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

Good morning, everyone. Welcome, and thanks for being with us today at the conference of results of ISA and its companies for this first quarter. We have our President, Emilio Posada, Daniel Isaza, Vice President of Corporative Finances; Patricia Castano, President of Corporative Strategy; and Andres Villegas Director of Planning and Evaluation of who are going to present today a very interesting chapter with a focus in energy transition. My name Diana Cardona I am from the team, our relationship with investors [Operator Instructions]. Matteo is a person who will support us with this presentation. Matteo, please let's go to the next slide. And at the same time, I give the floor to Juan Emilio, who's going to present the highlighted facts of this first quarter.

Good morning. Welcome all. It's a pleasure to be here in this new occasion. To start, Matteo, please next slide. Before starting with highlighted facts of this period, I'm going to show you that the mentions of ISA 2030 based in the generation of sustainable value on one hand because the results are going to show that, that strategy takes care of these 3 dimensions that I'm going to mention that generation of sustainable valuable has 3 dimensions. The first one is to generate value to the shareholder. In this dimension, we have challenges for 2030, preserving the financial discipline that has characterized us. The second is to create a social impact and environmental impact that is positive. Our strategy contributes actively to caring for the planet and compliant with the objectives of sustainability of the UN. And the third one is to ensure that corporate sustainability. In this dimension, we see that the creation of value to the shareholder and the positive social environmental impact are sustainable and are permanent on the long term in our value proposal, developing this way, no businesses adjacent and permanent with the energetic transition with persistent innovation against digital information, developing new capacities of the human team. The Strategy 2030 is pet to create value through time, transcending the economical value generation, including in social environmental topics being more dynamic, more collaborative and digital. Next slide. Next, we will share 3 important facts of this quarter that validate our commitment to impact in a measurable way, the growth of the countries and are going towards the strategic dimensions that we already mentioned. ISA obtained from ICONTEC the Colombian Institute of Technical norms, a carbon-neutral certificate for 11 of its companies. This fact supports the efforts of the company, not only to reduce and compensate the emissions created by its operation, but also creating a positive impact, social and environmental facing the climate change. [indiscernible] achieve the certification, they considered our voluntary actions in circular economy, which are focused in less consumption of water and energy, reside management, sustainable mobility, use of renewable sources and reduction of emissions of SF6. The gas used in the operation of some of our active specifically at the substations -- transformation substations with this benchmark, either becomes the company, the transmission company certified by ICONTEC with greatest geographical coverage in the region, in the LATAM region. Another important achievement in this quarter was obtaining the bronze medal delivered by S&P Global Sustainability Yearbook, which recognizes the most sustainable companies. For this addition, S&P located ISA on the 13th place locating it as one of the most sustainable within the industry. For the seventh year in a row, ISA became part of this list that considers the work of the companies according to the SAG criteria where ISA has been doing through its programs impacting positively the environment and generated progress within the region. Within the innovation initiatives of ISA, along with Rockstar, we selected 10 start-ups to approach challenges in the energetic field. These startups will strengthen the ecosystem within the energy tech sector of LATAM and will provide electromobility, access to renewable energies, digitalization of business and energy efficiency. The investments executed were give value to the stakeholders and created a positive impact within the country. During the first quarter, we invested COP 1.4 billion, number that becomes an upward of ISA to the energetic transition as great part of these projects will allow the nonconventional renewal energy entrance to the interconnected systems of the nations will contribute to the strengthening of the energy transmission network, improving its reliability and its capacities. Looking at it per country, the CapEx is distributed in the following manner. In Colombia, we concentrated 27% of CapEx, and we advance in the construction of 9 projects. For connections or high-voltage connections with renewable energy sources, nonconventional sources that were connected to the in-transmission network. And we increased our capacity and 29% was focused in Brazil where ISA [indiscernible] continued working in its reinforcement and improvement plans, executing 6 transmission projects that were we were acquired through different bids. We continue with our 2 main businesses. Transmission of electric energy. We worked in the increase of 3 groups in Chile, including Lagunas, 100% ISA and Kimal-Lo Aguirre, which is 33% belongs to ISA. Now we keep working building the concession routes of law as well as improving that road safety that generates no income and extension of our concessions. In Peru, Finally, we advanced in 8 projects that include 3 reinforcements to substations and collections and the projects, Coya, Yana, and Chincha-Nazca, t's important to alike to say that if we analyze these numbers, subtracting what belongs to minatory shareholders of the affiliates we control, I mean especially [ Setepia ], Brazil and [indiscernible] Peru. The composition of the execution of investment of ISA in the first quarter was mainly in Colombia with 36%, followed by Chile with 34%; Peru with 16% and finally, Brazil with 14%. The cost of this investment done in the first quarter, adjusted by military participations of third parties in [ Viejo ] we control has its COP 1 billion. On the other hand, during that trimester, we were -- we had 13 expansions that will add a CapEx of $80 million and will add kilometers to the network. About these projects besides reinforcement of 15 improvements in ISA CTEEP, interconnection of [ Itau], we started commercial operation partial with the rights to 68% of its regulated annual income equivalent to $8 million. Matteo, let's go to the next slide. As I was sharing with you in the last meeting, one of our focus this year that working with our 3 strategic dimensions. In other words, a sustainable value to the stakeholder with positive and social environmental impact and corporative improvement is to grow in a disciplined manner in order to be main chapters of the energetic transition focused in the human being. Please recall that without transmission, there is no transition, without transmission of electricity, there is no electric -- possible electric transmission. In the next transition, in the next 12 months, the organic opportunities to invest and to $20 billion. 72% belongs to the electric transmission business and 28% to the business of roads. Looking at it per country, Colombia, we expect to have convectors from the planning unit by [indiscernible] that will go over $2 billion and bids in roads for 1 billion that include a bit of the second wave of the 5G concessions. In Brazil, there is going to be a bid for a project by [indiscernible] by $10 billion. So this volume of bids for electric transmission in Brazil is 3.5x greater than the average bidded in the last 5 years. At ISA, we will analyze this portfolio of opportunities in Brazil, and we will participate on the bids for an amount that's not very different from the previous years. In Chile, we've identified opportunities for $530 billion in electric transmission lines, substations, and on storage project of large-scale batteries. Also in Chile, for the roads, we expect to work at the bid for routes that are already exist at the Ministry of Public Works for $4.8 billion. And Peru, Finally, we've identified opportunities in bids in transmission and energy transmission for $1 billion, including the second bid for the interconnection between Peru and Ecuador. Now we'll give the floor to Daniel so he can present the financial results of this quarter. Thank you very much.

