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 third quarter results call. This conference is being recorded, and the presentation we will 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 you. Now let me introduce you to Jorge Tabares, our CFO, who will lead the call today. Jorge, good morning.

Thank you, Manuela. Hi, everybody. Thanks for the interest and the participation in our call. We can move to the next page, please. So the 4 items typically that we will cover are listed here. As a key message, I will emphasize that the results of the quarter and the cumulative results over the 9 months are quite positive and are a result of the diversification of the portfolio and the industries in which we participate, which are all quite resilient and are demonstrating significant growth over the last few months, and we are able to deliver positive financial results on the back of that, mainly higher volumes, higher quantities consumed by the clients across the portfolio. Go to the next page, please. In terms of recent relevant information, a few of the companies have received recently. I've not seen it yet [Technical Difficulty] in terms of the snapshot. On the left, we see an EBITDA. These figures are in COP 1,000 million. We call billions here in Colombia, different from the U.S. billions, COP 824 million during the quarter, and that is a 26% increase over the previous quarter. If we normalize in the quarter of last year, we received an extraordinary dividend from Enel of COP 529,000 million which was the last dividend that we were receiving from Enel after the agreement with the partner in terms of dividend payout of cumulative dividends of the previous 5 years. So 26% normalized growth is a key highlight of the quarterly results. And you see all the business segments show increased and positive contribution of EBITDA. In terms of geography, 60% came from Colombia with a 26% growth and the region delivered 40% with 27% growth. The net debt-to-EBITDA in the middle of 3.3% is higher than the previous one, mainly because of -- not so much because of new credit, but mainly because of the conversion of U.S. debt to pesos. We did take some new debt, but the most significant part of the increase to 3.3% is associated with the re-expression of U.S.-denominated debt. We still consider that 3.3% is a comfortable level and allow us to continue growing, and we will see in the next quarter the impact of the additional debt that we are taking to fund the Brazilian acquisition. Both the ROE and ROI are at a healthy level, lower than the previous quarter of last year, mainly associated with the additional equity created by the merger of the Enel entities, again, associated with the agreement with our partner. In the bottom, we see very healthy growth across the metrics. And the net income from the control entities stayed at COP 754,000 million with a 6.2% increase. And finally, on the CapEx, on the bottom right, USD 104 million, a 29% increase. We are gaining pace in our organic infrastructure projects, and that is reflected here in this growth. We wanted to show here on the far right, go back, please. Key drivers that support the positive financial results over the quarter, we saw a 14% depreciation of the peso. And both the international PPI and Colombian PPI are a very high rate, which are captured in a few of our businesses in terms of the indexation. Go to next. We saw updates and confirmation of ratings, not just in GEB, but also in TGI and in Calidda, quite comfortable about the support of the rating we have. We are 1.5 notch or 2 notches above the sovereign in Colombia, and we have 1 notch over investment grade, which we feel is the optimal level in the long term. We had an initiative from the government in the middle to reduce tariffs. This is associated and have more information later, but associated with those high PPIs that I mentioned, the tariffs in Colombia are associated with that and what the government suggested was as a voluntary action from the industry players to deflate by the PPI and then index again through CPI, which has been a lot much lower in the last 2 years. And 2 of the companies agreed to do that. Our transmission business, as you see in the bottom in the middle and Enel decided also to participate in that. This is on the back of very high increase in tariffs that we have seen in Colombia, more than 40%, in some cases, more than 50% in general, in Colombia over the last 12 months. And we consider both companies, our transmission business Enel consider that the -- it was positive to provide a relief to the final clients. The financial impact is moderate and it's a onetime impact for 12 months. On the top right, you see our -- we have been making progress in our acquisition in Brazil. Basically, our financial -- all approvals have been secured by Brookfield, the seller, and we expect closing of that transaction by the end of November. We're getting the final approvals for our borrowing in order to pay for that acquisition. Finally, TGI on the bottom left, completed a repurchase of part of the bonds that are due in 2028 with an initial target of $150 million. We reached $156 million in very positive financial conditions for the company, but most importantly