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

Good morning. Welcome to the results conference of ISA and its companies for the second quarter of this year. We -- are here with us today our Chief Executive Officer, Juan Emilio Posada; Carolina Botero, Chief Corporate Finance Officer; Cesar Ramirez, Chief Energy Transmission Officer; Olga Patricia Castaño, Chief Strategy Officer; and Eduardo Larrabe, Deputy Chief Road Concession Officer. My name is Diana Cardona, Investor Relations Officer. At the end of the event, we're going to have time to answer any questions you may have. [Operator Instructions] And Virginia is the person that's going to help us with the presentation. Let's go, Virginia, to the next slide, please. So we welcome right now Juan Emilio Posada. Juan Emilio is a business administrator from EAFIT University. He has an MBA in International Business from Pace University in New York, and he started postgraduate studies in Financial International Law at the London School of Economics. He has a wide experience and international experience in the energy, infrastructure, telecommunications and transport sector. In the energy sector, as member of the Board of Director of Ecopetrol, he was part of the 2040 strategy for that group to face with success, the challenges of the energy transition. He also participated in the analysis and decision of a big part of the stake of ISA. He has obtained experience in infrastructure as member of the Financiera de Desarrollo Nacional and ODINSA Group disagree and has [ instructions ] of different coats for roads and airports. In the transport sector, he was the Chief Executive Office for Avianca and Aces. As an entrepreneurship, he created VivaAir, changing the [ airline ] sector by introducing the low-cost model in Colombia. He has contributed actively to the management of an international organization nonprofit as Plan International. In ISA, we're very happy of having with a leader of his professional expertise and his human skills. Juan Emilio receives -- more than welcome once again to these quarter results. Virginia, let's go to the next slide, please.

