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Edited Transcript of ALUP11.SA earnings conference call or presentation 14-Nov-19 6:00pm GMT

Q3 2019 Alupar Investimento SA Earnings Call

SAO PAULO Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Alupar Investimento SA earnings conference call or presentation Thursday, November 14, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* José Luiz de Godoy Pereira

Alupar Investimento S.A. - Chairman, Dy. CEO, Chief Admin., Fin. & IR Officer and Member of Board of Exec. Officers

* Luiz Coimbra

Alupar Investimento S.A. - IR Manager

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Conference Call Participants

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* Andre Sampaio

Santander Investment Securities Inc., Research Division - Research Analyst

* Gustavo Miele

Banco Itau BBA SA, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Most welcome to the conference call of Alupar to discuss the results referring to the third quarter 2019. The audio and slides for this conference are being broadcast simultaneously through the Internet in the website, www.alupar.com.br/ri. The presentation is also available for download. (Operator Instructions)

We inform that forward-looking statements are subject to risks and uncertainties. Therefore, they may or may not occur in the future. These forecasts only represent the assumptions on the

(technical difficulty)

This quarter, we would mention the first one, which was the conclusion of the acquisition of AETE. This belongs to Eletrobrás. Eletrobrás held an auction for a minority share, and at the time, we were not partners. This was a partnership between Alupar, BIPAR and Eletrobrás. They were the 4 partners, and we acquired in this auction the participation in this asset together with the Perfin fund. And together with them, we acquired participation in this asset, and this was concluded on 14 August 2019.

The second relevant fact, which is important to us, was the entry in operation, the operation startup of the substation of ETC, where in the auction of 2016, which really started in 2015, but took place in 2016. So this is the second acquisition in this recent wave of auctions. And we entered into operations. We announced this.

The third fact, which I consider and which was announced and duly participated, was the issuance of ESTE installation license. We have it together with Taesa and through TPE, this asset we have in partnership with Taesa, where Taesa holds 49% through TPE. And so we are together in this is ESTE project, and we had the installation license on October 15, 2019.

Another highlight, important step was the issuance of TSM installation license, and this project was the recently carried out auction in 2017 April. And this line, from the environmental standpoint, in all the projects we have, this was the one which had more -- the greater number of complication points because this is a big project from Atibaia to Rio de Janeiro, going throughout all the Paraíba Valley. And therefore, we had a very important work to help with the project's world environmental requirements, and it goes through regions of reserve. And therefore, the fact that we were granted the installation permit was very important.

This is almost 400 kilometers, 330 to be more precise. And the fact that we were granted the license made us very, very satisfied, very happy, in terms of our performance in the case.

Another important point was the conclusion of the acquisition of equity interest on TME. TME is the line we have in Mato Grosso, together with Eletronorte and with Mavi Engineering. And we acquired -- we had 46%; Eletronorte, 49%. And we acquired the stake which belonged to Eletronorte, which was also submitted to the auction they carried out at BOVESPA for the sale event with the interest in their assets at AETE, and we acquired them. We had 46%, and we acquired all of Eletrobrás' stake, but we sold part, 2%, with the goal of using this asset together with the AETE assets and having great synergy among the 2 of them. They generated very good synergy, and therefore, we decided to set up the structure I am describing to you.

Out of the projects we have in our pipeline, the 2 of them that -- are already in operation, and all of them have old installation permits. So today, we only have one, the Colombian project, which -- where the environmental process is slightly different from us. In Colombia, they don't have a previous permit. They go straight to the installation phase with the environmental studies, and they have some particularities, but everything is going on as expected.

Apart from this Colombian project, all the other projects have their installation permit issued.

As to land issues, which are important, the land negotiations, we have a slide on Page 11 in our presentation explaining project by project and indicating how we stand in terms of land negotiations with each of them. If you have -- if you are looking at the presentation, you will see that most of the land negotiations are finished and have been acquired. And the first 2 are with 100%, TPE, and TCC are around 97%, 96% already acquired by us. There's a little bit still missing. And they are under operation, already under work, and the TSM, ESTE and TCE, where we've got installation permit in the last quarter, in the area of around 74% of the land negotiations concluded. And there is around 25% that still have to be concluded.

And the Colombian projects, we anticipated ourselves to start the land negotiations before the granting of the permits. We started 3 months ago, approximately, to work in the process, and we have already 42% of the land already acquired.

In the next slide, you will see that we break down projects one by one that concluded once. It's better if you look at the slide. But anyway, EDTE and ETB, the first 2 projects to be concluded, we are in the work -- civil work phase. And assembly is concluded, cable launching as well and the earthmoving also.

