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Edited Transcript of TIET11.SA earnings conference call or presentation 7-Aug-19 1:00pm GMT

Q2 2019 AES Tiete Energia SA Earnings Call

BARUERI Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of AES Tiete Energia SA earnings conference call or presentation Wednesday, August 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clarissa Della Nina Sadock Accorsi

AES Tietê Energia S.A. - CFO, VP of IR & Member of Executive Board

* Italo Tadeu de Carvalho Freitas Filho

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

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Conference Call Participants

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* Gabriel Fonseca Francisco

XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A., Research Division - Research Analyst

* Kaique Vasconcellos

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

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the conference call of AES Tietê Energia.

In this conference, we will discuss the company's results for the second quarter 2019. The IR area of AES Tietê Energia also informs that the release and the presentation of earnings results are available on the company's website at ri.aestiete.com.br. (Operator Instructions)

We'd like to inform you that this conference is being recorded and is also being transmitted via webcast with access on the Investor Relations website of the company.

On behalf of AES Tietê Energia, we would like to clarify that any forward-looking statements that may be made during this conference call regarding the company's business prospects, projections, operational and financial goals are mere forecast based on current expectations. Such expectations may change due to variables, such as market conditions, economic performance of the country and that of international markets. The presentation, which will be accompanied by slides and can be viewed in the webcast transmission, will be made by the CEO of the company, Mr. Italo Freitas; and by the CFO and IRO, Ms. Clarissa Sadock. In the end, the officers will be available to answer any questions.

Let me remind you that journalists that wish to ask a question may do so by e-mail to the press office of the company at aes.imprensa@aes.com.

Now I would like to turn the call over to Mr. Italo Freitas. Please sir, you may proceed.

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

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Thank you. Good morning, everyone. It's a pleasure to be here with you to disclose the results of AES Tietê Energia. With me today is our CFO, IRO Clarissa Sadock, as well as the other directors of the company and our IR team.

On Slide 2, beginning the presentation, we bring the main highlights of the company that contributed to the results that will be presented during this conference call. The second quarter of 2019 had a number of important achievements in the 3 strategic pillars of the company.

Starting from the growth and diversification pillar. We highlight the physical progress in the construction works of Phase 2 of our Ouroeste Solar Complex, which is planned to become fully operational in the third quarter 2019. It's important to mention that it will start operating one year before the start of its regulated PPA. An additional highlight to this pillar is the option required to purchase 500 megawatts of greenfield wind power pipeline in the state of Bahia, in line with our strategy of growth based on sources complementary to hydropower and structuring of clusters, focused on operational synergies. The performance of this agreement guarantees a period of exclusive rights for the acquisition of 500 megawatts of wind energy capacity in a region of a high-capacity factor at an advanced stage of development. We have strong market demand mapped out, and our sales team has been working on the execution of long-term contract with our clients operating both in the commercial and industrial segments. Once the contracts are signed, we will sign the implementing -- we start the implementation of the project.

The parties continue working under the preceding condition for the completion of the transaction related to Alto Sertão III as disclosed in the material fact, and a new decision in June, revoked the grant of the Phase B of the complex, and we are currently assessing the impact of such a decision.

Moving to the commercial excellence pillar. We highlight the fact that we had just brought in 2 new projects in the distributed generation category for large commercial customers. In addition, we draw your attention to the flexible sale of energy for the medium-term period in the first half of the year, achieving 95% of energy contracting target for the period from 2019 to 2023, ensuring the optimal level for each specific year. We were able to make the sale at average prices above those in our pipeline portfolio, thanks to the market intelligence, which identified the opportunity created by the atypical hydrology in the beginning of the year. Such a higher contracting level ensures ability of results.

Finally, on operational excellence pillar. As I stated in the previous quarter's earnings release, in April 2019, we refinanced more than BRL 2 billion of our debt, a move that allowed us to extend the average debt maturity by 2 years, in addition to optimizing the costs and covenants of our current portfolio, in line with our commitment to generate clean energy. This is the first solar project to receive the Green Bond seal. Clarissa will give more details about the operation throughout the presentation.

On Slide 4, we show the progress of the constructions of Ouroeste Solar Complex. As mentioned in previous earnings calls, the complex comprises 2 phases. And when completed, we will add 144 megawatts of installed capacity to our portfolio with an annual EBITDA estimated between BRL 70 million and BRL 80 million. With the works completed, Phase 1 has been operating under test conditions since March of this year, and its commercial operation will start in the first half of this month. The Phase 2 of the complex has more than 90% of the works completed, and its delivery has been confirmed for the end of next quarter.

