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Edited Transcript of TAEE11.SA earnings conference call or presentation 6-Aug-19 2:00pm GMT

Q2 2019 Transmissora Alianca de Energia Eletrica SA Earnings Call

Rio de Janeiro Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Transmissora Alianca de Energia Eletrica SA earnings conference call or presentation Tuesday, August 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* José Aloise Ragone Filho

Transmissora Aliança de Energia Elétrica S.A. - Business Development Officer & Member of Executive Board

* 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

* Rafael Bezerra Dias

BB-Banco de Investimento S.A., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thanks for standing by, and welcome to the conference call of Taesa. (Operator Instructions)

I would now like to turn the call over to Mr. Raul Lycurgo Leite, Taesa's CEO.

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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 would like to thank you for attending this conference call. Here with me are the directors, Mr. Marcus Aucélio, Director -- Financial Director and IRO; Marco Faria, Technology Director and Jose Ragone, our Business Director.

Before beginning our presentation of results, I would like to mention some important deliveries of the period in a very brief manner. In the month of May and April, we completed the acquisition of the shares of Eletrobras in ETAU, Brasnorte and Transmineiras that we acquired in the first auction of Eletrobras that was held in September last year. With this, we started to have the important shares in those assets, adding more than BRL 50 million of RAP in our asset bases and BRL 9.8 million to the results of the company in view of the advantageous purchase of those assets.

In the greenfield projects that are under construction, in this quarter, we were granted the installation permits for our major undertaking, Janaúba, Paraguaçu, Aimorés and some facilities in Ivai. And therefore, we are now with all projects with their work target. At the end of the presentation, we will provide details of the progress of each of them.

From the regulatory viewpoint and new published in June, the Homologatória Resolution 2,565 of 2019 that establishes that (inaudible) of its concessions of transmission for the cycle 2019, 2020 beginning in July 1, 2019, and being valid up to the third quarter 2019.

Without going too far, we are going to complete the reduction of the cycles relevant of RAP in view of the concession agreement of Category II. And as of December this year, we will see an increase in our regulatory income in view of this concept of the new project under construction.

In addition, completing all the conditions based on the acquisition of the 4 assets, we are going to increase our RAP in an additional BRL 130 million. We'd like to stress that Taesa has been working to continue its growth process always based on the pillars of financial discipline, return, operating efficiency and value generation to our shareholders.

Another relevant point is our commitment with sustainability, its levels of governance, social responsibility and environment. In this regard, I'd like to stress our issue of green debenture with a maturated period of 25 years that was completed last May, reinforcing our commitment with all society and our stakeholders.

Before turning the floor to the next speaker, I would like to remind you that we launched the new RI site, fully reformulated with direct and simple communication and an interactive and innovative experience that is responsive to all types of -- to (inaudible) investor in the investment. This is a proof of our commitment with transparency, an important pillar of our corporate governance. We've enjoyed this rich source of information about the company and the transition sector.

I turn the floor over to our Financial Director and our IRO, Marcus Aucélio, who will present the results of this second quarter.

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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. We are going to start our presentation from Slide 3 with the highlights of the second quarter and with the results in IFRS.

In this quarter, the income profit reached BRL 307.4 million, an increase of 11.3% were higher when compared to the second quarter 2018. The main factors that impacted in a positive way the net income of the second quarter 2019 were the following. The first one was the increase of inflation rates, both for IGP-M and for IPCA with an impact in the line of the monetary correction line as well as the equity method with a growth of BRL 10.2 million and BRL 19.9 million, respectively.

With a higher operating income and maintenance income at BRL 6.5 million, this is a result of the adjustments of the 2018, 2019 cycle. We also had an improvement in our variable parcel of BRL 8.2 million in the annual comparison due to the major events that took place in 2018. We had a reduction of BRL 3.8 million in cost and expenses of operations, excluding construction costs and OEM costs.

