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Edited Transcript of TRPL4.SA earnings conference call or presentation 30-Apr-20 1:00pm GMT

Q1 2020 CTEEP Companhia de Transmissao de Energia Eletrica Paulista Earnings Call

Sao Paolo May 3, 2020 (Thomson StreetEvents) -- Edited Transcript of CTEEP Companhia de Transmissao de Energia Eletrica Paulista earnings conference call or presentation Thursday, April 30, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandro Gregori Filho

CTEEP - Companhia de Transmissão de Energia Elétrica Paulista S.A. - Financial & IR Director and Member of Executive Board

* Rui Chammas

CTEEP - Companhia de Transmissão de Energia Elétrica Paulista S.A. - CEO, Interim Project Director & Member of Executive Board

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Conference Call Participants

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* Marcelo Sá

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Vinicius Tsubone

HSBC, Research Division - Analyst of Latam Utilities, Oil & Gas

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the ISA CTEEP conference call where we will present the results for the first quarter of 2020. We would like to inform that this event is being recorded. (Operator Instructions) The audio and slides for this conference call are being presented simultaneously on the Internet at www.isacteep.com.br/ri, where you can also find the presentation for monitoring and downloading.

Before proceeding, we would like to clarify that forward-looking statements made during this event regarding the prospects of ISA CTEEP's business, projections, operational and financial goals, our beliefs and assumptions from the company's management as well as currently available information. They involve risks and uncertainties as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions and other operating factors may affect the future performance of ISA CTEEP and lead to results that differ materially from those expressed in such considerations. Today with us are Rui Chammas, CEO; and Alessandro Gregori Filho, CFO and Investor Relations Officer, who will give the presentation. During the Q&A session, other company executives will be available.

Therefore, I would like to give the floor to Mr. Rui Chammas that will begin the presentation.

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Rui Chammas, CTEEP - Companhia de Transmissão de Energia Elétrica Paulista S.A. - CEO, Interim Project Director & Member of Executive Board [2]

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Good morning, everyone, and thank you for participating in ISA CTEEP conference call. I'm Rui Chammas. And today, we will present our results for the first quarter of 2020 published yesterday, and we will update the main company matters.

Please let's go to Slide #3. I will begin this presentation by talking about how our management is conducting business amidst the scenario before us as a result of the pandemic. In the first place, we're taking care of our teams so that they can guarantee the continuity of essential power transmission services provided by the company. ISA CTEEP has taken several measures to seek the maintenance of service for society. During the pandemic, we've activated an alternative control center to our decenter in the city of [Cabre] everything in one place. We've reduced all unnecessary displacement and event attendance in order to meet greater social distancing.

We have 60% of our employees working from their home office, 850 out of 1,400 employees work from their homes. Hygiene in all work environments and functional transportation has been reinforced, and we have an infectologist to validate the protocols. We've also created the health channel to assist employees with daily monitoring of health status through an app in addition to the implementation of social and emotional support activities, such as yoga classes and relaxation by Gympass and the [Supportpass], which offers support in the psychological, financial, social and legal areas.

I personally lead the Daily Crisis Committee, and we are conducting a risk assessment in all operations. We've emphasized that the reduction in demand and default by distributors could generate a risk of default in the sector, which has been managed by our government through economic, financial solutions and the MP 950, and they are very robust solutions according to our view.

Another potential impact would be a delay in the work for the growth project, which depend on the activities will go back to [normal]. The company -- we are following this, and we are respecting safe -- safety and health. The company is financially robust with low leverage and sound in terms of liquidity to get through this moment and continues analyzing potential sensitivities with different scenarios to define possible action plans, if necessary.

We believe that in order to achieve our purpose of creating connections that inspire, we must transform our manifesto into concrete action. That's why we launched the Todos Somos Um program, an initiative that has a direct impact on fighting COVID-19. Our first action was to donate BRL 1.5 million to Fundação Oswaldo Cruz, Fiocruz, for the production of a rapid test kit for the detection of the disease. This action is part of a great collective effort from the power sector, articulated by the Institute [Ignites] Brazil to minimize the impacts of this pandemic. We understand that we will strengthen our health sector reducing the spread of the virus and flattening the contagion curve in Brazil.