Thank you, Juan Emilio. Good morning to everyone. We will start to talk about the whole financial results of the first quarter of 2023. As a general comment, I'm very happy to report the very positive results in the first quarter of 2023. We have income and EBITDA in the transmission and roads business is growing over 30%. The total income of EBITDA quarter were 3.9 billion, 41% more than the first quarter of 2022 and EBITDA to COP 2.7 billion, which is 38% more compared to first quarter of 2022. You look at these by businesses as it's seen in the upper portion of the slide you have on your screen, the incomes of transmission will grow 35% strengthened by the contractor escalators, greater income in Brazil operation of projects in the whole geography and also by efficiencies in energizing projects. In Brazil, the business of road grew 81% compared to the first quarter of '22. And these increases explained by greater income in construction in the lower routes of Arauca and the [indiscernible] and also very relevant due to the change in the financial active in Chile with the third trimester of '20 in the third quarter, '22, we changed to change from Chilean pesos now to Fomentos in order to have a natural courage with the cost of the debt, representing an increase in net income in the road business in Chile. In telecommunication, we had greater income, 16% and -- we -- the contract in dollars. We had several contracts in dollars by indexation of the representative market. We had greater connectivity, Internet services between Peru and Colombia. On the EBITDA, you can see the data on the lower right side of your slide, I would like to mention that the EBITDA without construction that recognizes efficiency, so the profitability in the margin of operations of the business operational business increased 0.84% in the first trimester to 85%. And when we look at the total EBITDA margin, we see a decrease of 2 points of 71 to 69, but please consider that what is happening is that here, we're mixing construction and operational businesses. And in a quarter where we have greater construction income that have a lower margin. In the combined margin, we will see a decrease, but the fundamentals behind these markets are still solid, and greatest part of our income come from the business of operation where we still have 85% margins, 1 percentage point above what we had on the first quarter of '22. Let's go to the next slide. In this slide that you see here, we're making a bridge between the gross income of ISA from the 433 million to the first trimester of '23, which is COP 828 million. The increase is 92% in the net income. If we understand this as return on the [indiscernible], this is a ROAE that takes -- the indicator comes from 11% to 15%. Besides the EBITDA and income terms, it grows the operational income without construction growth and the incomes and the results that are controlled even though there's an increase of 31% in the AOM that is explained by the operation of new projects between April 1, 2022, and March 30, 2023. Well, a little thing that we need to consider here is that all these new projects have associated income. So we have a positive margin, increase that income even though we also increased our costs. We also need to consider the inflation of the AOM costs, which are complex or need to be careful. We need to be careful. But there are compensated in the fact that the base of our income have escalators that also reflect the changes in price levels. So even though we increased the AOM on the net - ISA's net results to the protection of this company towards inflation, we have more positive results. I would also like to mention that in the modification of -- in the income, we have a modification in the way we change from peso Chilena to U.S. So this is an effect that has nothing to do with the cash flow. It asks how we consider these in the financial flow. So we don't consider 97 million in the increase of the profit because accounting and IFRS does have an effect. So the profit will go from 91% to 70%, which is a high -- a very important number. Also, I want to check in this presentation and that we showed at the shareholders' meeting [indiscernible] present to the market. Our profitability considering the path ROAE. We wanted to use this in order to provide better information to the market and information that could be compared with that reported with other investment alternatives and with peers from ISA. So we are using that ROAE that includes that A, which means it's an average port [indiscernible] to understand the profitability in terms of the -- so we also -- we considered 2022 and 2023, we increased from 11% to 15%. In this slide, there is some information about the level -- the leverage level of ESA and how it varied from December 2022, we're comparing with March 2023. As you can see, the increase in absolute terms is 1%. We have accepted that is similar to what we have at December 2022. Nevertheless, we had -- we paid some debt in Brazil, Chile, Peru, Colombia, and we haven't got no debt this first quarter. Also, a convention effect because we decreased the value of the debt since there's a revaluation of the Colombian peso, so that we have in foreign currency is loaded on the balance in 2023 at a lower rate aligned with what we announced in the report of the first quarter of the fourth quarter of 2022, excuse me we see the EBITDA going down from 4.2 million that we closed a year to 3.9%. And the position has increased to 6.7 billion. Here, besides generating cash during the period, there is a reclassification of investors in short-term investments that became cash available. And if you add to the short-term investments that are not within these cash, we will have a total liquidity at March of COP 7.1 billion. The EBITDA here is 3.1%. And again, that is at the same level. So EBITDA increased and the cash position is stronger that index has a sensible lower from the EBITDA that we had at the closure of the balance of 2022. So let's go to the next slide, and then I give the floor to Andres Villegas, who is going to present a special chapter about energetic transition. Thank you very much.

