Interconexión Eléctrica S.A. E.S.P. (ISA) Earnings Call Transcript & Summary

Good morning to everyone. Welcome to the presentation of results for the second quarter of ISA Group. We have with us today, Bernardo Vargas Gibsone, ISA's CEO; Carolina Botero Londono, Chief Financial Officer; and Cesar Ramirez Rojas, Chief Energy Transmission Officer. My name is Gloria Cecilia Velasquez Trujillo, Investor Relations Specialist. This event is broadcasted in Spanish with simultaneous interpretation in English. The question-and-answer session will take place at the end. [Operator Instructions] One last thing to inform is the platform. There will be a survey available about the information regarding ISA ESG. So we ask that you please help us out by taking the survey. To begin, I will give the floor to Bernardo, who will present the relevant events of the quarter.

Good morning to everybody. Thank you, Gloria. Very happy to have you today in this meeting for the second quarter of 2021. Please, let's go to Slide #3, where we're going to present relevant issues about what we call ESG, which is environmental, social and corporate governance issues. The first point that I would like to highlight here is that in June, we held an extraordinary general Shareholders meeting, where Mrs. Rudy Paula Ortiz was appointed as representative of Empresas Publicas de Medellin on ISA's Boards of Director. Following this appointment, the number of the independent members of the Board of Directors continued being 7 out of 9, 77.8%, and female representation increases from 11% to 22%. Dr. Ortiz has a very important career in topics related to the business of this group and is a person that has expertise and knowledge that is going to help us to continue, going ahead, all the business that we have under our 2030 strategy. We welcome her, and she's been very active participating in the Board meetings. Also during this period, for the full year in a row, ISA was included on the FTSE4Good Index from the London stock market, for complying with the ethical requirements of the stock market as well as global corporate responsibility standards. The third point that I would like to highlight here is that company was selected in this quarter as well as one of the 5 best companies in best Private Social Investment practices in Colombia, and it was highlighted for having the best social and environmental investment strategy in Colombia. We were part of the 5 big companies. We have 138 of Colombia's largest companies, whose revenues represent 17% of the Colombia's GDP. Also, during this quarter that we are highlighting here, our first tax project was delivered, and it was the public water supply system for the Viejo community in the northern part of Colombia. We are very, very happy about the impact this project generates. This has to do with a deep well to get water, purify it and deliver it in tanks. That allows the families that used to walk hours and hours, now they don't have to walk -- only max 1 hour to be able to reach water. From the main well, we're spreading right from water supply that benefits, about 7,800 inhabitants on 81 Viejo communities in a rural area, in La Guajira. In this quarter also, had to strengthen the educational capabilities and generate transformations in a field that was very important in the territories where we have an influence. ISA INTERCHILE, our affiliate, launched the program Conexiones para El Desarrollo development connections, which will strengthen educational capabilities in communities that are in need of them. Another important event of this affiliate, INTERCHILE, has to do with the placement in the market of the first green -- structured green bond for $1.2 billion. And the objective was to refinance the debt obligations acquired due to construction of the Cardones-Polpaico transmission line. As you know, it was a key infrastructure where Piniella President says that is the most important structure in the last few years in Chile. Because what it does is that actually promotes clean energy, nonconventional energies from the North of Chile and connects this energy with urban zones at the South and center of Chile. And in this way, we contribute with the decarbonization process and mitigation of climate change. This financial milestone represents this largest placement of this type of bond. It's very important because it's the largest placement of these type of bonds in Latin America and the Caribbean. We also want to share with you the recognition, the award given to us by the global publication, Institutional Investor magazine during this period. We are very proud because this publication acknowledges us and values our assertive