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

Good morning to everyone, and welcome to results conference of ISA and its Company for the third quarter of this year. We're joined by our CEO, Juan Emilio Posada; John Bayron Arango, Chief Corporate Financial Officer; Juliana Suso, Chief Institutional Relations Officer; Patricia Castaño, Chief Strategy Officer; Cesar Ramirez, Chief Energy Transport Officer; and Eduardo Larrabe, Chief Road Concessions Officer. My name is Diana Cardona, Investor Relations Specialist. Today, we have the development by Juliana Suso of a special chapter dedicated to the management of ESG issues at ISA that we know there are a lot of interest for all of you. At the end of this conference, we'll have a space to answer your questions. They can write them through the window that appears on the right side of their screens. Please write your name and the company you belong to. Virginia is the person who will support us with the presentation. Virginia, please go to the next slide, and I'll give the floor to Juan Emilio, who will present us with the highlights of the quarter. Go ahead, Juan Emilio.

Thank you, Diana. It's a pleasure to be with you today. And doing it on behalf of ISA and the admirable professional and human team that constitutes it is an immense honor for me. To begin with, I invite Virginia to advance to the next slide, please, #3. Thanks, Virginia. The results we're going to share with you right why ISA has a big important investment alternative. Our results are the reflection of a solid growing financial result. We closed the quarter and we came out of the year with a very important increase in the main financial indicators among them. We have a growth of the net income of 450% compared to the third quarter of the former year. That's 23.5% if we do not take into account the nonrecurrent effect of the same quarter of 2021. And then later on, we're going to explain the financial part by John Bayron. Also, the net income for the first 9 months of 2022 grew 45.6% compared to last year, or which is 1.3% if we exclude the nonrecurrent effect of 2021. Also, the ROE at September grew from 12.5% to 13.2%, confirming our strategy of sustainable value through time. We continue strengthening our contribution and leadership in the energy transformation. During this quarter, we energized 2 projects in Brazil and 1 in Colombia, and the accumulated investment were USD 368 million. Also, we were awarded and energy transmission project in Chile that represents an investment of USD 194 million more. All these projects improve the liability of the energy transmission sector and also allows to transform renewable sources of energy that are not conventional from faraway sources to big consumption centers. Let us remember that our higher purpose is to generate sustainable growth. And that of course has an impact on the profitability of the investment because of the confidence with a commitment of having a social and environmental impact, which is positive in the territories. In these regards and the ones that generated a positive social impact, in this year, we have invested, at the consolidated, in the social part, USD 2.1 million, and in the environmental part USD 5.3 million. Later on, Juliana Suso, our Chief Institutional Relations Officer, is going to go in deep in this sustainable value. Virginia, please let's go to the next slide to start with the investment of this quarter. From now on, we'll refer to figures in Colombian pesos. During the third quarter, we made investments for COP 1.3 trillion. Most of them were concentrated in Brazil, where ISA CTEEP continue working on the projects that were awarded in past tenders, including the 2 lots that were in June of this year in addition to its plan of full reinforcement and improvements of the transmission grid. In Colombia, we made progress in the construction of energy transmission projects, among which we have El Rio, Sabanalarga Bolivar, La Loma Sogamoso, and Copey Cuestecitas. All of them will strengthen the reliability of electrical grid of the Caribbean coast and especially the last 2, La Loma Sogamoso and Copey Cuestecitas, will connect nonconventional renewable sources of energy to the national transmission grid. In Chile, in the power transmission business, we made progress in expanding of ISA into Chile network and in the Kimal Lo Aguirre project. And on roads, we continue working on the construction of Rutas del Loa and in road improvement and safety works that will generate new income or extensions of the terminal concessions. Finally, in Peru, we made progress in the construction of Coya-Yana and Chincha-Nazca projects and some reinforcements to Transmantaro consortium grid. In total, we currently have 32 power transmission projects underway along an additional 4,900 kilometers of circuit. These represent investments for more than USD 4.8 billion, and when they come into operation, these projects will generate revenues for about USD 350 million per year. Virginia, please let's go to the next Slide #5. Thank you, Virginia. On the other hand, ISA continues being an enabler of the energy transmission through the