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Edited Transcript of EGIE3.SA earnings conference call or presentation 6-Nov-19 2:00pm GMT

Q3 2019 Engie Brasil Energia SA Earnings Call

FLORIANÓPOLIS Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Engie Brasil Energia SA earnings conference call or presentation Wednesday, November 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marcelo Cardoso Malta

Engie Brasil Energia S.A. - CFO & Member of Management Board

* Rafael José Caron Bósio

Engie Brasil Energia S.A. - IR Officer

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Conference Call Participants

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* Fernando Borges dos Reis

Banco Itau - Analyst

* Kaique Vasconcellos

J. Safra Corretora de Valores e Cambio Ltda, Research Division - Research Analyst

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Presentation

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Operator [1]

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[Interpreted] Good morning. This is ENGIE Brasil Energia's conference call where we will discuss the results for the third Q 2019. (Operator Instructions) We should remember that this teleconference is being recorded.

This presentation, followed by slides, will be simultaneously transmitted through the internet through www.engie.com.br/investors. The slide presentation and the company's earnings release are also available on that website.

Before proceeding, I would like to clarify that all statements that may be made during this teleconference regarding business outlook of the company should be treated as forecast depending on the country's macroeconomic conditions, performance and the regulations of the electric sector, besides other variables. Therefore, they are due to changes.

With us here, we have Mr. Marcelo Malta, Chief Financial Officer; and Rafael Bósio, Investor Relations Manager, who will talk about company's performance in the third Q 2019. Right after, we will have the Q&A session with them.

We remind that journalists who wish to ask questions can do so by e-mail, sending them to the company's press office.

It is now my pleasure to turn the floor over to Mr. Marcelo Malta. Please, sir, go ahead.

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Marcelo Cardoso Malta, Engie Brasil Energia S.A. - CFO & Member of Management Board [2]

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[Interpreted] Good morning to all and thank you for being with us in this earnings teleconference of the third Q 2019. This is my first call since I took over as CFO at EBE last August. And unfortunately, Mr. Sattamini is outside Brazil. And therefore, he could not be with us today, for which he apologizes. And certainly, he will be present on our next teleconferences.

For those who do not know me, I joined the company in 2005. And in these 15 years of my professional life, I acted as Accounting Manager, also as the Financial Planning and Control Manager and accumulated a very wide view of the processes and strategies of finances at EBE as well as all of our interests.

To start our talk today, we have Slide 5 with the main financial operating indicators in the period. And as you can see, we have an important growth in EBITDA and net profit in the periods compared, and this financial situation was motivated by several factors. First, the level of commercial operations of our wind energy complexes of Umburanas and also from the commercial situation of our thermal electric company. And the operation of these complexes added BRL 140 million to our EBITDA.

Another factor that also contributed for this financial performance was the execution of a guarantee of the building contract for our thermoelectric Pampa Sul complex. And the execution of this guarantee was duly motivated by the delay in the conclusion of the works. And we had foreseen by contract to complete it on December 31, 2018, and it was only completed at the end of June 2019. Therefore, to compensate the results, we did not receive the [further] delay in the completion. The executors of this guarantee made us receive the amount of BRL 334 million and with this 14% generated an impact in our EBITDA of BRL 321 million.

In the slide 20 -- 6 and 7, we have the main events of the quarter. In the transmission segment, we had important advances in the transmission system Gralha Azul involving the construction of 1,000 kilometers of transmission lines in Paraná. And now we have this situation in Miranda. We issued some tranches with the bill dates in 7 and 10 years, and this will give us 3.6% to 3.9% per year increase.

And most recently, we concluded the financing contract for BNDES around BRL 1.26 billion and the financing of the construction of our wind energy complex Umburanas. It's a 19-year contract with a TLT rate of 1.7 throughout the year.

And in terms of our Gralha Azul project, which is our transmission line of 1,000 kilometers which is being built in Paraná, we obtained 2 installation license/permits, one for the Ponta Grossa substation and another one for most of our transmission lines. Therefore, I would say that these are 2 landmarks that show our advance and progress of implementation of the lines and also for the achievement of our implementation program.

We issued the distribution of 100% of net profit in the first Q in the amount of BRL 893 million and also approved the credit in the amount of BRL 354 million. Shares were ex dividends and ex interest paid as of December 3, 2019, and the payment quota will be soon informed to the market.

In this quarter, we also have important awards such as the Company of the Year by Época Negócios 360º. And we were also awarded for the 10th time and the seventh consecutive with the Transparency Trophy organized by Anefac, Fipecafi and Serasa Experian.

