Promigas S.A. E.S.P. (PROMIGAS) Earnings Call Transcript & Summary

Good morning. Welcome, everyone, to this presentation of quarterly results of third quarter 2020. My name is Juliana Vergara, Director of Relations. In the platform, we will enable a space for questions and will be -- those questions will be answered in the end of the question. Taking account that this call is being recorded. Today, we have with us Eric Flesch, President of Promigas and Financial Administrative Vice President. In the introduction, I give the floor to Dr. Flesch to start the presentation.

Good morning, everyone. On behalf of the Promigas team and presidents, on my behalf, too, I appreciate all the investors, shareholders, the people who are joining this video call, we are pleased to introduce the results of the third quarter 2020 of Promigas. In the end, as Juliana says, we will answer questions. Let us go through the presentation. The content of the presentation is relevant facts, corporate aspects. We are going to go through the transportation and distribution. And we will mention the main figures of our financial balance. Regarding the most relevant facts of the third quarter 2020, we had the bond issuance in the international capital market for a value of $120 million. After initial indication of $100 million, it was possible. Thanks to an order book that reached a total of $818 million to bid to cover 8x. Also, we launched the open season process, where we use the tool to be able to provide a country with a new transport infrastructure of 300 kilometers between Córdoba and [indiscernible] this project would cost $400 million. The gas plant will be 300 kilometers long, and the idea is to connect the coast with the interior of the country. We also had a bond issuance in the market. We placed bonds or COP 600,000. We had bid to cover demand of 1.74. The last IPC was 5 years and 25 years for UVR. These are the lowest in bond emission made in local market in 2020. We also received qualifications of buildings that show the good energy. Promigas received certification at an original level and Fitch rating with international scale, local -- AAA local scale and BBB international scales. So if you COP 262,411 million indicates execution of 103%. Net income, COP 212,761 million execution and it represents 104%. That is we have handled a comprehensive health and the work at home management. The results have been satisfactory. We have seen the involvement of all the collaborators. Promigas reaches a stock -- capital of $2.2 billion. And responding to COVID, Promigas has been a conscious company and has been the first priority to protect the workers. We have 60% of our workers working from home, 918 belong to 40%, they work in the field and some of them in the office. The operation has been on 100% normal without any problem. We have supported our customer through temporary flexibility of transport contract. We have financed users 1, 2, 3, 4 social class in the Brilla and other concepts in gas billing and we have a return plan in our offices in the first quarter of 2021. The date is under analysis and the risks in the country, et cetera, with a prevention strategy and handling strategy to avoid our workers to spread the virus or to get the virus. Regarding the corporate aspects, we can say that it was the hardest months. Our results match the situation of the customers. We continue supporting the recovery of the Colombian and Peruvian economies with our transportation and distribution infrastructure. We see that the Colombian resiliency of the companies is good. So joining efforts, we will approach close levels to what we budgeted in 2020. I will share with you the main numbers of the third quarter and the end of the year for the market. We will have more details. I can say that the third quarter, our income were $0.3 billion, execution of 97% EBITDA reached 0.2 -- 103% with $0.2 billion and net income of 104% execution $0.2 billion, really the effort of the company, the control of expenditures and costs has been important by the fact that the income have lowered part of the EBITDA we reached the budget in this third quarter. The result are accumulated for 2020. We see the revenue have reached 99% execution. The number is COP 0.9 billion (sic) $0.9 billion. EBITDA again is above 100% with $0.7 billion and net income $0.6 billion. That means an execution of the budget of 98%. Out of this result, 49% comes from the share market providers and 51% Promigas. Regarding the consolidated state -- financial states is a 90% execution with COP 1.0 billion (sic) $1.0 billion of revenue. EBITDA is $0.3 billion, with execution of 109%. And net income $0.2 billion with execution of 106%. They belong to the third quarter 2020 and 46% is due to providers and 54% transport. In the accumulated September 2020 results, we have revenues of COP 3.1 million (sic) $3.1 billion, with EBITDA COP 1.9 billion (sic) $1.1 billion with execution of 104%. And net income of $0.6 billion with execution of 99%. Really, the numbers, despite this situation, that the -- well, is going to -- we practically are close to the budget with all the effort made towards expenditures and costs. The main facts or strategic business groups, we have the following. On the closing of the third quarter, we have 3,291 kilometers of gas pipelines. Transport capacity volume transported is 458. And regasification, we have installed capacity of [ 100 million ] daily. Regasification, we have [ 12,621 million ]. And regasification 60% -- 70% means 191 days. Regarding the generation capacity, we have 46.85 megawatts with gas treatment capacity of 35 million cubic feet. In the distribution part, we can say that this year, we have 150,000 new users. In Colombia, we have 3.79 million, that belong to 38% of the country. In Peru, 1.11 million for a total of 94% of users. So the total is [ 902 ] total. We have 64,000 kilometers of laid networks. And gas sale is [ 8,000 cubic meters -- million cubic meters ] in Colombia, 2,000 in Colombia -- more than 2,000 in Colombia, more than 5,000 in Peru. Due to the pandemic, we have had these numbers. Regarding the nonbank financing, we have 3.6 million users. We have had an increase of 10%. The