execution of projects that interconnect nonconventional renewable energy resources to the large consumption centers. And here we can highlight other elements. During this quarter, we energized 3 projects that meet these characteristics. The first 1 is the Cerromatoso-Chinú Copey project in Colombia, which improves the reliability of the electrical system by connecting generators in the central zone to the country with the Colombian Caribbean. This project whose investment was USD 164 million represents annual income for more than USD 14 million to its 352 kilometers of circuit. Also, ISA CTEEP and TAESA in Brazil entered into operation, the Paraguaçu electrical interconnection. This project represented an investment of USD 120 million and annual income for more than USD 26 million. This line of 676 kilometers circuit will connect with the Aimorés transmission line, also put into service by ISA CTEEP and TAESA. The third project that connects non-renewable Paraguay's sources of energy with consumption centers is the Biguaçu electrical interconnection, which came into operation a year before the deadline established by the National Electric Energy Agency and now Brazil. It is the only project in Brazil that includes the lines with aerial, submarine and underground sections. Its investment was USD 84 million and will represent annual revenues for USD 9 million. Also, we are very pleased to tell you that ISA won the Kimal-Lagunas project in Chile, 1 of the most important tenders in the country this year. These projects will represent a CapEx of USD 194 million and annual revenues of USD 15 million. These projects have great relevance in the expansion plan of the Chilean electrical system since it will transport energy from nonconventional renewable sources from the Kimal substation to the Lagunas substation in northern part of Chile. Virginia, let's go to Slide #6, please. Thank you. Between the remainder of 2022 and 2023, the investment opportunities in tenders amounted to a total of USD 19 billion. 71% of this pipeline corresponds to the Energy Transmission business and 29% to the Roads business. In a view by country, the largest share of these pipeline opportunities is taken by Brazil with 66% driven by the ANEEL auctions that will total USD 10.7 billion. Second place is occupied by Chile where we have identified opportunities in the energy business for more than USD 650 million represented in the tenders of 2 new transmission lines plus [indiscernible] storage project. For [indiscernible] in Chile for the Roads business, we expect to participate in the tenders and re-tenders of the Ministry of Public Works that exceed USD 4.3 billion. In Colombia, we'll have coals by the mining and energy planning unit, UPME, that exceeds USD 150 million and road tenders for USD 1.2 billion. In Peru, we have identified opportunities in energy transmission tenders for USD 1 billion, including the Peru-Ecuador interconnection of great importance for ISA. Virginia, let's go please to Slide #7. Thanks a lot. Before going into the highlights of the quarter in terms of ESG, I want to remind you that sustainability management at ISA is leveraged on the generation of sustainable value in accordance with our ISA2030 Strategy. With this, we seek not only to generate a positive social and environmental impact, but also to improve the competitive position of our businesses, extend their life cycle, and attract new shareholders and investors who are increasingly interested in companies that, in addition to being profitable, financially speaking, also generate a positive impact on environment and society. Let us then review the highlights of the quarter in terms of ESG, and Juliana is going to go in this later on. ISA launched the first school for linesmen in Colombia, which will allow 17 women to be trained and certified in maintenance of electrical transmission lines. This program is a pioneer in the country, and it gives opportunity to these women, the opportunity to perform a job that has traditionally been done by men, making history in Colombia and in the energy business. Assuming this role, setting an example of tenacity and physical and mental resilience will allow them to offer new positive possibilities to their families. Also, and again with ISA Interchile and ISA Intervial, we continue to advance with our Conexión Jaguar program known in Chile as Conexión Puma. During 2022, we started a project to protect more than 20,000 hectares of forest in Chile. In this ecosystem, we are contributing to the conservation of endemic and endangered species. We also seek to reduce up to 223,000 tons of CO2, which will contribute to the achievement of our corporate goal of reducing 11 million tons of CO2 to the planet by 2030. Finally, within our initiative for economic reactivation and with an investment close to USD 2 million, we have structured projects that support enterprises of rural and business communities in Colombia, benefiting more than 12,600 people in 100 municipalities of this country. Virginia, let's go to the next slide please to give the floor to John Bayron Arango, our Chief Corporate Finance Officer. Go ahead, John Bayron.