Now on Slide 4, we have the update of the greenfield projects. It is possible to verify the status of the installation license, the progress made in the land tenure and the projects, where all activities are considered until the project is energized. This in the 12 lots that are under construction. All of these projects total ANEEL CapEx of BRL 5 billion with RAP of BRL 567 million for the '19/'20 cycle. The total cap is already realized by the company in this project was BRL 1.2 billion. As I mentioned, there is a potential impact on the project schedule, depending on the normalization time of activities due to the pandemic. Some suppliers hired to carry out the project have been signaling difficulties in maintaining the pace of working due to the lockdowns in several municipalities in the country. Remote people, difficulty with mobility, hotels, construction material, food, late delivery of equipment.

ISA CTEEP is monitoring the evolution of the current scenario as well as the decision from the authorities and regulatory bodies. Possible schedule adjustments of work and disbursement of CapEx will be communicated to the market, and we are following the adequate protocols. In the 2020 budget, investments of more than BRL 1 billion have been foreseen for greenfield project, and there is an expectation of energizing 4 to 6 projects.

Now I go to Slide #5. Organic growth through project reinforcement and improvement aims to guarantee the quality of the transmission service. In the first quarter of 2020, these investments totaled BRL 7 million. The company has made an average of BRL 100 million per year for the last 5 years in investment in reinforcement and improvements and are remunerated by the regulatory WACC. This type of growth is an opportunity for companies with renewed contracts. And these investments make it possible to reduce the maintenance and operation costs, therefore, allow additional efficiency gain. ANEEL has already authorized BRL 5 million in this type of investment for ISA CTEEP. It is worth to mention that the company has an asset complex with important renewal opportunities that will be the result of future approvals of projects.

For the organic growth of the company, there have been efforts to continuously achieve efficiency with profitability. All this thanks to the technical planning capacity of our teams supported by the solidity of cash generation. In these projects, there is also a risk of delay in energization due to the pandemic. Looking to the future. The decennial plan 2029 provides an opportunity for investment for reinforcements and improvements of BRL 70 billion. We have BRL 38 billion in greenfield opportunities. Two auctions were planned in 2020 with estimated investments of BRL 11 billion, but the major auction was postponed. Nevertheless, our teams continue studying a number of projects, which apparently are part of the auction so that we are prepared with enough knowledge regarding prior lot auctions.

I would like to go to Slide #6. I would like to update the tariff review process for Contract 059, which represents 70% of the company's revenue. ANEEL opened a public consultation with an indication of a 0.2% reduction of the RAP, and it goes to BRL 2.4 billion -- million to BRL 2,449 million on June 2018. It also presents the positive total of BRL 110 million of adjustment portion to be diluted in the next 3 readjustment cycle. The contribution period of the public consultation will go until May 15. RTP will be applied in 2021 cycle with retroactive effect for the 2018/2019 cycle. In the O&M pillar, we highlight that ISA CTEEP was reference company in the regulatory models and obtained a 34% efficiency award. In this proposal by ANEEL, the reduction in O&M revenue has a 17% spread over the cycle and the methodology does not consider the margin of 10%. The WACC for the transmission sector was 7.71% in 2018, 7.40% in 2019 and 6.96% for 2020. The 2018 WACC will be used in the RTP of the Contract 059 with a positive impact in the RAP for the 2018/2019 cycle of approximately BRL 80 million. With regard the asset base, ANEEL began inspections on March 30.

Now I give the floor to Alessandro.

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Alessandro Gregori Filho, CTEEP - Companhia de Transmissão de Energia Elétrica Paulista S.A. - Financial & IR Director and Member of Executive Board [3]

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Thank you, Rui. On Slide #7, we have the main operational and financial indicators of the company.

In quarter 1, our net revenue was BRL 734 million, a 6% increase year-over-year driven by the inflation adjustment and the boosting of new

(technical difficulty)

adjusted EBITDA was BRL 674 million with a margin of 88%. The evolution of this margin and explained by the increased revenue

(technical difficulty)

reduced PMSO in the period, which primarily reflects the lower expenses of personnel. The net income was BRL 309 million, an increase of 34% year-over-year, explained mostly by the performance of IE Madeira, which has been receiving in full RAP since September '19. This result was supported by the operational excellence demonstrated through our availability and non-supplied energy indicators. Focus on operational efficiency and quality put ISA CTEEP in an outstanding position in its industry.

