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

[Operator Instructions] Please consider that this session is being recorded. Today, Juan Manuel Rojas, joins as President of -- Chairman of Promigas, as we also have the financial team. I give the floor to Manuel who will give the results for this quarter.

Good morning, everyone. Thank you, Juliana. Welcome to these results for the 2022 year, I would like to begin. Particularly, I want to highlight, firstly, the following cumulative results until June that our company group has been presenting. These results can be seen where we have had an increase of 19%. We have an EBITDA margin of COP 700 trillion. We've also had some net revenue of -- where we've experienced growth of 10%. Another important event in this quarter is related to the -- or currently, we have 42.2 megawatts in installed capacity, of which, a good part are solar generated megawatts, 27.1 megawatts. In self-generation, 15.3 megawatts. And in operation and maintenance, we have a -- we have 73% of energy solutions that we've experienced in the last quarter of -- another important event where we've had the fortune of being able to formalize a strategic alliance with Sumitomo Corporation based on the inauguration we did for our green hydrogen pilot in the [ La Heroica gas station ] in Cartagena with the purpose of being able to advance in electrical mobility with hydrogen in Colombia and in Peru. Speaking of Peru, I would like to remark 2 important aspects that also constituted milestones in the second quarter. The first one is related to the approval of the Peruvian regulator of the Cálidda rate, very in line with what we were expecting in the regulatory revenue in this important investment that we have in Peru. And in second place, and by the way, we feel very proud of this, is related to the rendering of service of gas line operations in Northern Peru. In June 30, we had an advancement of 90% in the project. We can mention that this gas line is operational right now. And part of the directive team is traveling to Peru to its formal and official inauguration despite the fact that in July, we had some service issues. Lastly, I want to mention that we had the ratification of AAA rating by Fitch Ratings. So now let us take a look at the operational results of the period by business. And here in gas transportation in liquefied service and natural gas, I can highlight that the transported volume of gas by June 2022 is 7% above what we had in the first semester of 2021, reaching 472 million cubic feet per day. We've had, however, a reduction of an average of liquefied natural gas in a good measure as we've seen because we are in a very rainy year. In terms of industry solutions, we continue with our commitment in servicing our customers in the oil and gas industry. We've attained the construction of 21 kilometers during the first semester of the year. And we maintain our gas line maintenance services in 2,756 kilometers. Let us now take a look at the results by business in distribution by June. And here, I want to make a stop in 4 aspects. The first one is related to in users, we are above 4.06 million users in Colombia. On second place, in Peru, we had an increase of 25% in connected users. This is a very important milestone because in Peru, we're already learned we have more than 1,600,000 gas users. On third place, we've increased the coverage in populations in Peru and 12%. So now we're servicing 76 populations. And if we add the populations that we service in Colombia and Peru in gas, we reached 963. And if we add the populations that we service with electrical energy, we're above 1,000 populations between Colombia and Peru that are receiving our services. On fourth place, I would like to remark that we're about to reach a milestone of gas sales in distribution of 6,000 million cubic feet. We reached by June 30, 6,989 cubic feet. We've had an increase of 4%. I also want to remark the breakthroughs we made to Brilla in nonbanking financing. We placed COP [ 430,020 ] million, and we have a user base of 767,000 users that currently use this service. This is a business that I call a new business that we've been advancing in Colombia for 15 years. And by June 30, we've launched the Brilla app through which we are operating these 767,000 users are operating their credits. So now let us move to the financial results of the period due by strategic group and specifically, with the second quarter of 2022. Here, I would like to remark 2 things. Firstly, the important increase we've had in revenue of 11% and increase. We reached COP 1,402 million. And by the second quarter of 2022, although we've experienced a drop in net revenue this second quarter in 10% -- around 10%, explained by financial expenses and greater interest rates and increase of rent taxes. If we take a look at the accumulative by June, we can see that the accumulation to June rendered some impacting numbers. In revenue compared to the same semester in 2021, we had an increase of 19%, explained by a greater market share rate to which we adjust our rates. And also, we -- because we can sell [indiscernible] per through the [indiscernible] contract, the greatest transportation of gas and also explain through the disaster we had in Promioriente and we had some great losses. So there's a great increase of almost 20% happened due to these 3 reasons. This implied an increase of our EBITDA margin during this semester and almost 20%, 19.5% in a good sense, due to these larger incomes and larger expenditures and an increase of net revenue of 10%. Here, I want to highlight once again what we've said in other presentations, there's a good balance that we have between the transportation business and the distribution business where both the EBITDA and revenue is distributed almost in an equitative way between the 2 strategic business groups. And EBITDA 54%, net revenue 56% in distribution, 44% in transportation. Let us continue. So regarding individual financial results in Promigas in the second quarter of 