U.S. Markets open in 5 hrs 7 mins

Edited Transcript of TIET11.SA earnings conference call or presentation 6-Nov-19 1:00pm GMT

Q3 2019 AES Tiete Energia SA Earnings Call

BARUERI Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of AES Tiete Energia SA earnings conference call or presentation Wednesday, November 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Italo Tadeu de Carvalho Freitas Filho

AES Tietê Energia S.A. - CEO, President & Member of Executive Board

* Jose Ricardo Simão;Corporate Planning and Investors Relations Director

================================================================================

Conference Call Participants

================================================================================

* Kaique Vasconcellos

J. Safra Corretora de Valores e Cambio Ltda, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to AES Tietê Energia conference call. In this conference call, we'll discuss results concerning the third quarter 2019 for the company.

The RI company also informs that the release and the results presentation can be accessed at the company's website at ri.aestiete.com.br. (Operator Instructions) This conference is being recorded and is also being broadcast via webcast with access at the RI website.

On behalf of AES Tietê Energia, we'd like to state that forward-looking statements made during this conference call concerning the company's business perspectives, operational and financial perspectives are based on the company's current assumptions. Such expectations might change due to variables such as market conditions, country's economic situation and international markets.

The presentation will be followed with slides that can be also followed with the webcast transmission and will be conducted by Italo Freitas, the company's CEO; and the Corporate Planning and IR Officer, Mr. Jose Simão. At the end, the company's executives will be available to answer questions you may have. Once again, journalists who wish to post questions may do so via e-mail to the company's press office at aes.imprensa@aes.com.

Now I'd like to turn the floor over to Mr. Freitas. Please, sir, you may carry on.

--------------------------------------------------------------------------------

Italo Tadeu de Carvalho Freitas Filho, AES Tietê Energia S.A. - CEO, President & Member of Executive Board [2]

--------------------------------------------------------------------------------

Thank you. Good morning, everyone. It is a pleasure to be here for one more earnings call for AES Tietê Energia. With me today also present are Corporate Planning Director and IR Officer, José Simão; and other company's executives in our IR team.

Before moving on to the company's results in the quarter, I'd like to share with you an important landmark in the company's history. On October 27, we celebrated 20 years of AES in Brazil. Our history goes back to 1999 when we moved from being a state-owned company to a listed company. We have accomplished a lot since then in this period. We have expanded our asset portfolio through the acquisition and development of solar and wind assets. We have conquered new and important clients with a new solution platform. And we have worked bringing a leading role in the electric sector. Today, we rank among the largest fiber-generated companies in the country with 3.3 gigawatts of installed capacity, and we keep moving on. I'd like to thank each and every one of you who are part of this history and have been following us in this successful path.

Now moving on to Slide #2. We have the main highlights and accomplishments under our strategic pillars, which have contributed significantly to our results in the third quarter.

Starting by growth and diversification. We highlight the ramp-up of the Ouroeste Solar Complex, which has already started contributing to the company's results. This asset adds 144 megawatts of installed capacity to our portfolio. More details about this feat will be given as we move forward with this presentation.

As in front of commercial excellence, we have the positive effect of our commercial strategy to strike a balance in our portfolio in the period. As we have highlighted throughout the year, the company has adopted a series of actions trying to hedge against exposure to the short-term market. Simão will show that in numbers that even in a year which was quite atypical in terms of rainfalls pattern as this year, our portfolio has proven to be very resilient.

Lastly, as we talked about operating excellence, we have reinforced our diligence in cost control. For 8 consecutive quarters, we have maintained our level of operating expenses even considering inflation and the addition of new capacities to our portfolio that has provided a real reduction of 5% ex growth. Simão will always give more detail about those numbers when he takes over the presentation.

Moving on to Slide #4 now. We have this landmark for our history. Since the beginning of the development of this project, we made it a point of sharing with everyone the status of the works. And now it is with great satisfaction that we announced the ramp-up of the Ouroeste Solar Complex, the second asset in the solar energy of the company with installed capacity of 144 megawatts. The first phase comes with 69 megawatts and started operation last -- in August this year. The plant has been operating as a pilot plant since March and now will contribute effectively to our results. The first phase is 100% contracted under a PPA of 20 years. The second phase of the complex, which adds another 75 megawatts to our portfolio, has been under testing since last month, 15 months before the start of the PPA. The energy generated by the assets in 2020 will be sold in the free market at higher prices than those contracted at the auction which will start in 2021, ensuring an increase in return for that project.

Between 2017 and the third quarter 2019, we have invested BRL 582 million in the complex. It was a fundamental piece for us to work with the state government to meet our obligations in terms of installed capacity of that project. It's a real return of 2-digit, reinforcing our control and capital allocation and the company's vision in putting together a portfolio that have synergy and that provide attractive returns to our shareholders.

On Slide #5, I'll talk a little bit about the company's growth strategy. As you know, in October, we announced the end of negotiations for the acquisition of the wind complex, Alto Sertão III, from Renova. The completion of the negotiations happened because preceding conditions were not met as per an agreement signed in April.

