Earnings Call: Q3 2019

Nov 13, 2019

Good morning, ladies and gentlemen, and welcome to the Auto Conference Call of Equatorial Energia S. A. To discuss the earnings of the third quarter twenty nineteen. Right now, all participants are in listen only mode. Later on, we will start the Q and A session when further instructions will be provided. Now we are going to turn the call to Mr. Auguste Miranda, CEO and Leonardo Lucas, CFO and IR Officer. Please, Mr. Miranda and Mr. Lucas, you may go on. Good afternoon, everyone. First of all, I would like to thank you all for joining us in our third quarter twenty nineteen conference call. Before I start with the results, I would like to talk about some recent news that were published in a recent notice to the market. You know that Mr. Pininfo Santayo has left the position of Chairman in Equatorial Energy, but he remains as a Board member. The Chairman position is taken by Mr. Carlos Piame, who has already held this position before between 2020 and 2015 and is a former CEO of the company. Another recent change is Mr. Eduardo Allama stepping down as CFO and IRO and being appointed as a Board member, which should be voted in the general meeting already called for next week. I would like to thank I ama for the eleven years she dedicated to the group as CFO and IR Officer, and I'm happy to note that we should keep this strategic view as a Board member. The CFO and IR position is now filled by Mr. Leonardo Luka, who has been working in the group since 2005 in several different positions within the financial department. So Leo, we are going to continue counting on your competence, and please introduce yourself to the market. Hello, everyone. Good afternoon. Thank you, Augusto. Well, as Augusto mentioned, I've been in the group since 02/2005. It's been fourteen years. In the beginning of Equatorial Maranhao, at the time, CEMAR, I was responsible for the budgeting department, then took the role of Controller and finally, I stepped up as CFO. In 2012, when we acquired CELTA, I took the role of CFO and IRO in Para, taking part of the turnaround since the beginning. In 2016, I became the Corporate Officer of the Holding, overseeing, controlling, budgeting and funding operations for the group as a whole. I'm very motivated with this challenge now, taking the position of the CFO and IRO of the office of the group. I would also like to thank Jaime in all those years we worked together in several matters, and I'm sure I can keep on counting on his guidance as a Board member. Now we are going to go to the presentation. I'm going to start describing the highlights of the quarter. Then I will comment on our operating and financial results. Next, I'll give you an update of the transmission project. And finally, we are going to open for the Q and A session. So now we are going to start on Slide number three. In the third quarter twenty nineteen, Equatorial's consolidated EBITDA reached BRL1 billion. This number was affected by the consolidation of Sapioli and Alagrobras distribution companies, both already posting positive figures to the group. And also, we have the adoption of IFRS 15 for the transition assets. We'll further disclose this impact on the next slides. In Halogues, we are posting BRL61 million as OpEx in the third quarter following several measures taken by the group since we arrived. Also in Alagoas, we received a benefit from Subeni that will last until 2028. In POE, the highlight is the drop in losses for the second consecutive quarter. As for our sold volumes, we had growth of 1.6% in the quarter, basically following the growth posted by three of our four concession areas. As for transmission projects, we've recently received the last environmental license that is necessary for the construction of all of our projects. In SPV-eight, we have another session of the assets that has gone online in September, amounting to additional BRL 17,000,000 in annual revenues. In terms of EBITDA, if we were to consider only the old assets, basically Maranhao and Para, we would have reached million in the quarter. Now we are going to move on to Slide five. The combined energy sales from all the four discussed in the group grew by 1.6% in the quarter. The 3% growth posted by Maranha was mainly fueled by the growth in industrial and residential segments. Industrial segment was impacted by the pickup of mining activity in the state. In Para, we grew by 1.7%, strongly affected by the residential consumption growth and retail sales in the region. POE posted a growth of 1.2% in the quarter due to the loss reduction following the loss comeback activities we have already been implementing in that concession. Alagouas was the only concession to report negative growth in the quarter with a drop of 0.9% due to increased energy losses in the quarter. On Slide six, we show our growth in required energy in all but one of our concessions in this quarter. Consolidated numbers, our combined growth of injected energy reached 2.1% in the third quarter. Maranhao and Para posted the highest growth within the group, amounting to 3.52.8%, respectively. Both are slightly influenced