as a key tool to manage exchange rate risk if the correct resolution that moves the income from pesos to -- from dollar to pesos at TGI, if that is actually at the end confirmed, which is an ongoing process. This action will reduce significantly the cost of hedging for the company. Next, the markets in which we operate are growing at a very healthy rate and very consistently. You see the different quarters for the last 3 years, both in Colombia and gas demand in Colombia and electricity demand growing at 4.8% year-to-date over the 9 months. And that, as I mentioned before, has helped us in our quantities sold to customers and is shown in the positive financial results we're showing. The same situation has occurred in Peru, most importantly, in gas demand, which Calidda has been able to capture some of it, growing year-to-date at 12%, again, very healthy growth rate in Peru, but we'll see in the results later. So move to the next one, please. In terms of operating income, most of the increase is organic. Some of it is reflected in higher gas volumes, which we have been able to deliver. The 28% increase, this is quarter-over-quarter in our operational income, mainly associated with the revenues for COP 436,000 million. Some of the cost we are seeing are -- the cost increase are a combination of higher inflation and most higher activity, like Calidda has many more clients than previous quarter. This is more than 300,000 more clients than in the previous quarter and many more kilometers of gas to maintain -- of gas distribution lines to maintain, and that is reflected in the additional cost that we are seeing, but the margins are being protected and sustained. We are seeing also if you look at the revenues on the bottom left, this 31% also captures -- start to capture Elecnorte, which is the transmission business we acquired in Colombia, and we're starting to capture those benefits. The FX effect is the main impact overall of the increase, and that is a reflection of the diversification of the portfolio and the U.S. dollar currency that we have in some of our operations, mainly Calidda and currently TGI. When you see the different business like the different blocks of the 2 bars, all of our businesses are contributing. So diversification and all businesses delivering higher revenue and higher margins also. Looking at the administrative expenses, we have a slight increase of 7% and I say slight because the inflation levels we are seeing in our countries of operation are much higher than that. I highlight that Brazil is the -- from the 3 main countries in which we operate is the one that's most advance in the control of the inflation. We're seeing inflation in IPCA in Brazil that are half of what they were at the peak. And that's because their Central Bank took actions very early on when we started seeing signals -- when they started seeing signals of inflation in the economy. And in the operational costs, again, some of the increase, and especially in the natural gas distribution, which is a significant increase of 35%, I have to say is we are in a controlled cost environment, but the higher number of clients and the most bigger operation because of the growth in connections, we have been able to deliver in Calidda over the last few quarters is reflected here in that cost increase. Next, the EBITDA is showing very positive results. I highlighted a 26%, an increase of COP 173,000 million and you see here the normalization of COP 529,000 million, the red block to compare the previous quarter to this quarter. And when you look at the 4 businesses, natural gas, both transportation and distribution are the highest contributor to the increase on our EBITDA. The reported numbers are going to show COP 355,000 million lower with a 30% increase, but that's a normalized and nonrecurrent figure. The recurring figure is COP 824,000 million and compares to COP 651,000 million. And when you look at the EBITDA by business on the bottom right, you see also double-digit and much higher than that increases across business lines, very healthy EBITDA figures in a quarter that we did not receive dividends from noncontrolled entities. Next. The net income and the 6% increase in the net income is affected by the additional financial expenses. We're seeing an increase in financial expenses of about 50%, and that's despite having around 70% of our debt portfolio at a fixed rate. The few remaining debt portion, its costs are increased by the higher CPI in Colombia. And that is impacting this minus COP 288,000 million and the 64% increase in the financial expenses. We are not expecting to have a significant impact on the current high interest rate environment as we are to a great extent or have to a great extent, very moderate maturities over the next 2 years, and in fact, the higher one we have already secured the financing. So this financial -- this increase in financial expenses is something that we do not see growing further in the future. And the second biggest block of this increase in our net income is the equity method in the middle of COP 571 million. And though the composition of that is explained in the bottom of the chart. A healthy growth at Enel with 5.4%, that's by far the biggest contributor