Grupo Energía Bogotá S.A. E.S.P. (GEB) Earnings Call Transcript & Summary

Good morning, everyone. My name is Manuela Ramirez, Financing and IRO in Grupo Energia Bogota. Welcome to our second quarter results call. This conference is being recorded. The presentation that we'll see today was sent yesterday and is uploaded in our Investors section of our web page. In the right corner of your screen, you can ask questions at any time in the Q&A section. Please state your full name and the company that you represent, so we can easily identify. Now let me introduce you to Jorge Tabares, who will lead the call today. Good morning, Jorge.

Hi, everybody. Thank you, Manuela. Thank you for your interest, and I'm going to go as typically to the presentation, and then we'll open it for Q&A at the end. So we welcome any inquiries that you may have. Following page, please. Next. So the snapshot of our results as headlined, I will say that our operating results were quite positive during the first half of the year, in part because of the structure of our industry as the tariff indexation allows us to capture, in some cases, the inflation and the fact that we published our results in Colombian pesos also allow us to benefit from exchange rate depreciation of the Colombian currency or cross currencies depreciation of the Colombian peso against the Peruvian sol, for example. But also, the results show the execution of the inorganic growth strategy that is delivering positive results for us. On the left, we have the EBITDA for the quarter increases by [Audio Gap] All these figures are in COP 1 billion, and the exchange rate is about COP 4,300 on that order of magnitude so for you to keep that in mind. When we look at the composition of the business, gas continues having the most significant contribution both as a combination of gas distribution and gas transportation. And very importantly, I think I highlight the increase in all businesses EBITDA, so the positive results are a consequence of contribution for all businesses. In the quarter, Colombia represents 60% and the Region 40 percentage. In terms of EBITDA, this is a quarter in which we don't receive dividends from our noncontrolled subsidiaries. So that is the reason why this composition and also the -- as you will see later, the composition is not as typical as the first quarter or the same as the end of the year. When we look at the table on the bottom, revenue increased by 23%. The operating income was flat and the controlled net income increases by 0.8%. I highlight also that we are investing very actively in our portfolio, both organically and inorganically from this $227 million, $116 million were the amount that we paid for the Elecnorte acquisition and the rest of it is the organic CapEx, mostly in the Colombian transmission operation and in Calidda, as we continue expanding the network and connecting more clients in gas distribution in Peru. A very -- in the middle, a very healthy net debt-to-EBITDA, 2.9x. And our return figures are slightly below the figures of the last quarter, but mostly as a positive, I think, because the increase in the asset base that will deliver results and returns on a continued basis as we move forward. A very active, I would say, macroeconomic environment with depreciation of the Colombian peso of 6% in the quarter. And we continue seeing as most of us in the finance world see a very, very high headline numbers, both in PPI and IPC. Next. So a summary of what we have already mentioned to the market is our acquisition in Brazil, which is the total enterprise value is $1.4 billion, a very transformative acquisition for us and one that is fully aligned with the strategy that we outlined back in 2020. The transmission lines in Colombia also with Elecnorte, we put -- we raised some money out of placing bonds in the local market which as markets continue to evolve after our issuance, proved to be a good timing to go to market. The District of Bogota found a different funding mechanism to actually agree with the central government to construct and pay for a new metro line in Bogota, and we did that. They terminated the process, so we are no longer executing and the district has no longer in its plans to sell the percentage stake that they were considering selling. When we look at the subsidiaries, Calidda just completed a 5-year tariff review. One was -- the outcome was positive. The process, despite of all the political turmoil and uncertainties in Peru, the technical body Osinergmin managed a fairly technical process and according to the typical guidelines that they have published, the tariff increased by 9.7% on average, and we will start charging that back since May of 2021, and this we have been very efficient and a lot of people also are connecting new homes to the -- to our system, and we now plan almost to double the expected number of connections by year-end, reaching 210,000 connections, which is a good source of further revenue for the future. And in the near term, it just provides for a high CapEx, but also some increases in the expenses, some of them which are passed through. The Colectora project, which is a cornerstone project in Colombia to connect the nonconventional projects, we have reached 90% of the agreement with the local communities, which is an outstanding achievement, 201 agreements and counting. And with the remaining communities, we are engaged in a positive dialogue. And the ones that we have not been able to is because of internal issues in the communities themselves, it is not something related to our interaction with them, which gives us a good hope to actually finalize all the agreements with the communities to start and infirm the process with the Agencia Nacional de Licencias Ambientales with ANLA. And we managed to get some -- to demonstrate some delays, the cost of some delays and we've got more time from the Ministry of Energy for both Colectora and Refuerzo Suroccidental, which are 2 key projects for us. And on TGI, a lot of good news. We highlight here that the bidirectionality of the gas transportation system in Colombia has now been tested, which means that we can, using TGI, get gas from the North Coast re-gas facility all the way to the center of the country. Next. In terms of performance, you see here the operating income flat. We -- some of the costs and administrative expenses have their corresponding increase also on the revenue side, which is an important element because some of the growth figures for the expenses are relatively high. But I'll say that they are healthy, and we continue managing and have under control the cost base of the company. A 23% increase in rental revenues is something remarkable really, given the maturity of our businesses. And I highlight the Elecnorte contribution of almost COP 40,000 million. The FX effect, which reflects the currency diversification of the company and the contribution from the base operation of 200, which is actually compounded, as I mentioned, from -- by contributions from all segment lines. As I mentioned, the way to look at this relatively high variations on expenses on the top right is better understood if we look at the margins because the macro environment reflects some of the increase in the expenses and also because we are organically connecting more people and that also implies some additional expenditures. On the operating cost, perhaps -- I'm sorry -- no, on the administrative expenses on natural gas transportation, where we have this 40% increase, it's part because we lost dispute with Sur in Peru and had to write off $12 million of income that we were expecting from this company. Next. You see again the 15% increase in EBITDA, how all businesses contribute notably natural gas transmission, which reflects Calidda, for the most part and the energy transmission, which is where we are focusing our growth strategy and is already delivering positive results. 