by better weather conditions in the quarter. In the case of Maranhao, we also had a pickup in industrial activity in the quarter. In POE, we believe that despite the slight positive influence of the weather, the main reasons behind the 0.4% drop in the quarter are yet the slow economic activity as well as the beginning of the loss combat initiatives. Alagrohas posted a 0.9% growth in the quarter, which we believe is due to some economic activity pickup, especially considering the activities in the oil and gas segment. Finally, we would like to highlight that in this quarter, distribution companies showed an increase in consumers registered as low income due to the campaigns made by the group in order to guarantee access to the tariff discount for consumers who are eligible. On Slide seven, we show total energy losses in our discos. The level of energy losses in Moreno and Para were affected by the more integrated policy of loss, combat and collection adopted in this concession since the second half of twenty eighteen. In Para, we believe the effects of this new policy is already accounted for. In Parana, after the tariff review approved in August, regulatory level of total losses went up to 27.5 following the increase in the level of technical losses recognized in the company's tariff structure. In Pirao Ui and Alagoas, the level of loss in the companies were basically affected by adjustments in the billing procedure that had to be made when we arrived in this company. Despite all that, some loss combat initiatives in POE are already showing results, reducing the level of losses in the second quarter in a row. In Alagoas, in turn, given that we are concluding hiring, training of teams and structuring of the loss combat program, we had energy losses growing by 0.3 percentage points in the quarter. On Slide eight, we see that quality indicators for Maranhao and Para continue to be well below the regulatory target. As for POE, the increase seen in recent quarters is a consequence of the adjustment in the measurement we've made after our arrival in quality indicators. This change should continue to affect the indicator until the fourth quarter since it's calculated as a twelve month moving window. In Alagoas, there was a similar adjustment in the calculation, but with a much smaller impact in the final picture. Moving to Slide nine. As for SAIF, we are below the regulatory target in all our discos, even acquired recently acquired even considering recently acquired companies, DOE and Alagoas. Moving now to Slide number 11. Here, we show the evolution of our manageable expenses in the Discos. Maranhao's operational expenses amounted to million in the quarter, up by 16%, mainly due to the increases in third party services connected to loss, combat and collection expenses. In Para, expenses or operational expenses had a drop of 3% due to the internal redesign of some companies activities within the company. In COE in Alagoas, we had significant reductions in OpEx in the quarter of roughly 30%. It's always important to remember that in the early stages of a turnaround process, we should expect some volatility in such expenses. Moving on now to Slide 12. Maranhao posted a 13% drop in EBITDA in the quarter. The main reasons behind this figure are difference in the unbilled revenue between quarters, higher OpEx, as explained earlier, and lower financial asset updates. The EBITDA in PERA dropped by 2% in the quarter due to a reduction of million in the financial asset update. If we are to disregard this effect, EBITDA would have grown by 6.5% in the quarter. And POE for the third quarter in a row, the figure is positive, reaching million in the quarter, a strong number even before completing a year controlling the company and before the company's extraordinary tariff review. In Alagoas, already in the second quarter, we are consolidating results. The recurring EBITDA amounted to million following the ongoing restructuring in OpEx of the company. On Slide 13 now, we show the consolidated EBITDA for Equatorial. In the third quarter twenty nineteen, we posted an adjusted EBITDA of BRL1 billion, results that benefits from the consolidation of transmission assets and the newly acquired Discos. For comparison purposes, we exclude the results of the new assets, that is Piaui, Alagoas, Transmissao and Inqueso. And in this case, the consolidated EBITDA would have reached BRL550 million, a drop of 6% year on year. However, if we disregard the total decrease of the BRL32 million of the financial asset update at Maranhao and Para, the EBITDA drop would have been just 1%. As of the next quarter, I would like to highlight, we are going to have the full impact of Para's tariff review. Moving on to Slide 14. Slide 14, we show the amortization schedule and leverage for the company. Equatorial leverage, considering the full consolidation of this asset, reached 3.4x in the quarter, following the consolidation of the numbers of POE and Alagoas and accumulated CapEx deployment in the transition assets construction. Remember that when we calculate leverage, it's just different from the calculation of covenants