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Edited Transcript of TAEE11.SA earnings conference call or presentation 13-Mar-20 2:00pm GMT

Q4 2019 Transmissora Alianca de Energia Eletrica SA Earnings Call

Rio de Janeiro Apr 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Transmissora Alianca de Energia Eletrica SA earnings conference call or presentation Friday, March 13, 2020 at 2:00:00pm 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

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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 the Taesa conference call. (Operator Instructions) Now I would like to give the floor to Mr. Raul Lycurgo Leite, CEO of Taesa. Mr. Raul, you have the floor.

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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 to everyone. We would like to thank all of you ladies and gentlemen for participating in our conference call regarding the results of the fourth quarter and 2019. With us, we have our IR Director, Marcus Aucélio; and the Technical Director, Marco Faria; and our IR team.

Before starting the presentation, I would like to talk about the main highlights of the company the year in which Taesa celebrated its 10 years after closing 2018, signing the purchase and sales contracts of 4 ÂMBAR assets with the winners of 3 lots in the Electrobras auction and 1 lot in the December annual auction, we started 2019 with the challenge of completing these acquisitions.

Moving forward in the construction of concessions, not yet operation as well as looking for growth opportunities.

In the brownfield, we completed the acquisitions of the 3 lots in the Electrobras (sic) [Eletrobras] auction, and subsequently, we bought Bipar shareholding in Brasnorte, owning now 100% of the concession. We signed a purchase and sale agreement for the Rialma I concession and proceeded to complete the acquisition of São João and São Pedro completed in February 2020.

In 2019, we invested BRL 718 million in the works and equipment of the projects under construction. We energized 2 of the 3 projects under construction; Miracema and EDTE, which added to Taesa BRL 99.6 million in RAP. The company stood out last year in the debt market, leading the movement to extend the terms of infrastructure debentures in Brazil. Taesa and its projects issued in 2019 BRL 4.7 billion in debentures, out of which BRL 3.7 billion in debt, which -- with a 25-year term, this movement was only possible due to our credibility with the market as well as highest credit risk rating.

In the operational field, Taesa remained at the benchmark level in the transmission sector, recording a 99.9% availability rate for its line. And a Variable Portion of 0.98% of our consolidated RAP. The net income closed the year, again, above BRL 1 billion, and we continue with our commitment to maintain the regular payments of earnings to our shareholders.

I would still like to reinforce our attention and commitment to sustainability. In 2019, we established environmental, social and governance actions, ESG, and issued 4 green infrastructure debentures. We also adhered to the UN Global agreement and won The Best Place to Work -- Great Place to Work and Best Company in the area of safety and health at work, which reinforced our commitment to the safety, health and well-being of our employees.

We continue to focus on the strategic pillars of sustainable growth, financial discipline, operational efficiency and value creation to our shareholders. We have been working hard to make the company more competitive, both in the auctions and in M&A, in addition to maintaining our leadership position and being a reference in energy transmission in the country.

I will now turn it over to our Chief Financial and Investor Relations Officer, Marcus Aucélio, who will present the results of the fourth quarter and 2019.

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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, and good morning to everyone. I would like to initiate our presentation on Slide 3. This is a summary of the earnings result of the fourth quarter of 2019 and 2019 for our results for the IFRS.

In this quarter, the net income totaled BRL 177.5 million, a drop of 34.1% when we compare it to the fourth quarter of 2018. And for 2019, our profit closed at BRL 1 billion, registering a drop of 6.4% vis-à-vis 2018.

The main factors that explain this drop are: number one, a reversal of BRL 80.6 million during the fourth quarter from the construction revenue for the improvements. We also had a drop of monetary restatement because IGP-M and lower IPCA. This drop in the year was BRL 182.2 million because of the variation of these inflation indexes, and there was an increase in the net financial expenses because of the fund raisings that were carried out in 2019.

I'm going to explain the reversion of BRL 80.6 million. This was because of a conservative position from the company. That we -- and we classified the very small improvement as an O&M cost, generating a decrease in the balance of the contract assets related to this project.

Now this reversion actually was because the ANEEL positioning and ANEEL signalized that investments of small improvements of bidded companies would have no additional recognition in terms of revenue as of the first of January of 2018.

So therefore, ABRATE and transmitters have discussed this together with ANEEL regarding the way that they position themselves. But due to the technical ruling of ANEEL, we decided to be conservative, and therefore, we carried out the reversal of BRL 80.6 million.

