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Edited Transcript of EGIE3.SA earnings conference call or presentation 19-Feb-20 5:00pm GMT

Q4 2019 Engie Brasil Energia SA Earnings Call

FLORIANÓPOLIS Mar 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Engie Brasil Energia SA earnings conference call or presentation Wednesday, February 19, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Rafael José Caron Bósio

Engie Brasil Energia S.A. - IR Officer

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Conference Call Participants

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* Carolina Carneiro

Crédit Suisse AG, Research Division - Sector Head

* Gabriel Fonseca Francisco

XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A., Research Division - Energy, Oil & Gas Analyst

* Marcelo Sá

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Pedro Luiz Manfredini

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. This is ENGIE Brasil Energia's conference call where we will discuss the results for the fourth quarter 2019 and the full year results. (Operator Instructions) We would like to remind you that this conference is being recorded.

The 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 forward-looking statements made during this conference call regarding business outlook of the company should be treated as forecast that depend on the country's macroeconomic conditions on the performance and regulation of the electric sector, besides other variables there, therefore, subject to changes.

With us today, we have Mr. Rafael Bósio, the Investor Relations manager, who will talk about the company's performance for the fourth quarter of 2019 and the full year. Ensuing this, we will go on to the question-and-answer session. We remind journalists who wish to ask questions that they can do so by e-mail, sending them to the company's press office.

It is now my pleasure to give the floor to Mr. Rafael Bósio. You may proceed, sir.

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [2]

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Thank you very much, and good afternoon. Now before we go on to the presentation per se, I would like to mention that our CEO (sic) [CFO], Marcelo Malta; and Eduardo Sattamini, could not be with us in the call because of commitments that they had that they could not reschedule. Once again, we have the visit of foreign Board members.

You can see that the year 2019 was a year of a great deal of achievements for the company. On one hand, we had a very volatile energy situation despite the fact that the electrical energy levels were very similar to 2018, but the spot prices tended to differ. We had lower prices during the second and third quarters compared to historical prices and higher prices during the first and fourth quarter when we traditionally have the rainfall period, but we did have several successes. Our share in TAG that coming into operation of the Pampa Sul, Umburanas, and at the end of the year, in December, the acquisition of the transmission project, Novo Estado Energia.

We're going to begin with Slide 5 of our presentation where we present the financial and operational highlights. You can observe that the net operating revenue for 2019 was BRL 1 million higher than 2018, a growth of 11.5%. And further ahead in the presentation, we will go into more details in terms of our revenue. But we can already observe that the growth of revenue was due to the coming into operation of our new plants, Pampa Sul and Umburanas, that came in, in 2019. Campo Largo in full operation at the end of 2018, and this was the first year that it's fully contributed towards our results and also because of the higher revenues that we have had in transmission in general.

The EBITDA had a growth of 18.2%. Once again, because of the expansion in installed capacity and also due to other factors. For example, the contribution of TAG, T-A-G, an increase in results due to our assets in Jaguariúna, and we -- the purchase of energy in our portfolio in the third quarter, we recognized BRL 321 million referring to indemnity for a delay in the Pampas Sul electrical plant.

Our net income was practically stable due to an increase in our financial expenses, due to the increase in interest and monetary restatement, not only for our debt, but also on concessions and a greater depreciation because of the size of our generating complex, besides having to pay a higher income tax and social contribution taxes. But we are going to refer to these in greater detail at the end of the presentation.

We now go on to the highlights on Slide #6. Since our last release, we draw attention to the acquisition of the Novo Estado Energia transmitting plant that will include 800 kilometers, a new substation and an expansion of another 3 in the state of Paraná (sic) [Pará] and Tocantins.

We also highlight the BRL 351 million in dividends for TAG, once again, arising from profit. And the third highlight of this slide is that we, for the 15th consecutive year, very proudly are part of the Corporate Sustainability Stock Index.

On Slide #7, another highlight also linked to sustainability, the renewal of our partnership with Banco Itaú to -- when it comes to CO2 by acquiring carbon credits from the Lages Cogeneration unit at UCLA.

And finally, the last highlight, as was already expected, of course, the approval of the proposal for the distribution of complementary dividends amounting to BRL 950 million. Evidently, this will have to be ratified in the ordinary general assembly. But this proposal enables us to reach 100% of our payout in accordance with our policy, and this despite the ever-growing investments that the company has undergone.

We're going to skip a few of the slides, if you allow me. We don't have any significant alteration in our shareholding structure. And thanks to the Novo Estado Energia acquisition, we're adding new lines to this project.