Good morning. Thank you, Daniel. Yes. The next slide will talk a little bit about the infrastructure and on what Juan Emilio mentioned in his initial message, the transmission infrastructure that needs to be understood within the energetic transition environment. Next slide. So the infrastructure right now corresponds to 48%, almost 49 kilometers of circuit and in total, around 106 megavolt Amperes of transformer capacity. This capacity of transformation refers to the capacity that substations have to transfer that energy that travels to the high-tension networks to the low and medium touching and then to be distributed to the final customers. If these numbers are seen, considering not only the control and noncontrolled companies, we are talking about 70,000 kilometers of circuit and around 137,000 NPAs in transformer capacity. This network, which is in operation grows, keeps growing and function of no projects due to the participation in bids in expansion projects. And right now, it implies a value of around 5,000 kilometers of new transmission circuits and over 16,000 transformer capacity MDA. These network in construction needs to be understood in a different environment. And here is where it makes sense to talk about transition and the role transmission has within transition. So let's go to the next slide, please. Of this topic, many things have been written. There is lots of information available. Here, we're taking the liberty to bring 3 examples to be able to present to you basic concepts. So you can understand the important role that transmission has with the transition. So let's start with the first topic that refers to the paper on the left, which is our paper published January 2023 written by Bill gate. This is surprising because Mr. Gates is writing about transmission, but the most interesting thing is that his definition of transmission as a key element in order to have a future of clean energy. And the reasoning, and I hope you have the opportunity to read this. I invite you, it's a very short, simple document in very simple words, what he says, it's something very basic. In a scenario of deep decarbonization, there's an interesting of all countries and all systems to have access to renewable nonconventional energy sources, understanding, of course, that some of these solutions can be developed and be delivered to the system in a distributed manner. The generation in great scale is usually far away from the demand centers. So this obligates to build no transmission infrastructure. Now that generation that is inserted within the system also creates our change, which is part of the transition process that leads to some solutions that will be more electrified in more electrified economy. So that would meet a greater increase of demand that way, not only due to the connection of renewable energies, but the increase of demand due to the electrification of economy that networks need to be updated. And I call the attention on this. In general, when we talk about the role of transformation, we need to understand it that we're under a double concept, not only building new infrastructure, but also updating, modernizing, adapting that network for the new conditions. This is clear. If you don't recall, most of our infrastructure was created a long time ago. So we talk of infrastructure with over 50, 70 years. So updating is a very important priority now. This effort of updating the electric grid is not easy. Mr. Gates even says in a very simple way, he emphasizes that the challenges of the development of the network of the grid is associated to 3Ps. He talks about piece, planning, payment and permissions in order to develop the grids required by that transition. And finally, he concludes something that we placed here as the heading of these articles. If you care about climate change, you should care about transmission because the human beings are wise enough to consider this, but if you can serve a climate change, we need to be concerned about transmission. The first article is very simple, but it's a powerful about what it means transition and transmission. Now all these -- what all these leaders is to a transformation process within the grid, especially of the electric grid. The transition is a process -- evolution process in a transformation scenario, which means that the grid, which is a basic component also needs to be transformed and the grids have to grow their capacity and the second article from the economist April this year says that the expectation of a great redevelopment is expected during the following decades. So how much growth are we going to have? So now we have this document on