 will be of around COP 369 billion and that of the controlling company which estimated to amount to COP [135] billion.

The CapEx that we will have between the maintenance CapEx and growth CapEx is divided in more or less this way, COP 331 billion for the maintenance CapEx and for investments for growth of COP 816 billion. We will have a 2020, well, very dynamic, very busy with many topics. And we expect to continue consolidating the transformation of energy and to have a bigger portfolio with more renewables because our share will definitely will be dedicated to the [hydro] and solar, and we expect to continue having this portfolio of service that we want to have for our clients.

In addition, I want to point out that the line of new businesses that is obtaining now some important figures. And this year, we expect to be close to a figure of COP 70 billion or COP 80 billion in sales.

So thank you very much. And if you agree, we will now open a space for Q&A. So I will invite you to be in our assembly on March 25 in Medellín.

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Questions and Answers

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Unidentified Company Representative, [1]

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(Operator Instructions) We will start with (inaudible) from [Colombiana].

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Unidentified Analyst, [2]

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Everything was very interesting, especially what you have done and the clearness of what you have given us. I have a couple of questions. I will now attend the meeting with you, so I will have other questions by then. Mainly, I will try to ask 3 quick questions because we have short time. I would like to understand more the accounting management of P&L, everything related to Caoba you’ll have, so that you can visualize it better in the model.

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Unidentified Company Representative, [3]

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Very well, Esteban, so could you take that? We’ll be taking your questions one by one.

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [4]

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[Roberto], of course, yes, Caoba was, according to what we mention, regarding to the structure of interventions we implement with our partners, is not a company that is consolidated. Therefore, in the status of results, what you will see is an income for what we will share at the (inaudible) we will have is 51% of the net unit is an instrument and probably an investment of the company in the assets, which is basically going to be moved. Well, depending on what we have invested in the movements of patrimonial share.

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Unidentified Analyst, [5]

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Perfect. My other question is related. I would like to understand better when you talked about the plants, the nonconventional plants in La Guajira, we took [hydro] projects there. I would like to know what is the connection point that your projects will have because as I have understood, a financial point there — there’s a bunch of them that could have some delays. So I would like to know which of the differentiating points for the Celsia projects and if that delay of that other connection point will affect us or not.

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Ricardo Andrés Sierra Fernández, CELSIA S.A. E.S.P. – CEO [6]

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Very good question, [Roberto]. And it’s good to clarify this. In fact, today, during the conference, we will have 2 people that are part of the management of Celsia and they are our generation leader and our transmission leaders and — transmission and distribution leader. So they will give you details of any of the operational questions that you might have in this regard. But that is a great advantage that we have in our [hydro] projects. We do not depend on third parties for the connection. We will have a direct line from our hydro to the substation of [Huences Didas]. And basically, that connection depends on us, and we are not subject to the successful termination of the collector. So that is a great advantage that we can, I’d say, we will have today in this morning.

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Unidentified Analyst, [7]

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And on other 2 very short things. You have been very — what we have in terms of an EBITDA, as you mentioned, I would like to know if there is any objective level or optimum level that you have set with that indicator?

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Unidentified Company Representative, [8]

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Esteban?

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [9]

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Well, I can say that today, we have a respectable principal in the company. With the EBITDA today, we are more than the AAA when you compare with other companies in the same field. Clearly, the utilities of the world are in levels of EBITDA that are higher than ours, but actually, we do have — or we have set a goal, which is always to have a financial flexibility that is — or that has a wide range. So yes, I think, [Roberto], today, we will see the — or to the — or sorry, during the Investors’ Day, we would see that clearly because already is up 2% and the idea is to keep below 3.5%. Now with the combination of 2 things, is one, the debt of Central America, which has always been higher due to the structuring of the project plan that we have in that region. And Colombia closed this year with indicators of 2 and 2.5x. That will be basically the level in our typical borrower flexibility. The idea is to be always before 3.5x, which is according to the report for all the ratings that we have. And the (inaudible) bonus, yes.

We have a very good duration. We are exceeding 8 years and 16 basis points for the pesos part and 23 for the dollars parts. And that helps a lot. And in order to have these differentiation into what controls that, the one idea is with the investors in our goals for value creation in the long run.

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Unidentified Analyst, [10]

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The 3.5x is the next step, right?