to our equity method and all companies showing an increase except Argo. In Argo, the reduction is due to the -- as I was mentioning before, the control of the inflation in Brazil because of the accounting rules, the concession is valued as a financial asset and when the CPI, which is the key factor that indexed the revenue of the company is lower those revenues. Those revenue projections are lower, and it goes to the P&L. Unfortunately, it shows some volatility in the P&L. It does not have an impact on cash, that reduction of the COP 41 million in the Argo during the quarter. We do have the -- in the others, a minor impact in Gebbras also, but that is reflected on a monthly basis -- on a biannual basis as opposed to Argo, which does it in a monthly basis. All other businesses are showing a higher contribution. So those are the 2 main blocks that explain this 6% increase in our net income. We can move to the next one. The debt composition, as I was mentioning, $3.9 billion. These figures are in U.S. dollars, $3.9 billion of total debt portfolio, 71% fixed and 11% indexed to the CPI and 16% indexed to LIBOR. Those 2 are the ones that are impacting the higher interest cost. Our net debt to EBITDA, as I mentioned, 3.3x, which we think is healthy and we have a cash position at the end of the quarter of $432 million. Showing here the next few years maturities, basically 2023. The biggest maturity is the $320 million at Calidda, which we already financed. So we need to start working on the '24 maturities, which mainly we have a GEB syndicated loan, which is now at $319 million after some repayment and the Contugas GEB guaranteed $355 million. Again, those 2 maturities are 2024. And here, we show the lower maturity at 2028 with $594 million, which is the remaining outstanding of the TGI bond after the tender offer that we executed during October. Next. We keep a healthy organic CapEx pace in the -- through September, we have invested $408 million. The organic piece, which is all the color blocks except the [ $113 million ], which is the white one, is growing at 33%. And mainly, that's associated with our Colombian transmission business, which we have -- we are making good progress on many of the projects we are executing after an initial relatively long period of permitting now we are putting powers on the ground and connecting cable to each. And we maintained also at our Calidda operation relatively fast pace of investment that we expect to finalize over the next couple of years with the current investment plans we have in Calidda. Our transmission business is the one that extends further out even to 2026. And all of those investments are going to help the country reliability and are going to help the development of nonrenewable energy generation delivery to market. So it's a portfolio that supports the energy transition in Colombia in a very big way. And as shown in the next 5 years, the projection is $2 billion in our -- in our organic CapEx program. As I mentioned before, the profitability indicators here, we're showing in the last 12 months, in the previous one we were showing in the quarter. And we are -- the reduction that we are seeing from 15.5% to 9.8%, again, is not a reflection of the profitability of the business. But instead is the nominator as the equity increased in a significant manner, COP 1.8 billion due to the merger of the different companies in the Enel Group -- in the Enel Colombia Group. Next. I mentioned some of it in our -- in the introduction because this was a topic that was a lot in the news, at least in Colombia. I think the most important thing to keep in mind is the chart on the bottom left, there was a historical dislocation, a very significant historical dislocation between PPI and CPI, and that was reflected in the final tariffs and the utility bills to the clients on the electricity sector. We think that the solution that the government proposed was a technically sound solution. It was voluntary and the bilateral agreements had to be agreed between parties without intervention from the government. Most of the players agreed to do that, no retroactivity and on a 12-month period have that relief to clients. Transmission and Enel decided to do that. And in 2022, we have -- we expect a very low impact in 2023. This [ COP 400 billion ] in Enel is growth of 100% the Enel Colombia operation. The impact on us is more slower as you have to apply dividend payout and then our 42.5%. So it's basically immaterial the impact that we will be seeing here over the next year, year and a half. Next. So again, very solid operating results, not just the macroeconomic environment, but also diversification has helped us deliver positive results and margins. Most of it is organic, although we are seeing an initial impact of our Elecnorte acquisition. We maintain a very significant cost discipline, having a moderate impact on the significant increases in the interest environment, both internationally and Colombia and the tariff actions from the CREG had another impact on the group. With that, we'll open to questions, Manuela. And we have a few, as we mentioned in the presenters, a few of the vice presidents of the group available to support us in answering questions.