management in niches related to 2030 strategy, which has to do with the creation of sustainable value. In the 2021 ranking, ISA reached second place with the most honorable companies in the country, a distinguishment granted after evaluating 7 categories. And also, we ranked third at the regional level in the energy sector in the categories of Best Company in Environmental, Social and Corporate Governance Management and Best Crisis Management in the midst of COVID-19, pursuant to the concepts delivered by site community. This gives us a lot of satisfaction because when we are told that we are one of the best in Latin America for the management of the crisis of COVID-19, these highlights all the efforts that we did from crisis committees and all the direct support that we were able to provide to communities that needed this, including hospitals, including technology, including innovation to defend from this pandemic. Last but not least, I would like to share with you a development that ISA just launched, that is a session dedicated to ESG in our website -- in our corporate website in the Investors section. So we invite you to visit this new section, ESG, and that you benefit from it based on the information that it has, but also to give us any observations that would help us improve it better. So let's go now to the next slide, which is #4, where we're going to talk about investments in projects. During the second quarter 2021 we invested COP 771 billion, totaling in June, COP 1.9 trillion. Including the acquisition of 100% of PBT shares that took place last year at the end of the year, but it was finally materialized in this quarter for about COP 1 trillion. The remaining investments were focused on advancing in electric power transmission projects in Peru, Colombia and Chile. This year, we maintain our sustainable growth dynamic. We began operations in the Northwestern Interconnection project, which will represent -- it's one of the most relevant infrastructure of high-voltage that has been developed in Colombia in the history. These projects represent close to $42 million in annual revenues. And as you know, is the one that allows to evacuate the energy that is going to be generated at Ituango towards all the country. The North Wind Interconexión project has 3 branches; one that starts from the hydroelectric towards the north, so Cerro Matoso substation that would help to strengthen the Caribbean Coast grid. There is a second branch that goes to the [indiscernible] substation. That is going to be called then the [indiscernible] substation. And probably you realized, we carry 7 transformer of the biggest ones that have been actually carried out through the Colombian roads. And that forces not only to strengthen overpasses and roads and to go through small villages with these gigantic machines did in past, but we were able to move them in the times that we had approved by the ministry. And -- but excellent success. In this project, also, we started environmental and social initiatives during its construction that reached COP 250 billion. The third branch led the hydroelectric and goes to the West of the country to the [indiscernible] substation and the Sogamoso substation in the [indiscernible] going towards the east, or the Colombian geography. So as you see, is a project that makes us feel very proud, is high engineering project, and is a project that is going to contribute a lot to provide reliable electricity to millions of Colombians. Also during this quarter, ISA obtained The Energy Mining Planning Unit awarded a project to ISA for Carrieles 200 kV and associated transmission lines located in the Department of Antioquia. Let's go now to Slide #5, please. In this slide, we're going to present a summary of the financial performance, then Carolina is going to describe in detail. But I want to comment about the financial results of this quarter, that as you can see, it continue ratifying that positive path of growth reprofitability that we are committed in this Group, and confirms that even though the difficult times, this group is a group that deliver results to shareholders, to stakeholders, and it's committed towards a permanent discipline work of world-class collaborators in providing the results that we present today. In this period, we have EBITDA and net income that when we compare with the same period, grow significantly. Results also show the efficiency and profitability of the group in that message that we will present to you, that is return ROE. That is very important levels, close to 16%. Now I would like to give the floor to Carolina for her to continue explaining into detail these financial details. Go ahead, Carolina.