Now I would like to give the floor to Rafael Bósio, who will discuss the quarter's most important updates in the first sessions of our presentation. And then I'll be back to comment on the financial performance. Thank you very much.

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [3]

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[Interpreted] Good morning to all. Thank you, Malta.

And the first update we had to our presentation on the second Q earnings results, controlling interest -- in the controlling -- in simplified controlling interest on Slide 9, where we now have a direct participation of 29.25% at TAG. And since in the month of September, there was the incorporation of the TAG -- Aliança Transportadora de Gás. And we have a direct participation in up 29%. And then we will see now the results.

Now speaking about the segments of natural gas on Slide 12.

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Operator [4]

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[Interpreted] Ladies and gentlemen, please remain connected. We are reconnecting the lines.

[Technical Difficulty]

Please proceed, Mr. Bósio.

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [5]

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The line went down. So I was speaking about Slide 15 on the generation -- on the solar distributed generation.

Going to this subject. Besides the update numbers of units and installed power, I draw your attention to our geographic expansion, which was carried out in the quarter. Now, we will have our footprint in over 4 states since the end of this year's second quarter and now reaching 17 states with the major contribution in segment B2B. Now on Slide 19, we had a 19% improvement.

On Slide 21, we updated the graph of canceled energy contracts with an increase in the availability for 2020 and 2021, as per what we informed in the last -- on the second Q '19. This is part of our new strategy to mitigate the impacts of deficits from hydroelectric generation through the adequate management of our portfolio. We also had a small decrease in the cancellations in years 2022 and 2024. They are small amounts, but this will intensify as we get closer to these years because it's very rare to see free market clients buy energy for more than a year, 1.5 years earlier.

Now on Slide 22, we can see that as compared to the first Q, we had a reduction in the third -- in the 3 years '19-'21 and an increase in the sales price in 2021 with stability for this year. This grants us a margin.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

[Interpreted] Our first question comes from Mr. Kaique Vasconcellos, Banco Safra.

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Kaique Vasconcellos, J. Safra Corretora de Valores e Cambio Ltda, Research Division - Research Analyst [2]

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[Interpreted] I have 2 questions. The first, looking to your growth and analysis, I would like to know if you have any comments or any area that you'll be more interested?

And second, if you could speak about the commercialization and more visibility for 2020? And how do you see long-term prices?

(technical difficulty)

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Operator [3]

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[Interpreted] (Operator Instructions) Kaique, I will ask you to be patient because our speaker will go on with his presentation, and then we come back to your questions.

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Presentation

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [1]

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We now -- we will go on with our presentation, and we'll return to your question.

Entering in the expansion details and speaking about the development and construction of our new projects. Slide 26 show the evolution of the development constructions of our new assets. On slide -- on this slide, we see that 3Q '19, earmarked the beginning or the start-up of the wind energy complex Campo Largo Phase 2, both with the execution of new accesses that have been the works of the connecting line.

On Slide 27, we show the advances in the implementation of the transmission system Gralha Azul in Paraná. And in this Q, we had the installation permit to start the works of substations on Ponta Grossa. And now last October, we received the installation permit to enable the beginning of the building of the works of the system's main first lines. Now as in Campo Largo Phase 2, we are maintaining forecast for the start-up of operations in this line with an anticipation of 12 months as to the deadline in March '23.

I now give the floor back to Malta for his comments on the financial performance. And then Mr. Kaique, we will go back to your questions.

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Marcelo Cardoso Malta, Engie Brasil Energia S.A. - CFO & Member of Management Board [2]

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Well, thank you again.

So on Slide 30, we show the demonstration of variation of the net operating income, EBITDA and net profit. Our net operating income shows growth in this 3Q '19, and this slight growth was impacted by a reduction in the positive effects of our transactions of BRL 49 million. As a counterpart, we had a reduction in our operations of BRL 412 million and in the compared quarter BRL 23 million. But since we have the negative impact of BRL 409 million in our revenues, we have here the result in our net operating income.

In the EBITDA, yes, here, we had an important growth of 11.1% -- 56.1% (sic) [55.1%]. And great part of this is the results of the operations at Campo Largo and Umburanas, Pampa Sul and also the impact of the recognition of the guarantee that we received in August 2019. And with the effect of the guarantee we recognize in our results, the variation of EBITDA would be around 25% in the -- comparing the quarter. And the net profit also showed an important growth of 16.2% in the 56.2% in the same quarters.