I would like to mention that this agreement will start operating one year before the start of its regulated PPA. In addition, the strategy of the composition of this complex, therefore, reinforces the company's vision to add to its portfolio of projects that have synergy and then brings attractive returns to our shareholders.

On Slide 6, we show the profile of new contracts signed this quarter with commercial customers in the distributed generation modality. We increased our installed capacity by 8.3 megawatts through partnerships with McDonald's and São João drugstore network. The term of the contract is 12 years, and the prices stand above the current portfolio.

With McDonald's, we will set up one of the largest remote solar plant of a single customer in the country with 5.3-megawatt installed that will supply 39 stores.

With São João network drugstores, the installed capacity is 3-megawatt, which will be enough to supply about 200 stores and has the potential to be expanded of up to 9 megawatts.

This new contract, in addition to bringing new sales revenues to the company, bring cross-selling opportunities with other services offered by AES Tietê for McDonald's. In addition to the plant -- solar plant, we will migrate the grid to the free energy market through our retailer, and we'll take over the energy management of 196 group units, all in the state of São Paulo, Rio de Janeiro and Minas Gerais.

Together, the projects show AES Tietê's ability to develop new business brands to meet our customers' needs, including the new projects as we mentioned. The company already has 15.5 megawatts of projects in this model, making it increasingly relevant player in this growing market in the country.

Moving to Slide 4 (sic) [Slide 7]. I reinforce the message conveyed at the beginning of this presentation with current portfolio snapshot. To date, more than 95% of our energy relative to our optimal contracting level is already contracted for the medium term, resulting from our effort to combine attractive selling prices with reduced volatility of results through actions that mitigate hydrological risks.

Therefore, I turn the call over to Clarissa Sadock, who will discuss the company's financial results.

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Clarissa Della Nina Sadock Accorsi, AES Tietê Energia S.A. - CFO, VP of IR & Member of Executive Board [3]

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Thank you, Italo. Good morning, everyone. Moving on to Slide 9, we will talk a little bit about AES Tietê's results. The EBITDA of the second quarter 2019 was BRL 270 million, while the second quarter 2019 stood at BRL 225 million.

We highlight 4 main variations. The first is the seasonality strategy that was responsible for a reduction of BRL 34 million (sic) [BRL 32 million] this quarter when compared to the same quarter last year. Our risk and return strategy for hydropower business aims to mitigate risks of up to 95% of the hydro scenarios. What we have seen so far in 2019 is a dry summer and a humid winter, which has been quite atypical.

The second explanation for the variation of EBITDA is a gain we had with the MCSD, the offset mechanism for surplus and deficit. Last year, we had extraordinary gaining of BRL 25 million in the second quarter. From this contracting part of outset and to energy and in the regulated market and recontracting it in the free market at higher prices, this extraordinary gain in 2018 will not be repeated due to a change in the regulations. In addition to the impact of BRL 27 million for this quarter, we're also going to have a gain in the third quarter of BRL 70 million and a gain of BRL 40 million in the fourth quarter 2018.

Another item that contributed to the variation is the introduction of solar assets that already contributed by BRL 14 million this quarter. In relation to OpEx, the variation explained by BRL 1 million of cost related to solar operations, BRL 2 million of cost associated with growth and BRL 1 million with the option to purchase the 500-megawatt of greenfield pipeline mentioned by Italo. The inflation would also be responsible for an increase of nearly BRL 3 million, but this inflation impact is not perceived provided that we optimized other expenses that mitigated such an increase.

Moving on to Slide 10. We can see that the net income totaled BRL 35 million in the quarter. We also have a waterfall chart to give more details of this variation.

In addition to the 3 first items that I explained in the previous slide, I think it's also important to mention 3 other effects. The first one would be the larger depreciation between periods. This new level of depreciation reflects the company's growth due to investments made in the last 12 months. It's important to remember that this is -- this does not cause an impact to our cash. The refinance of half of the company's debt generated a one-off impact of BRL 8 million net in the quarter. Refinancing brings about positive NPV, and the cost of reduction gains will begin to be perceived as early as next quarter.

In addition, as in the line of depreciation, we have the effects of the growth of the company, generating higher financial expenses due to the higher -- to the increase of BRL 800 million in debt.

