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Edited Transcript of TAEE11.SA earnings conference call or presentation 14-Nov-19 2:30pm GMT

Q3 2019 Transmissora Alianca de Energia Eletrica SA Earnings Call

Rio de Janeiro Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Transmissora Alianca de Energia Eletrica SA earnings conference call or presentation Thursday, November 14, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marcus Pereira Aucélio

Transmissora Aliança de Energia Elétrica S.A. - CFO, IR Officer & Member of Executive Board

* Raul Lycurgo Leite

Transmissora Aliança de Energia Elétrica S.A. - CEO, Chief Legal & Regulatory Officer and Member of Executive Board

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Conference Call Participants

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* Carolina Carneiro

Crédit Suisse AG, Research Division - Sector Head

* Thiago Silva

Santander Investment Securities Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for waiting. And welcome to Taesa's conference call. (Operator Instructions)

Now I would like to turn over to Mr. Raul Lycurgo Leite, Taesa's CEO. Please, Mr. Leite, you may proceed.

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Raul Lycurgo Leite, Transmissora Aliança de Energia Elétrica S.A. - CEO, Chief Legal & Regulatory Officer and Member of Executive Board [2]

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Good morning, everyone. We'd like to thank you all for participating in this conference call to announce the results of quarter 3, 2019. Here I have with me Mr. Marcus Aucélio, CFO and IRO; Marco Faria, Technical Director, in addition to our IR team.

Before I start my presentation, I have a few comments to make. We closed another quarter with consistent and positive results. We had an annual growth and our net income IFRS, both for the quarter and also for the accumulated in the first 9 months of the year. With this, we continue our policy of maximum distribution of earnings to our shareholders. Yesterday, our Board approved the distribution of dividends and added to all the payments made in 2019, including the payments referring to the fourth quarter of 2018 totaled BRL 1.71 per unit of diluted. This represents 6% in the 9-month accumulated amount, considering the closing price of BRL 28.30 on yesterday.

Regarding the regulatory results, this was impacted by the 50% cuts in the RAP, in some categories through concessions as expected and known by all of you. [Dr.] Marcus also will give you more details about what we have been doing to minimize these cuts.

Another highlight is our commitment to the teams of governance, environment and social responsibility. Proof of that was the emission of another green debenture with a term of 25 years, which was completed in October 2019, which reinforces our commitment to the society and all the other stakeholders. Finally, I'd like to reinforce our focus on sustainable growth, always supported by the pillars of financial discipline, operational efficiency, value generation to our shareholders, seeking to prolong the average term of our concession, and consequently, the longevity of our business.

Now I'll turn it over to our CFO and IRO, Mr. Marcus Aucélio, to present the results of the third quarter. Thank you.

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Marcus Pereira Aucélio, Transmissora Aliança de Energia Elétrica S.A. - CFO, IR Officer & Member of Executive Board [3]

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Thank you, Raul. Good morning, everyone.

Let me start by Chart #3 with the highlights of quarter 3 for the IFRS results. In this quarter, our net income recorded BRL 357.8 million, an increase of 21.4% or BRL 63.1 million, higher in comparison with quarter 3, 2018. The main factors explaining this 21.4% increase we have 3 factors. First, the increase in the construction margin by virtue of the progress of projects under construction. And also in this quarter, we started to account for the construction margin of 3 concessions Novatrans, Miracema and Mariana. And the accounting of these 3 reinforcements generated an impact of BRL 130 million. Another relevant factor, which explains the better net income was the decrease of 22.6% in our net financial expenses, due to a higher average volume of cash investments, also greater profitability from investments and also a drop of the IPCA base when compared with quarter 3, 2018, which is the index of 76% of our growth there. These 2 positive effects were partly offset by the BRL 88.6 million reduction in the monetary restatement revenues. Since when we compare with quarter 3, 2018, we have an IGP-M and a new IPCA, which were lower than last year.

The adjusted net income after deducting the margin, referring to the adoption of CPC 47 of BRL 210 million, we had an adjusted net income of BRL 614.8 million. After deducting the BRL 210 million, we put them into a special reserves without compromising our cash and the company's leverage, since this gain is purely an accounting gain. After legal and tax incentive reserves, the distributable earnings reached BRL 532 million. As Raul already said, this is equivalent to BRL 1.54 per unit, which represents a payout of 86.6%.