The message here is that we continue to be engaged in our growth strategy, seeking for complementary energy sources and to ensure that strategy will have a series of assets under analysis. And we work around 2 main fronts, M&A and greenfield.

For the M&A front, we are looking for owning projects in the Northeastern region of Brazil, a region which is well-known for its wind conditions and which will allow the development of clusters to generate added value through operating synergies. We also look for long-term PPAs that will contribute to an increase in the predictability of our results.

On the greenfield front, we announced last quarter the signing of the right of option for purchase of a wind pipeline in the state of Bahia. This pipeline was baptized Tucano and is located in a region with a high level of capacity in a advanced stage of development. Today, we have guaranteed access to about 600 megawatts ready for construction. For greenfield, our focus is on development sun -- solar and wind projects to sell energy in the free market, which brings better, more attractive returns than the regulated market.

On Slide #7, we have the result of the work we have dedicated by our commercial and energy management teams. 2019 has been a year where we have atypical rainfall patterns, a very dry summertime and a very wet wintertime. According to CCEE, it is the seventh worst hydrological cycle ever recorded. As we mentioned in our previous conferences, our strategy has as its objective to minimize risks and returns. The atypical hydrology seen in the first and second quarters were still outside of that interval. And because of that, they reduced our commercial margin in the first half.

For the third quarter, one of the main success factors to mitigate those factors was their capacity to anticipate trends that -- our market intelligence team, they realized the purchase in 2018 of energy for this year, thus hedging us from price variation in the spot market during the dry period of this year. That purchase, combined with the allocation strategy, which can be shown in the lower part of this slide, were key to ensure an increase in our hydro margin by BRL 37 million, reversing the reduction that was posted in the first half of the year. Our hydro results grew by 19% in the third quarter of this year when compared to the third quarter of last year, a combination of [bin] strategies I mentioned and of the good performance by our assets.

Now moving to Slide #8. We have the current profile of our assets portfolio. I think it's worth mentioning the construction, the building of long-term partnerships with major clients throughout this 20 years. AES Tietê delivers customized solutions for -- to meet the demands of our clients and they form a robust contracts chain, which can be seen on the left-hand side.

On the right-hand side of the slide, we talk a little bit about the level of contracting for our portfolio in the third quarter 2019. The focus of our commercial team is on 34 business opportunities that will increase our contracting level at attractive prices. Today, we have 96% of our target for contracting for midterm already accomplished, which places us in a contracting level which is quite comfortable at 80%. In this quarter, we sold 85 megawatts -- additional average megawatts of conventional energy for the years 2021 through 2023. The price -- market price currently for energy sale in conventional terms is of approximately BRL 200 per megawatt hours for 2020 and BRL 185 for 2021 and BRL 165 per megawatt hour for 2022.

Now I'll give the floor over to Simão who will be talking about the company's financial results. Simão, you have the floor.

--------------------------------------------------------------------------------

Jose Ricardo Simão;Corporate Planning and Investors Relations Director, [3]

--------------------------------------------------------------------------------

Thank you, Italo, and good morning, everyone. We'll start with Slide #10. Here, we see that the third quarter's EBITDA sat at 22% higher than last year's. In this quarter, we have reported an EBITDA of BRL 254 million vis-à-vis BRL 208 million last year in the same period. On the chart on the slide, we show the main variations in the period. And the main reasons for the increase in EBITDA was the higher hydro result, as Italo has just mentioned, which led to an increase of BRL 37 million in EBITDA. In this third quarter, we saw a positive impact on our commercial strategy. We anticipated purchases in bilateral energy to reduce our costs in that quarter. We also had stronger results coming from bilateral transactions.

The second item for the growth was the performance of our wind asset. We saw a gain of BRL 21 million for Alto Sertão II, a result of 2 main factors: a good operating performance in the period and the reduction on expenses with OEM for that particular asset.

Still about the wind assets, the third column shows the nonrecurring impact, which generated in 2018 a positive impact of BRL 17 million. But as I said, it's a nonrecurring one-off event, which was a de-contracting of part of the energy in the regulated market and the re-contracting in the premarket at more attractive prices.

The third driver for our EBITDA growth was this ramp-up of our solar assets. As Italo also mentioned with Guaimbê and Ouroeste, they brought in BRL 9 million. Both are already 100% operational, and the last phase or second phase Ouroeste started the testing phase on October 4.

Still in the same slide, an important point to highlight is the relevance of the real reduction, real drop in OpEx of about 5%. We have been staying at the same cost level for 2 years even with an accumulated inflation of around 8% in the period and with an increase of 300 megawatts in installed capacity. All of that confirms our discipline in controlling costs.

Moving on to Slide #11. We show our net profits, which saw an increase of 175% vis-à-vis the third quarter of last year. In this quarter, we recorded BRL 97 million in profit as opposed to BRL 35 million last year. Here, we see a second chart that brings slightly more detail about the variation. The main contribution of the results were an increase in the hydro margin and the good performance of our solar assets.