Slide #8 shows the company's debt. On March 31, 2020, the gross debt reached BRL 3.4 billion, and the cash balance was, at the time, BRL 767 million. Thus, the net debt was BRL 2.7 billion. The net debt over adjusted EBITDA ratio closed quarter 1 at 1.1x. We have a AAA Fitch rating with a stable outlook, and a competitive capital structure allows us to drive return on investments. The average cost of the consolidated debt was 6.4% per annum, and the average term was 3.8 years. In 2020, we have BRL 1.2 billion in debt expected to mature. The Board approved in April the raising of a maximum BRL 1.2 billion by December 2020, with a maximum term of 2 years to reinforce our cash and refinance the 2020 debt. The financial team is working on raising [this one].

Slide #9 shows the return to shareholders. The company announced in April BRL 150 million in IOE to be included in the mandatory dividend of the 2020 fiscal year. Our budget also provides for earnings in July, October and December, with the latter scheduled for 2021. The strong cash generation has allowed for growth and payouts. In 2020, ISA CTEEP expects to deliver on the announced distribution of at least 75% of its regulatory net income.

Now I turn the floor back to Rui for his final remarks.

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Rui Chammas, CTEEP - Companhia de Transmissão de Energia Elétrica Paulista S.A. - CEO, Interim Project Director & Member of Executive Board [4]

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Thank you, Alessandro. We will wrap up this presentation. On the next slide, we see some -- the pillars of our strategy whose purpose is to maximize the generation of sustainable value to be shared with our stakeholders.

Starting from our excellence and operational efficiency, which is at the center of our operations. We are always seeking to have the least social and environmental impact, and this is supported by a well-disciplined management of our assets. That's how the company is capable of generating cash and results from operations. And that's why we're capable to develop our 2 important growth pillars, growth by efficient business by participating in auctions, always seeking growth, occasional M&As and the reinforcement and improvement programs that I mentioned before. Another growth pillar that we have, which is associated to new power-related businesses with investments directly to our connection network and real estate projects, which allow us to make the most of the land bank that the company has in order to develop our real estate operations to add further value to the company. So this is a summary of our strategy. We are now closing the presentation and we will start a question-and-answer session.

So now I turn over back to the operator to start the Q&A session. Thank you all for participating.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question Marcelo Sá, Itau.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

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I have a few questions. First, about debt -- show more than BRL 1 billion in debt, which would be up. But I'd like to -- 3 or 4 on your -- But it was a short term -- at -- so that as soon as the market improves, it should have lower price. What is your strategy? Are you also looking at a shorter term? And the second question, the M&A market, payers that I talked to -- said that their M&A actions are on hold because of the pandemic. So I'd like to understand if you are looking into any assets or whether you have also suspended [your M&A]?

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Rui Chammas, CTEEP - Companhia de Transmissão de Energia Elétrica Paulista S.A. - CEO, Interim Project Director & Member of Executive Board [3]

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Thank you, Marcelo, for your questions. I would like to ask Alessandro to answer the 2 questions about the debt and the M&A. Alessandro?

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Alessandro Gregori Filho, CTEEP - Companhia de Transmissão de Energia Elétrica Paulista S.A. - Financial & IR Director and Member of Executive Board [4]

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Marcelo, well, as you can see -- approved the raising of BRL 1.2 billion and -- market by now -- notice risks and so the market is still open. And we have a very good outlook -- costs, what you see is effective effort that -- but with the drop in the Selic rates in the nominal costs of -- average nominal cost of the company. So the effective disbursement has not really shown any major variation compared with what we have with past issues. And about the terms, what you've said is true, we are going through a time of instability. So shorter-term issuances are more viable and longer-term are less attractive right now. So the company has been focusing on reviewing the market conditions for shorter terms with a prepayment condition, of course, so that we can go through this more uncertain, more difficult period and considering the balance of the [company low] average and the low risk -- that we have all the conditions, meet our commitments from the standpoint of the M&A action. [We] is still active, which means that we are still looking for opportunities. You -- we know that some companies are in a more critical situation in terms of liquidity. We know that transmission assets are assets that have a higher liquidity [focus. So] companies that have a cash need due to other reasons or to complete their projects are going to the M&A market. And the company has been looking at opportunities.