This drop was offset positively with an increase -- with the result of shareholders' assets because our projects under construction. So we are already seeing the results of the projects under construction. And so the margin of the Taesa projects that are 100% Taesa.

This is why our adjusted net income, which excludes the effects of CPC 47, totaled BRL 711 million. We have to remember that we've been including the effects of CPC 47 for the purpose of dividend distribution once this effect is purely accounting the cash. And this way, we do not compromise our cash and the leverage position of the company.

So 2019, the CPC adjustment was BRL 291.3 million, and the current balance of the special reserve is BRL 501.2 million that will be distributed in the future. Therefore, after the allocation of all of these reserves, the distributable profit totaled 60 -- BRL 655.9 million. This is during the fiscal year of 2019. That is the equivalent of 92.3% payout, when we compare it to the adjusted net income, as we had already paid BRL 594.2 million between dividends and interest on capital in 2019.

Our Board approved yesterday the remaining amount of BRL 61.8 million to be distributed as additional dividends that will be submitted for approval at the shareholders meeting during the month of April.

Now we go to Slide #4, and we will talk about the regulatory result. Here, I would like to highlight 4 points. Number one would be the net revenue during the fourth quarter, it was BRL 339.5 million, and this is an increase of 2.3% when we compare it to the fourth quarter of 2018. And this is explained by the inflationary adjustment and the operation of Novatrans reinforcements. And this was also an accounting reclassification that was carried out in the fourth quarter of 2018.

Now in the year, the net revenue closed at BRL 1.39 billion, with a drop of 8.7%, basically due to the RAP cut of some concessions. Subsequently, we will show you a slide that explains the measures that we have been adopting and what have we done in order to minimize these impacts of these cuts of -- in our RAP.

A second point would be the operating cost and expenses, which totaled BRL 81.3 million during the quarter and BRL 240.5 million in the year, an increase of 13.2% in the quarter, 8.5% in the year. And this is because of higher expenses with personnel, third parties and service and decrease in the inventory related to the conclusion of Novatrans reinforcements. So we ended last November, and we replaced 4 capacitors. So they weren't totally depreciated, and they were taking out of our assets, and this impacted our cost and very specifically, of course, during the fourth quarter, and this represented BRL 15 million.

So with this, the company's regulatory EBITDA totaled BRL 258.2 million during the fourth quarter and BRL 1.15 billion during the year 2019, presenting a drop here.

Now the third point would be the gross debt of the company, which totaled BRL 5.3 billion and the cash position was BRL 2.4 billion, resulting in a net debt of BRL 2.8 billion. The net-debt-over-EBITDA ratio ended the year at 2.2x. As a result, we reinforced our strong liquidity and adequate levels of leverage.

Last and not least, as Raul had already highlighted, we closed 2019 with a line availability rate of 99.9%, a variability installment of only BRL 15 million, and our PV regarding the consolidated RAP of Taesa was 0.98%.

Now let's go to Slide #5, where we will talk about the inflation impact on our shareholders' results. When -- we always mention in our teleconference that impacts of macroeconomic indices of Taesa's results. And this -- and they can have a significant impact on IFRS monetary revenue. The 3 months that impacted, the GP-M presented an inflation of 0.97% in comparison to 1.92% registered in the fourth quarter of 2018. The IPCA was 0.57% vis-à-vis 0.72%.

So with this, we had a drop in monetary restatement. This is a 48.4% in the revenue of monetary correction. When we see the year, we had an IGP-M of 2018 of 9.68% and IPCA of 4.05%. And in 2019, we had IGP-M of 3.97% and IPCA of 3.27%. And therefore, there was a loss in the revenue monetary restatement of BRL 182.2 million (sic ) [BRL 182.8 million]. This explains the drop of the company when we compare it to 2018.

Now when you go to Slide #6, I would like to explain what we have done to offset the impact of the RAP cut. Because here, we have -- so we have 20 concessions that are of Category II. If we analyze the total RAP of all of our 38 concessions, 31 operational and 7 under construction, we had an increase of 2.7% versus the BRL 73 million additional when we compare the cycle of 2018-2019 to the cycle 2019-2020, even with a RAP cut of almost BRL 300 million.