Thanks a lot, Diana. ISA works nonstop for the strengthening of the territory, the protection of the environment and the construction of the social [ tissue ]. Besides being profitable and competitive, ISA is very solid and in compliance with its commitment with the stakeholders, connecting to the sustainable development goals. ISA is a company with a vision of contributing to the change that the world needs to the objective of generating sustainable value in everything it does. It's a company in which we innovate and we support on the new technologies to improve the quality of life of society in the countries that we operate [ in ]. And the more I get to know ISA, the more I admire its talent and the more I aim the superior objective of the Strategy 2030. Virginia. Let's go to the next slide, please. The results that we're going to share with you today ratify ISA as a big important alternative investment. Our results are solid and growing. Overpassing our goals, we closed the quarter with an increase of 2 digits in the main financial indicators. And among them, we have a growth on the net, 14% compared to the second quarter last year. We consolidated our leadership in the energy transition with investment of more than $840 million represented in the 2 projects that entered into operation during the quarter, plus the 2 that we obtained in Brazil that are par of our CapEx. The total of CapEx for the next 5 years is more than COP 18 trillion, exceeding 43% what's planned at the beginning of the year. Our higher purpose is to create sustainable value, and that purpose goes beyond profitability of the investments, because the idea is to generate an environmental and social impact that is positive in other territories. In that regard, recently, we were awarded as the third company with the best investment -- social investment strategy. Virginia, please. Let's go to the next slide to start with the investment of the quarter. During the second quarter, our investment amounted to COP 846 million and the accumulated is more than COP 1.6 billion. During the quarter, because of the investment were concentrated in Brazil, where ISA CTEEP continue working and improving the transmission grid with the insulation of the [ battery ] bank under construction of projects of order in former coal in Colombia. We advanced in the construction and different plants. Among them, we have the Cerro [ Matoso ] project, Chinú-Copey, and the project Cuestecitas-Copey-Fundación since it improves the reliability of the service in the Caribbean coast of Colombia and the connection with renewable sources of energy, nonconventional projects from the Department of Guajira in Colombia. In Chile, we invested in the expansion of ISA INTERCHILE in construction of lower roads and improvement works for safety on road that will increase the extension of the concessions. And in Peru, we advanced in the construction of the projects, Coya-Yana and Chincha-Nazca. Today, we have 33 energy transmission projects in execution that represent more than 4,900 kilometers of circuit, and they would generate an approximate income for $350 million, $130 million into operation. In addition, we are very satisfied, and it's very important the fact that from these, we have 9 projects that helped connect the nonconventional renewable energies helping with that every transition. Virginia, let's go to the next slide, please. I want to talk about 2 projects that entered into operation during this quarter in Brazil and that contribute to the transition towards a low-carbon economy. The first one is Três Lagoas, which has started operation with more than 1 year in advance before it's due date and it's dedicated to connect the generation of renewable sources of energy, solar, biomass to the Northeast of São Paulo region. This project has a 37 kilometers of lines and it represented an investment of $21 million. And the second project that I want to talk about is the Aimores interconnection that is located in the Minas Gerais state, and it was built by TAESA and ISA CTEEP. It's about energy transmission line of 208 kilometers and the substations related to this line. The investment was $83 million and the annual revenues is up $70 million. This is a fundamental and paramount project to take energy from renewable sources from the Northeast to the Southeast of the country. And the region of the highest consumption of energy in Brazil and increasing the reliability and energy security of the country. Virginia, let's go, please, to the next slide. We closed the second quarter with 2 important cost placements. ISA CTEEP was awarded 2 of the 3 projects for which it presented offer in Brazil. The expected investment is $780 million with an annual revenues of $60 million. The third will require an investment of $730 million, and this is located in the states of Minas Gerais and Espírito Santo that would transport renewable sources of energy through its 1,139 kilometers of line. Also, the other lots, lot #6 that would request $50 million investment. It's about the construction of a new yard of Agua Azul substation in the São Paulo state. These projects will be financed by ISA CTEEP, and we expect that generate EBITDA margin higher than 90%, thanks to the operational synergies with existing assets. Finally, in this field, we're very happy to share with you that thanks to these last 2 projects, in the first quarter of this year, we reached investment commitments by $852 million, overcoming in advance -- well in advance the goal for the year of $700 million. Let's go, Virginia, to the next slide, please. The Portón del Sol Connection and the installation of SAG compensation devices are 2 projects awarded to ISA, that even though our small size, represent a big importance in the energy transition in Colombia. The Portón del Sol Connection would integrate a generation plant with a capacity of 100 megawatts to our 2 new substations. This project has an important strategic value for ISA because it contributed to keep our corporate validity. As a matter of fact, we see that the connections, marketing Colombia to the renewable sources of energy would reach the $400 million by 2040. Also, TRANSELCA will build SAG compensation devices in Colombia. These consist in implementation of advanced technology for the control of energy fluxes in the [ richer ] nation. The project allows the restriction of the capacity in the -- into new sources of energy to the national grid. These group of projects is 100% aligned with our commitment of promoting the expansion of the use of renewable sources of energy and warranting the transmission of energy in a safety and reliable way to the population. Virginia, can we go please to the next slide. Our committed investment for the upcoming years is more than COP 18.3 billion, a 43% higher what we expected of this year. Close to 56% would be executed in Brazil, where we include the reinforcement and improvement of the CTEEP Group, the installation of the battery banks and the construction of transmission projects included in the lots of order. Of course, 20% will be invested in Colombia for the construction of [indiscernible] and connection projects to renewable sources of energy in Chile. A 14% will be executed with the incorporation of the contribution to the Kimal-Lo Aguirre project. CapEx for the construction of Ruta del Loa and regulation, safety works and the lines. And the 10% -- remaining 10% will be executed in Peru, in the Coya-Yana and Chincha-Nazca. These investment opportunities were already awarded to ISA and to all its companies. And it gives us a same 1% progress in the investment goal by 2030 of $12.5 trillion for 2019-2030 period. For the coming 12 months, we have identified a growth opportunities in the region that is close to $6,400 million. With the success rates that we have accomplished in former the years, we feel very positive that with continued investment in the pace that we've been doing it until accomplishment, the ISA 2030 goal. Virginia, let's go to the next slide please. Now let's talk about the important topic of sustainability. We obtained important milestone in this quarter. In our program, Conexiones para el Desarrollo, we work with UNDP, the Fundación Barco and 7 municipalities of Atlántico and Bolívar in Colombia in the road map for the sustainable development by 2041. A territory with the capacity to dream was the starting point that this aim has started for the transformation of this area where stakeholders for all different territories contributed to the construction or the development agenda for the next 20 years. Also, in ISA, innovation is the most important thing for change in society. And that's why during this quarter, we finished entries to the Rockstart program to leverage the incoming reactivation to the acceleration of 10 start-ups with a positive environmental impact. At the end of the program, we generated investment round with possibility of financing close to $1 million. On the other side, we're very happy to tell you that ISA participated in the measurement of the Social Private Investment Index (sic) [ Private Social Investment Index], being the third as part of the 151 biggest company in the country. Lastly, in the celebration of the Earth Day, we planted more than 7,300 trees of different species, some of then turned more than 6 hectares and that's going to absorb more than 800 tons of carbon per year. Let's go, Virginia, to the next slide. With the purpose of integrating ISA to Ecopetrol Group, we advanced in the implementation of the synergies identified and that we announced in former conferences. About that, we highlighted the following. In the growth, we continue the -- continue effort in the identification a new business of energy as well as the definition of mechanisms that allow us to consolidate the entry of ISA into the United States market. From a financial point of view, we continue capturing efficiency and the investment in terms of liquidity, cost to the management of insurance, optimization on the rates, tax rates, among others. In carbon neutrality, our Conexión Jaguar program will go beyond what it was established by the 2030 goal to contributing the compensation of the Ecopetrol. Continue with the generation value through knowledge, one of the more important synergies has been the possibility to contribute from ISA to reduce the electric failures in the main oil production fields, generating important savings for the Ecopetrol group. In addition, in this front, we include new projects of renewable sources of energy and the storage of energy to contribute in the connection of those into the national grid. I close by presenting my greetings and to sharing that the more I get to know ISA, the more I like its people and I'm convinced that its strategy is suitable, and I feel very proud of this big important company. So now I'd like to give the word to Carolina, who will present the financial results. Go ahead, Carolina.