Of course, that any decision -- fully supported by technical evaluation, detail technical evaluations of the assets. And if we deem they are good enough, they will be recorded in a way that does not affect the dynamics of the company. So we are looking at opportunities, but with a lot of caution because we know that the uncertainty level in the market today is much higher than it was in the beginning of the year, for example.

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Operator [5]

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The next question is from Vinicius Tsubone, HSBC.

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Vinicius Tsubone, HSBC, Research Division - Analyst of Latam Utilities, Oil & Gas [6]

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I hear about the -- construction projects due to the pandemic, what is the level of -- so far versus your plan? And there -- do you expect any potential impact on the CapEx due to these delays?

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Unidentified Company Representative, [7]

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Thank you, Vinicius, for you question. Let me start by the final part of your question. No, we have not seen any possibility of an impact due to foreign exchange rates because all our buys are in reals. So we don't see that type of risk exposure. Now as for the delays, we have not seen any material delays in any of our projects. We have 8 -- sorry, I apologize, we have 12 projects ongoing. Actually, 9 are under construction now. And we have not seen any possibility of a substantial delay in any of them. As we said in the beginning of the conference, we know that the impact will be more or less relevant depending on for how long this pandemic goes on.

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Operator [8]

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(Operator Instructions) We have a question [Guilherme], Santander.

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Unidentified Analyst, [9]

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We saw -- you had a good PMSO over [4] personnels, number of employees -- due to the processes that were mentioned in your -- could you give more details about these -- does it make sense to consider these gains recurrent? Could it improve even further in the next quarters? And the next question is, is there any possibility of changes in the dividend payout due to the impacts of the pandemic?

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Rui Chammas, CTEEP - Companhia de Transmissão de Energia Elétrica Paulista S.A. - CEO, Interim Project Director & Member of Executive Board [10]

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Thank you for your question. Alessandro will answer your question.

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Alessandro Gregori Filho, CTEEP - Companhia de Transmissão de Energia Elétrica Paulista S.A. - Financial & IR Director and Member of Executive Board [11]

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[Guilherme], as for the PMSOs -- how to optimize our processes, corporate and operational, which led to some efficiency gains as we saw and also for PMSO, for personnel and MSO. Also with recurring negotiations with our suppliers, this all has allowed us to review the price conditions and the terms of the services provided to us. We are monitoring all this and doing this recurrently. And this is how we have been able to reduce these costs. In quarter 4 last year, we already saw an improvement and now a further improvement. Of course, we have some one-off events related with the COVID-19 pandemic. But the idea is try to maintain this trend towards reduction in costs and gains in efficiency.

If we look at the EBITDA, the margin, the evolution of the margin has been very impressive, we went from 81% to 83% in quarter 4 to -- 81% in quarter 1, 83% in quarter 4 and now 88%. And this evolution is related not only with the reduction in expenses, but also the increase in the revenues of the energized project. And this allows us to add value, to add results and to have a better margin condition. And this is the company's premise for its growth. And this has been very positive so far, both in terms of margin and also PMSO with the reduction that I just mentioned.

Now as for the dividends, to date, considering the impacts mentioned by Rui on the CapEx and the projects and considering the evolution of the company's receipts, which have been stable and steady and have suffered no impact of default due to the current situation, the company's practice in terms of dividend payout will be maintained. There will be no changes. Of course, if there's an aggravation of the situation, which can impact the company's liquidity, then we may go towards a different direction. But right now, we don't see any need to change anything in the dividend payout. I hope I've answered your 2 questions.

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Operator [12]

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As we have no further questions, I would like to give the floor for Mr. Rui for his final remarks.

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Rui Chammas, CTEEP - Companhia de Transmissão de Energia Elétrica Paulista S.A. - CEO, Interim Project Director & Member of Executive Board [13]

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Thank you very much. I would like to thank everyone for being interested in our earnings result and for participating in this conference call. Our Investor Relations team is at your disposal, ladies and gentlemen, should you need additional information. And I invite you to participate in a new conference call in 3 months, to see our earnings result. Please stay healthy, stay safe, so that we can go through this difficult moment as fast as possible. Thank you very much, and have a very good morning.

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Operator [14]

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The ISA CTEEP Conference Call has come to an end. We would like to thank you for your participation, and have a very good day.

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