And also, if we combine the effects of the execution of the recognized guarantees, the variation of net profit would be around 12%. And it's important to mention in recognizing our financial expenses in the amount of BRL 100 million motivated by the growth of the company.

On Slide 31, we have a breakdown of the composition of our net operating revenue. And with an increase of BRL 215 million due to the increase in the sales volume, and -- which was mainly mitigated by the operations of Campo Largo and Pampa Sul. And we also had an increase of BRL 98 million in revenues. And we also have an increase of costs of BRL 53 million, which gave an impact in the operations at negative BRL 25 million. We also have BRL 68 million revenue from the building of infrastructure for transmissions. And with the cost of the construction, we have BRL 424 million as -- with the net positive results of BRL 4 million.

And the sales aggregating BRL 29 million in our net operating revenue due -- mainly due to the inflation with an increase of 4% in our average sales price due to inflation. And the installation of solar panels also impacted the revenues. And this represents the control of solar panels in 2018, which now have helped us consolidate its operations.

And now we have the contribution of our complexes of Jaguara and Miranda due to the increase in financial assets remuneration. As we mentioned before, we have the reduction with the transactions, which resulted in a decrease in our net operating results and also a reduction on the amount of BRL 409 million. The motivation on the decrease in our short-term markets or in our PLD -- in our energy reallocation mechanism with the -- a result in the quarter of around BRL 214.

We also had the lower impact in our generation scaling faster, much lower and better than the other assets. And we had the recognition of the reduction of our sales position at the energy trade with a lower generation in thermal electric and the recognition in the third Q of the uptime ratio of Salto Osório.

Now in our next slide, we go back to EBITDA, where we have an impressive and important impact, growing 55.1%. And we received the EUR 321 million referring to the indemnity due to the delay in Pampa Sul, which I already mentioned. Excluding the income reconciliation, the increase of EBITDA would be 25.4%.

We had the reduction of BRL 45 million in the purchases of energy and also drop in the fuel consumption of BRL 41 million mainly due to the reduction in the thermoelectric generation in our contract with Jorge Lacerda. We have a positive result in our equity income at TAG, and we have BRL 21 million added by TAG in our -- to our EBITDA in the quarter. And part of the financial assets of Jaguara and Miranda, BRL 10 million. And we had reductions too -- in the costs of SG&A and personnel motivated mainly by the length of the commercial operations, by the start-up of operations of Campo Largo.

As we mentioned, we had an increase due to the recomposition of revenues due to the charging of indemnity due to [sinister] as per contracts. And also the renewal of operating risk policy and also in the translation to [CCEE] due to commercial operations of nonexpressive amounts.

Besides everything that was commented on the EBITDA, as a consequence, we had an impact of the increase of interest rates and social accounts, as mentioned, and also an increase of BRL 100 million of the net financial expenses.

And to conclude, we had a growth of depreciation and amortization of assets and also Campo Largo and Umburanas' specific situation.

Now on Slide 34, we had a small nonexpressive reduction. And the major drop is represented on return on invested capital of 19.6% and also an increase in the sequential comparison of the company.

The next slide shows the composition of our indebtedness. This, on the third Q, we had a growth in the relation between gross debt and net debt-over-EBITDA motivated, as we mentioned, by the increase of the indebtedness of the company mainly due to acquisitions and the projects we are developing now. And we attained 2.7 of the debt -- of the gross debt-to-EBITDA and 2.9 -- 2.2 net debt-over-EBITDA in a very comfortable leverage level still.

The next slide, 36, shows this movement in our net debt in detail. The main component of this evolution are the reduction of 1.2% in the comparison with last year same quarter was the impact of the BRL 726 million in dividends and IOE. And the exchange variation is compensated by an effect of BRL 213 million in this graph with the hedging -- exchange hedging operations with BRL 11 million (sic) [BRL 211 million] of appropriated interest and BRL 121 million of income tax and social charges.

Besides, we had an investment amounting BRL 93 million, amounts that were paid by the obligations of construction of BRL 18 million, and all the expenses were paid. And the cash that were generated by the operations of BRL 1,434 million (sic) [BRL 1,464 million], and as mentioned, the effects of the indemnity for the execution of the guarantees at Campo Largo. This is the other part of the execution of the guarantee. And we have -- it has to cover impacts -- negative impacts with the results we had or the results we did not attain due to the delay in operations. And we also had the execution of another guarantee to cover the exceeding costs in the amount of around $18 million, which are represented by this amount in real.