portfolio is $963,259 million. And the placement this year fell 52% due to the pandemic, and we have placed COP 275,750 million (sic) $275,750 million Regarding the electric power, we have to date 406,476 users. And the gas demand is 741 gigawatts. The losses reached 14%, which is a reasonable figure. And laid networks, we have 27,864 kilometers. Regarding the sustainable management, relevant facts, we have received a rank by the 100 companies and leaders with the best reputation in Colombia 2020, carried out by the Corporate Business Monitor Reputation, Merco. Also, we have contributed with COP 4 million (sic) COP 4 billion for medical supplies and hospital elements in the Department of Atlántico. We have held more than 80 families, victims of the fire in Tasajera. We have worked with respect, enthusiasm and good energy, always. We were recognized by Cincel as one of the 4 companies awarded by the categories of quality of organizational climate and healthy work environment. Regarding the sustainable management, we have received an award by the Ministry of Sciences and Technology and Innovation of the Republic. We have research and innovation and development. This places Promigas in the first company in the Colombia oil and gas sector to have this recognition. We also have received Stock Exchange recognition granted by the Colombia Stock Exchange for our transparency and good practices in the relation with shareholders and investors. Also, we received the company of Western part of [indiscernible] we received the business innovation ranking. Next, we are sharing the main results of the operation in Colombia and Peru. We can say, in Colombia, we participate through 4 companies from the West and the East. We transport 50% of natural gas. We count with 3,200 pipelines and we have regasification plant in Cartagena. We also have a value -- added value through the producers in the gas plants. Through these last 5 years, the country has extended. Out of these 372 were installed by Promigas. This means that 82% of expansion of the gas network in the country, we have the network. The blue lines belong to Promigas gas plants and the -- it's companies. The investment has been $473 million. In the last 5 years, the increase of the capability has been more than 200 million cubic feet. Transportation results through the Promigas company, Transmetano, Transoccidente, Promioriente and Cartagena. The transportation has income based in January and September by COP 908,887 million , an increase of 2%. In the third quarter, the income was COP 320,092 compared to 1% -- plus/minus 1% growth compared to 2019. The most relevant aspect of the period, we can mention the next following regarding the sectors. Thermoelectric in September had an increase of 22% with a fall of 6% distribution by minus 27%. And the rest, minus 34% in the end. During the year, the gas transportation had an increase of 2%. Nevertheless, in the third quarter, the number dropped to 6%, especially by the health emergency due to COVID-19. And it means the thermoelectric sector, the plant in the coast area has covered the demand first in the third quarter where the [ dams ] reached to the lowest numbers. Thanks to our plant -- gas plant in Cartagena, we were able to guarantee the delivery of the energy service in the coast area. The industrial sector shows 6% of distribution due to the COVID. The distribution sector has shown this drop. At the end of the third quarter of the year, Promigas reached length of pipelines of 2,755 and transportation capacity of [ 951 cubic feet -- million cubic meters ], I'm sorry. Additional relevant numbers in the period. We have transported 32 million cubic feet. Between January and September, it was [ 28.5 million cubic meters ] that was less than 10%. So this -- this drop is due to the piece of consumption in the business and industries served directly by the Vanti distributor and decreasing consumption in the Barrancabermeja refinery due to the COVID emergency. In Atlántico, we also have a decrease of minus 7.9% and 3.6%. Basically, that is the consumption in the regulated industry and we hope we recover the usual levels in 2021. And the relevant aspect to finish, we -- efficiency and safety of the transportation system is guaranteed, including the executive expansion that serves market in Cartagena and Barranquilla, we replaced the pipeline in Riohacha. And we have the replacement of the 20 inches pipeline. It's approximate length of 8 kilometers in Riohacha. This guarantees the well-functioning of the pipeline, as always, we have done, this service. We have received the current risk rating, 20th consecutive year of AAA at national level for; 10 consecutive year, BBB, at international level. Moody's has awarded second year Baa3 at an international level. They reflect consistency of our credit quality and it is important to mention to the resources in terms of illiquidity in advanced market conditions. In Promigas, the transport volume for the third quarter has an increase of 2% compared to third quarter of last year. We had failures in the thermical generation -- thermic generation. And on Promisol, we held the replacement of the pipeline, Guajira, Riohacha. The works in 50% development. It will be finished in December. This is the infrastructure of the natural gas and liquid gas. As I told you before, we are the company that has the only regasification plant in the country. So it strengthens the energy matrix, where we had a low production as it happened in the first quarter this year. We have emergency maintenance, availability of energy transmission or delivering our natural gas in Colombia. It's been a great benefit for the country. So far, we have received 14 compared to 6 compared to the previous year, an increase of 7%. We have received more than 180,000 cubic meters of gas, an increase of 94% in the year. We have increased the cubic meters -- the cubic feet with an increase of 134%. And we have regassified 191 days in the year. As we said in the first quarter to our regasification ensure the regasification in the country in the Atlantic coast. In the quarter, we see a trend to drop, which is normal in this season of the year. The regasification plant