And in the map to the right, on Slide #10, you can see the substations that have been foreseen as part of this project.

And we now go on to Slide #14, skipping a few slides as well, where we show you an increase in our stake in the annual allowed revenues that were auctioned between 2003 and 2019. We had a 2% share with Novo Estado. We will now have 5% of the total annual amount -- allowed revenues, which means that we are expanding our activities in the transmission sector, as was part of our original strategy.

When it comes to distributed solar generation, on Slide #15, we show you the consolidated figures of the installed capacity for 2019. And we continue on with the strategy of diversifying our activity in the B2B segment. In 2019, this accounted for 91.4% of the commercial capacity, the installed capacity.

We are going to go on to Slide #19 to speak about strategic sales and the commercialization and marketing of energy. In truth here, we will speak about our contracting until the year 2021. And we're going to update the number of clients with an increase in 2019 of 20 clients, reaching 181.

Now all of this, of course, relates to the next slide, #20, where we show you the new diversified portfolio. If we compare this graph with what we saw in previous quarters, in the previous year, sales to free represented 4%, they have now increased to 5.7%. And this is the result of being able to capture new clients and releasing some clients. And of course, all of this will tend to become more diverse with the expansion of the market. And we're, of course, always there to take up opportunities for new clients.

On Slide #21, the uncontracted energy. With the growth of our availability for the year 2022 to more comfortable levels as part of our portfolio management to be able to mitigate, attenuate the generation scaling factor impact. And in previous years, we did carry out the sale of energy that will be delivered in 2023, 2024 and -- as part of our strategy.

And in the next slide, you will also be able to observe our energy balance. And you will see that the year 2025, we'll work with 40.5% of decontracted energy. Once again, there has been an increase in the sales price for the year 2020, 2021, with regard to the third quarter. And presently, we're working with average net price and sales prices for 2022 that had already been closed previously, highlighting that the price sales is about BRL 191 per megawatt hour.

When it comes to speaking about expansion, if you could please go on to Slide 25. We show you the evolution, the construction of new assets that we present here. Speaking about Jirau, even with a drop in generation for the fourth quarter, our generation remained stable vis-à-vis the year 2018. And what is important to highlight is the high availability level, which confirms the excellent operational performance of this asset.

Speaking about this, January, we announced that Jirau was the third client with greatest production in the country after the amount of an uptime operating factor of 99.7%.

In the next slide, an update on the Campo Largo Wind Complex Phase II, and the energy here will be geared to the free contracting environment. The construction, as you can see, progressing well that enables us to hold on to our forecast for the year 2022.

On Slide 27, the advance of the Gralha Azul Transmission System. And presently, we have all of the licenses for installation. The civil work continue, especially for Ponta Grossa, which is the center of the system. This was concluded in September, and we move forward according to our schedule.

We would now like to share with you a slide on the new Novo Estado Energia transmission company. And we communicated to the market the implementation of this project. We will have an additional 1,800 kilometers of transmission, 1 new substation and another 3 existing substations. The close of this operation should happen in the first quarter -- while still during the first quarter.

We're now going to move to Slide #31 to speak about our financial performance. And here, you see the evolution for the last 4 years. For our net operating revenue, with a growth of 15% -- 18%, as you can see. And of course, this confirms a very sound financial performance.

In the next slide, you will see in greater detail the evolution between 2018, 2019. Net operating revenue for ENGIE Energia, with a growth of 11.5% in 2019. But what led to this growth of revenue was the increase in the sales volume with an increase of 4.1%, obtaining BRL 383 additional millions compared to 2018, and a growth of 4.5% and the sales price, the average sales price, giving us an additional BRL 200 million for the year's revenue. And because of the monetary restatement of contracts, new contracts with the trading companies with average contracts much higher than the existing ones. We also have the additional contribution of BRL 31 million for the Jaguara and Miranda plants because of the remuneration of our financial assets, because of the increase in average balance of these assets and because of the increases between 2018 and 2019.

And of course, we would like to highlight another important point, a great contribution in our operating revenue, BRL 484 additional million for the year 2019 and the additional revenues in transmission.

And of course, segments for the sale of photovoltaic panels was BRL 61 million. And what is important here is that the sale of the solar panels was impacted. We acquired the full control of distributed energy company in August of 2018. And during the 12 years, of that year, we had an impact due to the figures of this acquired plant. And this is one of the reasons, while we have those BRL 61 million for the photovoltaic panels.