2022. Here, I want to highlight an increase of 14% in income as I was mentioning before, mainly because of larger billing. Because of greater market share, we had on our second quarter of COP 3,091 per dollar and before the margin was slower. The EBITDA had a reduction of 3% due to a reduction of income in participation method because of the [ IFRS 15 ] norms because of important construction breakthrough we had in 2021 and a drop in net revenue of 1% in second quarter, as I mentioned, because of greater financial expenditure. Let us remember that the IPC increased 40%. If we take a look at the following slide and we look at the individual cumulative results by June, we see that in the accumulation, there's an important contrast by June regarding what we experienced in the second quarter of 2022. Particularly, we have in the accumulation, consolidated 26% increase in income in Promigas, an increase of 18% in EBITDA and an increase of 10% in net revenue, reaching almost COP 700 million, proving in all fronts and performance way above what we expected in net revenue, an execution of 60% above. Let us continue. Let us take a look briefly at the results in regards to operation and industrial safety. And here, I want to highlight 2 important points, the evolution of corporate loss. We reached only 0.25%, which is very below the 1% demanded by the regulations. And the evolution of the operative continuity indicator where we have a continuity indicator of [ 99. -- 98.8% ], very in line with our commitment for excellence in rendering all of our services. I want to highlight that in transport volumes, we had an increase of industrial consumption between April and June, particularly due to an increase in the sector of Cartagena and cement refineries. So this is the reason we had a major increase. This is an element that differentiates consumption -- industrial consumption in April and June 2021 from the last year period. Here, I would like to mention the breakthroughs we've made in safety. We have aligned with DuPont SS, an exercise to strengthen safety culture in our corporate culture. And this project has a duration of 3 years where we've been working in safety diagnosis. We've been awarded and rated as independent. This is a very good rating compared to our peer experts, what DCC called interdependence. So we're moving along that direction, making workshops with -- throughout different parts of the organization. And this project we'll move on to a phase where we will begin with an action plan in order to close the gaps that we've identified in such a way that we can consider ourselves with the greatest interdependence rating in a 3-year period. This is a step-by-step process, but we're advancing in the right direction, and we're very pleased to communicate that we're very well rated in comparison to our peers. This not only in Promigas, but throughout all our group. Another relevant fact that we want to highlight is related to what we accomplished in innovation. And here, I would like to mention 2 things. The first thing first, Compañía Energética de Occidente launched the first intelligent transformer, developed with Universidad del Valle, where this prototype we expect to promote it in the rest of our operations. And on second place, I mentioned this is an important highlight is related to the signing of the agreement with Sumitomo in order to explore opportunities in electric mobility with Colombia and Peru in hydrogen. We see in Sumitomo as a strategic ally because they have all the experience in one of the countries that most have advanced in hydrogen, such as Japan. So we see important opportunities in this front for Colombia and Peru. And we've had 2 visits since we signed the alliance with Sumitomo. So we're assessing opportunities in electrical mobility to this. If we move on to results specific to the second quarter in transport group. As you well know, in the transport group, we have Transmetano, Promioriente, Transoccidente, Promisol and SPEC. In this regard -- in regards to natural gas transportation, Promigas as such had an increase in regards to the second quarter 2021 in transported volumes in a good sense because of a greater thermal generation in the Atlantic Coast compared to the same period in last year, which shows an increase. In the nonthermal electrical sector in vehicle gas, we continue growing in consumption and 80% in transported gas for this sector before the pandemic if we compare. If we specifically take a look through allies, we see that Promioriente has levels very much in line with what we had 35 million cubic feet in cumulative volume for second quarter and now 36 million cubic feet for the second quarter of 2022. And these have varied slightly in their volumes, whereas Transmetano did present an increase in volumes by the second quarter 2022 compared to 2021, increasing 4 million cubic feet per day due to a new contract signed with Pepsico, which positively affected volumes. And Transoccidente increased 42% in transported volumes or 100% of capacity. So they saw a 42% increase in the second quarter compared to 2021. SPEC, as already mentioned, the beginning had a lesser regasification volume in a good sense because thermal generation compared to last year has been done with local gas and not with imported gas and furthermore it has been a very rainy year. I also mentioned that in June, the availability of our regasifying plant was 100%. And we've been demonstrating 5 years of operations. And we're an asset that brings trust to electrical generation in Colombia because each time it has been required and has been available. If we move on to the results by the second quarter of 2022. So we want to see that they are very motivating. We've been experiencing growth in Peru. Here, we had an increase in the volume of transported natural gas. I mentioned, we're almost nearly close to 6,000 million cubic feet per day, an increase of electric consumption through our central companies in Cauca and a substantial increase in the number of users. We