TPE, TCC, we already have these 2 phases concluded, and we are doing our utmost to have the projects concluded.

As of Slide 14, you will have the photos of our -- all of our enterprises if you want to see. If you are following the presentation with the slide, you will be able to see them. Then we will start the Q&A session, and then we'll be able to discuss a bit more.

I'm giving the floor to Luiz Coimbra, and he will go on with the presentation of our results in this last quarter. Thank you very much again.

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Luiz Coimbra, Alupar Investimento S.A. - IR Manager [2]

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Well, good afternoon to all. Thank you for being with us for the results of the third Q at Alupar. You here have the IFRS figures and the regulatory.

Our revenue totaled BRL 1.259 billion as compared to the numbers that we had last year. And the main variation here was in transmission. We had an increase of BRL 445 million due to the increase of BRL 889 million in the revenue. Here, you have the results that were around 47 -- BRL 437 million. Every time we invest in the project, we go around the margins of the building and we have a slightly higher number.

In terms of generation, we had a reduction of BRL 2.9 million. You'll see here the combined calculation on the generators. We had a drop of BRL 3 million. And here, there are 2 reasons. First, the reduction of 6% -- the increase of GFS, which was higher at 6% as compared to 58.1%, which we had in the third quarter last year, and with the reduction of PLD average in the north. This was in BRL 222.42 as compared to BRL 495, which we had in the third Q last year. We also had a reduction of BRL 2.2 million due to the assets in Colombia, where we had favorable revenue in this quarter.

When you analyze the -- commercialize the marketing company, you see that, basically, due to the sales we had of 21 megs, we acquired this 21 megs to put the -- this -- invest it in [FGTS] this quarter. Here, you have the regulatory debt of BRL 427.20 million and compared to what we registered in the third Q last year. The difference here is due to the increase of BRL 36 million in total sales in this generator and here, the difference due to the operation of the 2 assets. We had an increase of BRL 35.6 million in total sales in AETE due to the consolidation in this quarter, and we also had the reduction of almost BRL 14 million in the revenue because they started the 15-year period of being in operations. And this was recognized with a pro rata in the measurement of the revenues.

Next slide now. Let's talk about the EBITDA. EBITDA totaled to BRL 620 million in this quarter as compared to the numbers of last year, and we have an increase of BRL 658 million in the net revenue and an increase of BRL 432 million to what we carried out in the implementation of the new installations. We had an increase in operating expenses due to the fact that we had a BRL 4.1 million increase in the AETE's major accounting and an increase of BRL 2.1 million in the wind complex due to the start of commercial operations in December last year.

We had an increase of BRL 5.9 million in administration expenses and due to the consolidation of AETE, and we had a nonrecurring situation with an impact of more -- BRL 2.4 million in the generation segment due to La Virgen. And basically, the purchases of energy were at the commercializer as a trading company. And we had the counterpart in our total sales, and we had a swap operation of 35 megs in the market and this totaled BRL 14.9 million.

Moving on, we have an increase of BRL 11.2 million in equity income, and this was basically due to the increase in the ETB results. We are building this transmission plant, and we have a relevant position in this quarter, so it totaled BRL 37 million vis-à-vis the BRL 1.9 million results in third Q '18.

Now the next slide. We have the variations of regulatory EBITDA. They totaled BRL 327.9 million as compared to BRL 346.8 million in the same period last year.

The variations here are in the line of the net revenue and of the equity income. The net income, as I explained, we had an increase of BRL 26.1 million basically due to the debt of TCE and ETAP as well and the reduction of RAP due to the fact that we entered the 15th year.

Now we have a reduction of BRL 3.6 million as compared to the increase of BRL 20 million, and the increase was due to the implement, which I already explained.

The next slide, we'll go on net income. The slide is -- was compared better than last year. And the main interest here were BRL 150 million in EBITDA and a difference of BRL 54.4 million in income tax and social contributions due to deferred taxes and an increase of BRL 56.1 million in majority shareholding. And this was the increase in the results of the transmission companies under implementation, in which we have partners due to the investments made and the application of CPC 47.

And in the case of the minority participation, we have some partners in the company, and that justifies the difference.