In addition, the company had a gain of BRL 26.5 million in relation to the acquisition of the shares of Brasnorte, Transleste and Transudeste companies that recorded a fair value of asset higher than the paid value. Accounting for considering the 3 acquisitions is specifically an advantageous purchase.

On the other hand, due to the acquisition of the control of Brasnorte, we have to remeasure the value of this asset in the balance of the company based on the fair value of this acquisition. With this, there was a loss related to these new measurements at BRL 16.7 million in the net results. The company recorded a gain in the acquisitions of BRL 9.8 million in the result of the second quarter 2019 in IFRS.

Lastly, the company had a financial expense of BRL 71.6 million net, BRL 16.9 million higher than that of the second quarter 2018, and this was due to the funds that were raised and the sixth emission of debentures of Taesa in May of BRL 1.06 billion and the first emission of debentures that we held related to the project of Janaúba in February 2019 in the amount of BRL 224 million.

We'd like to mention that the good performance of our investment that was above 106% of the CDI in the first quarter 2019, together with the cash position, which was high, contributed to the financial revenues, reducing the impact of the financial expenses for the quarter.

And it's important to mention the net -- the gross profit in comparison to the previous quarter. As we had already mentioned in the conference call of the first quarter, the highest levels of inflation that's recorded in April and May were signed that we would have better results in the second quarter. And this was confirmed with a growth of 92.6% of our profit. In other words, BRL 150 million in comparison to the first quarter 2019.

It's important to mention that the company, in order not to adversely affect the cash and its leverage levels, have been excluding the effects of having adopted the CPC 47 for purposes of dividend payout because there is no cash effect in the result. Therefore, the adjusted net income in the first quarter 2019 amounted to BRL 384.9 million. After the allocation of the legal reserves and the fiscal incentive, the payout distributed on this result added to BRL 345.5 million. In other words, BRL 1 per unit and a payout of 89.8%. As we had already mentioned before, and we had already paid BRL 96.7 million between dividends and equity -- return on equity. Our Board approved the maximum distribution of net income distributor -- which is distributable in the amount of BRL 248.7 million. The payment related to this distribution will happen on August 19 based on the shareholding position of August 8, 2019.

We are now going to move on to Slide 4, where we will discuss the regulatory results, and this result continues to be very solid when we look at our liquidity position. The company started the quarter with BRL 2.2 billion. That means an increase of 82.8% in relation to the first quarter 2019 due especially to the sudden raise with sixth emission of debentures that happened in May 2019.

The net debt was nearly BRL 2.5 billion, an increase of 5.3% in comparison to the first quarter 2019, and this was driven by the payment of dividends that happened in last quarter, but was partially offset by the operating cash generation. The ratio, net debt and EBITDA closed the quarter at 1.8x, slightly above what was recorded in the first quarter 2019 that was 1.7x.

I would like to draw your attention to the excellent result of our funds raised -- raising related to the sixth emission of debentures of Taesa in the amount of BRL 1.16 billion for cash reinforcements in order to pay for the projects that are underway as well as the recent operations related to the acquisitions we are carrying out.

The first series with institutional debenture in the amount of BRL 180 million was rate at 108% CDA -- CDI with a maturity period of 7 years. And there's also a demand of nearly 3x the book of the offer that led to closing the rate at 250 bps from 110.5% to 108% of the CDI.

The second series was something really positive because we captured the debenture -- incentive debenture in the amount of BRL 210 million to pay for our projects in Mariana, Miracema and Sant’Ana at the cost of IPCA plus 5.50% with the certification of green title reinforcing our social responsibility and the commitment of Taesa has had for social environmental topics. We would like to highlight that this emission of debentures was the longest ever recorded in Brazil.

The net income of the second quarter 2019 amounted to BRL 360.2 million with an annual drop of 13%, which was driven especially by the cut of 50% of the RAP of some concessions. But this is well known by everyone, considering the nature of this concession agreement.