99% of the EBITDA this quarter came from a control entities because of the dividend issue that I mentioned before. And when we look at the EBITDA by business -- by company, the TGI and Calidda plus Contugas contribution still are the most representative of all the businesses we have. Next. In terms of net income for the quarter, here perhaps is highlighting the financial expenses we -- despite having 70% of the total debt in fixed income, we are seeing the indexation and the higher cost of financial expenses due to that indexation. And that is partially compensated by the current tax, which overall reduces by 109, so just growing 9%. When we look at the equity method, that 546, here again, most of the companies are either growing or being relatively stable. In Enel Colombia, that reduction is for the most part associated with the generation business and lower energy prices, spot prices in Colombia as this year has been a fairly rainy year, and the 2 businesses operated by ISA, CTM and REP showing increases, reflecting that our Peruvian overall business position is healthy, not just because of our Calidda situation, but also because of the businesses managed by ISA. Next. Sorry, I'm sorry, then Argo. Here, we show on the equity method, the positive growth from Argo, which is where we are focusing most of our growth efforts and are in the process of closing the announced transaction. Next. So almost $4 billion in debt, 70% of that is fixed. And on the bottom right, we basically have minimum exposure to the high interest environment that we are seeing. The $176 million this year is something fairly manageable for us. And out of it 417 for 2023, the Calidda 320, we have already signed a committed line and have a very -- and we're able to capture very low financial cost for the rollover of that maturity. And on the top right, our net debt-to-EBITDA is 2.9x, which we consider healthy, and it will increase by about 0.3x due to the acquisition of the Brazilian business. We do have a healthy cash position of $350 million at the group level, which again allow us to be quite disconnected, if you want, from the high interest rates that we are seeing both in pesos and in U.S. dollars. We still have leverage capacity and continue to looking to acquisitions, not on the size of the one that we announced in Brazil, but we believe that we have still some capacity to continue growing on the back of that increase in the EBITDA of the group. Next. CapEx was, as I said, was a positive. Organically, we grew our CapEx by 40%, and this is mainly, as I mentioned, Calidda, in which we invested 79 and the transmission business in which we invested 78. This June '21 should be June '22, I apologize for that. And the total was 306. And we see a very healthy balance in our continuous CapEx profile. To highlight here is that these figures do not -- these figures already include the Calidda commitment. As I mentioned, Calidda closed the 5-year credit renewal and that incorporates about $250 million of additional investments in Peru to continue to expand in our network and reaching basically the coverage, the full coverage of the concession area in Lima. In terms of growth opportunities there, we are evaluating expanding, on the proximity of our concession leverage on our infrastructure and be aligned with the President Castillo and Peruvian government overall intent of massification of gas in which we think we can play a role and develop a profitable business there. We are also looking initially from the financial perspective, the Colombian potential re-gas facility. The previous government decided to restart the project in order to develop some resilience in our gas sources, in our gas business, in our gas industry overall. And we are evaluating the terms, we have yet to speak with the new government to see what they think about that additional gas connection point to the world markets. So the CapEx is and will continue being a combination of executing our organic projects plus looking for acquisition that we could execute on a profitable basis. Next. We have -- we conducted a conference call to discuss all the details of our Brazilian acquisition so far, we signed, but in the process of approval. And just to highlight the key elements of that acquisition is that these are assets that do not have demand risk that the environment -- the regulatory environment has been fairly stable and allow us to -- in the tariff reviews -- from the periodic tariff reviews, we just need to incorporate the actual cost expense -- financial expenses of the company and with that, the tariffs are updated. It's a BRL revenue stream, and these 5 concessions are in the Northeast of Brazil, which is fully connected with our ESG strategy on the environmental part because this is the area of Brazil in which more projects are going to be -- more solar and wind projects are going to be developed. And more transmission lines are going to be needed to connect that new electricity with the consumption centers in Rio, in Sao Paulo and in the state of Minas Gerais. And besides that, kind of organic expansion of the system as we move forward. The sale letter of these assets still has 4 more concessions that we think are going to be sold in the near future and being present and having a bigger scale in Brazil will allow us much more flexibility and some synergies to be competitive on a potential divestment of those 4 additional assets that are pointed in the bottom left. Next. And I think the 2 additional elements of that is, in terms of synergies and leveraging on the platform we have, the whole due diligence and investment analysis process with [ REE ] which was previously Red Electrica of Spain, was very constructive and allow us to have much more confidence on the valuation and the assessment of the potential value that we could extract from this company. So we are leveraging on that position that we established. And also, it tested, if you will, our local teams -- and we have a very solid local team with deep expertise and knowledge of the industry in Brazil. And again, that gives us confidence about our ability to capture value from this acquisition. Next. And then these are the $116 million investment in Elecnorte. So we added 138 kilometers. These are 2 lines. In the map, they are shown there on the Guajira department, which, again, helps us or allow us to leverage on the knowledge of this territory, all what we have learned through the Colectora project is going to be useful here, although these assets are already constructed and operating, so we did not incur in these projects. Next. Transmission is the key focus area for us. And here is a very nice picture of how we are adding the geographical footprint and expanding this business. So if we count the operating and nonoperating assets, the ISA ones, our total footprint will be north of 15,000 kilometers. In the last 12 months, big and small, we have added 2,900 kilometers. And from years past efforts dating back to 2015, 2016, we are constructing also about 3,000 -- so about 3,000 kilometers. When all of that is operating, we will have 21,000 kilometers, which is a 37% increase from the current footprint that we have in the electricity transmission business. This is going to be a key part of our financial growth strategy but also the development of the technical capabilities and the synergies that we have to run these assets gives us confidence to being able to operate in a profitable way and in high reliability, which is what the systems and the regulations require from us. And when you look at the different countries, of course, Brazil has a 21% increase; Colombia, 7%; and then also Peru, we have growth, so it is a balanced growth, clearly with emphasis on Brazil. So that's what we had as the overall summary. We like to make it short to allow time for questions that may be more interesting of what we have to say. So I go back to you, Manuela.