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [11]

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Yes.

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Unidentified Analyst, [12]

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And all the — well during the — do you have or can you give you me an idea which are the average years of the depreciation that you have for type of asset? I understand that for distribution, it’s like 35 years. But for the generation assets, could you give me like an idea, what is the depreciation?

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [13]

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Well, we have — or we are very ample in this regard because they depend on each type of asset. In average, the distribution assets have a useful life of 45 and 50 years. Most of them, the generation assets, well, depending on the type of technology, have more or less. The renewables have around 30 years. Shelf life, thermal, have around 20 or 25 years, and it only have around or useful lives that are much greater, we have seen in 100 years for some of them.

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Unidentified Company Representative, [14]

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We now have 3 questions from [Nicolas Saraso from Capca]. The first one is how to fund the construction of (inaudible) up until 2022.

The second question is, due to the tariff adjustment, what is the growth of the rate?

And the third one, how have the profit growth improved without considering the nonrecurring events?

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Unidentified Company Representative, [15]

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All right. Perfect. This question was sent through the chat. All right. I will start off with the second question, which is the growth of the rate. The growth of rates is a very important topic due to the change of the news team over remuneration of the distribution assets that are not paid off by the — according to the assets that we have for the clients. And this totally changes the landscape. We have now taken 2 decisions. The first one, in Bahia, a recognition of the charge and compared to the assets that we have, well, basically, we continue in the same line of increase of the rates that we were having, and there is no variation for our clients. Even in Bahia, we have contracted 100% of the energy.

So our clients there, in Bahia, are not seeing any variation in their rates due to the results of the great variability that we have had in the last 3 months in prices due to the intense summer and the proximity of Niño phenomenon in the next few years. So this is very important for our clients in Bahia.

And in Tolima, where we did have, due to the tariff or rate change, the need to make an increase in our rates, we have opted to have a tariff direction that we — for which we obtain authorization. So our clients in Tolima didn’t have these sudden increases. So we’re taking this direction that will take us around 3 years and gradually increase. So our clients can see some tangible improvement of the services which is adjusted to that increase in the rates.

Unfortunately, in Tolima, we have not contracted all our energy or power. We — there, I have around 20% in the market. So we are having our contract of the energy there in order to close that gap and to have everything contracted. So we are taking that path, and this is the handling that we’re giving of our rates to our clients so that they can have the least impact with a good relationship between quality of service compared to the rate.

So let’s talk a little bit about the funding plan for the [hydro] project and a little bit about the profit. The adjusted profit of the nonrecurring events of last year. In terms of the funding of Begonia, which is the project, the hydro project in La Guajira, we are starting to work on all those topics. But what I can say is that, from a strategic standpoint, what we’re looking for is a funding, which is the [ALI-4] project funding, which allows nonconsolidating that debt, so that we can have 100% concentration of the assets. This year will be a very interesting year for the completion of the financial strategy, of both the Begonia project as well as the thermal spinoff project.

About the question for the profit, you can see this with greater detail on Slide 18 of the presentation. Adjusting from 2018, all the extraordinary events include the results that we had up until September last year of Zona Franca and also adjusting Zona Franca by [2018] in order to make all these assets comparable. What we have is a growth or the net profit of 5% and in the controlling company of 9.1%.

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Unidentified Company Representative, [16]

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Okay. The next question by [Juan Andres] (inaudible). He also has several questions. The first one is, how long do you estimate in order to achieve EBITDA providing that has been set in Tolima?

And the second question is, what are — or what is the expectation of the situation of Central America? For international, what is the strategy with the thermal? Same trends will continue in the spot market? Or do you have any progress in the renewal of contracts for Central America?

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Unidentified Company Representative, [17]

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Perfect. I will start with the second question. And I think it’s very important. We had — well, you know that BLM has been without a contract for basically 1 year or more, and this has affected the results of our share in Central America. So actually, the summer in Panama has been very intense, and they’ve had great problems in that country with the canal, the Panama Canal, and the levels of water of the Panama Canal.

So we are undergoing a very competitive situation there. But the good news that we have is that, well, this week, on Monday, we presented the tender issued by the government for the energy and power retention. And even though it has not been awarded or the tender has not been awarded, we expect to get the official results in 1 week. We are leading that tender, so we expect to have an important award of the retention for our BLM plant.