Bernardo, thanks a lot, and good morning to everybody. I'm very happy to be with you, once again to tell you about the excellent results of our group. And especially, I'm very happy because today is the first time in many times that I'm doing these presentations from my office. So that's a big motive of acceleration. Let's go to Slide #7, please. As Bernardo mentioned, ISA results were very positive. Let me break down these figures a little further so that we may understand ISA's operation in its true dimension. In both the second quarter of 2020 as well as 2021 second quarter, there were 2 significant extraordinary events that positively impacted our results. We will summarize these events to visualize the company's operating result and to compare these 2 periods. And you're going to remember them, for sure. In June 2020, we had the periodic tariff review at RBSE adjustment at ISA CTEEP, especially the recognition of the Ke over the Ke. And in 2021, the recognition of Ke over the Ke, and the reprofiling of the RBSE financial component. So as we can see on this slide, we discount these extraordinary event, the variation in results compared to the same quarter of the previous year increased significantly. For instance, revenues rose by 28.9%, EBITDA by 40.8% and net income by 34.4%. Let's go now to the next slide to explain this into more detail. During the second quarter of 2021, operating revenues were COP 2.8 trillion that correspond represent 6% more than the same period of 2020. Excluding the extraordinary effects about mentioned, the result is COP 2.5 trillion in revenues, representing an increase of 28.9%. And this is explained by several factors. We're going to look at the main ones. #1 is the consolidation of all the operations that we purchased. We have ORAZUL, as of the third quarter of 2020. RUTA COSTERA concession as of the fourth quarter of 2020, and PBTE as of March 2021. Secondly, the entry into operation of new transmission projects at the end of 2020, such as Copey-Cuestecitas and CopeyFundación, and the second transforming in the Ocaña substation, this in Colombia. Now in Peru, we also have the expansion 20 and Moquegua - Papujune Connection in Peru, as I mentioned already. And the second bank of the Cardones, Maitencillo and Pan de Azúcar Substation in Chile. The third factor was the inflationary adjustment in ISA CTEEP and its companies and the updating of the contract asset in accordance with CVM's pronouncement that was given at the end of December 2020. And finally, and very importantly, the 5.5% increase in telecommunications revenues as a result of a strong marketing strategy, which allowed us to take advantage of the increase in Internet use in Colombia, Peru, Chile and Brazil, to attract new customers. It's been a very effective strategy. So now in revenues as of June totaled COP 5.2 trillion. And excluding, again, these extraordinary events, revenues amounted to COP 4.9 trillion, 21.4% higher than in the same period previous year. Let's go to next slide, please. EBITDA for the second quarter, excluding the aforementioned extraordinary events reached COP 1.6 trillion, and this represents an increase of 40.8% when compared to the same period of previous year. On the accumulated basis, we had an EBITDA of COP 3.4 trillion that when we exclude these extraordinary events, we reached COP 3.1 trillion, representing a 27% growth. In addition to the aforementioned events regarding revenues, it's important to highlight here that the EBITDA performance was also a consequence of an efficient management and strict control of AOM expenses, which grew by 4.5%, much lower than the 80.2% growth in revenues. For the first 6 months, the EBITDA margin was 65.6% and 77.6%, when we exclude construction. Let's go to Slide #10, please. Accumulated income as of June 2021 totaled COP 1.1 trillion, and this represents an increase of 17.8% over the same period of previous year. So we're going to explain this behavior in 2 parts. One, what is higher than the EBITDA; and 2, which is below the EBITDA. So let's start explaining about EBITDA. The main reasons for this growth were higher construction revenues due to the increase of this activity in Brazil, Chile, Colombia and Peru and the application of the construction margin in ISA CTEEP and its companies. Once again, according to proposal of the commission, the Valores Mobiliários de Brasil, Security and Exchange Commission of Brazil, CVM, added to the extraordinary events I already mentioned, and which are recorded in operating revenues. Now below EBITDA, we have: number one, higher results of the jointly controlled companies as a result of higher IGPM and IPCA in Brazil and the restatement of contract assets due to the application of the CVM's pronouncement. And also we have net financial expenses increased by high -- by certainly high interest expenses due to the consolidation of Costera, Orazul and PBTE; second, because of the higher inflationary indices in Chile and Brazil that were already mentioned. And thirdly, because a higher expense from exchange differences. Net income for the second quarter was COP 585 billion, which represents a growth of 6.4% compared with the same period of 2020 and is explained by the same reasons that we mentioned for the accumulated amount. The accumulated net margin reached 21% and for the second quarter, 20.6%. Let's go now to Slide 11, please, to talk about our financial indicators. This continue showing the strength of our business. For example, as Bernardo already mentioned, ROE as of June reached 16%, which reaffirms our commitment to grow, but grow profitably to be able to generate sustainable volume for our shareholders. As we mentioned, the operating EBITDA margin, this is excluding construction, was 79.6%, reflecting a financial strategy focused on the permanent profitability of our operations. Moreover, the debt-to-EBITDA ratio was 3.8x, remaining stable when compared to the ratio for the second quarter of 2020. This result continues to be below the requirements that exist to maintain the current risk rating that we have today. And this allows us to continue, leveraging ISA's growth in accordance with our ISA 2030 strategy. Let's go to Slide 12, please. As of June, the consolidated financial debt amounted to COP 26.4 trillion, 16.1% more compared with December 2020. What are the main reasons to have this increase of the debt? #1 is the exchange rate effect of approximately COP 1.7 trillion, explained by the 13.7% devaluation of the Colombian peso versus the Brazil real; dollar, that has a devaluation of 9.4%; and the Chilean peso, which is 6.9%. And as the second place, the increase in debtness in ISA CTEEP due to the bond issuance promissory notes for COP 1.4 trillion for the financing of the lots of order in the December 2019 auction and the consolidation of PBTE debt for COP 274 billion. So now let's talk a little bit about risk rating. What I would like to mention here that due to the changes that occur with the Nations International sovereign debt rating, on July 6, Fitch ratings modified ISA's international rating to BBB with a stable outlook. Previously, it was in BBB+ with a negative outlook. The important here is to highlight that we are to not use higher than the rate declination. Moody's ratified ISA's international rating in Baa2 with a stable outlook last July 19, 2021. Let's go now to Slide 13, to talk about the investment plan for 2021-2025 period, which consolidates all the obligations already acquired. In this version, we have adjusted the investment plan as of June 2021, taking into account several factors. First, one, the completion of projects; second, the inclusion of the Chincha - Nazca project in Peru and also increased reinforcements and improvements in ISA CTEEP; and thirdly, a better perspective of devaluation in the COP over USD exchange rate. For these 5 years, we have planned to invest COP 14.3 trillion, a figure that, as you know, we expect to increase year-by-year as new investments projects are consolidated. I will now turn the call over to Cesar, who will update us on the energy transmission projects. Cesar, go ahead, please.