Thank you very much, Juan Emilio. Good morning to everyone. It is a pleasure to share this space with you. Let's go to the next slide, Virginia, please, to check the financial results, which are presented in Colombian pesos. For the third quarter of 2022, operating income, which includes construction and operating income, reached COP 3.6 billion, COP 24.1 million more than in the same period for 2021. Let's start with the operating revenues that amounted to COP 2.6 billion, 11.1% more than in the same period of the previous year. The reasons for this increase by the business are the following: in Roads, there is an increase in income of 81.3% due to modification in the treatment of the financial asset of the Road Concessions from Chilean passage to the Unidad de Fomento, UF, achieving natural coverage with the debt. These represented additional revenues from COP 180 billion. Additionally, increases in the performance of the financial assets in the operation and in the collection of tools. On the other hand, for the business of energy transmission, a reduction of 1.9% was recorded, explained by the effect of the lower consumer price index recorded this quarter in Brazil, which impacted revenues at ISA CTEEP and its companies by COP 393 billion. This effect that was reduced in part by great income in Colombia and Chile due to favorable behavior of macroeconomic variables under a tower type of projects in all geographies as of the fourth quarter of 2021. Construction revenues for this quarter had an increase of 80.3%, explained by the grid construction activity in Chile, Peru and Brazil, a country in which we also had higher construction margins and obtained profits from efficiencies in the energization of projects. EBITDA reached COP 2.3 trillion, which represented an increase of 14.6% compared to the same period for the previous year. The EBITDA margin with our construction stood at 83%. In the accumulated figure, the EBITDA increased by 13.6%, reaching COP 6.5 billion. The EBITDA margin went from 70.5% to 67.5%, and from 83.9% to 83.6% excluding construction. Virginia, let's go to Slide #10, please. Thank you. The net income for the third quarter of the year exceeded COP 668 billion with a growth of 450% compared to the same quarter of 2021. Let's go into the detail of the graph to understand the results. When compared, the net income for third quarter of 2022 against 2021, the 2 components that contribute the most to the increase are, first of all, the operating income for the reason explained in the previous slide. And secondly, a 26% reduction in net financials. Let us remember that in the third quarter of 2021, we registered the re-profiling of ISA Interchile's debt. If we exclude this nonrecurrent effect, financial expenses would increase by 31.5% due to higher debt to finance growth and increase in the exchange rate difference due to higher development unit. You have a value to which it is indexed debt in the road concessions in Chile. At this point, I would like to point out that if the effect of the re-profiling of ISA Interchile's debt and the change in the income tax rate in Colombia registered in 3rd quarter '21 are eliminated from the profit remained, the solid results since profit for the quarter grew by 23.5%, and the accumulated profit by 8.3%. We closed the quarter with a net margin of 19% and an annualized ROE of 13.2%, which exceeds the 12.5% reported in the third quarter of 2021. In the cumulative, the net income amounted to COP 1.8 trillion, 45.6% compared to the same period in 2021. Let's go to the next slide, please. It is important to highlight that ISA's operational strength allows to generate greater cash surpluses at the end of the quarter. The initial balance was COP 4.7 trillion, and during the period, operating cash flows of COP 8.5 trillion were generated. And we received dividends from co-controlled companies, investment surpluses, and debt disbursements of COP 4.5 trillion. These resources were used for debt service, principal and interest, COP 5.8 trillion; CapEx, COP 2.9 trillion; OpEx COP 2.8 trillion; tax payment, COP 1 trillion; and dividend payments of COP 550 billion. As of September, the final balance was COP 5 trillion, 7% more than December 2021, which leaves us with a robust cash position to continue growing and meet our future commitments. Let's go to the next slide, Virginia, please. As of September, the consolidated financial debt amounted to COP 31 trillion, 11.5% more compared to the end of the previous year. The explanation for this variation has to do with the transformation effect that amounted to COP 3.2 trillion, derived mainly from the depreciation of the peso against the dollar. If this effect does include the debt as of September, we have a minor variation in relation to the end of 2021. The main movements so far this year are summarized below. In Brazil, net investments of about COP 316 billion generated mainly by ISA CTEEP and its companies, who have issued bonds and have acquired bank loans during the year to finance their investments. Chile has reduced its net indebtedness by more than COP 350 billion in 3 of that countries from concessions. The debt EBITDA indicator continues to stand at 4.1x, reflecting adequate levels to maintain the current credit rating with room to continue leveraging our ISA2030 strategy. Let's go to the next slide, please. Our planned investment commitment for the next 5 years grew 65% more than we had estimated at the beginning of this year. Near to 50% will be carried out in Brazil, which includes the reinforcement and improvement plan for the ISA CTEEP grid, the installation of [indiscernible], and the construction of transmission projects, including the last one in June. The 22% will be invested in Colombia for the construction of energy transmission projects in connection to renewable energy sources. In Chile, the 19% with incorporation of the Kimal-Lagunas project and the contribution to the Kimal Lo Aguirre project plus the CapEx necessary for the construction of Ruta del Loa and regulatory safety works in road concessions. The 9% will be carried out in Peru in the Coya-Yana and Chincha-Nazca projects. These investment opportunities have already been awarded to ISA and its companies. This amount will grow to the extent that we are awarded new bids or acquire companies in progress as ISA has in the past. Now I would like to give the floor to Juliana Suso, Chief Institutional Relations Officer, who is going to take a very important chapter about the sustainability strategy by ISA. Go ahead, Juliana.

