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Edited Transcript of ISA.BG earnings conference call or presentation 6-Aug-19 2:30pm GMT

Q2 2019 Interconnection Electric SA ESP Earnings Call

Medellin Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Interconnection Electric SA ESP earnings conference call or presentation Tuesday, August 6, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernardo Vargas Gibsone

Interconexión Eléctrica S.A. E.S.P. - CEO

* Carolina Botero Londoño

Interconexión Eléctrica S.A. E.S.P. - CFO

* Gloria Cecilia Velasquez Trujillo

Interconexión Eléctrica S.A. E.S.P. - IR Officer

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Conference Call Participants

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* Diego Alexander Buitrago Aguilar

Bancolombia S.A., Research Division - Energy and Gas Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the teleconference of the Second Quarter of 2019 of ISA. I will be the operator today. (Operator Instructions) Now Gloria Velásquez will talk to you. Ms. Velasquez?

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Gloria Cecilia Velasquez Trujillo, Interconexión Eléctrica S.A. E.S.P. - IR Officer [2]

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Thank you, Hilda. Welcome to the 2019 second quarter results presentation. We have with us today Mr. Bernardo Vargas Gibsone, ISA's CEO; Mrs. Carolina Botero, CFO; Mr. Bayron Arango, Director of Corporate Electric Energy Projects, who will present the quarterly results. And then we'll take your questions in the Q&A session.

Recordings for this conference in Spanish and English will become available tomorrow via our website at www.isa.co. Please take a look at the forward-looking statements prior to making any investment decision regarding ISA.

At this point, I will turn the call over to Mr. Vargas to begin. Sir?

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [3]

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Thank you, Gloria. Good morning, everyone. Let me welcome you to today's presentation of the second quarter of 2019. As always, it's a real pleasure being here with you today.

Let's start with Slide 3. Reviewing the highlights for the period. I would like to take a few minutes here to share with you the initiation of certain new projects, the Cardones-Polpaico project in Chile. During the second quarter and prior to the expected day before the energy coordinator, ISA INTERCHILE, started up the final portion of the Pan de Azúcar - Polpaico tranche. This transmission project, done by the President of the Republic of Chile, is the most important energy transmission project in Chile in the last 50 years. This is the system that links different zones, producing zones in Chile with urban centers. This project has a length of 781 kilometers requiring the construction of 1,728 high-voltage towers at 500 kilowatts and this allows our renewable energies to electrical systems. This project permits the entry of renewable energies as part of a national energy system.

I would also like to mention that in Peru, entry into operation of Expansion 19 this quarter, which ensures reliability and timely attention to existing energy demand in Northern Peru. This project will generate annual revenues of about $1 million.

Let's go to Slide 4, please. In May, Fitch Ratings affirmed the AAA Colombia for ISA's bonds, which comprise its securities program, and at the same time, affirmed the company's BBB+ international corporate rating. Both ratings have a stable outlook. Likewise, Moody's gratified ISA's international rating at Baa2, and improved the outlook from negative to stable. According to the rating agencies, the ratings reflect, among other things, the credit quality of the underlying assets, the company's low business risk profile, its geographical and commercial diversification and the high predictability of its operating cash flow and its growth strategy, which is very solid and credible.

Let's go to Slide 5. As we all know, Empresas Públicas de Medellín is in the process of selling its shares in Grupo ISA. The first phase of this process ended on May 31, representing shares equivalent to a 1.35% of the total available for sale with a weight point -- 8.66% of this remaining for sale. As a consequence, ISA's outstanding float in the market increased from 38.42% to 39.77%, which is quite beneficial for the shares' liquidity and the price composition. On July 29, EPM announced its second stage of the sale process of the remaining stake in ISA equivalent to 8.66% of its stake in the capital stock. To date, what has been announced is that this will take place via the Colombian stock exchange. The allocation mechanism is yet to be defined.