Now on Slide #4. Here we talk about our regulatory results. In the end of quarter 3, 2019, the cash balance closed at nearly BRL 2.1 million (sic) [2.1 billion], which represents a drop of 6.3%, when compared with the previous quarter due to the payment of earnings for our shareholders. And there was also a period of maturation of interest and amortization of a great part of our debt. The net debt was BRL 2.6 million (sic) [BRL 2.6 billion], an increase of 4.9%. This is basically due to a lower cash balance. And our net debt over EBITDA ratio reached 2x, which was a little over what was recorded in the previous quarter of 2019. It was 1.8x in quarter 2. Our regulatory net revenue were BRL 331.9 million, down 8.4% year-on-year, mainly due to the 50% cut in the Annual Permitted Revenues, or RAC, of some of our concessions in the 2019-2020 cycle. As previously known by all of you, you all know the characteristics of Taesa concession. The operating costs and expenses totaled BRL 56.7 million, an 8.9% increase year-on-year, mainly as a result of higher personnel expenses. Our payroll expenses increased by 15.3%, basically due to the salary readjustments of our employees due to the collective bargaining agreement, so there was a readjustment of 7.32%. And this salary increase is based on the same mix of inflation industry. The IPCA and IGP-M, which we adjust our RAP. So the RAP readjustment was the same as that of the collective bargain agreement. We also have a program of many processes, promotions and talent retention, considering that the transmission market is very depopulated. So in order to retain our talent, we have this main focus on talent retention program.

We also had the consolidation of Brasnorte. So Brasnorte is now consolidated into our balance. And therefore, we saw the effect of the Brasnorte employees, which are now recognized in our company. And we also have some open job positions, and we were able to fill those positions -- some of these positions, increasing the number of people working for Taesa. The regulatory EBITDA totaled BRL 275.2 million, 11.3% lower year-on-year, and the EBITDA margin was 82.9%. It's worth noting that even with this drop in our R&D, which had already been projected, this has -- we have been able to achieve maximum distribution of earnings for our shareholders. Our net financial expenses also decreased, as explained before, in our IFRS results. The availability rate of our transmission lines was 99.88% and the variable portion was BRL 8.3 million, representing a drop of 35.4% year-on-year. Therefore, our PV was only 0.7% in the first 9 months, which is lower than the 1% reported in 2018.

In respect to our opportunities in the secondary market, we acquired Bipar's stake in Brasnorte, a stake of 11.6%, and now we hold 100% of Brasnorte's total shares. We also signed an SPA with RC Administração e Participações for the acquisition of Rialma I. Regarding our construction projects, we have an installation license for ESTE now. We were also granted the installation license for a great part of the Ivai project. So today, we have all the installation licenses for all the substations. We have 4 [stand of line], and we already have the permit for 2 [stands]. And also for Sant'Ana, the concession that we acquired in December in the last auction, we signed the agreement in March, and we already have installation licenses for the 2 substations.

We continue to advance in the construction works of the concession for which we already have installation licenses with some projects now at final stages approaching their completion and amortization in the coming months.

It's worth mentioning that we have already energized the Miracema - Lajeado transmission line in an extension of 30 kilometers and this was completed on September 29. We still have the second part to energize in the Miracema construction.

And finally, I would also like to highlight the 7th issuance of debentures, where we were able to raise BRL 509 million at IPCA plus 4.5% for a term of 25 years and an average duration of 14 years. As Raul already said, this is another green debenture issued by the company and this emission, it was based on the CVM 400 instruction, and we were able to put 90% of their volume to individuals more than 4,000 different taxpayer IDs, which demonstrates the company's credibility, selling a 25 years debenture mostly to individuals.

On Slide #5. It's important to highlight the macroeconomic impact on our IFRS revenue. This is to show the influence of inflation on the distribution of our results. We have a greater exposure in IGP-M because 20 operational concessions are linked to the IGP-M of a total of 27. That's why we have a strong correlation of our revenues with the IGP-M.

And on Slide #5, we can see that when compared with quarter 3, 2018 and quarter 3, 2019, we went from an accumulated IGP-M of 3.1% to 0.52%. And for the IPCA, comparing quarter 3, '18, when we had 1.5%, we went to 0.31% in quarter 3, 2019. This decrease in the IGP-M and IPCA indices that we can see on the bottom chart on Slide #5, we went from a monetary restatement revenue of BRL 105.7 million to BRL 17.2 million this quarter, which represents a drop of BRL 88.5 million in this monetary restatement revenue.