Thank you, Carolina. Good morning to everybody. So I'm going to tell you a little bit about the aspects of our projects in the next slide that you can see right now. Projects that we are structuring right now, it's important to mention that we have identified from here to 2023 opportunities in the region that we are present, close to $6 billion, and the amount that we are structuring to participate and the costs that are republished is $2.2 billion, spread in 298 billion in Brazil, 340 billion Colombia, 163 billion in Peru and 1.4 billion in Chile. To highlight, in Brazil this year, towards the end of December, there's going to be a public call, where 5 lots are going to be offered from which we are analyzing and starting to participate in 2 of them. The first one in Paraná and with connection to the São Paulo state for amount of $212 million, 2 station lines. And another lot, the 4 one, that is located in Minas Gerais, that is important substation development that is $486 million. So now in Colombia, also, I would like to highlight [indiscernible] projects. Those are projects 1 and 2, the $155 million and the second of $180 million located, and it will connect with Casa Naré with Arouca and Casa Naré with Santander. There is a substation also that is important in [ Carmen Iatrato ] which is Iatrato's substations, $33 million. The [indiscernible] substations and some connections in San Juan and Bolívar for 20 million and [indiscernible] for 40 million. In Peru, an important project, the one that provides international interconnections of Peru-Ecuador, that is a project developed in Peru onto the border [indiscernible], that it's an estimated about $163 million that we expect to go into bidding process towards the end of October. And at the end, one of the big projects that we're working right now, that is a transmission line of direct current, high-voltage connected in Chile, Kimal and Lo Aguirre. That's an investment close to 1,000 -- $1.4 billion, and which offer has to be presented in October 7 and the award after all the technical analysis is performed would be in December of this year. It's also important to mention that these that we are structuring, corresponds to 2,976 kilometers of circuit and 3.6 thousand MVA. And in '20 and '21, $282 million being water, and in Colombia, we can [indiscernible] $140 million. And as I mentioned already -- Bernardo mentioned already in his presentation, we were awarded Carrieles project here in Southeast of Antioquia for $15 million. The next slide, we want to mention about what we are building today. Today, in execution, we have $3.1 billion, where in Brazil we are executing [ $1.5 billion, COP 924 million, Peru COP 648 million and Chile COP 75 million ]. So now these amounts represent 6,580 kilometers of circuit and more than 17,000 MVA of transformation. If we're going to see the size and infrastructure in Brazil, we're building close to 3,800 kilometers and installing about 13 MVA of transformation in Colombia; 180,000 transformation in Peru and one 400 MVA transformation in Chile, it's at expansions of Cardones - Polpaico project expansions to substation to improve the capabilities of transmission. Those projects, we hope that enter in the operations between the '21 and 2023. Next slide with a little more detail. We can see the date that we estimate in each of these projects. And you can see the annual revenue linked to those projects when they enter into operation. It's important to highlight in Colombia that the Costa Caribe, that is 14 million, we expect that to enter towards the end of the year, but also we have in Brazil, IEITAPURA in Peru. By 2022, we have a very important project that brings annual revenue of $81 million, which is by in the south of Brazil. Also, we have IEITAÚNAS and Conexión in Colombia, solar -- I'm sorry, a wind production energy that will be in August, that is Windpeshi in Peru. A big project that we are building, that is COYA-YANA, that has -- will have a revenue of about $41 million. And in Colombia, in -- by 2023, we have Copey - Cuestecitas. So these revenues that we see here for 254 million are revenues of these projects once they enter into operation. But they add all these, especially, this is an important participation in reinforcements performed in Brazil. Next slide, please. I would like to mention -- once again, Bernardo mention this, is Northwest, which is the 718 kilometer circuit, 900 MVA with revenues of more than $42 million. It goes to 36 municipalities, Bernardo mentioned that the impact and the investment in community works. This was a project that brought a lot of challenges to transport these huge transformers. Each transformer of this is 120 tons. And that's a challenge to transport that and to take it to those substations via secondary roads. And hence, it was mentioned, it requires some reinforcement of bridges and roads to be able to transform this -- transport these big transformers, but also brought us a lot of technical challenges. It's the first line in Colombia that has a double circuit in 500 kV and the first one that is in towers that charges in full circuits and 230 kV. So this is a project that tested the capability, innovation and management and leadership of ISA when we faced the challenges. These projects wasn't final. Port Sogamoso that was entered into operations in 5 of June. And after that, we inaugurated with the presence of the President of the Republic, a project that was awarded to ISA in 2015 and enter into operation this year. And talking about other projects that also enter operation, I would like to mention in Brazil, we put into operation [indiscernible]. That was an investment of $71 million, 151 kilometers of Circuit, and 1,400 MVA with revenues for 16 million year. Also in August, just enter into operation the reactive compensation of [indiscernible] that is an investment of 57 million. It was a stock of SVC Plus with revenues for $4.6 million per year. And also in Peru, March this year, we entered in operations at Quellaveco Connection, an investment of $35 million, that brings $3.2 million revenues per year. We'd like to inform this. And in Brazil, we'll continue working on reinforcement of the 41 reinforcements that bring revenues per year of $8.2 million. After saying this, I'll finish my presentation. Now I would like to turn the call to Gloria Velasquez, who will begin with you the other session.