Thanks a lot, John Bayron, and good morning to all the people who are with us today. Today, we want to present the main elements that make up the company's ESG management. We'll take a look at the strategy element. And if you consider that they require a greater depth of some topics, we can schedule an additional space. Please, Virginia, let's go to the next slide. Sustainability management at ISA is based on the generation of sustainable value as strategy sets and as Juan Emilio told us a moment ago. We have solid methodologies to manage the 3 focus of ESG. In the environmental component, we seek to make a positive contribution to the environmental challenges that we face today as a society, as a company. From the social part, we have the conviction that the transformation of the territories and the improvement of the quality of life is possible, thanks to the contribution to the development of the territories where we have presence. And of course, in the governance management, we strive a corporate governance focused on value creation. These actions are leveraged by our corporate programs. Conexión Jaguar, a connection for development and the corporate volunteering, and our program, we are all one. Let's go to the next slide, please, Virginia. In 2021 and 2022, we executed the second measurement of reputation and sustainability. In ISA, we apply a very innovative model that has been very efficient to manage the issues that the company's key stakeholders can see they're important. And also to understand in depth what is the perception that they have about how ISA manages them. The robustness of this model is leveraging more than 3,500 queries, interviews, and we also take into account the vision of members of the Board of Directors of ISA and its company. And this tells us which are the key elements for achieving the business objectives and which are the issues the most could actually destroy trust if not managed. These key aspects are corporate governance, health and safety, social management, environmental challenges, and also, we highlight the expectation that ISA will be a leader in the energy transmission. This is how, in the last measurement, ISA achieved a reputation index of 4.4 out of 5, evidenced solidity in the addressing key issues and a high level of trust in the company. Let's go to the next slide, please. We want to highlight some achievements and management of the ESG matters. In the environmental dimension, the climate strategy is carried under the TCFD guidelines and our efforts have focused on the reduction of emissions of 1,720 tons of CO2 in this period. Also in the permanent control of the technology of the SF leaks, which is the main pollutant gas of energy transmission. And we have maintained a percentage lower than what is considered by the standard of International Electronic Commission. The social dimension reaffirms our commitment to the territory. Through investments close to COP 9 billion and with significant impacts on development, education and economic reactivation, we have managed to benefit nearly 36,000 people in more than 100 municipalities in Colombia. And the most relevant thing is that according to the SROI methodology, that is the social return on investment methodology, these investments with clear and seriously implemented strategic choices would be generating a social value of approximately 2.59x the investment, becoming an investment that is equivalent to about COP 23.310 million. This judicious management has earned us recognition among others of the third place in the ranking of responsible investment in Colombia in the last edition. In the governance dimension, it shows the improvement of the company in its corporate governance with an outstanding result in its compliance with the governance of the country code, an increase in the Dow Jones and FTSE4Good sustainability indexes, and the nomination as a leading company in investor relations and sustainability by ALAS20. The response of ISA to climate challenges and the commitment to the reduction of 11 million tons of CO2 to the planet are sustained through the mitigation hierarchy. The negative impact of our operations is managed from the impact reduction that includes eco-efficiency action, SFC management, and sustainable mobility, likewise we offset our emissions by being carbon neutral in Scope 1 and 2. Moving toward positive impact because we have committed to this contribution. We have a commitment to the new energy businesses and the contributions made from the Jaguar Conexión Program, which in addition to reducing millions of CO2 for the protection of areas, generated a contribution to biodiversity and the protection of fauna and communities with the highest standards of projects at this time. For each of these action, goals have been set for the year 2030, as you can see at the bottom. Let's go to the next slide, please, and let's talk a little bit about how we are doing in those results. As I mentioned a couple of minutes ago, Conexión Jaguar is a program that contributes to the preservation of biodiversity, the mitigation of the impact of climate change, the development of rural communities, and the connectivity of the natural habitat of the Jaguar and Puma in Latin America. This program has goals for the 2023 year, and we shared with you the accumulated progress for the year 2022. We'll soon have 10 projects with potential reductions of more than 7 million tons of CO2, and we have doubled the goal of protected hectares as well as the goal of benefited families. Also as today, we have also surpassed the number of families benefited that we have established for 2030. Let's go to the last slide, please. To finish, how others see us the look of investment analysis regarding this management. What is that level of maturity that we have in rates? And what are the goals innovation that allows us to improve our performance? As you can see, we have a solid maturity level, having high percentiles in indices so important as Dow Jones Sustainability Index, the MSCI, and Sustainalytics, which set goals for the current year and 2030. Our continuous management to strengthen our investors' confidence, to manage risk and advance the positive contribution to the planet and sustainable development goals. Thanks a lot, and I give now the floor to Diana to start with the Q&A part.