Thank you very much, Jorge, I think your screen froze, if you can turn on the camera, I'm turning on again, so we can see you. Thank you, everyone. We have some questions. So I'm going to try to go through them. Remember, in the question-and-answer section in the top right part of your screen, you can ask your questions. Please state your name and the company you represent so we can easily identify you. So I think, Fredy, we need to do -- we need to clarify. As of the second quarter, we had a date of operation of entry into operation for Colectora in 2024. But now that they have been updated for July 2025. That's correct?

That's correct.

Okay. Perfect. So I'll start with you with this question that we have on Colectora to continue on topic. And then I can go through the rest of the question. So this question is from Andres Duarte from Corficolombiana. Can you please explain the effects of delaying the start-up deadline for Colectora taking into account the auctions awarded in 2019 and 2021? He's meaning the effects on the generators on the distributors and on JV as well.

Okay. I would say that we are aware of the problems we will have in the country with this delay, but you have to know that we are doing everything we can to do it as soon as possible. As you could see in our project, we already had the first section of the first part is going to have the license -- environmental license probably this week or probably maybe next week. And then we will start building the substations and the first of the line immediately and putting in operation as soon as possible, probably in the first quarter of 2024. And we will have still 10% of the agreements with communities in the second part of the project. As soon as we got the 100%, we will also start the process of licensing, and we will do everything we can to build it as soon as we can. We will not save any resources and do it as soon -- the date we have today approved by the minister in 2025 is the deadline but we will have to work and we know that we will put every effort to do it sooner than that.