had 6 million -- more than 6 million users in natural gas and energy. In gas [ 5,608,000 ] and in energy, 430,000. We've serviced more than 1,000 populations with a significant variation. And as mentioned, the placing of Brilla which has been consistent and now we will look at these figures, which have been very much controlled. We feel very proud of this business. The EBITDA of the distribution business grew 20% if we compare the first quarter -- the second quarter of 2021 with the second quarter of 2022. Let us take in-depth look to Brilla. This second quarter, 767,000 users have COP 1.50 billion. And this year, we've accumulated COP 4.83 million. I want to highlight that these credits in 47% go for social economic Level 1, 36% for Level 2 and the rest for Level 3. This has a significant social impact what we are doing with Brilla because these are users of credits that generally do not have access to the financial system -- to the traditional financial system. And they have this excellent tool available in order to finance their needs. If we take a look who assign these credits, we see that 1/3 goes for improving their housing, the most vulnerable people in the country. Third part is the testing for mobility. And the remainder is still being distributed between education and home supplies and goods. So this is an important tool for financing for vulnerable populations in Colombia. As a relevant aspect, I also want to highlight the launching of Brilla app for franchise companies. This new sales channel demonstrates that we evolve the way we relate with our customers. Our clients have at the palm of their hands and the mobile phones, a tool that show multiple service acquisition and product acquisition tools. So this is very relevant, and we feel very proud and glad about this. And this is rather important financial results in EBITDA compared with the same period in 2021 was COP 20,000 million and Brilla reached COP 101 million in EBITDA margin for the second quarter. If we take a look at the energy solutions [indiscernible] , as we saw in the Board of Directors of Promigas authorized that we consolidate this strategic business group. And as we mentioned at the beginning, this has been functioning favorably in this front. Particularly in solar energy distribution and generation, we had growth of 73% compared to the same period in last year. What comprises the strategic business group, 3 lines, solar, self-generation and sustainable mobility. Here, by June 2022, we had, as I mentioned, 27.1 installed megawatts, of which, we have 14.4 in operation and in construction, 12.7. 24 contracts functioning effectively. In self generation, we have 15.3 megawatts, 8.8% in operation and in construction 6.5%. And here, we expect to continue growing importantly. We have 4 contracts with the capacity -- with total capacity of 42 megawatts. We also count the front line of maintenance and operation. We had to make a correction here. In regards to sustainable mobility, we've been advancing with a demand of 10.2 cubic feet per day, what we do in Surtigas and GdO. And in Peru, we've been advancing effectively with almost 1 million cubic feet per day. So in this front line, we've been evolving very favorably with important growth, and we will be showing this quarterly. And looking at this in terms of results, we feel very glad about this. In regards of corporate aspects of sustainable management, I want to highlight 4 programs that we've been implementing in Promigas. The first one is related to the efforts by the Fundación, the foundation for implementing programs that will allow a greater employability of younger people. These current programs are impacting 3,500 young people as direct beneficiaries. 93% of the young people have graduated, 40% of graduates have a formal employment. And these are young people who start with salaries that are above the minimum wage in average with COP 1,350,000. With this program, we're reaching 30 municipalities in the country and particularly in areas that have been classified as vulnerable and as PDET. In entrepreneurship, the foundation has advanced supporting 515 entrepreneurships, strengthening business models and with an impact on 990 direct beneficiaries in training processes for entrepreneurship. We also began our program in Cauca to benefit 150 women for their economic autonomy. And in this front line, we reached 22 municipalities in the country, out of which 18 are considered PDET. On the second quarter of 2022, also in the most productive communities, we were working 199 productive units, strengthening their processes with 579 direct beneficiaries. And in this case, we reached 9 municipalities. And lastly, in environment manners, we also have been making advancements with initiatives that seek for a great biodiversity. In the second quarter of 2022, we began a program in the Sierra Nevada de Santa Marta with 128 indigenous families that benefited 640 persons, supporting 40 family greenhouses and community greenhouses. So this way, 64,000 plants will be planted. In human rights, we've also advanced. We are filling a self-evaluation from human rights for relating with communities with the purpose of identifying opportunities for strengthening our management. We began an alliance with the Desarrollo Paz program in Cesar and La Guajira to make trust building in Wayuu communities and weaker communities in our influence area of our gas line. This will allow us to work in development programs and social programs in our social and governance and environmental issues. In climate issues, we also made advancement in forest restoration. We signed agreement with NGO with the Arhuaco community in Sierra Nevada de Santa Marta where we expect an impact of planting 64,000 trees in order to restore 128 degraded hectares, training young Arhuaco communities and capturing carbon information in order to analyze implementation. Now I will give the floor to my colleague Aquiles Mercado, our CFO, so we can get into detail of our financial statements. Thank you.