Thanks a lot, Juliana, for that very complete explanation of these topics of the ESG topics. Before starting with the Q&A part, I would like to announce a good news and it's that in our website in Investors section there is a valuation kit for each of the companies that we did together with Ecopetrol. The objective of this kit is to allow the construction of an easier and faster exercise to assess ISA and its company using 100% public information. We want you to check this kit and contact to the team for better understanding of it. So now let's open the Q&A session. The first question comes from Lucas [indiscernible]. He says that he would like to know what is our estimate of the impact on the revenues and EBITDA due to the modification of the targets from the national government? Lucas, thanks a lot for the question. Juan Emilio Posada answering that question.

That change in the tariffs that we voluntarily accepted corresponds to a very unusual behavior of the ABB. That grew several times faster than in IPC. And please, Colombian consumer to pay very high tariffs that were according to the real cost and inflation of the production of energy. That's why we thought it was reasonable to accept a voluntary reduction of fees and tends to be the correct easy resolution that allows us, because it's a very regulated industry, allows us to accept this reduction. The estimated impact for the consolidation of ISA is a reduction of about 2% of the revenues in cash generation. Specifically, we're talking about 1 year. One complete year in [indiscernible] is COP 37 billion and Intercolombia, COP 283 billion in revenues. Now specifically, the net income, the impact in 2022 is COP 43 billion. And in 2023, it is COP 169 billion. Those impacts do not affect our level of over-execution of our financial plans regarding 2022 year and the expected for 2023 as our plan 2030. So even without impact of the reduction of tariffs, we are over-executing our financial plan in revenues and net income.