When we have the data confirmed and the official award, we will communicate this immediately. But we are — or we have great expectation for this to happen and all points that there has been no problems with the Begonia plant. And this will give us a very important leap in order to have better operational levels and without any — or sorry, with requirements of cash flow and capital have been adjusted compared to what we have bid. So we are very excited for this development in Panama, and we expect to confirm the good news in 1 week or more. Do you want to take that first question?

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Unidentified Company Representative, [18]

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The EBITDA for client in Tolima will have several associated variables. What we have foreseen is that at least during the first 5 years, they will not be equal because they depend substantially on the improvement of the quality of the service, but we expect quickly to have that EBITDA grow and gets closer to that figure. Well, I don’t have the specific data about the time, but I would like to make a reflection.

In Tolima, we presented — well, when we were in the transaction of the acquisition, we were having the application of charges to the pack with investment plans. So there was a collaborative work that was important in that regard. And that investment plan, well, right now, is being readjusted according to the need to improve the quality of the service. If we achieve to end that investment plan, which should be completed in the next 3 or 4 months, and to be able to present it to the creditor to make a reconsideration, a complete reconsideration of what Tolima needs in order to have a positive level as the one that we are used to giving at Celsia, we could have an effect of more acceleration in the results and an important improvement in the level of quality of the service, which is what we are always concerned about. So we expect that to happen and we’re working harder to achieve this EBITDA because we want to achieve this as soon as possible.

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Unidentified Company Representative, [19]

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All right. Now we have from the line of (inaudible). What is the rationale for delivering extraordinary dividends when the company is in a stage of transformation?

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Unidentified Company Representative, [20]

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Well, that’s a very good question, and we want to also make a reflection in this regard. Actually, this company has been undergoing a transformation and growth process for many years. And the investors have both supported us in the good and bad times that we’ve had. We nowadays have a situation which is very interesting, and it’s a situation in which our investment plan, which is very important, it’s ambitious, well, has been practically funded. We have other opportunities for growth, which are under study.

But to be able to take a price to our investors that have been with us throughout all these years due to the great year that we had in 2019, is what has motivated the Board to present the proposal of having this extraordinary dividend that will be only for this year. So this is a way to share and to tell our shareholders, we are here with you, having this, so that you can have a yield that excites you and so that they continue being loyal to our company. So that will be the rationale, and that’s the message that we wanted to transmit with this extraordinary dividend.

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Unidentified Company Representative, [21]

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All right. Now we have from [BTG Pac], Andres Moncada. Gonzalo, this happens because we’re having a chat, so we could not have an interaction with you, and we apologize for that. So if you want, we can elaborate more on these questions in the conference that we will have. And if you want to make live questions, you could also do that doing or pressing the button with the microphone in the platform.

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Andres Moncada Lopez, Banco BTG Pactual S.A., Research Division – Research Analyst [22]

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This is Andres Moncada from BTG Pactual. Two questions. In your performance indicators, have you considered getting to a bridge that is positive at some point in the medium run?

And the second question is what about the process of looking for [strategic investment] for preventative notes? Can we see more impairments in 2020?

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Unidentified Company Representative, [23]

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All right, very well. I can talk about the free cash flow, and then Esteban, you can elaborate on the other part.

The most important about this company right now is that we have a [super] primary when we make the distribution of dividends, taxes, CapEx for maintenance or everything regarding the operational expenses of the company we are generating. And also all the payment of the debt, and we are generating primary access which is very important. This is what we can leverage on in order to develop all the growth that we want. But clearly, the free cash flow, well I think, by incorporating the growth CapEx will logically — it will continue to be negative, but with a profitability that is very interesting because we are contributing to the new verticals of growth.

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [24]

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And what Ricardo mentioned is very clear. The first part of the strategy has been to have a primary access, which just basically allowed us to nurture that growth without having the need to request new increases of capital from the investors. What we have built today between what we have in [DeSolito] and what we have in Begonia and what we have in the solar farms, and what we have in the transmission and distribution systems. This is the plan, has an entry of operations by 2023, 2024 in the last stage of the [hydro] project in La Guajira.

So while — during this year, we will have this important CapEx for growth, which are all very profitable, but we have to insist that we do have a primary access, which is very important, which who are with us or whoever with us in the Investors Day can see the evolution that we’ve had of that value. But what we are — we have peace of mind because we can leverage all these in order to continue our growth strategy and to have the opportunity of showing with our investors, all this good news in terms of the dividends.