in Equatorial as it considers the last twelve months of the results from any new assets acquired in the group in the period. The group ended the process with almost BRL4.7 billion in cash position, which is enough to cover more than the next two years of debt maturity. Additionally, the recent conclusion of the preferred shares issuance in Equatorial Distribuizo added recently this week BRL1 billion to the company's cash balance, thereby improving leverage and reducing the consolidated numbers. We believe that we have a very comfortable debt structure to accommodate the cash needs of POEs and Alagoas as well as the future CapEx for transmission projects, considering the long term debt that we have secured for the group. We'll now move on to Slide 15. Here, we show the main investments made by Equatorial in recent quarters. As you can see, the investments in the transmission segment have picked up in recent quarters and have reached BRL1 billion in the third quarter twenty nineteen. Given that all the eight projects are with ongoing constructions. Since the beginning of the development of transmission projects, we have already spent approximately BRL3.3 billion. Now we are moving on to Slide 17. We have already obtained the construction environmental license for all of our projects, including the last session of SPV7 that was pending. So all the eight projects are under construction. I would like to highlight the evolution of all our SPVs, but particularly SPV eight, the second largest in our portfolio and also the last to be acquired. It has already reached 95% progress as of the October. SPVs one and two should also be mentioned as they are almost reaching 90% completion. Finally, SPV four, our biggest individual line is above 50% built. On Slide 18, as we start to have bigger CapEx disbursements following this part of the construction of the lines, here we show the long term funding status for each SPV. This was the result of a three year long term raising effort from four different sources: BNDES, the Federal Development for the Northeast region, the Amazon Development Fund and also complemented by infrastructure debentures. We have already secured 100% of our long term debt at a very competitive cost. This should translate into a significant boost returns and reduction of risk, not only in terms of liquidity, but also in terms of volatility as all our long term financing are indexed to the IPCA, which is the same index of our revenues. Out of the BRL4.1 billion in financing signed, BRL2.7 billion or about 67% have already been disbursed. We'll now open for your questions. Our first question comes from Thiago Silva from Santander. Please, Mr. Silva, you may go on. Good afternoon, everyone. Thanks for taking my question. Thanks for the call. I have two questions. First, about the extraordinary review. I would like to ask if you could give us a bit of an overview of all the appeals that you've had? And also, what was the terms? Because I know that you recently had an agreement with Itau Bank. And within this agreement, I know there are some terms in terms of a buy option. So I would like to know if you could give us a bit more color on cost, terms and etcetera. Well, the first portion of your question, you talked about Serum and Electroacri. Perhaps you are referring to POE? Yes. I'm sorry. Yes. That's exactly that. Okay. Well, with regard to POE, we had the process denied, and we already appealed an administrative suit. We are very confident about the quality of our claim that was built, and we believe that discussions are going on. So we are quite confident with the quality of appeal that we made. And we believe that our asset base for Tiaui is the base that is better consolidated the best consolidated in the group. Of course, as we know that it is a matter of time, we have to break down the whole base. But I think that with a bit more time for discussion, we are going to successfully close this issue. As for Alagoas, the process is slowing regularly. We try to accelerate times, and we are watching out for any additional information that is required for us to be able to be implemented in Alagua as well. As for Itau, you are quite right. We do have buy option in this operation. And this is a term that is a condition contract. I don't know if I answered your question. Yes. Do you have any for the last question, do you have any information that you could give us in terms of cost and time for this agreement with Itau Bank? Well, first by option is corrected by CVI index, and we have a six years' time, seven years' time to make the option. Okay. Thank you very much. Our next question comes from Martelo Sa from Itau. Please, miss Assaf, you may go on. Hello, everyone. Just as a follow-up for the question before, could you give us an estimate of time to complete the process with CPESA? Do you think you're going to close that by the first quarter twenty twenty? As for Itau, do you have a sell option for Itau? That is, does Itau have a sell option? And the second question that I would like to understand is this company's PDV policy. I know in Temar, it was quite low. I know