Now as factors that led to a reduction in revenue vis-à-vis 2018, we have a lesser result in the short-term market, the spot market, and we have a reduction in the Electrical Energy Trade Board compared to 2018. And of course, this was overcome by the impact of the generation scaling factor and the higher hydroelectric generation. And therefore, the results of the Electrical Energy Trade Board reduced their contribution by BRL 224 million for the revenues of 2019.

In 2018, we had BRL 74 million referring to an indemnity for liability at the plant in Salvador, labor liabilities and also because of the Santa Mônica plant, is, of course, among other factors, BRL 74 million revenues in 2018, but without the same revenue for the year 2019.

We would also like to remind you that in the third quarter of 2019, we received an indemnity for a delay in the construction of Gralha Azul, BRL 320 million, an amount that was, of course, incorporated into the results of 2019 as operating revenue but without an impact in our total revenue. And -- but this did have an impact on revenue, as we see in Slide 33, we had a growth of EBITDA for vis-à-vis 2018 with a margin of 52.7%, an increase of 3.1 percentage points vis-à-vis the previous year. And we would like to highlight that the margin was affected by our trading operations, the recognition of revenues and cost from transmission and the sale of the photovoltaic panels that have had a margin that is lower vis-à-vis the other activities managed by the company. There is a dilution of margins. But despite this, there was an increase when compared to the year 2018.

We'll speak about the annual variation of EBITDA besides the impacts mentioned in the previous slide, the increase in volume, the average price sale, a higher remuneration for Jaguara and Miranda and Gralha Azul, and the indemnity that we received. We still had a positive impact in terms of the drop of the sales volume in the 2019 portfolio, once again, due to the generation park. And this led us to having a reduction of BRL 185 million in costs. And with a positive effect, the contribution of BRL 81 million as equity income from TAG, T-A-G, Transportadora Associada.

With a negative impact on EBITDA vis-à-vis 2018, we had higher recurring expenses because of the coming into operation of our new assets. There was an increase of BRL 90 million in the cost of material and third-party services; BRL 84 million with the cost of personnel, administrative and other expenses; BRL 53 million additionally in charges for the use of the electricity grid, because of our new capacity, besides BRL 21 million with the cost of fuel for the coming into operation and consumption of Pampa Sul and the consumption of our own coal.

And another negative effect, BRL 74 million because of the (inaudible) fine, something we had already had in 2018. And an increase of BRL 73 million in the short-term results, largely due to our exposure in the market in the northeast, southeast and center east with an impact on the annual results. And finally, the trading result is BRL 38 million lower. But once again, this is an effect of a mark-to-market between 2018 and 2019.

We now go on to Slide 34, if you please. We have already remarked on this. There was a reduction of 0.2% in our net income, which means it was practically stable vis-à-vis 2018, but with a worsening in our financial results. We would like to remind you that this is due to the payment of interest on a higher debt as well, and also due to an increase in variation and interest in the concession to be paid for. It's natural to expect that with the mitigation of the debt, if we tend to contract new debt for our project, we will have an improvement in our bottom line, a gradual improvement. And in 2020, we will have the contribution, the full contribution of the assets that came into our holding last year, Umburanas and Pampa Sul.

We now go on to Slide number 35, where we show you the consistency of our financial indicators, the return on equity growing vis-à-vis the third quarter of the year, with a small drop vis-à-vis 2018, and the return on invested capital with a minor drop compared to 2018. Of course, the ROIC, with a drop due to the higher indebtedness of the company. But despite all of this, you can see that these are highly consistent indicators, especially if we compare ourselves with other peers in the market.

On Slide #37, we will speak about the evolution of our indebtedness. At the end of 2019, the net debt ratio in 2018 was 1.6%, so there is already a drop compared to the third quarter, where we reached 2.3x. Potentially, this indicator may increase again in the coming quarter because of the acquisition of Novo Estado, but also because of the need to invest in the project.

And in the first quarter of January, we are going to pay out dividends referring to the first semester of 2018 with a reduction in our cash, of course.

On 37, you'll see the evolution of our net debt for the fourth quarter with a drop of 9.2%, with the inclusion of the BRL 351 million in dividends received from TAG and reserve on our net revenue.

And Slide #38, we show you our debt profile and the composition of this debt. This new expansion cycle did present an opportunity that was made the most by the company to optimize our capital structure. And vis-à-vis the year 2018, the -- we went from 35% to 40% -- 24%. When you see the TJLP and IPCA with the cost of debt in -- to 7.6% for 2019.

And to conclude, we continue with very strong cash generation to be able to fully honor our commitments. And of course, this will enable us to maintain our movement forward.