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Unidentified Company Representative, [25]

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All right. Very good. In terms of the Porvenir II. In Porvenir II, we have the situation of the super specialty of the license by the State Council which makes difficult to undergo the process of looking for the investor. However, this is a process that we expect to conclude positively on behalf of the company. And once this has been solved, we will be able to reanalyze this — the topics of impairment. Well, we don’t see any impairment. That’s why we wanted to have this small impairment for last year around the asset and we have to wait and see how all these legal topics evolve, which would mark the future of that decision.

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Unidentified Company Representative, [26]

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All right Ricardo and Esteban, we have several questions that we will be made light. The next one is — we have also Ricardo Sandoval from Valores Bancolombia.

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Ricardo Andres Sandoval Carrera, Bancolombia S.A., Research Division – Oil, Gas and Airlines Analyst [27]

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Could you please confirm the guidance of EBITDA? And what would be the EBITDA margin that you expect?

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Ricardo Andrés Sierra Fernández, CELSIA S.A. E.S.P. – CEO [28]

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Very well. Esteban?

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [29]

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The guidance that we would be — that will cost in the incomes of around COP 3.3 trillion and EBITDA of the organization is around COP 1.17 trillion. This gives us for the figures of the company, a margin of at least 34%. When we include — well, basically, this is the same EBITDA margin or a very similar EBITDA margin that we obtained for 2019. The current platform will have around COP 136 billion of EBITDA. However, due to the type of assets that it represents, it has an EBITDA margin, which is very — or much closer to 75% or 80% for Caoba. If we make a calculation, a quick calculation of the sums, because I reiterated Caoba is not a vehicle consolidated into the organization, and if we have maintained the business, we thought the EBITDA margin would be of 34% or 36%, showing a greater share of the network business — commercialization business versus the EBITDA that Zona Franca contributed with, yes?

Even when you see the Colombia EBITDA and the margins are totally high, we’re talking about levels over 40% in the EBITDA margin in the operation in Colombia, and will help the growth but we haven’t been affected by the operational growth in Latin — in Central America, which has reduced our profitability. And that’s where we have seen the effect.

But clearly, we have had a very interesting guidance for 2020, which is challenging and we expect to continue in this good track of results.

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Unidentified Company Representative, [30]

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So we will take now some live calls.

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Operator [31]

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Yes. We have Katherine Ortiz from Davivienda Corredores.

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Katherine Ortiz Sogamoso, Corredores Davivienda S.A., Research Division – Equity Research Leader [32]

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Continuing with the question that Porvenir asked — that they just asked, will have the — certainly of you are doing this type of appreciation with other assets in Minas Portes or [Cartivá] or any other asset that you also have? Are you doing this type of appreciation as well or this is type of (inaudible)? I would like to know also in Porvenir, which was the investment finally in the company books? That will be my first question.

Then the second question is related to the additional value that you mentioned in the base of assets that — for Tolima was COP 240 billion. I would like to know in Valle del Cauca how much it was because I saw a provisional income for these topics.

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [33]

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Well, I can tell you with this last question that we had a recognition of the [BRA] that was very good, almost 25% over in Tolima and over 100% in Valle. I mean with their size — before we had excellent results in terms of the solution of charges for Valle compared to what we had presented. So on that part, well, we’re doing fine.

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Katherine Ortiz Sogamoso, Corredores Davivienda S.A., Research Division – Equity Research Leader [34]

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Sorry. And so in the report, when you’re talking about a provision in Valle of the income…

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [35]

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Yes, precisely, I was going to answer that part, what about this provision. This provision is for the income, not expenses. It’s a provision for the income. Basically, Resolution 015 authorizes for the implementation of the charges with expiration April 2019. This is part of all the approval processes — of individual charges. Remember that the 015 is a framework, a regulatory framework, that rules all the rates, but the credit must give a declaration 1 by 1 of all the distributors for the case of the Valle operation and for the case of the Tolima operation, basically, we were notified at the end of the year but this does not prevent us from doing the retroactive in April for those 2 recorded for the Valle and Tolima markets. They recognize the income that the company has the right to — from [2019] to move in the rates for the coming months of 2020 but for a business due to the effects of the causation, this corresponds to income to — of 2018. So this is a provision of income.