Thank you, Juan Manuel. Good morning, everyone, who is joining us in this results report. As we can observe our financial status in Promigas by the second quarter of 2022 -- 2021 show an increase of 14% bypassing from COP 2,000 million to COP 162,563 million. In regards to the EBITDA, we had a drop of [ 50% ]. And now up next, we will explain the reasons and the net revenue drop in this specific semester of 10%. In regards to income, we had 22% of the budget. However, we had an increase of 14% as we were looking right now, and this increase is because the greater market share in billing because now we have the exchange rate in dollars. Now said rate passed from -- sorry, [ 171 ]. And in 2021, it was 3,866 per dollar. This joined to the volume of transport to increased mainly in thermal electrical sector, representing 82%. The EBITDA which reached COP 365,091,000, which is a drop of 3%, but a compliance of 104% compliance in budget because of the reduction of gas participation. Because of the [ IFRS ] 15 because in 2021, we had important construction breakthroughs in CapEx activities registered this year. We had growth in participation in investments such as Cálidda, Transoccidente, Promisol, which accounted for the drop in. The greatest cost and expenditures presented by the renovation in June in insurance, insurance policies, then because of the market behavior, which affected all sectors of the economy, expenditures due to trips and public services, they were overcome by the pandemic. The net revenue reached COP 700 -- our financial, we have the best income in participation and greatest cost and expenditures we also mentioned. In addition to this, this is a trend and a local level, which observes growth in financial expenditure. But in addition, a trend of interest rate rising in this parameter compared to the bonds we've made in Colombian pesos in the local market. And regarding the financial statuses, the cumulative status by June 2022, by the end of the quarter, we see an increase of 26% in income, compliance of 101%. EBITDA grew 18%, also reaching a relevant 115% of budget use and net revenue grew 10% by reaching COP 659,548. Regarding the income we've seen in the exchange rate, which has been rising between the annualized period, close to COP 771 compared to 2021. And we had a factor here that was very important in income increase because Ecopetrol was built due to anticipated termination of contract that they have with us for the Cartagena refinery, which brought extraordinary income of COP 306 million. It's important to highlight that this contract was renovated with a capacity close to COP 770 million and has been extended for 13 years. We transported to 4 million cubic gas compared to last year. The EBITDA margin, which we already mentioned, exceeds the budget in 15% is due to operational income and controlled operations and the participation method which reflects good results for the companies that comprise the Promigas portfolio. Regarding net revenue, as a final line of our financial states, we accumulate the great financial revenue generated by the loans to companies in our -- made a drop by financial expenditure due to a greater balance because of all the CapEx we had from last year, the rising trend of interest rates and the greater IPC. We had a greater recurring rate rise before the taxes. And by the change of the applied rate, that passed from 31% to 33% for Promigas and in compliance of what the tax reform 2021 establishes. If we go to our general balance, we can inform an increase of 5% in assets of the company that reached COP 9.8 billion. If we analyze the main, we had the current asset that represents 56%, 46% of our assets, an increase of 56% and mainly originated by the dividends by the companies that are highlights and are accounted as accounts to be paid. The financial asset consequent with our transportation concession and the companies that we keep control with these concession contracts, the -- this includes macroeconomic variables necessary for calculating which corresponds to charges to be made. And the other assets are registered in the companies with our capitalization we made in Gasnorp, subsidiary in Peru in order to strengthen their general balance in debt equity structure and which is compensated in its [indiscernible] by the dividends of the companies that are ascribed by March 2022. In regards to liabilities, we have an increase of 9% by the date, mainly because of the ordinary and extraordinary dividends [ decreed ] by Promigas, which according to the accounting procedures, will be paid throughout the year but are accounted as bills to be paid in the moment of being decree and to be transferred to a long-term liability and these decrees that expire in April 2023. The long-term liability dropped which is counteracted with the increase in debt in dollar because of the greater exchange rate. This difference is worth to -- it's covered naturally based on our foreign investment. That is all. Regarding the consolidated debt in order to end this financial status, we can observe a detail of the debt in product. In regards to bonds, we are strongly concentrated in capital market, not only in Colombia, but in United States and in international markets, the debt by the date of second quarter 2022 is 55% in Colombian peso, 42% in dollars and 3% in soles peruanos. The consolidated debt is COP 6.97 billion, 11% increase by June 2021. And what we've been mentioning if we observe the table on the right, the rate by 2021 on average captured 4.1%. And by June 2022, simply due to the behavior of macroeconomic variables, 8.08%. We can observe in detail the [ our Compañía ], the pair 2 is Promigas with 56% of the total debt, and Quavii with 23% of the debt, which are our operations in Peru due to the important CapEx requirement in this country. And in regards to debt, Juan Manuel mentioned it, on June 6, in Fitch Rating, ratified the rating at local level with AAA, the highest one, highest credit level that rating company can give us. With this, Juan Manuel, we end our financial balances. And now I give the floor to you.