Therefore, from the 2018-2019, the cut was carried out in a concession. Therefore, when we have a view of our operational RAP, the news is even much better because when we observe a growth of BRL 143 million from one cycle to another. And I believe our construction projects will become operational soon.

And also, when we see our new acquisitions, we believe that, in the proximal cycles, we will be able to improve our RAP.

Now when we go to Slide #7, we will talk about our projects under construction. Today, Taesa has 9 projects under construction. We have already delivered EDTE and Miracema. During the month of April, we expect to deliver Mariana, and we will be able to deliver in advance the other concession like Aimorés, Paraguaçu, Sant’Ana, Ivaí. A very important point is that all of these projects under construction or these concessions under construction in December 2019, we already carried out the necessary funding for all of these projects.

As Raul already mentioned, during 2019, if -- we funded BRL 4.7 billion and BRL 3.7 billion in infrastructure debenture of a 25-year term.

Now when we go to Slide #8, regarding the updates -- regarding our CapEx, it is very important to highlight the nominal CapEx of our concessions. Here, we're talking about projects that belong 100% to Taesa. The CapEx was -- that was realized was BRL 314 million, that was below our minimum projection, that was BRL 410 million. So this difference of almost BRL 100 million, the explanation is due to 3 reasons. In Janaúba concession, we postponed it for the payment of part of the cables that was postponed for 2020 because the need of these cables would not be necessary during 2019.

And with -- together with our suppliers, we were able to postpone the payment for 2020. And we also totally created the retention of payments of services that were carried out in 2019. But as there were some technical pending issues according to the contract, we can retain the total value, although most of the services have already been rendered in 2019. Now regarding Mariana, although we have seen that the rains in Minas Gerais were very strong during the month of January and February, the rainfall had been already observed since the month of November. So as a consequence of the rainfall, we diminished -- we slowed down the construction works during November and December. January and February were also complicated months in Mariana. But now with firm whether, we believe that we will be able to deliver this concession during the month of April.

Now regarding Sant’Ana, we also -- we -- there was a postponement of payment of land indemnities, and it will be paid in 2020. Now regarding Miracema, well, we had here a CapEx savings.

So it is important to highlight that the delay in CapEx does not compromise the conclusion of the Janaúba and Sant’Ana concessions, although Mariana has been postponed for the month of April. So this has already been anticipated in our time line of concession contracts.

So we reviewed 100% of our CapEx projects for the year 2022. Therefore, the CapEx projections were BRL 940 million and BRL 1,020,000,000, and it's been updated between 1 point -- BRL 1,040,000,000 or BRL 1,130,000,000. Nominal CapEx projections for years 2021 and 2022 remain unchanged.

I've finished here my presentation of 2019, and now we will have our Q&A session.

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Questions and Answers

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Operator [1]

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

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

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I have 2 questions. Could you confirm a piece of information that you just mentioned regarding your CapEx, just to be absolutely sure that we understood correctly. Therefore, in reality, you reviewed because of the displacement of the events of 2019, which delayed the construction work. So this is a displacement of time and not of CapEx. And this actually is not affecting the time line of all your construction works?

And the second question is I would like you to comment if it's possible about the expectation of the auction that will take place in the middle of the year. If you have a clear view, if you're interested in participating in this auction? And what type of changes do you have in mind in terms of your strategy if you think -- if you're thinking about changing your strategy because this may impact the debt market due to the stress -- stressful moment that is something very current?

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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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Good morning, Carolina, now regarding your first question and the second question, and I will hand it over to Raul. So -- if there are -- there is no expectation in increasing our CapEx. In the case of Miracema, we had a drop in our CapEx. Now regarding Janaúba, this postponement is because we saw an opportunity to pay the cables in 2020. And this would improve the return of the project. And in the case of Mariana was because of the rainfall. So we just displaced activities from 1 year to the other. But this really didn't impact the total CapEx, and this does -- will not also cause problems in the new concessions.

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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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Thank you, Carolina, for your questions. Now regarding the auctions, well, Taesa will participate in the auctions in the middle of the year. And during the second auction during the month of December last year. The auction at the end of the first semester is a small auction actually, therefore, the auction of the end of the year will be a bigger auction, very similar to the past auctions that we've seen in the recent past.

Yes, we will participate in both auctions. We have internally studied everything in order to present proposals that are highly competitive. Nonetheless, always focused on our financial discipline. And we -- of course, we have to generate value to our shareholders. We will never take a step ahead of our pillars.