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Katherine Ortiz Sogamoso, Corredores Davivienda S.A., Research Division – Equity Research Leader [36]

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And the questions about the impairments?

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [37]

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Yes. In terms of impairments, all the assets of the organization have to undergo the accounting policy. That means — that doesn’t mean that all the assets need to have deterioration analysis. Basically the first part of the policy state that we should be determined if there’s a reason for not making this appraisal. In the Cativá asset, there is no reason to make deterioration test in the BLM asset. Well, we can say that the approximation of the deterioration test was to migrate the deterioration test of reasonable value to migrating to another one of ongoing business.

And the balance, the position that we did, well, we — the separated one and the divider one that was not mentioned in the call, but it appears in the quarter, information in the case of the divided one of Celsia, we made 2 or several movements that were important that allows us or allows the BLM asset today for purposes of the assets of the organization has a value of 0 in the separated report. The investments has a value of 0 as well as the accounts receivable also has a value of 0. So from the standpoint of giving more clarity to our figures in the balance, BLM, which is the asset that has more difficulties in this long run is in 0 in our balances. So we should see no effect in terms of accounting if something happened. And we hope nothing happens.

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Unidentified Company Representative, [38]

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We now have another live call and then some other questions on the chat.

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Operator [39]

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This is Ricardo Sandoval from Valores Bancolombia.

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Ricardo Andres Sandoval Carrera, Bancolombia S.A., Research Division – Oil, Gas and Airlines Analyst [40]

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A very simple question. We have a CapEx guidance for this year — sorry, but I would like to know, with all the projects that you will execute at [Celsia] in the coming 5 years or 4 years, is it possible for you to give us the CapEx? And do you expect to expand in these new projects? So it will be the CapEx for the next 5 years without including the maintenance CapEx?

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Esteban Piedrahita Montoya, CELSIA S.A. E.S.P. – CFO & VP of Finance [41]

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Yes, of course. And in fact, we already have — well, this will be presented in this meeting that we will have today, but we can give you an approximate, Ricardo. And if you would like, we can give you also the information that we will have in the meeting with this data and also in what platforms and to which projects that CapEx will be assigned.

So basically, we have — well, I will talk about the big avenues of growth. The big avenues of growth are Tesorito, which is a CapEx of around $190 million, $200 million, which will be executed in the [associated] Tesorito where the company has a share of 57.5%. This is a CapEx that goes for this year, and we expect also by the end of 2021.

Then we have — all right. Well, let’s talk about this because you will see the need of cash flow for all these projects, and what is interesting is to achieve the time to market that is ideal in each of the projects. So if analyze the Tesorito case, well that’s really cool. Tesorito will have a project finance which is structural, which is very interesting, but the generation team, the project team is working intensely in order to put in the service of Tesorito in November, December last year.

If we achieve this, we will get in the market 1 year before than what we have been stated, according to the obligation of the — correct, to start the project. And this will generate 1 complete year of charges, plus a premium of $2 per megawatts that we have delivered. If this happens and we have an equity of 30% in the project, in which we have to provide 57%, almost all the income that we will receive during that first year, would liberate or free us or we pay off the [excess] that we will put for the project. So this is a strategy that we are planning with this project and it’s spectacular.

And you can see that we would not be requested any of our own resources. I mean it will be something temporary. We would just pull some of the resources of these excess provided and that would be compensated. So you should consider this, and we will give the details in our next conference.

All right. Begonia, on the other hand, is an investment, that in these pages, would have around $350 million or $400 million. What needs to be in the installation of the [only park] in La Guajira. What they could demand, power. At least in the plans that the company has, ongoing, which are the substation Toluviejo and several of the assets of expansion in [Voltage 3 and 4] in the Department of [Energy], we’re talking around $100 million. Obviously, it’s a vehicle that together with the partner, what we have considered is to have a vehicle for growth with this.

So we have several opportunities in terms of national transmission system that we will achieve through the market throughout this year, where very surely, Caoba will have a very important role from — and our asset (inaudible) or interest in discussion, but we have like around COP 100 million. And what we said is that, well, Caoba will invest these not the — believe that we will — where we are estimating that there are no additional contributions from our side for Caoba in order to materialize that growth plan, at least 1 plan of the COP 100 million. And in terms of these solar initiatives, we have around $160 million to be deployed in the projects that have already reached a feasibility stage and that are ready for construction. This is — involves around 280 megawatts that we have several of these to start operations in 2020.