The operating costs and expenses stood at BRL 50.8 million, a reduction of 3.5% in the annual comparison. This variation is driven especially by a reduction of expenses with the personnel, i.e., BRL 2 million, due to the change in the capitalization of costs with the personnel in the projects of construction after the implementation of SAP 4/Hana in the second quarter 2019, and also the correction in the second quarter 2018 related to the provisioning of funds and the charges for personnel expenses. These are all nonrecurring events. We had a reduction of BRL 1 million with expenses, with the sponsorship, which was partially offset by increase of cost with third parties of BRL 1.2 million to the service of the property around the project.

Our EBITDA regulatory stood at BRL 309.4 million. Even with the cut of RAP, our EBITDA margin stood at 85.9%, showing resilience and operating consistency in a period of drop of income related to these concessions of Category II.

It's important to report that even with an EBITDA dropping, which was expected and known, the company keeps its financial solidity with the financial rates, which are quite robust and a solid cash position that has allowed us to maintain the maximum tradition of payout to our shareholders.

The availability rate of our transmission lines stood at 99.89%, and the variable portion in the first semester of 2019 amounted to BRL 2.3 million with a reduction of 84.6% in relation to the same period of 2018.

Our focus is to continue searching a level of excellence in the operation and maintenance of lines to deliver a quality service and, thus, contributing to the interconnected system in Brazil.

In relation to the progress of brownfield and greenfield projects, Raul has already mentioned the topics. I would only like to add that the acquisition of the share of Brasnorte as of May 31, when we started to hold the total share of 88.4% of the assets, the company started to consolidate the full results of this concession. And it no longer accounts for in the equity method line. And the share is included in controlling of Brasnorte in the net income of Taesa. This amount is not distributable to our shareholders.

On Slide 5 where we show the macro impact of our results. It's important to mention that the impact of microeconomic rate of Taesa are very relevant because any percentage point of inflation would significantly impact the revenue of the monetary correction of our contracted assets. At present, the company has 20 concessions, which are indexed to IGP-M and 16 concessions which are linked to our IPCA, out of which 9, considering those 16 concessions that I mentioned, are project under construction. And there is a major correlation of our revenues with those rates. But especially IGP-M, as we can observe on the slide, the 3 months that impacted the results of the second quarter '19, the IGP-M had an inflation of 2.65% when compared to the inflation rate recorded of 2.6% in the second quarter 2019.

On the other hand, IPCA for the second quarter 2019 stood at 1.46% in comparison to 0.71% in the second quarter 2018. So the impact of those rates in the monetary correction revenues was positive by BRL 114.1 million in comparison to BRL 100.7 million (sic) [103.9 million] positive in the second quarter 2018, an increase of BRL 13.5 million in the monetary correction revenue in the contractual asset.

I also draw your attention to the significant recovery of the correction -- monetary correction in the comparison with an increase of BRL 116.5 million against the first quarter 2019. As I mentioned before, we said that this recovery would actually happen in the previous conference call, considering the inflation rate that has -- were recorded in the last 2 months. It's very clear that the correction of IGP-M and the monetary correction of revenues of Taesa had a very important impact on our results.

Moving on to Slide 6 about the net income in IFRS. We can see on this slide, clearly, as I had mentioned before, the main impact that influenced the increase in net income in IFRS in the annual comparisons were the inflation rates, both in the monetary correction and in the equity method. An improvement in the variable portion is BRL 8.2 million and the net gain with the acquisition of the shares of Brasnorte, Transleste and Transudeste in the amount of BRL 9.8 million.

And this is my part of the presentation. I now turn the call over to our Director of New Businesses and Share Management, Jose Ragone, who will discuss our projects from Slide 7.