used the thermic energy. And we reached delivery caps of 179 cubic feet (sic) 159 million cubic feet of natural gas They generate 160,000 gigabytes (sic) 1,600 gigabytes of energy with the electric energy system and avoided problems in the transmission system. We have announced the possibility of broadening the gas plants to deliver and contribute to the energy security. We haven't made a decision yet. Regarding regulation aspects through the CREG Resolution 325 (sic) CREG Resolution 135 of 2020, we changed the stock market in Colombia. A new delivery will start in the following 5 years. The solution of the energy and mining ministry in 2020 extends to July. The transportation gas bill for the houses of classes 1, 2, 3, 4, Resolution 323 (sic) Resolution 153 of 2020, we're going to grant 2 to 4 months. We modified the Regulation of 2020. With the 4 quarter, there is a modification of the loss for gas transportation. We have a calculation of the rate. We have a resolution for the head consultation for -- to regulate the transportation activity. There was a consultation on a procedure for calculating the rates. There was a commissioning that included transportation of cash. Regarding the distribution results, we have 4.9 million users in natural gas between Colombia and Peru. These users are provided by Promigas and 38% belong to Promigas in Colombia too. We -- with electric power, we offered -- delivered to more than 400,000 users. Regarding the natural gas in 2015, we had 64% of the country was covered by natural gas with almost 8 million of emission in 2019. We were -- we had [ 19 of 0.8 million ]. That is a significant number year after year. To highlight is that 86% of these users connected are social class 1, 2, 3 and 4. The service, it means better life quality. This is very important. In Colombia, 10 million users are connected. Colombia, we have the 3 Americas 71% and Argentina, 77% -- 67%. So we have Mexico lagging behind with 8%. Practically 15 years ago, there was an increase. And we hope in Peru, we reached Colombia in the following years. Regarding the results of distribution of the third quarter, the income were [ COP 2,018 million ]. It was an increase of 3% of income. And in July, September, we have increase of 1% with COP 753,658 million. Relevant aspects, we can say the users increased -- accumulated users increased 3%; and connections, we had minus 27%; population served [ 863 ]. Laid networks, almost 50,000 kilometers. And gas sold, minus 10%. So gas distribution in Colombia represents 77% of total users of the distribution. That is 23% to users in Cálidda, Quavii in Peru. The decrease in connections compared to September 2019 is a result of coverage by natural gas distribution in companies, 91% in Gases de Occidente, Surtigas 97%, Gases del Caribe with 90%. As long as we have coverage close to 100%, the penetration in the 36 new towns population settlement reflects the permanent commitment of Promigas to massify the natural gas service to the countries, families and cartographic update, 20 new populated settlements were reached. 43% of the gas sold corresponds to the distribution business and 57% to retail. The demand behavior was affected by COVID and the lowest sales correspond to the decrease in retail. And in commercial and industrial volumes as main aspects. In Peru, we can say that accumulated users, we have received 14% more. We are over 1 million users and period connections with 74,195 connection has served 5%. And despite the pandemic, the network laid was -- we had an increase of 13%, and gas sold was minus 10% due to the pandemic. 1 million users served with a coverage of 89%. We invoiced 5.439 (sic) 5,439 million cubic meters of gas and 620 million cubic meters compared to the accumulated as of September 2019. In Quavii, we distributed 53 million cubic meters of natural gas. That is 104% starting practically from 0. Most amount of the customers are houses -- households, and we increased our -- reached our coverage of 48% is an increase of 8%, closing the third quarter with a total of 107,000 users, exceeding the contractor requirements by 6.2%. The main regulation aspect, we can say in Colombia that the Ministry of Mines and Energy with resources from the FECF granted additional subsidy of 10% over the subsistence consumption of the natural gas service to social classes 1 and 2 for 2 billing cycles that was extended, the residential natural gas service bill to additional cycle. The distribution companies presented the rate files for the approval of the new charges in accordance with those established in the circular of #62 of 2020. The relevant aspects in the distribution of electric energy for the year and we eliminate cancellation, and we modify the formula for the production. So operation highlight, we can say from July to September, we had 3,497 new users were connected to the network, accumulating a total of 406,000. The energy demand served directly by the company was 177 gigawatt hour, reaching 518 gigawatts at the end of September for a total of 741 gigawatts by CEO networks. With the aim of improving the quality of the service, the company registered a commercial loss indicator of 14.19%, lower than 17.17%. Regarding Brilla, our financing program, we can say that it has been seen as a very good business model by the World Bank, the G-20, the Financial Times. It's a successful example of an inclusive sustainable business that seeks to Improve the quality of life of the users and helps them achieve their progress milestones. Given the COVID-19 and the measures adopted by the national government, the credit placements have been affected. 181,066 users have been benefited from January to September, accumulating 3.6 million since the beginning of the program. And you can see in the slide that 95% of these users in the program are social class 1, 2 and 3. So as of September 30, 2020, it was COP 963,259 million that is minus 0.6% compared to the same period in 2019. So 90 days past due the portfolio index. It was good for our standards of 2.54%, lower than the national banking average for consumer loans. Regarding the financial statements, I will give floor to our CFO so that he can review the main figures.