Now moving on to Slide #6. Here, I will give you some more details about the drop in our RAP and how it impacts our regulatory results. The bottom chart shows the operational RAP. Here we can see that we had an RAP cycle 2018, 2019, we had an operational RAP of BRL 2.020 billion. So we had a drop of 50% of the RAP in some of the concessions, representing a drop of BRL 291.3 million in our operational RAP. And on the other hand, we have the inflation readjustment, which added BRL 148.4 million. And we also have an additional BRL 55.8 million from the recent acquisition that we have already completed. So basically Brasnorte, Bipar and Transmineiras, and considering the RAP of the company that will -- that's operating next December, we'll have an addition of BRL 77.1 million. Therefore, quarter 2019-2020 cycle, will have an RAP of BRL 2.010 billion, which represents a decrease of 0.05% (sic) [0.5%]. And this, without considering the acquisition for which we have already signed a contract. However, we still have the precedent conditions, which are the 4, we have concessions and also (inaudible) 1, which will allow us to add another BRL 150 million to the operational RAP.

Slide #7. Here, we have our projects under construction. And what's important is at Miracema, EDTE and Mariana, we are on the verge of energizing these big projects. Miracema, we have already energized a part of the project, and we should be completing the project energization within the deadline established by ANEEL. For EDTE and Mariana, we will also energize the project in the coming months. For Aimorés and Paraguaçu, which are 2 concessions that we have with CTEEP, we have already recorded some physical advancements of about 43% and 44%, respectively. Janaúba, another 100% Taesa project, we are -- we have a 15% physical program. And now we will start working with ESTE, Ivai and Sant'Ana, for which we just got the installation licenses.

So this is the end of this presentation, and we are now available to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Mr. Thiago Silva from Santander Bank.

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Thiago Silva, Santander Investment Securities Inc., Research Division - Research Analyst [2]

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I have 2 questions. First about the dividend. As you communicated in your release, according to the CPC 47 accounting and the IFRS rule, you reserve part of your income, considering that the dividends distributed on the IFRS rose. And also due to your construction projects, I think that you're holding back the dividends where you could be -- well, I'd just like to understand whether you're going to change your dividend policy? Or is your current policy to keep building these reserves for the future? And also, regarding your growth, we'll have an auction next December. And everything (inaudible) the M&A activities also relevance today in the transmission industry. So will you continue to post the growth in this (inaudible). Is there any obstacle of the (inaudible) controller to prevent or to hold back the growth?

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Marcus Pereira Aucélio, Transmissora Aliança de Energia Elétrica S.A. - CFO, IR Officer & Member of Executive Board [3]

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Thiago, let me answer your first question regarding dividends, and then I will turn it over to Raul, and he will talk about the growth part. In respect to the way we distribute dividends what we have been doing is that given the adoption of CPC 47, what's happened is that now during the construction period, we have a construction margin, and this resulted in an increased net income. This construction margin from this new methodology resulted in us having an income now, but without having any cash. And if we were to distribute the result of this construction margin, what this company would be doing is go to the market and take on debt to be able to pay for these margins. Therefore, what the company decided to is that we will continue to distribute dividends based on the past IFRS. And that is why, in our release, we demonstrate how we are taking out of this reserve the remaining construction margin, which shows that we will continue to have the same payout that we used to adopt in the [first]. So this reserve, as soon as each of the concession start operating, we will distribute part of these reserves in future results. And this is not to compromise the company's leverage and also not to compromise our future growth. The company has always taken a conservative stand and have really been concerned with our financial discipline. So this is in line with the company's usual attitude and these reserves will start to be distributed as a concession part of (inaudible).

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Raul Lycurgo Leite, Transmissora Aliança de Energia Elétrica S.A. - CEO, Chief Legal & Regulatory Officer and Member of Executive Board [4]

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Yes, I will thank you for your question. Regarding our growth, I would like to say that we are very well prepared for the December auction. It is somewhat smaller than what we saw in 2017 and '18, investments of a little over BRL 4 billion, and in previous years, each of these auctions were about BRL 10 billion, roughly. So in 2017 and '18, we have been nearly BRL 20 billion in investments. Now in December, it's [12 laws]. We are serving all of them so that we can take them to our Board, which are the best laws and the best opportunities. When we look at Taesa's footprint on the map, it encompasses all Brazilian regions. And any of these assets may make sense in terms of synergies for Taesa in the future.

