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Edited Transcript of ENGI11.SA earnings conference call or presentation 8-Nov-19 7:00pm GMT

Q3 2019 Energisa SA Earnings Call

Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Energisa SA earnings conference call or presentation Friday, November 8, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandre Nogueira Ferreira

Energisa S.A. - Regulatory Affairs and Strategy Director

* Maurício Perez Botelho

Energisa S.A. - CFO, IR Director & Member of Executive Board

* Ricardo Perez Botelho

Energisa S.A. - Deputy Chairman of the Board of Directors, Member of Executive Board & Director

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Conference Call Participants

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* Andre Sampaio

Santander Investment Securities Inc., Research Division - Research Analyst

* Carolina Carneiro

Crédit Suisse AG, Research Division - Sector Head

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Energisa's conference call to discuss the third quarter of 2019. The audio for this conference is broadcast simultaneously through the Internet at ir.energisa.com.br, where you can also download the PowerPoint pack. (Operator Instructions) We would also like to inform that the conference call is in Portuguese and will be presented by the company's management. And the English version will be broadcast by simultaneous translation.

This conference call contains forward-looking statements that are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those in the forward-looking statements. Such statements speak only as of the date they are made, and the company is under no obligation to update them in the light of new information or future developments. And they just depend on certain facts that may or may not occur. Conditions and other operational factors may also affect the future results of the company and, of course, may materially differ in the forward-looking statements.

I will now turn the conference over to Mr. Maurício Botelho, who will begin. Sir, you have the floor.

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Maurício Perez Botelho, Energisa S.A. - CFO, IR Director & Member of Executive Board [2]

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Thank you very much. Thank you all for attending our conference call for the results for the third quarter. With me here, we have Ricardo Botelho, who is President of the Energisa Group; Gioreli de Souza Filho, who is Vice President for Distribution; Alexandre Nogueira, Regulation Director; Cláudio Brandão, Finance, Corporation Director; and also our IR team, Deborah Nunes and Bruna Alvarenga.

I will be showing a sequence of slides, and then we'll open for questions and answers. I would like to remind you that just as in the previous quarters, the figures in the operational part of the presentation are included the information of the companies which have been recently acquired, Energisa Rondônia and Energisa Acre, controlled by Energisa since 2018. For the financing part, we have pro rata values, which do not consider the acquisition of these companies and only attach the [market and] distributors.

On Slide 3, we have adjusted EBITDA, BRL 980 million for the quarter, BRL 2.8 million in the 9 months for '19, an increase by 18 -- 28.2% and 26.5%, respectively, compared to 2017. Concerning net income, it's BRL 54 million for the quarter and BRL 174 million for the 9 months of the period. And it's worth noting that the Rondônia and Acre Energisa companies have contributed negatively for the quarter and, therefore, were down by 65.6%. If we do not consider these companies, the pro forma net income totaled BRL 246 million, which goes up to BRL 710 million in the 9 months period of the year, a decrease by 5.3% and an increase by 40.6%.

I would also like to highlight other important events that happened after the closing of the quarter. The first one which caught our attention is the extension of the concession at Tocantins for 2020. It was increased with the Ministry of Energy, and we'll be signing this agreement in December. Another highlight is that in October, we had a favorable decision for the tariff review for Rondônia and for Acre. And 15 days later on October 30, we appealed administratively at the regulator's agency, asking for the regulator to give their opinion and asked to maintain the same conditions. And this has been postponed to February '21. Therefore, we are asking to keep our assets for agreement on '19, keeping Acre; and also asking for the IRP, which is the annual adjustment, not to be acquired until it includes this.

On Slide 4, we have the development for the power markets. We are distributors. The sales of electricity has grown by 4.4%, whereas in Brazil, there has been a drop by 0.2%. In the first 9 months of the year, this growth was 4.2% against 1.1% for Brazil. That is the dynamics of our action within Energisa still presents a positive differential concerning the average for the country.

Growth for the third quarter is due to the performance of the household consumer class, which advanced by 6.2% for the quarter; and commercial, 6.3% for the period. This has been influenced by the high temperatures in our regions. And also the calendar factor also affected it positively. I would also like to highlight Energisa Mato Grosso with the growth by 8.4% in the quarter. Household also grew by 14%; and commercial, by 8.6%. Energisa Mato Grosso do Sul obtained the second best performance, which was 6.8%, also influenced by the household and commercial segments. In the North region, Energisa Rondônia also performed well, growing by 6.8%. And we had experienced the highest temperature in 30 years in the state and has influenced obviously the increase of the segment for household and commercial. Acre also had a significant development in the quarter of 8.7% in household and -- actually, 8.7% on average; and households, by 9.5%; in commercial, 51%.