The regulatory information now. The total was 50 -- BRL 72.1 million as compared to BRL 98.3 million in the same quarter last year. The main impacts were the reduction of BRL 18.9 million in EBITDA, an increase of BRL 4.1 million in depreciation and amortization due to the beginning of accounting of BRL 2.4 million in AETE and BRL 1.3 million in ETAP transmitter commercial operation. We had a decrease of BRL 4.3 million in financial results. Due to the configuration in this quarter, we had an increase of BRL 5.7 million in the minority shareholding and an increase of BRL 18.2 million in AETE. But on the counterpart, we had a reduction of BRL 10.4 million in ERTE and ENTE, lower results related to the 50% drop in the Annual Permitted Revenue, RAP. And the last year, it was a growth.

This quarter was a gross debt of BRL 690 million. Cash was BRL 646 million as compared to the BRL 46 million we had in December '18. And looking to the debt profile, the short term represents 32% in the quarter as compared to the 4% we had in the fourth quarter '18. And the debt is also due to the first tranche around BRL 128 million for -- which is set for 15th April 2020.

And we have the consolidated debt of the group. Gross debt totaled BRL 6.527 billion as compared to our BRL 2.803 billion last year, fourth Q. This increase in net debt is due mainly to the reduction we have of BRL 594 million in cash due to the investment we are carrying out in the project.

As to the debt structure index, I think there was no significant variation. Most of it is indexed due to like IPCA, due to the infrastructure projects we have. And then we have CDI with the 17%, and TJLP was 16%.

In terms of money, the debt is around 12%. And I want to remind you that this is due to the implementation projects we have in Colombia.

Now the next slide. We have the profile of the controlling company. We -- the project of the debt, which has allocated 45%, with the due date maturities up for after 2014 -- 2024.

So at TCE, we are nearly concluding the funding. And I think that we only have what we had at this other company.

To conclude, I want to show you Alupar's performance in the capital markets. Slide 29 here shows we had a performance between IBOVESPA and IEE. Alupar performed in the year-to-date, 32.72% (sic) [32.67%], IEE, 36.61%, and IBOVESPA, 20.68%. This is a point in which we have been improving in terms of liquidity.

Here in this table below, you can see the year-to-date. We have BRL 17.3 million. The year-to-date last year was BRL 13 million. When you compare quarter per quarter, we had BRL 9.9 million volume last year, and we closed the quarter with 7 -- BRL 16 million, BRL 17 million almost.

With having said this, I conclude my presentation, and we open for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Gustavo Miele, Itau BBA.

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Gustavo Miele, Banco Itau BBA SA, Research Division - Research Analyst [2]

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My question relates to the debt market in the transmission line. I would like to hear from you what is your perception when contracting new debt for transmission lines with interest rates in Brazil at such a speed than most of the market had expected. We know that most good share of your lines are already contracted. But I would like to hear from you what you have in terms of comparison for debt? And for infrastructure events, if you have any impact expecting for costs or something that has been done -- doing more effect in your accounting, please?

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Unidentified Company Representative, [3]

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Well, instead, we have been following the evolution of NCNB. The last time, the last contracting we had was IPCA plus 5 and for debentures and infrastructure. And this resulted in a 100 difference for more or less.

But from there on, NCNB is closed. They ended the year at around 3%. And what happened when they close, when the coupons sold very much at NCNB? Spreads increased a bit. But I don't feel that we are facing major difficulties in this respect, provided you have a good guarantee during construction because that's the term of more -- the period of more risk in our evolution. And I think it will remain like that, NCNB with equivalent terms. But with a pro rate like ours, I think it will be 100% or around this. But I think that we have the issuance, lower issuance in the past with higher coupons.

And I think we would say that the most expensive we paid was NCNB plus 0.7. But with the drop, despite seeing lower coupons, your spreads are slightly higher as compared to NCNB. But I think that with the drop in interest rates, what we are feeling is that the individuals are looking for alternatives in investments. And I think that this is a very attractive piece of candy. And if they don't have interest rate problems, I think that this asset is very interesting for individuals, around 4, 4-something-plus IPCA or 3.3%, 3.5% and 7.5 without the interest in the income tax. I think it's interesting.

And for infrastructure funds, I also think that they are increasing considerably because banks consider this market niche with very great interest. Some of them -- some of these banks are losing funding due to the interest rate. And so many -- most of them are migrating to this investment fund.

Another impact, which I think is quite important in the debt market, and I think this is a great change we have been undergoing in our country, the fact that the secondary market of private debt is increasing a lot. And today, an individual who buys paper securities of 10, 12, 15 years, when they want to sell after 2, 3 months, they have secondary markets to sell that asset. And this increases the interest on this time -- of this type of assets.

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Operator [4]

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Our next question comes from Mr. Andre Sampaio, Santander.