Therefore, internally, we have seen that with these new constructions that will become operational with CapEx efficiency, we -- and this is helping us in order to make up competitiveness and we also -- Aucélio has been able to create great efficiency.

Last year, we had a very successful raise -- fund raisings at very proper prices with very long terms. Therefore, yes, we have focused to be more and more efficient with responsibility and always focused on our financial discipline. Now of course -- and this has to be included in our bid.

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Operator [5]

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(Operator Instructions) We have (inaudible) from (inaudible).

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Unidentified Analyst, [6]

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I would like to know about the stake of CEMIG in the company. How do you see the movement of CEMIG's privatization in the future? And if this would represent a loss, if CEMIG sells 36% and you have 21%, and here we're talking about shares.

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Unidentified Company Representative, [7]

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Thank you for the question. Regarding this point, Taesa is focused on generating the most efficient results for our shareholders. If CEMIG -- we cannot speak on behalf of CEMIG because they have their own governance, nonetheless. We are independent -- we are totally independent to conduct the company the best way possibly, generating the best results without thinking if they will privatize or not. This actually does not affect the performance of the company. In no given moment, this has been analyzed by the Board of the company. Well, our first point here is to create value to the Taesa shareholders. So we focus 100% on Taesa's shareholders.

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Operator [8]

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(Operator Instructions) (inaudible) just sent a question via our webcast. I'm going to read his question. "Good afternoon, I would like to know if your third parties have been replaced, so you no longer have incidents with third parties that affect your availability?"

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Unidentified Company Representative, [9]

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Thank you very much for your question. Very interesting to approach this point, I would like to remind you that Taesa was the first company in the past, in 2017, to determine the replacement of these third parties, we identified a family of third parties, CTH 550.

Yes, CTH 550. In the past, this was (inaudible) and Taesa in 2017 determined that they would totally replace all the CTHs. We carried out the purchase in the end of 2017, beginning of 2018, all of them haven't been totally replaced. But most of the [CTHs] have been replaced.

What are we doing? We have laboratories that analyze the oil of all of these -- all of this equipment in order to see which equipment presents the most critical situation, and then we replace. Regarding -- in terms of how critical the situation is, I believe that the latest by the end of the year, all of them will be replaced, all -- everything has been purchased since the end of 2017, beginning of 2018. And the -- and in 2019, we replaced most of them -- more than half of them.

And now, during 2020, we are replacing the remaining amount. But I would like to reiterate that the replacement isn't done randomly, it is according to the information and we have to see which situation is more critical or not.

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Operator [10]

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(Operator Instructions) Now regarding the webcast, there's a question from Gabriella, and she asks the following: if the company is already observing restrictions in the credit market and -- what will be our financing level this year and the upcoming years?

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Unidentified Company Representative, [11]

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During the last month, we observed a deterioration in the credit market. And of course, this is a result of the coronavirus crisis. Taesa has always had a strategy. We've always had liquidity. We ended the year with BRL 2.4 billion in cash, and we had already anticipated the fundraising for our projects.

In December, all of our projects have sufficient resources to -- for the company's future investments. I believe that this year, we will have to roll out our debt by the end of the year. We still have cash flow to continue until the month of October of this year. But as Taesa is a company, we have a AAA rating by 3 agency; Moodys, Fitch and Standard & Poor's. We really don't see any major problems in rolling out our debt. And we are also going to follow and to observe and see what is the best window in order to attain this funding. Despite the crisis, the company does have cash flow and does have credit, in order to undergo these movements.

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Operator [12]

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(Operator Instructions) So we bring our Q&A session to an end. I would like to give the floor back to Mr. Raul Lycurgo for his final comments.

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Raul Lycurgo Leite, Transmissora Aliança de Energia Elétrica S.A. - CEO, Chief Legal & Regulatory Officer and Member of Executive Board [13]

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I would like to thank all the participants of this conference call. But before we end the conference call, I would like to congratulate the company for its 10 years of achievements with a very successful trajectory in the transmission sector because a team that has been fully dedicated and throughout the year has worked excellently. I say that we have 38 assets, but our best assets are the people that we have in the company. This is an extremely skilled team. So let's go forward and let's conquer the next 10 years. Thank you very much, and have a very good day.

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Operator [14]

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The Taesa conference call has come to an end. We would like to thank everyone for your participation, and have a very good afternoon.

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