So let us start with the questions, and to continue with the projects. [ Carlos Gaviria ] asks, could you give us a little bit more or elaborate more about the repotentiation of project Cardones - Polpaico.

Gloria, if you want, I can answer that question. Look, that question is very interesting today. In Chile, I would say there is energy crisis in Brazil that's happening as well. There is a reduction of the flow, hydraulic flow. And some restriction of the use of carbon. So even though the project came -- I mentioned to you already, it's a project that it will be reinforced in that carrier that we have in Cardones - Polpaico going towards the north, where we are. We proposed to the ministry more than a year ago a repotentiation of our Cardones - Polpaico project. Is repotentiation that we proposed in 2 stages. The idea that, a, was to be able to deliver that line of 1,000 MVA of transportation to 3,100 of capability in the year, we'll be to do it in 2 steps. The first one, which increased capacity, Pan de Azúcar and Pan de Azúcar-Polpaico. This allows us to increase our capacity to 3,000 and second stage, and this solution would start in 2025 and second stage to take advantage of all those renewable sources of energy are in the north and is to have a second reinforcement that it will be the Polpaico substation, applying static compensators solution. And that will make -- that we could increase the capability and also it would transform a circuit or the ones that we have today in [indiscernible] in direct current and that could increase the capacity to 3,100 MVA. That it would be a very good solution. The question is here is that the conditions of energy in Chile and is how do you compete this project with [indiscernible] is a project if everything goes the way it's planned, it would enter into operation in 2028. So there will be a solution that will provide a lot more reliability to the Chilean grid. Based on these energy crisis, this proposal should be taken into account because it's a proposal presented by ISA INTERCHILE, and I think that it's a good time for the question, and it's important to revise this project again.

We have another question. And is how the Internexa sale is going? And when do you expect to close that business?

We are in the hands of the Presidency of the Republic. That has to put that into the programming of the ministry meetings, the final steps for the approval. Once this happens, we could start the first round based on 226 for sale of Internexa. So we are waiting for that. We're ready, and we hope to take advantage of the market that is very positive for these type of companies.

Thanks a lot. So we have several questions from Diego Buitrago. Isa would be interested in participating on the generation business of non-renewal sources of energy in Colombia or other countries since the GP agreement we merged distribution and generation in Colombia. In the near future, ISA as part of the Ecopetrol, will have any restrictions to develop solar generation powers grid in Colombia?

This long question is very easy to answer and is that we can. We can in Colombia. There is regulatory restriction that is applied to ISA. Be it or not as part of the Ecopetrol group, that makes no difference. We understand that the agreement was based on the current regulatory, we couldn't. And from the plan that ISA has 2030 base in this restriction, but also based on thinking that the businesses we are roads and energy transmission, there is still a lot room to grow. So we didn't include this possibility of entering into the generation to renewable sources. When we were thinking about this strategy, we took this into consideration with our experts. So that would be the answer.

We have several questions also connected to Ecopetrol and the Ministry of Treasury, let's start with this. With the recent declarations of the Ministry of Treasury and Public Credit, Ministry of Treasury and Public Credit. What changes would you expect inside ISA in regards to corporate governance of the directed team and the strategy -- 2030 strategy?