there were nonrecurring effects that took place, but they were not very well described in the release. In Cepiza, there was a reversal, and in Ciel, it was 0.4%, which seemed to be too low. But as Ciel does not have much of a history with Eletrobras. We couldn't understand what would be its normalized level. So if you could explain the dynamics for this four areas, I would appreciate it. Well, thank you very much. I'm going to start with the review. Well, we thought that it had to do with time and for the discussion. And basically, our claim was to close the subject until March, and this is what we are working. As for the PDD, sometimes we have a bit more volatility in quarters, especially now in this quarter when you have an impact of the readjustment, it is natural that it is slightly lower percentage wise in this quarter. For you to think of PDV because of volatility, I think that you should think of a longer time, the last twelve months. When you talk about POE and Lagoas, we have been implementing several turnaround options, including fighting against delinquency. And we are having very, very high collection levels above 100%. So perhaps that we can even intensify this volatility. So this is about PGD. That is the provision for bad credit. As for the agreement with Epelu, we just have the buy option. They don't have the sell option. And could you think of a provision for bad credit in CL that would be a bit more normalized just for us to project the model from now on. I understand that in the short term, you have a lot of volatility, but perhaps we could have a reasonable number to consider in the long term, both for Cepiza and Cial. Well, in the case of Cepiza and Cial, we are implementing a series of actions and the level of collection is very high. So while the level is high, we tend to have a lower provision for bad credit. Level is only going to be clearer as time goes by. But we have had and we probably continue to have a higher collection level in this company given the opportunities of accounts receivable that we have. Okay, perfect. Thank you very much. Our next question comes from Liliana Yang from HSBC. Please, Ms. Yang, you may go on. Hello. Thanks for the opportunity. I had two questions. One is about the growth of volumes in the market. In your area, it's still below the average of Brazil. Could you comment a bit on that? And perhaps contextualize how you are changing your billing process to try to account better the part of loss and delinquency? The second question, and congratulations on your new role. Do you have a view about why what can be different from now on in terms of management? Or do you think that your management is going to be more or less in line with the previous management? Thank you very much. Good afternoon, Irene. Well, first with regard to volumes. We are seeing slightly higher volumes, stronger volumes in Maranhao in the residential market and again the pickup of the industrial market. So we do see a scenario of a somewhat recovery, particularly in Maranha. In Para, we do see the recovery, but not as strong. In Tiawe, we are still with negative numbers. So it seems that the scenario in TOE is a bit more deteriorated than in Para and Marina. And also because our combat loss combat program is going on, probably we are having some reaction of consumers holding up a bit of consumption. In August, a bit lower than the others in terms of the level of activity. But with our large combat program that is about to be completed, not still yielded effects in DOE. So generally, what happens in our concessions, especially in Maranhao and Parral, which are places that we are a bit more acquainted with, is that crisis takes a bit longer to hit the state, but also takes a bit longer to leave the state. And this is something that we have already observed, at least in Maranhao and Para. As for indicators, we have quite well consolidated program in terms of indicators, metrics, how to break down the metrics and monitor business performance. And not only monitoring business performance from top down, but also how they affect all the levels of the organization. So as we implement action in new companies, those initiatives have been an accelerator of our turnaround. So the numbers of POE and Alagoas are starting to show these results. Thank you very much. Since there are no further questions, we are now closing the Q and A session. We would like to invite Mr. Advisor Miranda to proceed with his closing remarks. Please, Mr. Miranda, you may go on. Well, to close, I would like to reinforce our commitment in delivering a differentiated appreciation to our shareholders through exceptional financial and operating results. Also, I'd like to highlight our adherence to the highest level of transparency and corporate governance and reassure that most me and our Investor Relations team are available to help you with any questions you may have. Thank you again for taking part of our 3Q conference call, and have a good day. The conference call of Equatorial Energy Hotel is now closed. We thank you very much for attending. Have a good day, and thanks for using Chorus Call.