Let's go to Slide 6. ISA's results demonstrate that we remain on a path towards profitable growth, but at the same time, keep our profitability. During the quarter, revenues totaled COP 2.1 trillion, and EBITDA COP 1.4 trillion, with a margin for the quarter that reached 67.8%. Net income reached COP 439 billion, and its margin was 20.9%. Revenues for the year so far reached COP 3.9 trillion, EBITDA COP 2.7 trillion, and net income COP 792.215 million. That's up-to-date this year.

Margins for the first 6 months of 2019 were 67.7% EBITDA and 20.2% net income. ROE reached 15%, the highest in the company's history. Once again, these are very positive figures that confirm the trend that we have seen for 4 consecutive years. And this denotes -- reflects a clear discipline in having profitable businesses and having expenses and cost contained so that the company meets the highest standards. And this is a sophisticated amount, and it has very good-performing assets.

Now I'm going to turn the call over to Carolina Botero for a review of the financial results.

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Carolina Botero Londoño, Interconexión Eléctrica S.A. E.S.P. - CFO [4]

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Thank you, Bernardo. Good morning, everyone. I'm very happy to be with you again. I would like to begin by reminding you that at the end of 2018, we changed the manner in which we recognize concessions in Brazil. As a result, we are analyzing the first half of 2019 as a Contractual Asset versus the first half of 2018, which was analyzed as a financial asset. At the same time, beginning in the third quarter of 2018, the update was monthly in terms of revenue inflation in Brazil.

Let's go to Slide 7. Operational revenues reached COP 2.1 trillion for the quarter. That represents 37.5% over the figure reported at the second quarter of 2018. The accumulated amount as of June, operating revenues reached COP 3.9 trillion, 24% more than in June 2018. The variation was mainly due to the following factors, mainly by the following: First, the start of operation of new projects in Colombia, Brazil, Peru and Chile from July 2018 until this last -- the second quarter; second, revenue from the monthly inflation update in ISA CTEEP and subsidiaries; higher construction revenues; and lastly, the impact of the implementation of the Contractual Asset where construction efficiencies are accounted for at the timing which they are generated. If we exclude the effect of the monthly update, income would vary by 19.3% for the quarter and 10.8% for the accumulated period.

Let's go to Slide 8. For the second quarter of 2019, operating costs and expenses increased by 14.3% with respect to the same period in 2018. This variation was mainly explained by higher cost and expenses that support the entry into operation of new projects in Colombia, Chile and Peru, and higher maintenance operation and toll management cost in Chile. For the first 6 months, operating costs and expenses totaled COP 1.7 trillion, which is 9.6% more than the figure for the first 6 months of 2018. Now let's remember that revenues grew 10.8%, excluding the impact of the Contractual Asset and the tariff cycle update.

Let's go to Slide 9. EBITDA for the quarter showed a 50.6% increase, given the entry into operation of new projects as we've previously stated. For the first 6 months, EBITDA was COP 2.7 trillion, equivalent to a 31.5% increase versus the figure for the first 6 months of 2018. Variations included the recognition of efficiencies in construction and the adjustment of the tariff cycle in Brazil. Without wage, the variation would have been 21.1% for the quarter and 10.84% for the first half of 2019. The EBITDA margin for the quarter was a 67.8% and 67.7% for the first 6 months. Again, excluding these effects, the margin for the quarter would be 62.8% and an accumulated 63.8%.

Let's continue with Slide 10, please. We can see the consolidated net income here, which for the second quarter of 2019 amounted to COP 439 billion, representing 89% in growth. Accumulated, this was COP 792 billion. These results include, as we discussed, the entry into operation of new projects. They also include the efficiencies of the projects that, under the Contractual Asset, are recorded in the same period in which they are generated and the adjustment of the tariff cycle in Brazil. Excluding these, growth would have reached 52.8% for the quarter and 24% for the first 6 months. With this result, the net margin for the quarter was 20.9%, very similar to the 20.2% accumulated net margin.

Let's take a look at the balance sheet on Slide 11. The assets of ISA and its companies at the end of the quarter reached COP 47 trillion, 5.1% more than at the end of 2018. This was a result of the company's growth through new projects in Colombia, Peru, Chile and Brazil, the construction efficiencies of the Brazilian projects and the cash increase from debt disbursements for the period. Compared with December 2018, liabilities increased by 7.4% basically due to incurring debt to support projects under construction. The higher revenues are offset by the dividend distribution, keeping equity at a relatively stable rate.