Juan Emilio, thanks a lot, and thanks for your beautiful words. We are very happy that you are, today, with this forum as our CEO. I'm very happy, as always, of talking to you. Let's go, Virginia, to the next slide to get into details about the financial results of the quarter. For the second quarter of '22, the operational revenues reached COP 3.3 trillion, 14.5% higher than in the same period in 2021. But before getting into the performance of those revenues, it's important to remember that in June 2021, we tracked to the COP 333 million in income because of the nonrecurring event related to the acknowledgment of the index, the capital cost of the years 2017 to 2020 of the assets of the basic grid has a score out of [ BTA ] in ISA CTEEP. So now without taking into account this stat, the operational revenues increased a 28.2%. As you know, the operational revenues are comprised by operating revenues and construction revenues. Let's start to detail the behavior of the first ones. So the operations added COP 2.6 billion that correspond to 11.7% more that for the same period last year. Let's look by business lines, what better explain this variation. Let's start with energy transmission. First to highlight, we entered into operation of the projects after the second quarter of 2021 in all the countries where we have operations. In addition, and by geographies, we have other factors that explain the growth of this revenues. In Brazil, we observed a positive effect of more than COP 400 billion due to higher IPCA and IGPM, both inflationary indices that -- remember, indexes our revenues of our operations in this country. Also, we had an increase in the revenues due to operations and maintenance services, also a higher performance of the contractual assets and the receivables of the [ error BTA ]. And on the other hand, it's important to highlight that this year, we didn't see the nonrecurrent revenues by COP 300,000 million that were aimed July of 2021. So now let's go to Colombia, where we received higher revenues by COP 108 million, and this is due the entry on the operation of the Interconexión Noroccidental after the second quarter of 2021, and also we had the favorable effect of the macroeconomic variables, EPP and TRM. Let's talk about Peru, where we registered higher income by COP 41 billion by the increase in the revenues that comes from the energy transmission contracts due to the updating of prices up by the favorable effect of the exchange rate from USD to COP and the consolidated financial statements. And in Chile, we have higher income revenues by COP 16,000 million because of the interoperation of projects and the effect in the revenues by the macroeconomic variables, IPP and IPC. So now let's talk about the road business and continue in the operation revenues. There was an increase of 11% because of higher performance, other financial assets and revenues related to the operation and maintenance in the road concessions that we have. Let's go now to construction revenues. These increased a 26.2% and this variation explained because of a higher activity of construction in Brazil and in the road concessions in Chile. Also, by mass construction activity in Peru and in Colombia where Ruta Costera, as you know, entered already in operation. For the accumulated of the year, the operational revenues reached COP 6 trillion, which is a 15.6% more than in 2021. And this is explained because of the energy transmission business that obtained revenues for COP 800,000 that represents 2.3% more than in 2021. Explain, because of the reasons of the quarter. Virginia, let's go to the next slide, please. In this quarter, EBITDA reached COP 2.2 trillion, while representing an increase of 10.1% compared to the same period last year. Also, the EBITDA margin moves from the 71.1% to 68.4% and excluding construction from 84.5% to 84.6%. The reasons for this increase are explained because of the dynamics explaining the revenues added by the behavior of the operational costs, which reached COP 1.2 billion, a 30.4% more than for the same period in 2021. As we know, operational cost are comprised by construction cost plus administration costs, operation costs and maintenance costs that we call AOM. Let's start with the details of the first one. So the construction costs registered an increase of 36.9%, due, as we mentioned before, a higher constructing activity in Brazil and in Chile, compensated in part by a less activity in Peru and Colombia. Also, the AOM, it was COP 580 billion, a 24% more than in the second quarter of 2021. In this point, it's important to highlight that this growth of the AOM expenses are below the increase of the operational revenues that increased 29% without taking into account the nonrecurrent events in Brazil that we already mentioned and that were registered in June 2021. AOM expenses were led by a higher inflation in Brazil, in Colombia and in Chile, and because of the entry into operation of new projects after the second quarter of 2021. The next item that has started being part of the EBITDA in order to homologate the calculation with the capital group is the results of the companies where ISA has a joint control, an important impact. This resource that we call co-control added at COP 177 billion and were 31% higher than for the second quarter of 2021. This is mainly because of higher margins in construction of Aimores project that Juan Emilio mentioned before and that ended its construction stage in this quarter. And the accumulated EBITDA increased 13.1%, reaching COP 4.2 trillion. The EBITDA margin closed in 69.6% and one is not taking into account the construction effect in an 84.1% Virginia, let's go to the next slide, please, to talk about our net income. The net income for the second quarter was higher than COP 670 million with an increase of the 14.4% recording the same quarter for 2021. Let's look into detail what we have observed in the graph. When we compare the net income second 2021 (sic) [ 2022 ] to the same period for 2021, the components that contribute the most to this increase are: first of all, the operating income because of the entry into operation of projects after the second quarter of 2021 and the behavior of the price index where our incomes are indexes. This ratifies the solid behavior at the operating level on ISA and