Thank you, Jorge. We do have one first question from Andrew McCarthy from CrediCorp Capital. He says, what impacts are you seeing from the latest proposal for the Colombian tax reform on your operations? Do you expect any impact on future investment decisions in your Colombian businesses?

I'll say the tax reform in Colombia was a big tax reform for the Colombian standards, perhaps twice what an average tax reform will be. The industry -- the energy industries has very minimal impact. The tax reform has very minimal impact on our business. The main impact of the reform is in individuals and a slight impact on our shareholders, if they will trade -- if they were to trade big blocks of shares but to a great extent the tax reform has moderate impact. There is one item that is still being debated and analyzed because it's not clear, which is in Colombia, it's called [Foreign Language], which is like a normalized tax rate or an adjusted tax rate that was stated at 15% in the reform. Our and our advisors' initial view is that does not have an impact on the group. That will be like a minimum tax rate stated for companies. We don't think it will have an impact, but we're still discussing it and analyzing it. There is a 5% -- 10% to 15% increase in what is called occasional earnings or nonrecurring earnings. If we were to sell assets, that could have an impact, but again, it's not material. And then the one item that targets the industry view will is in the hydro sector in which a 3% tax -- overtax was defined by the reform. So basically moving from 38% to -- from 35% to 38%. It will be applied to companies whose majority business is electricity generation to hydro. Probably it will not apply to our Enel business as written in the tax reform. So overall, the impact is moderate. And I will say perhaps the biggest impact will be in the overall economy dynamism and if the growth and investment pace of the economy goes down because of the reform, especially in the hydrocarbons and mining sectors, that could have an impact on the consumption on the quantities of probably say electricity and gas. So it's a secondary order due to the macro impact of the -- of the reform. In terms of investments, we are still willing to invest. We think that the environment is still prone to invest. And the most -- so the tax reform does not have changed that significantly or materially -- and the most important aspect perhaps to inform our investment decisions is the ability to actually do the projects and all the permitting and all the rules that you have to comply with before starting to put infrastructure in place.

We have another question from Andres Duarte from Corporacion Colombiana. And he wants to know what are you projecting in terms of credit metrics once you fund the CapEx expected in Brazil with more credit?

Yes, Andre. So we are in the final stages of approval of $509 million loan to GEB, that we will be used to capitalize the Brazilian entities that will be the acquirers of the Quantum assets. We expect the final metrics to be around 4x net debt to EBITDA, which is the key ones that we monitor in the 4x range and that's a level that we consider healthy.

I have a question about regulation and it's from Andrew McCarthy. What will happen to the electricity tariffs after [ October 23 ]. In the different segments, will they rewrite to the levels they have being without the adoption of the new CREG resolution? Do you want to answer that? Or do you want us to?

It is a good question. I can answer -- it is a good question, Andrew. The -- what we are putting in our budgets is going back to the kind of starting to apply from that point forward, the existing regulations. So we are not speculating if that could change or not. But I mentioned it's a good question because if that assumption is implemented, we perhaps will see a jump in the bills, in the utility bills at that point around the fourth quarter of next year. So if that's going to happen or not is yet to be seen. What the government has said, the Ministry of Mines up said and a lot of -- the industry is working along with the government is to define what will be a good index to use. So PPI has been used for a long time, and this is because the electricity distributors have decided that they were -- it was preferable to them to buy electricity index to PPI rather than CPI. What is being worked out is an industry index that perhaps reflects better the cost of the industry. And in that case, you have kind of 2 different types of operations. When you're building an asset, you are impacted by PPI and definitely that will need to be incorporated if it were to be done properly. But for long life assets that were built years ago, a reflection of the actual operating environment cost is perhaps a good technical solution. It had to be defined. And once it's found, then most likely the application of that new index will be enacted after the 12 months period of the tariff agreements that we mentioned ends.