Let's go to Slide 12, where we can review the debt performance. As of June, consolidated financial debt reached COP 18.3 trillion, 4.3% over the 2018 figure, once again supporting the growth of the group. Due to stronger results, the net debt EBITDA ratio continues to demonstrate an improvement over December 2018 from 3.03x to 2.68x in June. Interest coverage reached 6.12x, affirming ISA's strength.

Now let's take a look at Slide 13 to take a look at investments. As of June, we have invested COP 1 trillion in projects that are under construction, improvements and reinforcements. As we can see in the graph, investments have been concentrated mainly in the Energy Transmission business concentrated in Colombia, Chile and Brazil. We expect to close the year with investments of COP 3 trillion.

For reference, let's go to Slide 14. We're going to talk about the CapEx. The investment plan for the 2019-2023 period was revised and includes expansions, improvements, reinforcements and an equipment renewable plan. To date, there are committed investments for approximately $3.791 billion. Distributors are shown in the graphs on the right side of the slide. CapEx is concentrated in Colombia, Chile, Brazil and Peru and in the energy and road businesses.

All right. This ends the presentation. Now we invite you to start the Q&A session. Operator, you may proceed. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Diego Buitrago from Bancolombia.

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Diego Alexander Buitrago Aguilar, Bancolombia S.A., Research Division - Energy and Gas Analyst [2]

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I have 2 questions. I would classify them. One has to do with the regulatory regimen (sic) [regime]. What changes have there been with the tariff cycle in Colombia and recognizing the CREG in the areas in Brazil? And the second point I'd like to raise is with respect to -- from the point of view of the strategy. What can you share about this up to date? Are there new businesses, contemplated road concessions or participation? What can you tell us about this?

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [3]

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Well, Diego, what has to do with the tariff revisions in Colombia, the CREG I think has been concentrated in some other things. Other than the change in methodology, the entity has not said anything again. We're not clear on when the new construction will be rolled out. We've been in conversations with them regarding this. I think there's a historic closeness with CREG but they have -- because they have a more independence, now they've done an incredible performance. The director, Christian, he has been more responsive to the needs. So we're trying to see what will be the regulatory solutions. And I think this will trend positively. The -- I think this also has to do with the entire process of the administration. This is concentrated in the credit decisions that goes towards the energy transmission with the renewables. And there are also some topics related to the expert commission in the electrical sector, so there's like a waiting time, a holding time in order for us to see what will happen with all these.

As far as Brazil, there was an announcement made where the decision of the tariff is extended towards the middle of next year, so this allows us more flexibility in our own decision process. We're preparing a report about Brazil. We're dealing with the markets still. So as long as we have some downtime, we can deal with this.

In 2019, after the announcement was made, we've been progressing in a very dynamic way, and we've reached milestones in projects that I consider. It has been a historic of change for every sector and services of this company. Each one of these teams have reached milestones every year. This year, there are 37 internal initiatives to carry out this strategy 2030. And this is a permanent process to advance in innovation projects and everything related to new energy projects. But there's always circumstances that warrant to be cautious. In Chile and Colombia, we've been in a growth process. So at least, we are exploring markets.

We have an important announcement to make regarding Chile. The new toll road concessions last year, the Chilean authorities, with the presence of the minister, this aligns very well with President Piñera, and we are the first ones to enter this area in Chile, so this is an important milestone. And we continue dealing with regulatory regimens (sic) [regimes] in Chile, and we are dealing with the additional expansion of tranche 3 in the Maipo corridor and other routes that have allows us to retain those and we've been working in this sense. In Chile, it's very clear to us that our greatest risk is replacing revenues from Maipo, so we are considering carefully these strategies. We have an investment plan in Chile, about $700 million in Colombia. As I said before, we are contemplating market alternatives and some acquisitions and mergers in Brazil. And I think that for the rest of the year, we can have further news for you that could be consistent with those approaches. Thank you, Diego.