The most interesting about the solar business and about the solar platform is very similar to what happens in Tesorito. The turnover of the cash flow is very accelerated due to the benefits of 1715 Resolution where — well, the assets are assets owned by Celsia and the business with Cubico has other statements, but in this case, they are property of Celsia and the tax benefit is a tax benefit received by the company totally. And what this allows is that obviously equity that we have contributed with is repaid the next year after we start over and pick up these benefits.

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Unidentified Company Representative, [42]

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We have another call. Another question through the chat from [Camilo Manuel] from Davivienda Corredores.

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Unidentified Analyst, [43]

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What are the plans in 2020 for the assets in Central America?

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Ricardo Andrés Sierra Fernández, CELSIA S.A. E.S.P. – CEO [44]

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Perfect. [Camilo], the plans — well, we will have work that is focused on BLM, I mean, we are expected to have the — well, the award of the assignation of the power with this. We should start an [excessive] work to see how we can achieve to have an [exigency] point of this and that allows us to have more competitiveness in terms of costs and expenses. And the team in charge of this is doing lots of work in order to improve this. And in fact, we will have some conversations with our partners and creditors there that’s — which is the Panamanian government. And the Panamanian government has committed to the $9.5 million in order to finish the amendment of capitalization that they had with us. And we have pending another capitalization commitment for which we are expecting a discussion with the new business plan to see how this will be developed.

As far as Dos Mares, so we’re having operational improvements that are very interesting. We continue with low levels of water, but we are seeing how to incorporate a little bit more of water flow to that central. And in the solar topic, [wins] from the [community], we have been growing very well and we have projects that are very interesting of solar farms in Panama. We are now opening some solar roofs with some important clients. And last will be (inaudible) for the last we opened a very big roof in (inaudible), very important for our solar business where we have deployed some installations there that are strong. Also we started operations for the solar farm of Cementos Argos there and [it’s something] we are seeing the possibility of (inaudible) it or which will improve it. (inaudible) in those 2 operations.

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Unidentified Company Representative, [45]

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(inaudible).

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Unidentified Analyst, [46]

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I have 2. Also that you have [visitors of yours there] and who have the rest of it? And how would that work? And the last question, of those $100 million that you estimated for the CapEx — I have not run off the Caoba project, that CapEx, 51%, would correspond to Celsia?

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Ricardo Andrés Sierra Fernández, CELSIA S.A. E.S.P. – CEO [47]

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Yes, I’ll tell you a little bit about (inaudible) [Cerrito]. Well, we have 57.5%, we’re a partner there. The other 35%, and we have what is called [Prelectica] and we have [Caracolí] with 10% as well. So that is basically the distribution. The idea is and that the equities are placed for prorated according to the shares. And as I said before, it is very interesting because we are putting the equity in the front. And in 1.5 years, we would be recovering it once the project has started operations.

So basically, this is the rationale or the explanation about these projects. But Caoba CapEx has an advance with the financial structure that was set. And as Esteban explained, the investment plan that we have today, which are Toluviejo projects and the expansions of Tolima and others, well, all of this has been included within the financial structure that we have today and it will not be demanding more (inaudible) own targets. Well, if we started in the new projects, get it much lower, the portion that we have talked about would be less than COP 50 billion for our portfolio. That’ll be close to COP 1 trillion in new projects. So imagine the platform and the leverage that we have created with this, it’s very interesting. Well, something just to clarify, is that I’m not just talking about the — well, the representation of [Atlántico] is just under (inaudible). And we are the ones who — we will be operating amenities in these assets fully.

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Unidentified Company Representative, [48]

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Anything else? Right now, we have no other questions submitted in the chat or nobody with live calls. So I think that, that would be all.

All right. Thank you very much for (inaudible) in the discussions that we will have in order to give more clarity on all this. (inaudible), then you’ll know more about what we are foreseeing for the next 5 years. And so that you can also see that company little by little has been transformed into a company oriented into the renewables and all…

(technical difficulty)

[Statements in English on this transcript were spoken by an interpreter present on the live call.]