On Slide #39, you'll see our investments, our CapEx. What is important to highlight here is in this graph, in this projection of investments going forward, we have not included the amounts that will be used for the acquisition of Novo Estado as an investment or for its construction. Our investments in 2019 reached BRL 419 million. And it is important to observe that in the last 4 years, we invested more than BRL 15 billion. This, of course, is important because on Slide #40, you will observe that this is the same period in which we had 100% payout. So despite the very high amount of investments, we pay out all of our profit to our shareholders. I believe that with this, we will conclude the presentation, and we would now like to offer you the floor for the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Carolina Carneiro from Crédit Suisse.

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Carolina Carneiro, Crédit Suisse AG, Research Division - Sector Head [2]

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My first question, I would like you to comment on the possibility of participating in the gas auction that will be held in April now. This was printed in the official union newspaper, and we would like you to perhaps comment on what you're going to do if there's going to be a plant conversion or some sort of retrofit to be able to participate in this auction?

The second question, if you could speak a bit about the development of a complex that you were about to close down. You spoke about this in Investor Day. I would like to know if there's any novelty in terms of the contracting -- in the free contracting environment.

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

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Yes, Carol, thank you for the question. Regarding Jorge Lacerda, there is a possibility that it will fit part in the upcoming auction, especially when we speak about coal. And we will have more details when our CEO returns to the company. And what we want to do is to leverage this asset in the market. And if it is successful in the auction, we may have a 15-year contract, which would transform or enhance the sale condition for this asset. This possibility does exist when it comes to Santo Agostinho. We're working with contracting in the free contracting environment, but the time has not come yet. So again, the construction for this strategy is still standing. And of course, this will enable us to begin construction. I don't have a date that I can give you, a specific date, that I could convey to you at this point.

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Carolina Carneiro, Crédit Suisse AG, Research Division - Sector Head [4]

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And if you allow me to ask an additional question, referring to the hydrological scenario, where it seems to have been quite good. If you had any problems with location, with the service charges and if you could speak to us of the scenario, specifically for this year?

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

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Well, we don't normally disclose our strategy, but we're very far from having a strategy that is in conjunction with that of the sector. And last year as well, the position was quite inverted. This year, the sector has looked and allocated more energy at the beginning of January with less energy allocated in February until the beginning of April. And now, in fact, the prices are dropping with this improvement in hydrology. And our outlook for GSF is not very different to the one that has been forecast by the market. We're working with very similar figures. And of course, we might have to intervene eventually to close one of our positions. Thank you.

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Operator [6]

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Our next question comes from Gustavo Miele from Itaú BBA.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [7]

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This is Marcelo speaking to you. I would like to have more color in terms of your expectation of the PR for the hydroelectric sector this year. What do you think will happen? And if we could have a vision of when you believe that you can implement more energy, if this is going to happen in the coming year or further ahead?

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [8]

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Marcelo, thank you for your question. I think that very few people would be able to give you a schedule of approval of the PL and a change in the contracting of electrical energy. But things need to make headway in Brasilia for that. We do know that the government understands that this is an important point in their agenda to involve the market in the short term and for the planning of the sector, that issue of contracting of free energy. And beginning the next year, I think that we will have a better signaling of which will be the market prices. And because of the need of contracts and this support for energy, regulatory agencies are working to guarantee this and attempting to contribute towards a sector -- towards the regulation of the sector and also seeking greater expeditiousness. Once again, this is completely out of our control, Marcelo.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [9]

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And which is your expectation in terms of the PL of the GSF is something that has stopped in the past, do you think that a certain part of this will be vetoed? We had heard news that the Senate would not vote on this, we then received more positive news. Once again, which is your mindset when it comes to this? And if you believe there will be a solution for this PL or should we just simply wait and see this dispute come to an end?

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [10]

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Well, one thing depends on the other. I think that the vote on the PL will have to happen, but it would be a lottery to try to guess when this will happen. We continue to follow up on this.

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Operator [11]

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Our next question comes from Fernando [Redondo] from JB Investments.

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Unidentified Analyst, [12]

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When it comes to Jirau, which would be the more favorable conditions so that the participation can go on to EGE, and if there would be a financial counterpart for this?

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [13]

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It's happening with Jirau. As you could see operationally, this asset is performing very well, but economic and financially, it has suffered because of the generation scaling factor. It is not 100% contracted, and it has lost a great deal as well as other hydroelectric generators. Despite the fact, it doesn't cover the full GSF. And there has also been the impact of the expenses with the indebtedness of this plant.

My understanding is that the holding company and the partners are looking for a way out perhaps lengthening of the debt to alleviate the weight of these financial problems and to seek a lucrative exit so that the partners will not need to recurrently inject capital, as has happened.