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José Aloise Ragone Filho, Transmissora Aliança de Energia Elétrica S.A. - Business Development Officer & Member of Executive Board [4]

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Good morning, everyone. Additionally, in summary, what Raul mentioned before, in relation to the 9 projects that we have underway, I'm going to share with you the main highlights about the evolution and how they fit. At the end, I will make some comments about this important projects, which was not acquired in an auction, but it's an important reinforcement to our business that is part of this portfolio now 9 -- amounting to 9 that were acquired in an auction.

Mariana is the first one I would like to discuss. And in August, we started the last stage of implementation of the undertaking that comprehends the launch of conductors. So the undertaking is in line. It's going to start operation in December this year.

Miracema is a concession held 100% via Taesa in the state of Tocantins has a second circuit, the second interconnection of Lajeado to the interconnected Brazilian system. And this connection of the capital of state Palmas in the interconnected system. Physically and from the electrical viewpoint, we have 2 blocks in this concession, and the interconnection of 500 KVs in Miracema and the double circuit of 230 from Lajeado to Palmas. We are about to end the launch of cables in 230, and the completion considering the installation of accessories of the -- in the -- of the 230 line for the first fortnight of this month of August. And the completion of the launch of conductors of 500 KV for the end of August. In summary, we are going to complete the delivery of this undertaking according to the agreement with our regulator that was signed in November. So the schedule is very tranquil, it's very comfortable, so that we can deliver all the agreements within the agreed deadline. So the condition is that all the commissioning part has been done with our team from the technical management, so that will -- it will start operating. And our operation and maintenance teams will be operating in a very comfortable way and with a total control of this asset that is going to be explored.

And in Bahia, we have a project in partnership with Alupar. And we have made major headways with the launch of cables, which is the last phase of the project. All the structure has already been completed. And we have been working according to the schedule of -- for the stations. And this will make us very comfortable to understand that we are going to start operating in December. The 3 first concession; Mariana, Miracema and EDTE, will start operation according to schedule.

And we move on to ESTE, which is also a project with Alupar, 500 KV substation, 2 substations in Espírito Santo. We are going to be granted the permit that will allow us to start our work this year. We are preparing with our suppliers for the project to structure all the work sites, so that we expect to have the permit granted in the fourth quarter of this year.

On Aimorés, Paraguaçu and Janaúba, we hold 100%. On Aimorés and Paraguaçu, we have a partnership with Citi. And the 3 concessions comprehended the new interconnection -- the new level of interconnection of North, Southeast. And these are concessions that we can operate closely with this interconnected system and connect all the regions in the country. I would say that the 3 undertakings have been obtained in the same auction. The installation permits were obtained in the same period, and the works have started nearly together in the 3 concessions.

It's important to mention that considering the 3 concessions, we have a concrete prospect of negotiation with the suppliers, so that we are likely to start operating beforehand. So we are negotiating with the suppliers already at this time, involving all the materials and all the contractors, so that we will start operating before plan.

And Ivaí is concession in the state of Paraná with a partnership also with Citi. As Raul has already mentioned, we have partial permits that will allow us to start the construction of this undertaking. We expect to implement it with a lot of care because the region requires that. And this is an undertaking which is in our pipeline. And we are sure that we are going to start operating according to schedule.

Sant'Ana was acquired in the last transmission auction in December last year. And I would also like to add to what Raul has already been said when he talked about how successful the funds were raised. He said that part of the funds were -- is going to be allocated to Sant'Ana. It's important to mention this because we have lots of activities, which were focused on the authorities, on the permitting processes, which have been carried out together with Rio Grande do Sul authorities. And we expect that the start of the project will be this year, the beginning of the constructions. And we have this concrete project to have this -- the permit still this year, and family and construction will start in January, according to our plans, a very positive, consistent plan. And our IR team is going to report to you when this actually happens.

And lastly, we have a project, which is quite significant, very important to the company and also to the transmission factor, which is the new power of the new concession, which is Novatrans. It's a reinforcement, which is significant considering its technical challenge. In relation to the management and CapEx, we have this commitment. We require 2 authorizations by the regulator that is planned to materialize in October this year.