the right that talks about the expectation to grow between 2 and 3x, both the length of the grid as its capacity. So it's not a growth that's measured only in by kilometers, but also net grid capacity growth that is going to be very substantial in the emerging markets. All this vision of growth of transmission from ISA, we've [indiscernible] through 3 important elements. The first one in terms of the expansion, renovation and modernization of the infrastructure that leads that wants to have a better use of the available capacities. We are clear that our infrastructure to grow in length, but we also need to grow in capacity. The second very relevant topic was the beginning of the justification of these grids, we need to connect new renewable energy sources, connect them through transmission infrastructure. It's an ether-grade priority within the division of transmission as platform to transition is development of interconnections that will allow the growth of the regional market expands the market and gives us access to new renewable sources. So our vision of transmission under these contexts launches solutions towards these 3 important priorities. Next slide. So being clear on these, let's go back on our numbers. And now they start to make more sense. We start in operation in 2019 to 2023, over 1,000 kilometers per year in total 5,000 kilometers of circuit 1,800 transformer capacities. And now we have another line what did have before, which is with storage capacity per patters in Brazil, in the image at the left, you can see the substation with this project. So we're not only adding kilometers, but storage. So if we go back and look with more detail, the 4,600 kilometers and 1,600 MBA tens former capacity. What we have now is a representative sample of solutions we are trying to identify in the previous slide. In other words, those 4,671 kilometers are not only traditional expansion. We also have the new technologies, transmission technology with high tension in direct in HPC. Now we have a project that we're building. And we have in the portfolio opportunities, no projects in HSBC HVDC project. We also have a flexible transmission that allow to direct the flow to increase the capacity and make a better use of the available infrastructure. So in the portfolio, we have solutions that are being developed in Colombia. I didn't include them within the list, but we also have a project that's being executed to re-potentialize to increase the capacity of conversion of a transmission line in Peru, which has changed from 220 kilowatts to 500 kilowatts, duplicating the capacity of the line without building on additional kilobar. Now we also have connection to renewable sources, contracts to integrate to the system at 1,300 megabytes in Colombia with capacity of 600 megawatts during this year, we have an expectation of other 600 million next year. And if we look at this in the mentioned terms, we are talking about expansion of the network renewable connection. And in the portfolio, we also have several interconnection projects that we're working on, not yet being executed. We still are presenting some offers, especially in Ecuador and also in Colombia. So simply, I summarize in these slides that we can measure our growth not only in kilometers because that high powerful messages are the type of solutions, we're implementing solutions like re-potentializing [ don't add ] kilometers, but duplicate capacity. So the challenge, the transmission challenge as based on the transition we're going through it through solutions. And in the future, we hope to have great diversity of these type of projects that we won't see reflected exclusively in terms of kilometers. Next slide, please. To conclude our greatest challenge and our aspiration is to keep building our growth path. And so, to the 70,000 we already have and considering control noncontrolled companies and facing the 10,000 we had over 20 years ago, the expectation to 2030 is to reach 100 kilometers of net of grid -- we've tried to reflect this here in this graph. They have a different color. They have a different taste associated to this challenge of developing infrastructure that will respond to superior attributes, not limited exclusively to -- but ensuring the resilience the safety of the service as it's done from a sustainable fair sustainable transition. So if we consider what real case says, if you care about climate change, you should care about transmission. So we must be concerned in transmission, if we are really interested or concerned or in solving the issues of climate change. So I finish and give the floor to Juan Emilio for the final messages.