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Andre Sampaio, Santander Investment Securities Inc., Research Division - Research Analyst [5]

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I would just like to have an update on 2 topics. Please speak on the potential offer of FGTS and the TNE issue, if you have any update on the 2 issues.

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Unidentified Company Representative, [6]

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Well, I don't know exactly how the FGTS, the unemployment provisions, is -- fund is going because they made an announcement. But they had the problem of quorum, and they could not have the approval of the sales to look at. But of course, what we hear, and that's for you, I'm sure you also hear that, is that the policy, both of FGTS and the Caixa Econômica and BNDES, their policy is to sell all the assets they have, try to sell as many assets as they can in their portfolio. But what Caixa announced is that they would bring the topic of Alupar to the next meeting whenever the opportunity arises.

But what we felt was that they were focusing too much this year. They had the IRB, I-R-B, operations, and they were focusing a lot on this high volume that we had in Brazil. They had done a great job. And -- but I don't think that it was not a priority as part of the assets they had to sell in their portfolio. But after that stage, I believe that it makes sense in some moment to repeat this and do this again to bring it to the table of discussion. And this year, due to our flowchart, I think that we are in the middle of November, I don't know it will happen this year.

But all the assets we have in the portfolio, I think that Alupar asset is the one that is easier to realize through some type of sale.

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Andre Sampaio, Santander Investment Securities Inc., Research Division - Research Analyst [7]

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What about TNE? What's your update on TNE?

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Unidentified Company Representative, [8]

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Well, we have daily updates on TNE. TNE is a story that would give us an excellent fat book. What happens today at TNE is that our technicians are held together with the Indian community, native Brazilian community, to present a basic environmental native Brazilian plan. They made the presentation. This presentation is a long one. It's a 3-day presentation. They are together for 3 days -- for the past 3 days and had these meetings intermittently, trying to see if they can define this study.

We already carried out this analysis, and we are submitting them to native Brazilians to see if they accept it or not. There is a lot of -- there have been a lot of people together in the hearings. The public prosecutors participated in the hearings. And based on the RLC resolution, there should be a consultation before the auction. So there is a request to annul the auction. And I didn't have, so far, feedback, but I know that they are holding this 3-day meeting to present the situation.

On the other end, ANEEL approved a balance rule. As a matter of fact, they put the remainder of the contract for the remaining term of the building. And we have a resource -- a preliminary resource that ANEEL is saying that this was not a rebalancing calculation. They just had to divide the revenue for the time -- remaining time for the concession.

Now due to the contracts, we have the 9. And so they took the revenue. We would have in the -- this 27 number, divided it for '19. And we have been fighting with this, fighting to get this license for 9 years due to the specific -- specificities of the project.

Anyone -- anyway, the -- we are expecting ANEEL's position to know what's happening. But anyway, the license has not been granted so far. So we are [expanding] to see how this will go on, the negotiations with these native communities and FUNAI, the foundation that deals with this.

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Operator [9]

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(Operator Instructions) Our next question comes from [Luis Imanga].

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Unidentified Analyst, [10]

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Could you share with us, in your view, the situation of the secondary market for the project and the auction calendar of the government?

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Unidentified Company Representative, [11]

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Well, the secondary market has some things. We have analyzed some opportunities. We always do that. And I think that there are some opportunities, yes, but I don't know if we will be able to have success in some specific things. But as I said, we analyze everything that is being offered in this area. And we very often find something with value. The most notorious on the table is the Argo asset because, actually, we are not participating in this project. And the asset of Argo, from what we hear, is at the final stage. And there are smaller things that we are analyzing. But there is not so much in the secondary market at this moment. But there were some projects that the prices are very, very low, and therefore, I think that they will not generate value.

As to the recent swap auctions and the coming auctions, one already was announced. We will participate. And we will try to do our best to be able to get something for us. And the opportunity is on the table of discussion. We might be successful in some aspects, yes. And as you know, we will participate in all the lots, and whenever there is a feasibility, we will present our proposal.

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Operator [12]

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(Operator Instructions) The Q&A session today is concluded. We would like to give the floor back to Mr. José Luiz for the company's final remarks.

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José Luiz de Godoy Pereira, Alupar Investimento S.A. - Chairman, Dy. CEO, Chief Admin., Fin. & IR Officer and Member of Board of Exec. Officers [13]

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Well, thank you very much for being with us this afternoon. We are at your service for any explanation or additional comments that you may deem necessary. Whether you want to ask Luiz, myself or Kassia, we are at your disposal. Thank you very much, and good afternoon.

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Operator [14]

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Alupar teleconference is concluded. We thank you all for your participation, and wish you a nice afternoon.

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