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Operator [4]

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We have a question, [Juan Andrés Gallego] from (inaudible).

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Unidentified Analyst, [5]

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We would like to ask you about the growth, very important construction companies, about the efficiencies in construction. I would like to know more about these efficiencies in construction in the quarter.

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [6]

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Thank you. I'm going to have Carolina answer.

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Carolina Botero Londoño, Interconexión Eléctrica S.A. E.S.P. - CFO [7]

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Juan Andres, we had very important efficiencies in this first 6 months, efficiencies both in the construction part of ISA CTEEP projects and subsidiaries that impacted very positively the results. As we said before, one of the advantages of the Contractual Asset and the changes we've seen in 2019 is they allow us to see the reality of the projects we are building. Obviously, the entire impact has been very positive. We've been able to capture these efficiencies, without which, it would be the total opposite. We enter into operation some projects in Brazil much earlier than anticipated. We were expecting to go into operation in July, and we did it in March, so this had a very positive impact for our results. So these are what you are seeing in our financial assets. Thank you.

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Operator [8]

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We have a question for Mrs. Velasquez.

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Gloria Cecilia Velasquez Trujillo, Interconexión Eléctrica S.A. E.S.P. - IR Officer [9]

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Yes, Hilda. The first, are there any news about the process of sale that the national government could advance the participation of your company?

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [10]

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Well, other than what has been announced in the market, we are waiting to hear from the ministry, the law firm that was selected to deal with this. We were still waiting for the ministry to make a decision about whether or not the project is going forward. So we have the same information we had that we announced a couple of months ago. There's nothing new in that regard.

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Gloria Cecilia Velasquez Trujillo, Interconexión Eléctrica S.A. E.S.P. - IR Officer [11]

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We have another question in the chat. What advances can you give us about the agreement with Cóndor? What would be the accounting management with respect to this?

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [12]

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Well, with Cóndor, we're perfectioning some internal agreements that derive in the (inaudible) that we signed. And we have permanent discussions about strategy going forward that has to do with providing acquisition alternatives we may provide, but nothing more relevant that we can tell you now. This partnership is, the more we look at it, we like it more. It's fundamental in Colombia and for us. Cóndor is something that we consider very beneficial to us. But as I said before, throughout this year, in this road sector in Colombia, if the stars are with us, we will -- well, what we do is we take any opportunity and we are very careful in this area.

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Gloria Cecilia Velasquez Trujillo, Interconexión Eléctrica S.A. E.S.P. - IR Officer [13]

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Okay. And how would we account for these growth? Would it be like financial assets? We have 2 questions from CrediCorp Capital. An additional questions. Until the beginning of next year, will we continue to be seeing the effects of the contractual assets and the tariff cycle in Brazil? If not, when will we cease to feel this impact with regards to revenues?

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [14]

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You are right, we will look at this not until the last quarter of this year. Because if you remember, the change in the Contractual Asset, we have to register all of it in December 2018. So not until the end of this year, we will be having an impact from these aspects. And the same goes for the tariff cycle, not until the end of the year will we continue to explain -- this will continue to explain the difference we see this year.

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Gloria Cecilia Velasquez Trujillo, Interconexión Eléctrica S.A. E.S.P. - IR Officer [15]

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A question from Nicholas from CrediCorp. What impacts can we expect for the transmission sector with the entry of renewable projects in Colombia? What has happened to other countries regarding this effect?

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [16]

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No, we're looking at what's happening. The grant project, we have the (inaudible), which is basic to have renewables in La Guajira region. And our competitor, Grupo [TASCA], has built tower 1 for that same purpose. Transmission there is basic for the growth of renewables. As I said at the beginning of this discussion, that's why President Piñera called our line Polpaico, the line most strategic in Chile in the last 50 years because this line links renewable energy, not conventional.

And they couldn't save all this energy because there were no transmission lines. So the line is absolutely basic to this progress. And we have insisted at the ministry that this is fundamental for the planning phase. So we expect that in Colombia, this project is very ambitious to grow the transition of the energy sector. And for that, I think that we're on the right path going forward.