Andres thank you very much. And I would like to close with 3 messages that summarize this presentation. The first one, we had very solid financial results with growth over 30% in the main numbers with growth in the profitability reflected in an ROAE of 15%. This is a reflection of ISA's resilience and the strength of the attributes of our business model and especially of our human team and our talent. Of course, we generated value to our shareholders as is dictated by one of the dimensions of our 2030 strategy to provide sustainable value. The second message is that we have growth perspectives that are very ambitious, are supported on our portfolio of opportunities with $20 billion in that region, and we have the financial support to keep scanning ISA's footprint within the region and to deliver our sustainable value proposal. And third, we will continue giving important steps towards an energetic transition that would be inclusive, sustainable focused in the human being that at the same time, will help us to move forward in a tangible manner in these 3 strategic pillars: the generating value to the shareholder positive impact on social and environmental and to maintain our corporative importance in all the countries in all the region. So we'll go to the next slide to start the Q&A session. Again, Daniel, thank you, and I give the floor to Diana.

Thank you, Juan Emilio. So here, we have several questions from the people who are with us today. We will start with the following, which is as Roberto Paniagua from Casals. He would like to know our opinion about a possible change of is role in the energy chain due to the modifications of the national development plan.

Well, our strategy is the same. As we -- as our core is energy transmission and its adjacent businesses. And there are new businesses of electric energy adjacent to transmission. For example, the storage, we have the legal possibility to generate energy in other countries different from Colombia. And up until now, we haven't used this possibility. This big possibility since the strategy has been to use these huge opportunities mentioned by Andres Villegas in the energy transmission business. Please recall the world needs to do great investments in the region, specifically to update its transmission grid and to increase for several times, the energy transmission network as a result of the needs of the electrification process in the world in order to create an energetic translation that would lead us to reduce an increase to 1.5 degrees in the planet's temperature compared to the industrial area. So for us, it doesn't have a huge material impact effect that the Colombian Congress is successful or not with the article of the national development plan that will allow the vertical implementation of ESA in other phases of the productive chain in Colombia.

Here, continuing with our friend Roberto Paniagua from Casals. He would also like to know which is the evolution on our expectations on the bids in Brazil. As we mentioned, we will have big lots in June and December 2023.

Thank you, Diana. And thanks, Roberto, for your questions. In Brazil, we have a possibility to participate up to $10 billion in different bids for energy -- electric energy business in 2023. Of course, we will not participate in all of them. We will priority those where we have greater synergies and competitive advantages, and we've always selected some of the bids in June and December where we will focus our efforts to prepare in order to present our proposal in the bid. This year, the pipeline is pretty large, 10 billion. Of course, we will have to be very selective in that prioritization. And we are sure that, that we will be able to comply with and add a backlog and CapEx commitments to our business in Brazil since the dynamic of the bid in Brazil is pretty healthy. The fact that we have many opportunities in Brazil due to the size of the economy does not necessarily imply that we will take -- participate in an incorrect manner because we have a very healthy performance with health performance, so we will be coordinating and balancing these opportunities in Brazil with the good opportunities that we also see in Colombia, Chile and Peru.

Thank you very much. I will continue with one question made by 2 person, Florencia and Agustin related with the suppliers' account that had an important increase this quarter, and they ask they should continue in these high levels.

Florencia and Agustin thanks for your question. And I give the floor to [indiscernible], so he can give us a more detailed and professional answer since his specialists on this topic.

Okay. Thank you, Juan Emilio. Thanks for the question, which is pretty relevant because, yes, in the financial states this quarter, both individually as consolidated, we see an increase that is relevant in the accounts receivables of the suppliers, but also the payments of dividends to the shareholders. So as we mentioned and the General Assembly approved dividends of COP 1.2 billion. So dividends, this capital are -- should be paid in March to the shareholders, so it increases the accounts payable of the company. So we have the registry of these dividends. If you measure the account with those dividends, we see a decrease in the other accounts payable. And in a consolidated manner, we have to consider that we consolidate per line CP and Red CPM. And also there, we add a component that needs to be paid of dividends to [indiscernible] shareholders, different from ISA because the component that is to be paid to ISA are canceled in the consolidation line by line to the subsidiaries that we control. Thanks for that question. So there's a second element in this question. How does this account behave from now? Well, we need to recall that it is just dividends, we pay 50% in March, 50%, 1.9 million will be paid in May, and the other 50 million will be paid in December where we have the second payment of dividends authorized by the general assembly in 2023. Thank you.