We believe that 2020 will be a very busy year in terms of M&A. And of course, this is a consequence of the latest auctions. In 2017 and '18, there were small and medium developers that want some of the assets. Today, we have about BRL 3.8 billion in the hands of 75 to 78 players and this is an average of about BRL 49 million, BRL 50 million for (inaudible) calculate directly. And we believe that these players will lift these concessions as soon as the projects are energized. So we believe that 2020 will be a promising year. We'll have 2 auctions in 2020 that are all already scheduled, 1 in July, 1 in December, and we strongly believe in a very busy year, both in terms of [issues] and [balance sheet]. Our growth is always based on responsible work and [finish on] condition for our growth is to maintain the AAA classification in the 3 major rating agencies. Also, continuing with our dividend distribution policy, growing responsively with financial discipline and value creation. It's not just growing for the sake of growing. This is not our way of doing things. Taesa will always grow by adding value and creating value to its shareholders. Today, we have room to continue growing as we have been, and we will continue to grow always looking for the best opportunities that will bring the company the greatest return.

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Operator [5]

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The next question is from (inaudible).

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Unidentified Analyst, [6]

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Could you tell us more about the (inaudible) transaction? Is there any expectation in terms of when it's going to be completed? What are the precedent conditions that are not yet being there? And is there any possibility of it not being completed?

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Unidentified Company Representative, [7]

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Thank you for your question. We cannot forget that between April and May ANEEL cancelled a PLP for São João, which is one of the main concession that they have and this is known by everyone. It was even communicated by ANEEL themselves. They determine that return of 15 months of RAP. Of course, we took the legal measures required and of course, this will affect our relationship with the funding bank, which in this case is Caixa Econômica. And there was an injection for the RAP not to be discounted until the final ruling of the administrative decision. And this happened last month. We have the final ruling last month and the cancellation was maintained, which applies to the 10, 15 months of RAP. Of course, that there is a (inaudible) condition, which is Caixa Econômica consent, which has not yet been given probably due to this event, which was the 10 to 15 months of RAP. I think this was the first time in the history of the regulatory agency where they required the return of this many months of RAP. Of course, we will see some updates by the end of the year, and we believe that this situation will be solved before the end of the year, and that's what we're working on. And it's not just [Kaisa, it's Kaisa] (inaudible) and with Caixa Econômica who are financing them.

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Operator [8]

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The next question is from Ms. Carolina Carneiro from Crédit Suisse.

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Carolina Carneiro, Crédit Suisse AG, Research Division - Sector Head [9]

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I have 2 questions. First, due to the variable portion, it was a little higher this quarter. You even mentioned this in your release. So I'd like to know if we can expect a normalization of the level next quarter? And also, you talked about the progress of the physical construction of your projects. Could you please talk about Aimorés and Paraguaçu? You have practically 50% of the work completed and the ANEEL deadline for completion is February 2022. So can we see -- maybe expect that these projects will be completed way before the deadline?

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Unidentified Company Representative, [10]

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Carolina, with respect to the variable portion, when we compare the quarter 3, 2018 with quarter 3, 2019, in 2018, specifically in quarter 3, we had a set of reversions. And because we didn't agree with the application of the variable portion. And our requests were accepted. That's why we had a reversion in quarter 3, 2018. We had a positive value, a positive number. Therefore quarter 3, 2019, we have some current performance GE, specific GE equipment, and they are showing problems, not just for Taesa, but also, generally in the industry. And we detected this problem. And what happened this quarter is that we had some explosions of the transformers that were concentrated in this quarter, and this ended up having an impact on our PV this quarter. However, if we look at the results for the year, the numbers are lower than those of last year. And since we are aware with these problematic pieces of equipment, we previously ordered new transformers so that we can change the ones that are defective, and we have already changed some of them. And we are now moving on to change all of them, all of the defective equipments, and we should not have problems in the future like we had this quarter.

Your question about Aimorés and Paraguaçu, the licenses were issued early, that's why we were able to (inaudible) the work. So we have marked physical progress, and we are expecting to have these projects energized by the end of next year, which would mean that these 2 projects will be delivered early.

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Operator [11]

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(Operator Instructions) We just received a question via webcast. Gabriel's question is how is the company expecting to take part in the next auction? But I think that this question was already answered by Raul. (Operator Instructions) Since there are no further questions, this question-and-answer session is now closed.

Now I turn back over to Mr. Raul Lycurgo for his final remarks.

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Raul Lycurgo Leite, Transmissora Aliança de Energia Elétrica S.A. - CEO, Chief Legal & Regulatory Officer and Member of Executive Board [12]

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Ladies and gentlemen, we would like to thank you all for participating in this conference call. If you have further questions, Taesa's Directors and our IR team will be at your service. Thank you very much, and have a great day.

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Operator [13]

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Taesa's conference call is now closed. Thank you all for participating, and have a great day.

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