Thank you, Aquiles. Now if you please, we will open our Q&A session for our audience. We have several questions from Ricardo Sandoval from Bancolombia. I'm going to read them one by one. The first one is can you please make a comment on the regulatory change in remuneration in gas transportation that will move from dollars to pesos in Colombia and its impacts.

Ricardo, thank you very much for your question. As you all know, in November 2021, the crack to the resolution 175 published a methodology for transportation for natural gas. And based on this, the transporting companies presented their rate request in February 2022. This is the particular case of Promigas. And the update of positions is made in 2 different moments in time. One, first update is made in 1st of September 2022, what we call the first application, where we are updating the rates with the capital cost, right, where it lowers from 15.02% to 10.94%. Also, we update the money from dollars to pesos using the exchange rate of 2021. In this moment also by September 1 this year, we will update the investment variable with the resulting values of normative use life cost and assets that expire before December 2020. So this is the first application. The second one would happen in July 2023. And in this moment, we would make an internal recalculations, updating investment variables, operation, maintenance and management and estimations for demand. And in regards to this first update, we will expect an impact that will not overcome 3% of reduction of our income, COP 29,000 million to COP 30,000 million due to the effect of precisely of this updating of the normal useful life of our discount rate and our exchange rate. Now in July next year, we would expire when we have a second application to an increase of positions in around 15% to 20% for greater revenue and function of new investments and updating of management, maintenance, expenditure. I expect that I answer your question here.