Besides the EBITDA items I mentioned in the previous slide, we have 2 financial items here: the GSF injunction and there is financial results. As for the GSF injunction, we saw a positive impact of BRL 20 million in this quarter. And the rationale behind that is that the balance, updated by the IGPM -- was updated by IGPM, whereas the withheld cash is invested at CDI levels. So we saw lower numbers when compared to last year's third quarter. About the injunction, we can talk about it when the Q&A comes, but we're still waiting for this new law to be approved by the Senate. And we expect that to happen this year.

Lastly, our financial results. This slide is better especially because of the reduction in debt and tax burdens. We had a decrease in debt of 9.2% -- 7.9%, sorry, as opposed to 9.2% last year. So quite a significant drop in the cost of debt for the company.

Now Slide #12, we see the company's capital structure. Throughout the year, we have worked to recompose our debt profile for the company. At the same time, we are growing, looking for a better capital structure. This was possible with the new debenture issuance and the anticipated redemption of some of our debt, the most expensive debt, as we mentioned in the previous quarters. This reprofiling of the debt allowed for a reduction in the average cost, and with a more extended deadline and a better covenant profile for our company's growth strategy, today have an average rate of 7.9% as compared to 9.2% in the third quarter of last year. Our average term is 5.5 years as opposed to 4.4 we had last year, slightly over a year in terms of average term.

I'd like to reinforce on the same slide, that as you can see on the right-hand side of the slide, we have no amortization or relevant amortization going forward. That's also a consequence of this reprofiling of the debt we conducted just now.

I will give the floor back over to Italo for his final remarks. Thank you.

--------------------------------------------------------------------------------

Italo Tadeu de Carvalho Freitas Filho, AES Tietê Energia S.A. - CEO, President & Member of Executive Board [4]

--------------------------------------------------------------------------------

Thank you, Simão. Just to emphasize the highlights of the third quarter 2019, it was a very interesting third quarter for the company. Of course, we have great -- we are celebrating 20 years of the company in Brazil, in the Brazilian market. So it has been a very exciting third quarter for the company.

And as a highlight, the Ouroeste Complex at 144 megawatts, it's a key project for us to meet our obligations in terms of expansion in the state of São Paulo, a full operational status. And the hydro results, which is also driven by our market intelligence team working around mathematical models, predictions and with a lot of intelligence, if I may, to ensure an increase in EBITDA of 22%. Also cost control, which was quite disciplined and strict. Even growing the amount of megawatts, we managed to keep costs under control. And that was driven by the company's ability of having a digital operation, a remote operation for the plant. And the dividend yield at 7.5% LTM, an annualized yield of 136% of the Selic rate.

So I'd like now to close, and we are available for questions or comments that you may have. The whole team is here available. Thank you, everyone.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Mr. Kaique Vasconcellos from Safra Bank.

--------------------------------------------------------------------------------

Kaique Vasconcellos, J. Safra Corretora de Valores e Cambio Ltda, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

My question is about the group's strategy. You did mention negotiations about Alto Sertão III, the Tucano purchase options. But if you could give us some more color on new opportunities you are contemplating, short-term possibilities, your growth strategy. And also, just to be sure, a possible -- if a possible privatization of [A3 CGT] could also fall into your radar.

--------------------------------------------------------------------------------

Italo Tadeu de Carvalho Freitas Filho, AES Tietê Energia S.A. - CEO, President & Member of Executive Board [3]

--------------------------------------------------------------------------------

Kaique, as I mentioned during the presentation, we have basically put our focus on 2 different lines. Greenfield is one of them. M&A, of course, we are always looking for projects that might bring operating synergies to what we already have in place. That's quite clear because you have a way to extract value from M&A project. And as for the greenfield front, as we are a global company, we of course enjoy a significant capacity to negotiate equipment. We also have a wealth of technical knowledge that allows us to have better solar and wind project layouts that makes us very competitive in terms of delivering products for the free market. So we see you can identify projects with better returns.

It's worth mentioning that AES Tietê is also distinguished by the fact that with its hydro portfolio plus the renewable portfolio, we can reach -- we can adjust the curve according to clients' needs. That's why our focus is on the free market with long-term PPAs.

You also mentioned the privatization. We are not interested as of now because as I said, we are now trying to develop the Tucano project, as you also mentioned. And we also want to focus on the M&A projects which are already part of our portfolio.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) Since there are no more questions, I turn the floor back over to Mr. Freitas for his final remarks.

--------------------------------------------------------------------------------

Italo Tadeu de Carvalho Freitas Filho, AES Tietê Energia S.A. - CEO, President & Member of Executive Board [5]

--------------------------------------------------------------------------------

I'd like to thank you all for participating in our call. Once again, AES Tietê is celebrating 20 years in the Brazilian market, and we're trying to start a new chapter in terms of innovation, good solutions for our clients. And once again, the focus remains on the Brazilian electrical sector. We want to help that industry grow in Brazil.

So once again, thank you. And please feel free to -- later on after the call, to show us questions or comments. Thank you, everyone. Have a nice day.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

AES Tietê Energia's conference call is now over. Thank you all for participating, and have a nice day.