Moving on to Slide 5. You can see our efforts register low-income clients. Between September 2018 and 2019, we increased our client list by 151,000 clients, low-income segment with a highlight for Energisa Rondônia and Acre. In June of 2019, we also added 90,000 clients to the low-income bracket.

On Slide 6, to your left, we have the history of losses. The indicator was 13.6% considering all the companies in the group, which account for 0.56 percentage points above the target for the regulator. If we do not consider Energisa Rondônia or Energisa Acre, the total power losses represent 11.6%, which means 0.15% below the target. The highlights for the quarter is Energisa Mato Grosso, which reached the best performance of the group when compared to June 2019 and September 2018. It is the first time that this concession reached the regulator's target since its acquisition in 2014. We still have many challenges in this particular company, and we are working hard to keep this indicator within the target. Energisa Paraíba is temporarily above the regulator's target, which is explained by the raise in nontechnical losses, which has been dealt with through an additional plan of fighting fast. We have been intensifying our security and choosing actions. And this has been implemented in 2018 and has been intensified in 2019. This can be explained by the words of the social economic indicators in the region. Energisa Acre is below the regulator's target, whereas Rondônia is 6% above the regulatory limit. We have proposed a wide set of measures to deal with the situation by increasing team, inspection teams, focusing on soothing and focusing on areas of land and basins.

On Slide 7, we have quality indicators. Except from Rondônia, all distributors within the group are below the regulator's limit for quality, which is good. Many of the concessions are continuously improving their own figures. They're beating their record historically. We have for Energisa Paraíba and Energisa Tocantins in the average outage frequency and -- outage frequency, average outage duration is also better, not considering Energisa Rondônia and Energisa Acre. Energisa Tocantins presented a better performance of the group with a reduction of 4.3% in the average outage duration and 2.6% in the outage frequency ratio. Energisa occupied the second place, and its ranking improved 0.85 hours in the average outage duration and 2.05x in the outage frequency ratio. Energisa Rondônia and Energisa Acre continued to be the targets of our plans and investments and maintenance after their acquisition. At the end of the last year, we are speaking of training teams, automatizing networks and taking measures to clean and train -- trade pruning in order to improve these 2 concessions.

Moving on to Slide 8, we have financial information. In this case, we do not consider the results for Energisa Rondônia or Energisa Acre. We are doing a PMSO pro forma. There was a reduction by 4% in the quarter. In the 9 months of the year, the amount is in line with the same period of last year. If we do not consider nonrecurring events in the third quarter of '18, such as labor compensation in [GP 2] and also the payment of royalty in Energisa Mato Grosso, and PMSO for the third quarter of '19 would have grown by 2% compared to the third quarter of '18. It is still below the inflation of the period. A significant part of the adjustment and increase in staff is explained by wage readjustments and increase in the number of employees especially at the holding companies because it has now increased its scope of activities with the shared service center. On the other hand, in line with [human resources], we've had a drop in labor compensation especially in Energisa Mato Grosso do Sul and Energisa Sergipe. The reduction in services was impacted basically due to lower costs in consulting. And remarkable also to see, as I've said, we are now migrating the systems.

On the following slide, which is Slide 9, we have a brief analysis of PMSO for Energisa Rondônia and Acre for the quarter and for the last 9 months, excluding nonrecurring events with effects of the (inaudible), so to speak, the results. For both companies, these events are nonrecurring and basically we're sure to lay off, such as the incentive retirement program and voluntary layoff programs, and as well labor compensations, which affects the line of personnel. And in the line of services, these events are related to the consulting that we have hired and for the process of extraordinary tariff review for legal consulting. According to the charts, in the case of Rondônia, there is BRL 110 million in nonrecurring expenses in 9 months; and Energisa, BRL 23 million of nonrecurring events for the same period.

On Slide 9 (sic) [Slide 10], we have a chart for the consolidated EBITDA pro forma. The adjusted EBITDA, not considering Rondônia and Acre, totaled BRL 1.02 billion for the third quarter and BRL 2.89 billion in the year, an increase by 33% and 31%, respectively. I would like to highlight that taking away the nonrecurring events that we have detailed in this presentation, EBITDA for the quarter would have grown 24%, influenced by the increase of BRL 136 million in Parcel B for the distributors. The same indicator for 9 months improved 37% with an impact of Parcel B of totaling BRL 616 million.