On the next slide, we have the profile and composition of our debt updated, considering that we had the contraction -- contracting of debt for 2022 mainly with the operations we had recently and also the share of the execution of the 5th and 6th issue of debentures. And for July '19 -- in July '19, we had a very high issue of debentures. It's important to mention the reduction of the nominal debt costs, 7.2% if compared with the first Q, 7.6% versus 8.6% in 3Q.

And on Slide 28, we have our investment plan. We had important expressive amounts to take into account: The acquisition of shares in TAG of BRL 3.5 billion; in Pampa, where we had investments of around BRL 700 million. In 2020, we estimate having CapEx around BRL 2.1 billion in ex-Campo Largo and Gralha Azul and Campo Largo II, which should be around BRL 900 million. And for 2021, we also have for Gralha Azul and Campo Largo with the approximate BRL 1 billion investments in CapEx -- maintenance CapEx.

On Slide 36, we show the evolution of the dividends proposed and paid by the company on Slide 39. And our Board of Governors approved the distribution of dividends in the first Q 2019 at the price of BRL 4.39 per share and also an increase in social capital, giving the payment of interest per share of BRL 0.43. And adding up these dividends in the first Q and the equity capital, we have the amount of BRL 1.32 per share.

Having said that, I conclude my presentation and open for Q&A.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions) Mr. Kaique from Banco Safra, please resume.

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Kaique Vasconcellos, J. Safra Corretora de Valores e Cambio Ltda, Research Division - Research Analyst [2]

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[Interpreted] Well, I'll repeat my questions. First, I would like to understand if there is any region in the next transmission auction that you're interested in? Or how do you analyze the competition and the situation?

And the second question, on -- you have any view on how the next years will proceed in terms of energy transmission? And if you have plans for the long term?

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Unidentified Company Representative [3]

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[Interpreted] Well, the law hasn't published yet transmission auctions and the laws in auctions. But we have interest, of course, in making a presence in these auctions.

In terms of the forecast for next year, in GDF, we are now entering in this commitment. Naturally, we hope to have a better visibility. But anyway, we are already prepared with our portfolio, and we want to have a GSF in a level close to what we have been practicing in 2019. But anyway, we will try to have as our strategy this position.

As to our prices, we hope that in the short time, we will -- as the prices will be very much pressed. Because this year, we had something similar than one we had in -- at the end of 2018 but with a much higher volatility. And now with decreasing energy, I would consider the last one was the worst month in our history. And November, generally, has a very weak energy consumption. So we are pressing on prices for 2021, as well, 2020, '21 and naturally, as of 2022, prices will start to go down because they will separate from the energy pressure. And price is around BRL 60, slightly more or less. I think that that's what I wanted to answer.

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Operator [4]

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Our question now comes from Fernando Borges, Banco Itau.

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Fernando Borges dos Reis, Banco Itau - Analyst [5]

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I would like to pose a question on (inaudible) Energia because there was a document from the modernization of the electric sector last week. I would like to understand if you already have a study on how this could impact your company. Because of hydroelectric and reservoirs should have a higher reserve. And I would like to comment also -- and how you separate the energy concessions according to the contracts you have today.

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Unidentified Company Representative [6]

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[Interpreted] Fernando, I understand that this alteration will impact new contracts as to (inaudible) Energias for the future. It won't impact the past contracts. And our team, which deals with regulations, are very -- following this very closely.

And I think that there will be more positive impacts because we will have the opportunity to create new products such as the normalization with some wind energy generators, with the improved generation and this being a good opportunity for a possible auction. But I think that first, this -- if you want to contact, we will get into more details with you. Now, that's what we can say.

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Operator [7]

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[Interpreted] (Operator Instructions) Well, we'll now close the Q&A session. Now, we give the floor to Mr. Marcelo Malta for his final considerations. The floor is yours, sir.

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Marcelo Cardoso Malta, Engie Brasil Energia S.A. - CFO & Member of Management Board [8]

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[Interpreted] First, I would like to thank the presence of all of you in our teleconference. And as usual, we are at your service for any further question with our team of Investors Relations and the eventual questions that remain from our presentation. If you have any questions, we are here at your service.

Good afternoon to all, and hope to see you next time.

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Operator [9]

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This concludes ENGIE Brasil Energia's audio conference for today. Thank you very much for your participation. Have a good day, and thank you for using Voitel.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]