And also in December this year, we have already completed the most important -- the most critical phases of this project, which includes the bypass of the equipment, which are being replaced. So these initiatives that were granted and they were executed in July. So the equipment are out of service and they are being replaced by the new pieces of equipment. So the schedule is updated. And we already have requested the proper agency to start operating again, using those new pieces of equipment; and one, according to schedule; and one, bringing forward 3 months considering the authorization. So this reinforce will add an additional RAP of BRL 40 million to the company.

So generally speaking, these were the comments I'd like to make. And now we will start the Q&A session. And if you need any additional information, please contact us, me and our team. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Carolina Carneiro from Crédit Suisse would like to ask a question.

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

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I would like to make some comments on potential assets that you can consider. We hear a lot about some companies looking for -- or trying to dispose of some assets in the market. And recently, Eletrobras announced that it will start the process of selling some assets and projects. I would like to know if the company would be interested in those types of assets. And what are other assets that you would consider to add to your portfolio in the future?

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Raul Lycurgo Leite, Transmissora Aliança de Energia Elétrica S.A. - CEO, Chief Legal & Regulatory Officer and Member of Executive Board [3]

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Carolina, this Raul answering. Thank you for your questions. As we have already mentioned in the past, Taesa is always interested in some assets provided that it maintains our feelers of financial discipline, return and the addition of value. When Eletrobras started this process of divestment, we were one of the first companies to say that we would take part in this process provided that it would make sense in relation to our value generation. So when we talk about M&A, Taesa is always ready, always on the lookout.

And I would like to mention our IR website that I mentioned that has been remodeled recently. And by the way, I would like you to have a look, so that you would provide us with a feedback in relation to this new format of the website. So if you look at the website, you are going to see that the footprint and the map is very comprehensive. Any asset which is there, if anybody would like to observe this asset, this would make sense to Taesa. So we see 82 players, give or take, medium and small players that hold BRL 1.4 billion of operational RAP and BRL 4 billion under construction, BRL 5.55 million, BRL 5.6 million of reps divided by 83 players, an average of BRL 68 million for each one of those players. So it's a fertile ground for an M&A process. So at -- over time, considering the 82 players, so over time, there is a possibility of having an M&A. So Taesa, considering what we have in terms of assets today, we have 36. But if we can see the ramp up plus 4, we would reach 40 assets. So it doesn't matter the location where it stands in Brazil. There's always an asset, which is in our frontier. So yes, it does make sense.

We are also prepared to a future auction. We can see that the auction that will be held in December is a bit smaller. And of course, when we compare it to the previous 2 auctions that were held and were very significant, today, we are talking about 13 months, but we are ready to grow in greenfield and in new auctions.

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Operator [4]

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Mr. Rafael from Banco do Brasil would like to ask a question.

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Rafael Bezerra Dias, BB-Banco de Investimento S.A., Research Division - Senior Analyst [5]

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I would like some clarification related to this new power of Novatrans. How much has been invested? And how much more into December until you finish this process?

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José Aloise Ragone Filho, Transmissora Aliança de Energia Elétrica S.A. - Business Development Officer & Member of Executive Board [6]

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Rafael, this is Ragone speaking. We have been authorized by a new industry resolution to a CapEx of BRL 200 million, okay? Of course, we work with a negotiation efficiency. And the CapEx related to all those resolution and the new power involves BRL 200 million.

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Operator [7]

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(Operator Instructions) We close the Q&A session now. I would like to turn the call over to Mr. Raul Lycurgo for his final considerations.

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Raul Lycurgo Leite, Transmissora Aliança de Energia Elétrica S.A. - CEO, Chief Legal & Regulatory Officer and Member of Executive Board [8]

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I would like to thank you all for attending this conference call. If you have any questions, our IR team is at your service. Thank you all. Have a good day you all. Thank you.

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Operator [9]

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Taesa's conference call is complete. We thank you for your attendance, and have a good day.

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