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Gloria Cecilia Velasquez Trujillo, Interconexión Eléctrica S.A. E.S.P. - IR Officer [17]

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A question from Camilo Roldan. What projects do you expect will enter into operation in the second 6 months of 2019?

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [18]

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Thank you. For the second 6 months of 2019, in Colombia, we'll have a connection (inaudible) in the northern coast. There will be another substation there in Colombia. In Brazil, we're waiting for other tariff developments. Like (inaudible) and [Ituango], some of the lines will continue construction so they can enter into operation, and some of them have already entered into operation. Yes, in July, some of the lines have already gone into operation.

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Gloria Cecilia Velasquez Trujillo, Interconexión Eléctrica S.A. E.S.P. - IR Officer [19]

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[Juan] (inaudible) from (inaudible). With the announcements of the government of the 2020 where we need energy -- capital and resources to finance projects, has this changed your investment and dividend policies?

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [20]

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Well, as far as we are concerned, no. But we are in discussions with the government, and this has a big impact. We are permanently in communication with the government. The point of view of our numbers in Colombia, the ratios on the dividends sector, we know that the discussions with the government will have some impact, but it's always very positive. But these discussions have been more serious, deeper with respect to previous years. But during the second part of the year, this might increase now, and we hope to have some more clear results and answers.

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Gloria Cecilia Velasquez Trujillo, Interconexión Eléctrica S.A. E.S.P. - IR Officer [21]

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Ricardo (inaudible) from Bancolombia. I'd like to know what about the payment, the outstanding payment about the indemnification in Brazil?

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [22]

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Remember that the payment, the outstanding payment, the indemnification payments have been occurring as we expected. This is an 8-year repayment. This hasn't changed. What's been discussed is the (inaudible) payment. And that's been under discussions in the Brazilian courts. And this depends a lot on internal issues in Brazil, the privatization of assets and whatever happens with the government. But right now, what was under discussion in this area is the (inaudible) and we expect that we will be successful in recuperating a part of this.

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Operator [23]

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Okay. Now we don't have any more questions. Doctor, would you like to give a last few words?

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Bernardo Vargas Gibsone, Interconexión Eléctrica S.A. E.S.P. - CEO [24]

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Okay. No, I just want to highlight a couple of things that have happened in the second quarter.

We have historic numbers in ISA. I think this reflects very, very speculative movements, but this is positive with respect to all the news. But I think we've been -- whoever is following these different points, I think these have been assimilated already, the value of the company. I feel that consolidating assets like what has just happened in Chile, the permanent growth in Chile, we have very strong growth road in Chile. And many construction projects in Brazil going on right now. These are construction projects that we believe can be completed early, and also what we've been working on, on a permanent basis that we are able to get financing in markets positively makes this group very attractive for investment. So whatever has to do with financing, we're having international milestones in every country.

Our commitment to the environment and the emissions that we've done in the market has been completely green. And a long time ago from -- since -- it's been a while since we've been heading towards green energy, and we've been obtaining market advantages for our group that are internationally exemplary. And all of this has been accompanied by the look of financial analysts worldwide. And with respect to magazines like Institutional Investor, they have been recognizing what we've been doing and maintaining everyone informed about what's going on, and we expect to continue doing this in a very disciplined and open manner.

Some of you were asking about the accounting, how we do the accounting with respect to the Contractual Asset. I know that all of you are on top of this. Obviously, we can offer to you that any doubt you have in this regard, obviously, there's some complexity in these issues, but we are completely open and transparent to answer to any questions you may have in this regard. There -- all these changes from the change in the accounting from financial assets to contractual obviously has some impact, but we are committed to announcing and disclosing every impact this can cause in our operations.

We've had the best year in history, and we expect this year to be -- to follow in the same path in this ambitious goal, and this first 6 months of the year bodes well for us. And I do all of this thanking each one of you for your cooperation with the group and letting us know what we can do to improve our results, what can we do to be closer to you. And the valuable work you do in producing reports for your investors, let that be for the good of all. Thank you all.

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Operator [25]

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This is the end of the conference today. Thank you for your participation. You may disconnect at this time.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]