In summary, the main message on this slide is that more than 75% of the profit variation reflects nonrecurring items, such as the seasonality of hydro energy operation, the MCSD and the refinancing of the debt in this quarter.

Lastly, it's important to mention that we have approved the distribution of the quarterly results in the form of dividends. If we add the dividends paid in the last 4 quarters, we'll reach a dividend yield of 7.7% in a year.

Now turning to Slide 11. We show the current situation of Tietê's capital structure. At the same time that we are growing AES Tietê, we are making adjustments to reach an optimal debt structure. As I mentioned on the last slide, in April this year, we refinanced 50% of our debt portfolio with the issue of the ninth debenture. This new issue has an average maturity of 8 years and an average cost of 5.2% per year after tax. This refinancing has been causing the company's total debt to have a cost reduction of 1 percentage point and the maturity extended in almost 2 years.

In addition, this new issue entails a profile of covenants, which is better suited for a growing business. With the ninth issue, we were also pioneers in the issue of debentures of solar projects with a Green Bond certificate in Brazil, as mentioned by Italo. The proceeds from this issue were allocated to Guaimbê and Ouroeste projects. With this, we ended the quarter with a net debt of approximately BRL 3 billion and 2.9x of leverage.

I turn the call over to Italo for his final remarks.

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

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Thank you, Clarissa. As shown by Clarissa, we had the impact of unusual hydrological scenario on our bottom line. AES Tietê continues to endeavor to be prepared in case of recurrence of atypical scenarios. To mitigate this volatility in the company's results, we focus on our portfolio diversification strategy.

Finally, in a brief review of the main highlights for the quarter, we emphasize that the progress in the works of Ouroeste and the agreement to purchase the wind energy pipeline shows the diligence in pursuing the company's diversification strategy, aiming at balancing the portfolio in order to reduce the volatility of our results.

On the commercial side, we show our ability to take advantage of the market opportunities by contracting our medium-term portfolio and also by signing new contracts in different modalities, expanding our revenue front.

Finally, raising more than BRL 2 billion to refinance previous debt shows our team's effort to adjust the company's capital structure to the growth initiatives that have been materializing over the quarters. This shows Tietê's ability to be prepared for the opportunities that may arise on this front in the future.

I now open the Q&A session. Thank you very much.

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Questions and Answers

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Operator [1]

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

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

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First question, could you provide an update in terms of GSF? What's the negotiation of the base tax of CPC? And how can we calculate the profile of the extension of the concession?

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

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Hi, Kaique, thank you very much for your question. Well, we know that it has been passed by the House of Representatives, and now it has moved to the Senate. And it has a new [PL 75/2019]. It has a new terminology, which is under the responsibility of representative Eduardo Braga. As we have always mentioned in the previous calls, we support the resolution of this issue, this text. We want it to be passed as soon as possible. Obviously, the House of Representatives was very diligent in approving this item, considering how fast it happened. And obviously, in addition to GSF, there were other issues that were also discussed, and it has to be directed to the Senate. We expect that in the future weeks, this issue will -- this item will be voted by the Senate, so that other items can also be voted on.

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Operator [4]

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(Operator Instructions) Next question comes from Gabriel Francisco, XP Investment.

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Gabriel Fonseca Francisco, XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A., Research Division - Research Analyst [5]

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I think my question is directed to Clarissa. Considering this context of outset and the discussions by a new -- would it be up to the company to make any adjustments to the proposal, considering the authority of a new or there's not much to be done now?

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Italo Tadeu de Carvalho Freitas Filho, AES Tietê Energia S.A. - CEO, President & Member of Executive Board [6]

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Gabriel, thank you very much for the question. Gabriel, we are focused at this time to solve the preceding conditions. The material fact has already been published, so our focus today, even considering the issue related to Phase B, but our focus is to complete the preceding conditions.

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Operator [7]

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(Operator Instructions) If there are no further questions, I would like to turn the call over to Mr. Italo Freitas for his final remarks.

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Italo Tadeu de Carvalho Freitas Filho, AES Tietê Energia S.A. - CEO, President & Member of Executive Board [8]

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Well, I would like to thank you all for the interest in our company and also to attend once again another conference call. I hope to count on you again in the next earnings release, and we are available to clarify any questions you might have. Thank you very much, and have a good day you all.

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Operator [9]

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The conference call of AES Tietê has come to an end. We would like to thank you for your participation, and have a good day.

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