Going onto Slide 11, where we have the net income for the quarter consolidated figures, with a reduction of -- a decrease of 5%. Within the nonrecurring events that we mentioned above, I would also like to highlight the subscription bonus attached to the severance issuance of debentures. With an impact of BRL 172 million, I would like to highlight that this had no effect for the cash at the company. Excluding these extraordinary events, net income for the third quarter would have been BRL 369 million, that is 33% above the third quarter of '18.

In a year, the net consolidated income pro forma totaled BRL 710 million, which is an increase by 41% compared to the 9 first months of '19 -- 2018, taking away the -- what we mentioned. There is an attachment to this presentation where you can see the amount for the severance and issuance, and it's BRL 484 million. And net income for the first 9 months would be BRL 1.04 billion, 105% above than the recorded for the same period of 2018.

If we're to look at the company's indebtedness, we have BRL 12.9 billion consolidated debt. In this amount, we include the total of BRL 907 million, which refers to the bonus of subscription of debentures, which is -- also included the BRL 610 million associated to this bonus, assuming that this product is, which would mean a reduction by 0.3x in the net debt indicator for EBITDA. This covenant indicator was stable at 2.8x. It's highlighting, as mentioned in the first quarter, this amount takes into account -- accounting for BRL 1.2 billion resulting from the combination of businesses referring to the acquisition of Energisa Rondônia and Energisa Acre, which was written in, in the fourth quarter of 2018. Without considering this amount, this indicator would be at 3.7x, which is the level within the renegotiated limit for this year, which are between 4.5x to 5x.

The following slide, we have company investments for the quarter totaling BRL 870 million, the first 9 months totaling BRL 2.17 billion. And then this transmission segment, we invested approximately BRL 118 million in the quarter and BRL 237 million for the year.

On the follow-up information on transmission, to update you on the progress on the auctions, Energisa Goiás and Energisa Pará, we started in September and October. In Goiás, we had a physical advance at 91% and 66% in Pará. And this increases the possibility of anticipating the entry to begin operations or the date, bringing forward the date of operations. In terms of land, the negotiation with owners have been affected by the lines and the transmissions listed above are almost concluded, and we hope to close this in 2024. In Energisa Pará II, which is the amount to be bought in the auction in 2018, the works began in June of 2019, and the physical advance, the first part is 20%. In Energisa Tocantins Transmissora, which was acquired in December 2018, the basic project was submitted in July of 2019. And part of the studies to request for the preliminary license have already been submitted at the environmental regulator, also in July. And we have started negotiating with the landowners affected by the project. Together, these 4 adds to an RAP of approximately BRL 189 million with a CapEx estimated at BRL 1.6 billion.

This is what I had to say. I would like you to feel free to make any questions you may have.

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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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I have 2 questions. The first one, concerning your cost performance, you have given some detail on slide and on the release some points that have affected the quarter. But in the release, you mentioned the reversion of a provision that would or has effected specifically this quarter. Could you please elaborate on this? What specific provision was this? And what was the amount, if you have this question -- if you have this information?

The second is the RTS reconsideration request in Rondônia and Acre. Do you have an update for this for the first calendar? When should we expect an answer from the regulator concerning the reconsideration request? And also, what are your expectations concerning this request?

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Maurício Perez Botelho, Energisa S.A. - CFO, IR Director & Member of Executive Board [3]

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In terms of your first question, I would like to remind you that we had in the case of Mato Grosso around -- in 2018, around BRL 17.7 million. And basically, they are related to tax losses, and therefore, they impact 2018 and 2019. And when we also had an issue with IP when we completed the migration of this system, we -- actually, we had costs in Mato Grosso do Sul. This year, we don't. So we have around BRL 200 million impacted the quarter. Okay?

Concerning the expectations of the provisions, we did -- we sanitized, as we call it, the Acre, Rondônia. And we have a reanalysis that we did for these provisions. So basically, if you have a certain level of compensation, for example, let's say equipment, this equipment costs and average this, we compare the practices in this region with another region, and we adapt the processes that we find. So we can't really say there is a specific one single item. There are several items involved. Every kind of provisions, it could be related to the losses, labor losses, tax. Concerning the tariff review for -- I'll give you -- I'll give the floor to Alexandre Nogueira.