Thank you, Jorge. We have another question from Andres Duarte from Corporacion Colombiana. We have actually 3 more questions from him. I'll go one by one. Please explain the expected accounting movements related to changing the capacity revenue to pesos in TGI, asset valuation date and exchange rate used, et cetera?

I see on this list of people [ Beatrice ]. I don't know if Beatrice is on, or I can answer.

[indiscernible]

Okay. So there are many different scenarios, Andres because we have been engaged with the CREG for more than a year now in terms of what is done. So I think it's -- the reality is that we call it specification, that conversion to pesos will not be in place by the end of the year. So the earliest we have as an estimate now is January. Now they -- a lot of people in the government and in the CREG acknowledges that this is perhaps the worst time that you can identify to make such a change because hedges are expensive because interest rates are very high because the exchange rate in Colombia is at a very high point. So a full consideration is being given to the timing and the appropriateness of this timing to move the company from pesos to dollars. There are many different impacts. So one, which is uncertain, okay, the current asset base, that U.S. dollar needs to be converted on exchange rate. So the resolution 175 states that, that needed to be the exchange rate at December of 2021. Well, now we have 1 year and about COP 800 of depreciation of the currency. And so the CREG will need to decide what will be the exchange rate at which the assets will be converted. So that's one aspect. And then once you are there, again, once you're making such a movement, what regulatory rate of that asset base will you apply and if you incorporate the recent market changes or if you apply the one that has been approved by the CREG. We believe I think we'll need to listen to the question again to make sure that I answer everything, but the solution that we consider most likely, this is a speculation on our side is a judgment is that perhaps the solution is a hybrid solution, which is not 100% copy denominated, but a combination of U.S. and copy denominated as some of them, clearly, some of the investments are U.S. dollar-based because Colombia industrial capacity and industrial base does not provide all the equipment that we need to develop infrastructure. Can you repeat the question, Manuela, to make sure that I answer everything?

I think you did, Jorge. We are okay. Let's go to, again, Andres Duarte. Can you please tell us GEB's main expected operations or transactions involving the capital markets in 2023? It's a rocky year. So can you answer that one?

Repeat the first part, please?

Can you please tell us our main expected transactions in capital markets in next year?

So we -- as you saw, we have very low maturities. So basically, maturities in terms of debt rollovers are covered already. If we do transactions, it will be associated with anticipation of rollovers of 2024, which with the current market conditions, you probably will say that is not necessarily a good idea to do it prematurely. And if we acquire any other asset, we will need funding for that. But at this point, we're not looking at any other assets we're focused very, very highly on closing the Quantum acquisition and then the integration of that company into the Argo assets and execute a successful transaction post-closing. So the current view is that just because of CapEx, we may need $200 million to $300 million. Our main tool we're looking at is that we have some companies in the portfolio that have some cash and some other companies that have intercompany loans from us. So we're going to try to optimize the internal funding and the internal cash within the group in order quite frankly, to minimize going to the capital markets because of the complex conditions that everybody has a view, but we do not think it's going to get much better throughout next year.

Can you please discriminate the net foreign exchange expense in the P&L between debt and other?

Discriminate them?

Foreign exchange expense in the P&L between debt and other?

I don't have an immediate answer to that, Andres.