Thank you very much, Dr. Flesch. Regarding the profit and loss of Promigas, when we see the results of the third quarter of 2020 compared to third quarter of the previous year, we see that there was an increase of 3.2% (sic) [ 0.3% ] passing from COP 309 million to [ COP 308 million ]. So the EBITDA, which raised 2%, from COP 257.909 million. So the net income decreased 7% from the COP 227.661 million to COP 212.761 million. The reason is that income we mentioned in the numbers represent 97% of the accomplishment of the budget. We saw an increase of the transportation and also the hydric generation. To serve the demand of the thermic, we increased the exchange rate. In the participation, there was a decrease of 9%, mainly in some of the companies that we mentioned like Surtigas, since during 2019, there were recoveries associated with the portfolio due to the strategies implemented in the management that we didn't have during 2020. In Peru, there was a lower number of connection and higher financial expenses due to the higher debt balance as a result of the strategy of ensuring from the start of the necessary resources of the year activities in 2020. Promisol, we had delays in the construction works due to the effect of the pandemic. And the EBITDA reached COP 262.411 million, 103% of the budget. We have our President mentioned it. There was a control -- a strict control on the expenditures and costs implemented in the development of the coverage to face the COVID-19. The net income increased 104% with an execution of the budget to reach COP 212 million and mainly due to a lower income tax due to a lower tax benefit compared to '19 -- 2019 due to the lower investments made for expansion projects as a result of the impact of COVID-19. We had higher depreciation and amortization due to the capitalization of the Paiva-Caracolí gas pipeline and compressor stations. When we see the same results, but already accumulated as of September 2020 versus 2019, we see an increase of revenues of 8%, since we reached COP 928.317 million compared to COP 856.966 million. The EBITDA that is important reported or increased 10%, reaching COP 765.254 million. And net income increased 1% when we reached COP 636.570 million. Regarding the income, there is an accomplishment of [ 99% ] for the reasons, during March, April and May, an increase of the volume due to the thermic dispatches of the Coast with the hydric generation that reached 2,000 meters of water, the lowest levels in these 25 to 30 years, that generated, we had to compensate the gas -- an increase of our gasification plants, regasifying the gas to deliver for the demand of the thermics. In the accumulated participation, we had the delays in construction works due to COVID-19. And during 2019, most of the activities related to the construction of 100 million project were executed. It came through operation, it is serving to satisfy the demand in the Atlantic Coast. At Quavii, in Peru, we had less connections, higher depreciation and amortization, higher portfolio of provisions due to state of emergency or COVID-19, higher financial expenses due to the higher debt balance. Surtigas, we had expenses for donations to serve for COVID and higher deferred tax, since in the previous year, an adjustment was made in the calculation methodology for the financial asset granted. The EBITDA, despite covered 99% of the budget, reaches 101% of the budget. It is an increase mainly due to higher operating revenue and smaller increase in costs and expenses due to the environment that surrounds us for developing our operations. Regarding the net income, we had an increase of 10% to date of assets. And regarding the assets, the cash on investments is 79% of the total assets, because we obtained loans in March and April to respond to the COVID-19 emergency. In this case, we tried to minimize the negative. And the main objective was to reduce the CapEx and OpEx of the company in case the bank market reached important numbers. The other current assets was 88% due to dividends declared by the related companies in the March 2020 meetings. It is an increase the assets under construction 3% increase because of the process (sic) progress in the execution of projects such as: Jobo, Pavia-Mamonal and Jobo-Majaguas pipelines. Financial assets grew 7%. Update of the macroeconomic variables for calculating financial assets, which correspond to the recognition of the account receivable on the Colombian state for the purchase option that the state has on the assets under concession. [Technical Difficulty] Sorry, I'm not receiving any sound. I'm not receiving any sound. I'm not receiving any sound, I'm sorry.