There's a question from one of our shareholders. What is the impact of the tax reform in our financial statements?

Thanks, Diana. John Bayron, could you please answer that question?

Thanks, Juan Emilio. And the impact of the tax reform with a project that was debated is of about [ COP 185.475 billion ] because of the implementation of minimum effective rate of [indiscernible], COP 6 billion because of the discount in research projects and the elimination of commerce. We know that today there's a new project for the second debate. We are in analysis to see what's going to be the additional impact or less impact if there's any modifications as to what is presented.

Thanks a lot, John Bayron. Go ahead, Diana.

There is a question from Andreas Duarte from Corficolombiana. He would like to be reminded about the expected regulation for the transmission business in Colombia is using new requisition of the depreciated asset in the valuation of the investments to see -- could you give us a little bit of data about this regard?

Of course. Cesar, could you please answer this question?

Thanks a lot for the question. Today, what we have valid is [indiscernible]. One is from 2015, presented by the [indiscernible] that has been going through a lot of different phases and a lot of different projects. It's not issued yet. We expect that, hopefully, before the end of the year, there's going to be a resolution for the final proposal. In that regard, what is being debated and the proposal that is on the table is a depreciated asset methodology. But when soon we will have the final resolution, we expect to be at the end of the year or beginning of next year to see if we can apply as of 2024.

Thanks a lot, and thanks for the question. Thanks Cesar for the answer. Go ahead, Diana, please.

So the next question is from Katherine Ortiz of Corredores Davivienda. She wants -- if we clarify a little bit about the tax reform that John Bayron mentioned, it's going to be for the 2023 year, and it's going to be in the net income?

John Bayron, go ahead.

Thanks, Juan Emilio. Yes. The impact I'm talking about are for the 2023 year, remember that the tax income has an impact in the next tax period. They are calculated with the projection that we have for the 2023 year.

Thanks a lot, John Bayron. Go ahead, Diana.

Okay. So there's another question, and it has to do with the ISA2040 strategy. They would like to know we are doing in the definition of that strategy for 2040.

Of course. We have here Patricia Castaño, the Chief Strategy Officer. So please answer.

Of course, thanks a lot, Juan Emilio. Thanks a lot for the question. We are in a series of conversations with our Board of Directors. We had advanced in the first workshop, and we have, for the 22nd of November, a second workshop where we'll continue with these deep reflections about the 2040 strategy. But we have defined so far and what we also believe is very probable is that our strategy for 2030 and its fundamentals continue valid. We're going to expand the goals. We're going to make it a lot more ambitious, but the rationales behind the strategy will continue being based upon the 2030. We hope to tell you a version how is that going to be reflected in the new goals as of 2023.

Thanks a lot, Patricia.

Thanks, Patricia. And now there is a question from Sergio Segura of Credicorp Capital, and he asks if we could share the 5G projects where the company is currently interested to participate in Colombia.

Of course, we have here Eduardo Larrabe from Santiago de Chile, the Chief Road Concessions Officer. Go ahead, Eduardo.

Yes, thanks. What happens is that the potential list, it's 11 projects, we analyze in each of them. But I could answer right now which will be the main projects. That's going to depend a lot on the agility that the foundation for the projects are delivered, because we're still waiting for [ DMD ] to pronounce about the opportunity for tenders. Of course, are interest is to be part of each of them that are part of the road system, and of course, we're going to be present in all of them. Thanks a lot.

Perfect Eduardo. Thanks a lot. Diana, go ahead.

Okay. We don't have more questions so far. So we thank your participation in this presentation of the third quarter results. We hope to see you in future encounters. Thanks a lot for your attendance, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]