And I would add to that, Manuela, I am praying that the fact that we have managed to reach agreements with more than 200 communities is a very strong demonstration of our ability to engage with the communities. We are living in a new environment here in Colombia with the new government. And we're confident that we can sit down with the new officials and demonstrate that we have been [ liaising ] with communities and have managed to have a very amicable way, and following the strict processes that are required on the Colombian regulation, reach agreement with [Technical Difficulty] having the most benefit for them and for the country as this very critical piece of infrastructure is to be online in order for Colombia to develop the [Technical Difficulty] of the energy transmission that is a top goal of the government. So we are aligned with the government direction. We have done a lot of effort [Audio Gap] communities and because of the relevance of the solar wind projects that are being developed in the Guajira, we think we can collaborate with the new government and move forward this project at the pace that Fredy mentioned or perhaps even faster.

Thank you, Jorge. I have a question for Andres Baracaldo, our VP of Growth here in GEB. I lost it. One second. Yes. So Andres, is GEB planning to acquire power generation businesses of projects in countries where Enel Green Power Colombia is not present?

Okay. We look at opportunities in all the countries in which we are currently present and you know that we are present across the chain. And we look at opportunities on a case-by-case basis and look at the merits of each one. So we do look at all types of opportunities. But I will say that the focus, as Jorge mentioned before, the focus currently is probably not in that segment within the strategy that the group approved a couple of years ago. We are probably going to continue being more focused on transmission rather than generation opportunities. But as I said, we look at every opportunity and look at it on its own merit. So but that probably the focus is not going to be along that space. Manuela, I think I'll take the opportunity to answer #4 because I think there was a question related to Brazil and the EBITDA margin...

Yes, I was going to give you that one. Do you have an EBITDA margin also from Andres Duarte, Andres we thank you for all of your questions today. Do you have an EBITDA margin estimate for the 5 concessions won in Brazil?

Okay. These are normal businesses that have an EBITDA margin close to 90%. In the case of the assets we acquired, it's closer to 91%, 92%, which is just a reflection of the type of businesses it is. And we do expect to have a merger along those lines and probably a little bit higher going forward.

Thank you, Andres. Jorge, what is the accounting effect, if any, of the expiration of the intercompany loan with TGI?

Thank you. So for all of the participants, we have an intercompany loan to TGI of $370 million, which is expiring in December of this year. The announced strategy is to finance that loan by TGI on a stand-alone basis, most likely in the Colombian local market as the company revenues are likely moving to pesos in the near future. It is a minor effect and is associated with deferred tax. It is -- as we made the loan when the exchange rate was much lower. At the time of expiration, we will monetize, if you will, a tax gain on the repayment of that loan and that generates some tax impact, but it's not material at the group level.

Thank you, Jorge. We have a question of someone that didn't give us the name. Are the total cost going to continue having bigger variations related to revenues annually and quarterly in the third quarter and fourth quarter?

Thank you. That's a very good question because we struggle a lot how to explain to you in the best possible way those high variations. And I'd say as a key message, our cost base is under control. We're being very disciplined across businesses and are being able to control costs. There are a lot of one-offs and a lot of macro and network expanding expenses that are reflected in the numbers you are seeing. One of the higher ones is the impact in Calidda, more connections and we're selling more gas and both have a nominal effect on the cost increases. As we move forward and we look -- we try to estimate the end of the year in Calidda, for example, the results are going to be increase in our EBITDA. In fact, we just increased our estimate to close the year in about -- to about $205 million to $210 million of EBITDA in Calidda. So we will continue trying to explain you in the best possible way. There are many moving parts, and there are some one-offs that are reflected in those. I invite to the person who made a question to come back to us if there is any particular explanation that you want. But we have a very disciplined approach and austerity programs that allow me to say that we do not have a cost inflation of material and continued cost inflation in our businesses.

Thank you, Jorge. We have 2 similar questions regarding the gas situation in Colombia. So I will ask both of them, so you can answer them, Jorge. One is from Juan Jose Munoz from BTG Pactual who asked could you update us on the current regulatory situation of the gas transportation sector in Colombia? And have you received any news about the regulation that will adjust resolution 175. And the other one, is there any update with regards to the new gas regulation scheme in Colombia. That one is from Fernan Gonzalez also from BTG.