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Alexandre Nogueira Ferreira, Energisa S.A. - Regulatory Affairs and Strategy Director [4]

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Carolina, concerning the reconsideration request, we did file it on time. This request has been forwarded to the -- to [Sandoval], who will be giving the opinion on it. They have had a very busy month, but we have talked to the advisers and the superintendent on the reconsideration request. And what we have seen at the level of the superintendency is that they understand our arguments, and therefore, our expectation is that we have a positive outlook on this. And to maintain the date of December and due to the need of analysis, a validation of the basis, this process is probably going to be carried out in February, but we would keep the date. And to reinforce that, we have already submitted the (inaudible) for Acre. And now we're working on Rondônia. So even this brief that they missed and the appeal that they required, we would -- we feel that it's not necessary, but we did -- we have already met, then filed it anyway. And therefore, this reinforces our positive outlook on the facts. We also filed another request they asked for, which is the [consideration] of the accounting information with the expert opinion on it. This has also been filed.

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Operator [5]

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Our next question comes from Andre Sampaio from Banco Santander.

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Andre Sampaio, Santander Investment Securities Inc., Research Division - Research Analyst [6]

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I also have 2 questions, one of them concerning the regulator act. Could you comment on how this has been developing? And the second question is on the renewal of the Tocantins concession? Do you have any update on this?

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Maurício Perez Botelho, Energisa S.A. - CFO, IR Director & Member of Executive Board [7]

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I would then -- I'll give the floor to Alexandre Nogueira, who can give you more details.

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Alexandre Nogueira Ferreira, Energisa S.A. - Regulatory Affairs and Strategy Director [8]

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I understand that you are asking about the public hearing, right, of the new regulation that will be valid as of January 2020. Is that it? Is that what you want to know?

Yes, it's in 2020, but in practice, it will only apply it in April. The proposal was below what we expected, but there is a lot of room for improvement especially in terms of the differentiation with the distribution business. And the entire group, all the companies, we are organizing everything to take this information to the regulators. And we have a positive expectation in terms of reversing this amount. There is an ongoing discussion on the frequencies, the regulator's proposition is to have a walk which is shorter. We had already submitted a possibility of [shielding] walk. Especially to enable this better vision of an annual walk, we will be reinforcing this proposal, this request. And therefore, we believe, we think this is likely to be applied and will be, therefore, giving more stability in terms of remunerating the capital. That's what's the issue which is still open, the walk issue.

Concerning Tocantins?

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Andre Sampaio, Santander Investment Securities Inc., Research Division - Research Analyst [9]

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Yes, please.

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Alexandre Nogueira Ferreira, Energisa S.A. - Regulatory Affairs and Strategy Director [10]

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Concerning extending Tocantins concessions, we have already dealt with the Ministry of Energy to draft the agreement. And it will be very similar to a previous agreements we have signed when other companies also had their concessions extended. And the Mining and Energy Ministry has issued a legal opinion and a decision which is favorable to this extension. All we have to do now is wait for the execution of the agreement, which may occur in December. So this is something that is already solved.

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Operator [11]

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(Operator Instructions) I would like to give the floor back to Mr. Ricardo for his final words, Mr. Maurício or Ricardo.

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Ricardo Perez Botelho, Energisa S.A. - Deputy Chairman of the Board of Directors, Member of Executive Board & Director [12]

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Good after. Thank you all. Our third quarter conference call was very fruitful. Thank you for your questions. Thank you also for listening to our stand, our achievements. We are fully committed to the quality of our services, focusing on the satisfaction of our clients and consumers. Our entire company aims at improving its assets. And we are proud to say that in this quarter, 10 out of the 11 distributors have quality service indicators below the regulator's average, with a particular highlight to Energisa Tocantins, which has had its best historical figures and development within the companies. We also like to highlight that the losses are at a reduced pace, and we will be consistently working to improve it. The important acquisitions for 2018, Acre and Rondônia, are now part of Energisa and are using the logo and the trademark and the colors of Energisa. We are completely focused on the turnaround of our distributors, and we are sure that all the challenges make us want to work even harder to obtain success in this important company. As Maurício said, we are optimistic in terms of our projects starting to operate because of our pace of building. We are also looking at auctions in December, especially that is which have synergy with our concessions and distributions and offer attractive return in term of value generation for our services.

We would like to thank you all again, and we wish you a very good afternoon.

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Operator [13]

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Thank you. This concludes Energisa's Conference Call for the Third Quarter of 2019. You may disconnect.

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