its companies. Secondly, we have a reduction of the 76% of the income tax. And this is explained because of the application of a less tax in ISA CTEEP and its companies in Brazil that it would be declared on the exercise, and it impacts the favorable impact of the juros de capital. Let us remember that the juros de capital it is existing in Brazil to pay shareholders and is deducted for CTEEP. These -- it's going to allow us to have an effective rate during the year and the consolidated level of ISA and the Ecopetrol Group. On the other hand, the component that takes less is the net financial expenses were growth of 8% compared to 2021, which is COP 258 billion. So we can't -- see it in 2 parts. The first one is a higher interest by COP 206 million, for a higher debt obtained to finance the growth of ISA and its companies added to a high inflation. And secondly, we have a higher expense because of the different exchange rate by COP 33 billion because of the high inflation in Chile that is translated in a higher UF, which is [ fomenting ] unit. Variable but its debt is indexed in the road conceptions in that country. And because of the resources that we keep in dollars in Chile to the investment, future investments that we are doing in energy projects that were awarded already. At the end of the quarter, we closed with a net income of 21% and an ROE of 11.1%. These ROE of 2 digits is higher in 18.1%, the ROE that we estimated for this project, for this period. Now for the close of June 2022, we expected a net income of COP 795 billion that represents a decrease of 27.2% compared to the real accumulated net income in June 2021. We expected that because of the events that we have already mentioned that were not going to be repeated into 2022. However, thanks to the excellent behavior of the revenues that we already explained in detail and the monetization of the effective rate in Brazil also mentioned before, we were able to finish with a net income of COP 1.1 trillion. We increased a growth of 0.7% compared to the same period last year. And 38.5% higher of what is expected, of what is in the budget. The net margin was the 18.3%. So now, now that we know that behavior of the net income in this first part of the year, I would like to update your expectation for the close of 2022 with respect to what we presented in the fourth quarter last year. Virginia, let's go to next slide please, for the good news, please. Let us remember that at the beginning of this year, when we presented the closing results of the 2021, we anticipated that the net income for 2022 was going to increase between a 7% and an 11% when we compare it to the 2021. We call that the based -- basic scenario. Let us mind also that we listed some factors that it would happen, it will be translated in boosting a lot more of this result. Those factors are the ones that we can see in this slide on the right part. So now that 6 months have passed this year, what we found. We found that inflation, where we have presence are continuing and even are higher of what we expected. What you can foresee that has a positive impact in our revenues, mainly the IPC and IGPM and the IPP in Colombia. On the other part, our discipline and commitment with our efficient management of operational expenses, even in the growth scenario that ISA is today. These efficiencies reflected in a growth of administrative expenses, operation and maintenance below of the income as we mentioned. All this allows us to let you know and give you good news and is that if the behavior continues as the one that we have at the end of the first quarter. And if we do not have any extraordinary event that we don't see it today, we expect that our net income will be increased between 11% and 18% when we compare it to the end of 2021. Complying then with our strategic objective of generating value to our shareholders in a growth fashion and sustainable fashion through time. Virginia, let's go to the next slide, please. It's important to highlight that ISA and its company has a strong cash generation. In this year, we started with initial consolidated of COP 4.7 billion. We closed June with a marginal variation. During the quarter, we generated cash flow of the operation by COP 4.3 trillion. We received COP 232 billion dividends of co-control companies and loans were COP 3.3 trillion. These resources generated were used mainly to the following: COP 4.8 trillion, pay capital interest of the debt; COP 1.6 trillion in OpEx and other payments of the operation; COP 1.6 trillion in CapEx; COP 635 billion in taxes; and COP 143 billion for dividend payments to shareholders. The quarter then ends with a solid position of cash of COP 4.8 trillion that allows us to continue financing our operations, our investments and comply with the debt for the rest of the year. Virginia, let's go to the next slide, please. To June, the financial debt consolidated increased to COP 29 trillion, an increase of the 3.2% compared to the close of 2021. This variation is explained mainly by the conversion effect that was higher than COP 1 trillion due to the depreciation of the peso against the dollar, the UFC, the Chilean pesos and the [ UFR ] and the appreciation regarding the real currency. If this affects, the debt to June 2021 would have decreased compared against the value of the [ juros ] in the 2021 year because the net transaction of the debt were negative. This means that we -- there were a lot more debt amortization than new debt. Other important things during this year have to be with a net indebtedness for more than COP 360 billion in ISA CTEEP and its companies that have issued bonds and have obtained bank debt during the year for investment in projects and improvement to the electric system. Also in Chile, there's been a reduction of net indebtedness in more than COP 370 billion due to the prepay of debt of the road concessions in this country. Also, in Colombia, we observed a reduction of more than COP 141 billion, explained by the total payment of bonds of the 8 tranche and the amortization of loans by Ruta Costera. In this regard, the debt of our EBITDA indicator is 4.1x, reflecting suitable levels to maintain the rating and space to continue leveraging our strategy ISA 2030. So now I'd like to give the mic to Diana to start with Q&A session. Thanks a lot.