The second question from Ricardo Sandoval. He asks us to speak a bit about the management we've been conducting regarding the debt in order to reduce risks. I will ask our CFO, to help us with this question.

In this moment, Ricardo, we have a policy that is very conservative regarding debt management, second place. In this moment, we're looking at how much debt could we require to make a CapEx plan for this year at a corporate level. In this moment, we've -- we're analyzing bond emissions, local bond emissions by the end of the year. Because in this moment, we still do not have a relevant seminar to make an emittance. Let's remember that Promigas renewed -- bond emittance program as a recurring emittance and it overcomes at COP 1,000 million. However, today, if we would emit everything, we would have a negative carry and a negative impact in our financials. So we are taking this in pesos because CapEx is focusing in Colombian subsidiaries and dollar credits for the subsidiaries we have in Peru, which function in dollars. So they're covered. And in the case of Promigas, we have a natural coverage because of the investment we have in these companies. We're analyzing the market regarding rate trends. But, however, this is a trend that is generalized and we're attempting to optimize the mixture of rates between fixed and variable and terms.

Thank you, Aquiles. Now we will move on with the third question by Ricardo Sandoval. Canacol mentioned that they're about to sign a contract for building a gas pipe [indiscernible]. Are you competing in this contract?

Thank you, Ricardo. This project of building a gas line from [indiscernible] has been assessed in Promigas throughout several years. In addition, to this date, our group, particularly our Promigas subsidiary has important breakthroughs in the environment and social matters that will allow to develop this gas line for the moment when the market requires it. So specifically, going to your question, our subsidiary, Promisol is participating in Canacol in order to build the gas lines from [indiscernible] to the national transportation system in Transmetano, a process over which we want to make offer within the established terms. We will receive from Canacol soon.

Another question from Ricardo Sandoval. Have you studied any impact from the tax reform in Colombia for the company?

Ricardo, yes. We have studied it. It is very important to specify that at this moment, the reform is a law project that has been approved. So in the project as such, we've studied preliminarily which could be the impact. Obviously, we have to highlight that this has a follow-up process through the Congress of the Republic. And normally in these projects, the reforms end up being very different to the initially proposed projects. However, considering the project as it is today, we had the proposal as it is right now by 2021, we will reflect an impact of around COP 400,000 million, individual level in Promigas COP 331,000 million. This does not represent a cash, but it is important to mention that this impact will occur in occasional earnings to 30%. So this would be the most important impact. For the rest of it, there are not significant impacts, which are related to suspending the tax discount in [indiscernible] tax. The consolidated impact would not overcome the COP 1,000 million. So initially, this is the main impact. We also established in the reform a limit for the non-rent constitutive income because we cannot exceed 30% of the liquid rent. Since Promigas currently does not exceed the limit and has space, so we do not see an impact in this regard. We also see an impact in our investors, specifically in national people if the retention of 39% is supplied to them, approximately, I just remember that it's in 10% in received dividends, this would have an impact in the versatile character in their market value. So we have faith that particularly several of these points that are consolidated in the reform would be reconsidered not only because of the impact it would have in the community and in capital, but in the negative impact on companies.

We have several questions from Rodrigo Sanchez from Davivienda Corredores. The first one is considering compliance and the budget, could you please share the updated expectation in the consolidated level of EBITDA, income and net revenue from the comptroller of Promigas?