I think in the word we produce, I think we have that number. If not, Andres, we can contact you later and see what we can give you that is public information. We have another question from Sebastian Gallego from Ashmore. Congrats on the 3 quarter results, some questions on year end. First, can you provide an initial outlook and guidance for key segments for 2023? If you want to go back one by one, Jorge, so if you want to answer that one, the next one perhaps is for Andres.

We are seeing the economy still has momentum in both our 2 key countries clearly are Colombia and Peru, and we see good momentum of the economies. The Peruvian political situation is very disorganized and chaotic, but the economy keeps going, and we are seeing a positive environment in Peru. In Colombia, we're more uncertain. That is mainly because there are like 4 additional structural reforms that are being presented by the government. And what happens with those and what impact will cost into the investment climate and the economy is a huge uncertainty. And that comes in the back of public finances that need to access markets and that will be impacted by the different difficult market conditions that exist in the market globally today. We're still working through it, so I don't have a final view because the budgets are being in place. I know that the budgets in Peru that we are seeing are quite positive but the main key budgets are yet to be approved. So the key there will be the uncertainty and how that could impact demand or not. So far, we are seeing very moderate signals of negative impact. The economy is still -- the consumption is still very, very healthy. The dynamics of the economy is -- in Colombia is quite positive. We'll see what the impact of the high interest rates for everybody, companies, individuals and government and investment decisions and how that could be impacted by the reforms that are being taken by the government. They are too early to say.

Thank you, Jorge. This question is for Andres Baracaldo. If you could please discuss the potential M&A opportunities in 2023 after recent months?

I guess I'll give you the politically correct answer, which I think is the only one that we can give you, which is to say that we continue exploring opportunities. Obviously, Brazil continues to be a market of interest in transmission. There is a significant set of projects that are going to be auctioned next year in June and December. And we are having a look at our potential participation in those. And obviously, Colombia and Peru, as Jorge mentioned, are key markets for us. So if there are any assets that come to market in those 2 countries, we'll have a look at it. So obviously, we cannot give you the specifics as to which opportunities we may be looking at. But we'll continue monitoring and we'll see where the macroenvironment lands next year, and -- but we continue to believe that we have capacity and we continue to explore potential opportunities that will be due in form to the market if they come to fruition.

The industry is offering many -- the energy transition is our business. So it offers a lot of opportunities across the board. And the positive financial results give us some possibilities to access those opportunities if they arise.

And the last question from Sebastian Gallego from Ashmore. Could you talk about any progress on how the new government in Colombia is starting permits and licenses compared to the previous government.

I think it's too early to say, really. There is -- the government is, yes, for the people were disappointed a lot of changes, of course, and a lot of different profiles of people appointed. Some of the narrative is complex because from the President down, a lot of emphasis is put on the individuals and the regions and the people in living in the areas in which projects need to be developed but that comes in the back of a very strict environment in Colombia for permitting. So when you hear that and you contrast that with the extensive regulation and permitting process, you could say that we are in good shape. We are delivering on the -- taking into consideration involving the locals in every project we do. The key challenge for the country overall is that if that pendulum moves further out in terms of complexity of the permitting process, then you start getting into the risk of not having projects and not having electricity or not having reliable transmission systems. And that balance is a very delicate balance. I don't know if Fredy Zuleta, which handles this day in and day out has anything to add in terms of signals that we have seen from the government.

Now actually, we don't see many differences in the periods of time to approve for licenses or permissions. Everything is continuing doing to the relative well time. We have more like communities asking for things like Jorge said but in the -- it has to do with the government, we don't have any we don't see any difference in times, in periods and approvals.

Thank you, everyone. We do not have any more questions. However, if you think about a new question, you can always contact us at [email protected]. We welcome your questions anytime and please don't hesitate to contact us. And thank you very much for your participation. Jorge, do you want to say something on the -- to close the call, and we thank all of the speakers as well for answering the questions.

No. Thank you. We're happy with the results, and we continue having a significant cost discipline and exploring opportunity in this industry that is offering plenty of opportunities. Thank you.