Thank you again for joining. [ Operator Instructions ] The question is addressed at the new investments. Could you provide us with more information about it?

It's a pleasure for me to answer the question. In Peru, we have 3 companies, Cálidda in partnership with group in Bogotá. We have Quaavii companies and Gascop. Each of these 3 companies have fees or obligations to work on gas pipelines in the cities, and these projects should continue. Currently, we overcome the obligations of the minimums somehow within the users we connect better for the company the more users we have. So we may have stopped in the first months of the pandemic in the country, because the works are normalizing again. According to the concession of Piura, there is a project to install about 280,000 million (sic) [ 280 kilometers ] of gas pipeline and that project is ongoing. We hope we finish it in the end of 2021, the beginning of 2022. It is our ongoing project. The investments of the projects in Peru were not stopped. Peru is a market that is important in growth in the country despite the political situation that has worsened in the latest weeks.

We have a second question regarding the law change of transportation. Which challenges do you think it could have in the fares and business in general?

I would like our Vice President of Transportation, Ricardo Fernandez, to answer. Ricardo please.

Thank you very much, Eric. Regarding the law, we remind you that these changes were issued on the 27th of October. This approach is under consultation. So we deliver our comments on the 26th of November, but it could be extended. Once we have all the analysis that we are in a process of analysis, we will provide you with more information. But at the moment, we are conducting the analysis on the changes.

We have Rodrigo Sanchez from Davivienda. We have 5 questions. I will read the question one after one. The first one, can you remind us of the regulation of transportation regarding Promigas?

I'd also like Ricardo to answer. Please, Ricardo?

Currently, we have 15.06% before tax.

Second question, regarding the resolutions 155 and 160 regarding the gas transportation, how far is the proposal facing the expectations you had?

Ricardo?

Truth is that at the moment, we are conducting the analysis, revising the proposals. Of course, once we have checks of it, a, you'd see according to the new circumstances we know when we can lower or increase. But I repeat, we are discussing to see the best solution, and when possible, we will provide you with a better answer.

Third question, could you comment on the expectations regarding the impact of these resolutions in the regulation basis of assets Colombia?

Ricardo, please?

The proposed changes is the serving -- served life, we are supporting the information, we are going to deliver our comments to reach to conclusions. We do not have any possibility to tell you the impact at the moment. We will further go back to you to clarify your questions.

Fourth question, how are the negotiations going regarding the energy production in Cartagena?

I mentioned previously in our previous call that since the 1st of December, there should be an agreement, defined terms. So Canacol would be able to use the gas pipeline. There were differences in the previous months. And currently, there is an approximation with Canacol approach and conversations. These conversations haven't finished yet. And when possible and we have a result of the conversations, we will be go back to you. But there must be the agreement conditions in the pact, so Canacol can use the pipeline.

Fifth question from Rodrigo Sanchez from Davivienda Corredores. Can you tell us about the possibility or your intention to participate in concessions in the south of Peru? And how could you do that, taking into account there is a possibility to cover indigenous populations?

Our vision on Peru has been to analyze additional concessions. We have said that we like Peru very much. There is a lot to do there. Coverage of gas, currently, is 11%, while in Colombia, it is 70%. So they are going to be open. So the concession, the answer is no. We are not thinking of any negotiations with them. But in the future, if there is a possibility of that concession or other concessions of interest that make sense to the company that add value, of course, we are going to take them into account.