Thanks a lot, Carolina and Juan Emilio. So now we're going to open for Q&A. First of all, I have 2 questions that comes from Andres Duarte from Corficolombiana. He would like to remind -- be reminded about the restriction on not participating in generation in Colombia applies to other countries where we have presence, Chile, Peru, Brazil. And the second question is, if taking into account the 2 lots that we obtained in Brazil to remind him if there are differences in the in these revenues compared to the other bids that we have been awarded.

Diana, thanks a lot and Cesar. Thanks for the 2 questions. We are here with Cesar Ramirez, Chief Energy Transport Officer, he would give you a better answer. Cesar, go ahead.

Thanks a lot, Juan Emilio and thanks for the questions. So regarding to the restrictions of generation, Andres. That restriction only applies in Colombia and in Chile since our similar regulations regarding to that type of other stakeholders of the chain to participate in different activities compared to transmission. But in Brazil and Peru, it's possible that ISA developed those activities. However, it has to be approved before certain entities in Peru, not in Brazil. Peru, Prague region and Brazil [indiscernible], especially to be careful with what they call the [Foreign Language], which is another type of activities. There are -- with the platforms related to concessions that they have to share those profits. So it's possible to do it with another type of investment vehicle, but they are not split restriction on that regard. So I think that, Andres, answers the first question. And regarding the second question about the last awarding projects that we obtained in Brazil. The model is exactly the same that we've been using or applying. There are not changes regarding to those model for elicitations. They are greenfield projects. They are projects to offer that is called, in Brazil, a RAP which is [Foreign Language] and is a value that is updated annually by the APCA and in the concession is 30 years, including the construction period. So in summary, it's the same model that we've been practicing and not different to the one that we have in the other countries where it's -- the offers are based in an annual revenue. So I hope I have answered your question. And if it is not, through the established means, I could actually go into more detail about this regard.

Thanks a lot, Cesar. The next question comes from Rodrigo Sanchez. He says that he would like to know a little bit more about how do we think to finance the investment plan for 2022 and 2023.

Thanks, Diana, and thanks, Rodrigo, for your question. I will ask Carolina to answer that question, please.

Thanks a lot, Juan Emilio. Thanks for the excellent questions that you asked, Rodrigo. The answer is as be -- we're doing it, supported the excellent financial health. In generation of cash together with the financial market who are big, at least, to leverage our growth. We believe that our -- the best tools that we have to support the growth strategy of ISA and its companies. Each opportunity, Rodrigo, we analyze that into detail to understand what the market offers to us. What is the alternative that better fits the generation of cash flow and with the life of the assets. And with that, we make a decision and almost always, it's a mixture of banking market and capital market, but always, our biggest leverage is the excellent financial health we have had and that we continue having at ISA. Thanks a lot.

Thanks a lot, Carolina. There's also a question from Andres Duarte. We could expect a similar effect with the taxes because -- the Brazil for the second quarter -- second semester.

Thank you, Diana, and thank you Andres for your question. Carolina, please, could you help me answering that question?

Thanks, Juan Emilio. Andres, a pleasure. Thanks a lot for your question. As I explained during the presentation, what we did this year, what we typically happens is that it's decreed the payment of the juros de capital próprio in November. But then we anticipate it to normalize for the whole year. The effective tax rate incorporated that juros de capital próprio effect. What we accomplished with this was to have a stabilization month per month of the effective rate for the calculation of the tax. And we're going to continue doing this year after year at the beginning of each year. I hope this question was answered.

Thanks a lot, Carolina. The second question has to do and it comes from [ Mauricio A Londoño ], one of our shareholders, and he asked what are the next opportunities for the Road Concession business.

Diana, thanks a lot and Mauricio thanks a lot for your question. I would like to ask Eduardo Larrabe, our Deputy Chief Road Concession Officer, to answer that question.