It's stopping the bleeding, as we call it. And then this asset can be transferred. But of course, none of this means a financial exchange. In truth, this asset will be evaluated at the time of the transfer. And financially, it may be a better asset than it is at present. I would like to remind you, notwithstanding this, that because of the model that we use, there will be no destruction of value between the transfer of this plant, between the holding company and ENGIE Brasil. And of course, this is a transaction led by minority owners. And of course, this will be fully respected.

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Unidentified Analyst, [14]

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An additional question, if you allow me, regarding TAG, T-A-G. You have already received a positive contribution at the end of the year, which is your expectation and impact coming from TAG throughout the year 2020?

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [15]

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Well, we don't offer guidance nor projections. But the fourth quarter results, I believe, will represent a good benchmark, BRL 86 million as net income -- or net revenue from TAG and perhaps this could become a reference. Because starting now, TAG is paying its commitments. This reduces the cost of the debt. And of course, liquidity should increase as well as the contribution. I would say that this would be a good reference to use the contributions during the fourth quarter.

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Operator [16]

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Our next question comes from Pedro Manfredini from Goldman Sachs.

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Pedro Luiz Manfredini, Goldman Sachs Group Inc., Research Division - Research Analyst [17]

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A question that is very simple the energy that you purchased and you increased the amounts in the last quarter, you carried out a short-term purchase for the coming 3 years. How much of that energy is conventional? And how much is incentivated? And if you ended up buying more conventional or incentivated energy?

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [18]

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Pedro, I can't give you this breakdown, and I don't think I could anyway. Perhaps we can do this beginning with the next quarter. But it tends to be conventional energy. Of course, we also buy incentivated energy or we work with an energy swap. We sell conventional energy by incentivated energy, but I do believe it must be mostly conventional. This is energy purchased for the short term to mitigate the effects of the ESS, the service center. It wouldn't make sense to buy incentivated energy if we can't resell it. We would only do this in the case of the demand of a client, of course.

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Pedro Luiz Manfredini, Goldman Sachs Group Inc., Research Division - Research Analyst [19]

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Very well. So these are paired purchases. Another question about the sale of coal. Has there been a recent consultation? I believe this process is still open. This is in the hands of the holding, and you have to carry (technical difficulty) sale (technical difficulty) decarbonization, so this process is still pending. Has there been any recent consultation from any company? Anything that you could remark on?

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [20]

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Yes, we have a process that has basically divided in 2. We have the Jorge Lacerda complex and Pampa Sul. Pampa Sul is awaiting its background of operation. The operation will come into operation in June. There have been some generation problems with higher availability. This was resolved last year, and we are now going to wait for some months of operational performance with an -- to achieve an adequate availability to be able to sell this asset. But we should have a return of the process of sale of Pampa Sul this year. Now the Jorge Lacerda process is a continuous one, it continues to be in the market. We have received some proposals, but they were not binding. And therefore, we're awaiting a further evolution of the process.

One of the measures that we took, and I mentioned this in the previous question, was to enroll Jorge Lacerda in the 04 auction, the April auction, to have a contract at the plant and offer this contract to a potential interested party. Several of these interested parties want contracts with us for lengthy periods, which makes no sense if the idea is to decarbonize. It makes no sense to purchase energy from a thermal electric store and to offer contracts with the distributor as part of the package. Now if we are successful in the auction, if we do not receive an appropriate binding offer up to the auction. We're working on this, and there should be some novelty in the coming months.

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Operator [21]

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Our next question comes from Gabriel Francisco from XP Bank.

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Gabriel Fonseca Francisco, XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A., Research Division - Energy, Oil & Gas Analyst [22]

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In the fourth quarter '19, based on what is in the release that year, there has been no results as part of Aliança, only for TAG. I would like to gain an understanding if this is how you're going to perceive going forward. If you have no debt in terms of Aliança that you have presently or expenses as any other holdings? This would be my question.

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Rafael José Caron Bósio, Engie Brasil Energia S.A. - IR Officer [23]

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Gabriel, in this case, I need to observe that there was a reverse incorporation of Aliança. The company Aliança no longer exists. There was a merge with TAG. And from now on, it will be a sole company. And all the indebtedness is now part of TAG. That is why I mentioned that this was the first quarter with a company with reverse incorporation using our resources and because this would represent a good reference.

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Operator [24]

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The conference call for ENGIE Brasil Energia ends here. We would like to thank all of you for your participation. Have a good afternoon, and thank you for using Voitel.

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