Okay. Fernan and Jose, we have continued engagement with the CREG to try to delay the Resolution 102, which was the one that actually modified the 175 as we think that these are not the best -- this is not the best timing to try to implement a hedging strategy that TGI has decided. If that resolution will start its application as is written now in September 1. We are engaged with the new government, the Ministry of Mines, the Ministry of Treasury to explain to them that what we consider is bad timing to actually execute hedging policy because financial markets are very volatile, the interest rates are too high and do a hedging for 5 or 6 years in the middle of this volatility as a country is not perhaps the best approach and delaying that is our target. If not, we will implement the hedging strategy. We have advanced conversation with key banks and have a lot of the administrative work needed to do hedging in place. The rest or a key impact of the resolution 175 and 102 is the -- how much is being recognized and paid to the company for the assets that will be 20 years old in the coming years. That only will have impact on TGI starting in 2026, so we expect to continue explaining on demonstrating to the regulator and to the government but perhaps the Resolution 175 went too and assigned too little value under precedent globally actually to have this type of regulation in place.

Thank you, Jorge. That's all the questions we have right now. Let's give us a second to see if anyone wants to post an additional question. I will also ask everyone to give us your feedback -- yes?

Just looking here at some of the questions, the EBITDA margin estimate for the 5 concessions in Brazil.

[Foreign Language] I think I didn't miss anything. I ask everyone if you can provide feedback on this new, having 2 calls, 1 in English and Spanish that will help us a lot to see if it's better and if it's more understandable without the translator. We do have new questions here. So let me see. Sandro Pietro from BNP Paribas, considering potential gas shortage and regulation changes, do you expect TGI to continue contributing the same to EBITDA and revenues in coming years. If so, which strategies will be implemented? [Audio Gap] Jorge, we cannot hear you. [Audio Gap] Maybe Andres can give us his impression?

Is Jorge going to get that one, or?

No, we cannot hear Jorge. So maybe if you can help us, so I can answer as well.

No, I think from our side, and you correct me if I'm mistaken, but we expect relative stable contribution from TGI. I mean we know that there are some questions regarding where the long-term gas is going to come, but we think that the opportunity that Colombia has is that there are certain potential sources for that gas. We are -- I mean, as you know, we are in the midstream. So we are not directly involved in some of those discussions regarding the offstream, but what we think is good about Colombia is we have different sources. So we have the offshore that we all are aware of. There has been some discussion about potentially importing through [Technical Difficulty] or from Venezuela. And there's, of course, all the onshore exploration that has been going on. And what we hear from the new government is that the current exploration contracts are going to be kept. And therefore, that gas should come to market at some point in time. So we are not particularly worried about that in the -- for the short and medium term. So we will expect TGI to contribute a similar share to what it has been contributing to the group. In the past, obviously, we have to keep an eye on regulation developments and tariff reviews, but for the time being, that's our expectation.

Thank you, Andres, I will add that Colombia has about 8 years of [indiscernible] resource at the moment for gas. So that to complement your clear answer. Thank you, Andres. And we have a question from Fernan Gonzales, sorry, Fernan from BTG Pactual. What are your first impressions of the new Energy and Mines Minister? Jorge, are you back? Jorge? Okay. Fernan, I will say that question, we have to wait and see as a little bit. We hope for the best in the regulation system in Colombia, and we hope for the best for the new Ministry -- Minister. But I think we have to wait a little bit more and see how it develops in Colombia, especially understanding that the gas is absolutely important and absolutely mandatory as a fuel for the transition in Colombia, and we are expecting there to see what happens. I don't think we have -- we have Jorge back. So that's it for questions. Thank you very much, everyone, at 9:15. Sorry, we have another one from Fernan Gonzales. Fernan is asking about the taxes. Do you foresee any impact from the tax reform and, in particular, from carbon taxes. Jorge, are you back? I can read the question again to you. From Fernan Gonzalez, do you foresee any impact from the tax reform and, in particular, from carbon taxes?

Manuela what else is there? Obviously Jorge is having problems with the connection. I would love to answer that one, but I don't know the precise answer to that. And so I don't want to make up a number here, an impact. But I'll suggest that we don't -- why don't we reply to them with an e-mail or with some other form of communication to those questions because I think Jorge is having trouble.

Yes, Andres. I will contact Fernan personally later and answer that question. We are still reviewing the tax reform. The tax reform is still the first draft, so we might see a lot of changes underway as it usually happens, but we continue to monitor the changes there, and I will contact Fernan directly to answer that question. So thank you, everyone. We will have the version of this call at 9:15 in Colombian timing in Spanish. We will upload this recording into our web page, and we hope you contact us for any question that was left unanswered or that you may have. Thank you very much. Thank you, Andres. Thank you, Fredy. Thank you, Jorge, if you can hear us, and let's hope to see everyone soon.

Thank you, everyone. Thank you.

Thank you.