Earnings Call: Q1 2019

May 15, 2019

Morning, ladies and gentlemen, and welcome to the audio conference call of Equatorial Energia. Thank you for standing by. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions to participate will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Eduardo Haima, CFO. Please go ahead, sir. Good morning, everyone. First of all, would like to thank you all for joining us in our first quarter conference call. As per agenda for today, I'll start the conference call describing the highlights of this quarter, then I'll comment on operating financial results, give you an update on the development of the transmission projects, and finally, we will open the Q and A session. Moving on Slide three and for the highlights for the quarter. In the first quarter, Equatorial's consolidated EBITDA reached BRL600 million. This figure was impacted by the consolidation of CPESA, which already posted a positive result and also the adoption of IFRS 16 for the transmission asset for further disclosures impact on the next slide. In April, we were able to secure long term funding for SPEs four and six with BNDES in a twenty four year old financing. With this, we have already contracted about 90% of all long term funding for this project and should soon reach 100%. Also in April, Electrobras did not exercise its option to have a stake at CEPISA. Therefore, we ended with 94.5% of Cepiza's total shares. In the recent acquired Tiscos, the operational restructuring has already started. At Sepiza, we posted a positive $35,000,000 recurring EBITDA in this quarter, mainly due to the reduction of more than 40% in manageable costs compared to third quarter and fourth quarter of 'eighteen. At Alagua's restructuring is also in full motion through the conclusion of the voluntary layoff program and also hiring of third parties in line with our best practice. As per our sold volumes, Samarit Sapisa returned to growth posting 1.61.1% increase respectively. On the other hand, despite the positive growth of required energy, self up posted another negative variation of 4.2%, mainly due to the more interactive strategy regarding losses and collection. Moving on to Slide five. Unit sales grew by 1.6% at CEMA across all segments. This increase is mainly due to 2.1% growth in the number of consumers in the quarter, mostly residential and the return to growth from industrial segments, fueled by the food, beverage and chemical products. I'd also like to highlight that in this quarter compared to fourth quarter, we have added 25,000 clients classified as low income consumers, ready to gain access to subsidize tariffs. On Slide six, selfless billed units fell by 4.2 in the quarter, explained by the unfavorable weather conditions and the increase in losses through the more interaction that I mentioned regarding losses and collection strategy. As for on the slide as for fourth quarter, like I said, we have adopted a more interactive approach regarding loss in collection that impacted volumes. In terms of volumes, the highlights here is the positive growth in the industrial segment, boosted by the food, metallurgy and nonmetallic minerals industries. I'd also like to highlight that the required energy grew by 0.8% in the quarter. On Slide seven, Zepiza's bill data grew by 1.1% due to the increase in the number of consumers in the quarter and the average consumption. At Visa, we have already been able to add 36,000 new consumers as a low income, mainly due to campaigns done by the company in order to help their enrollment in the program, raising them at cost to the FBRs. Moving on Slide eight. CEMA's total losses end the quarter at 17.3%, a 0.1 percentage point. We continue to be below regulatory targets. In terms of non technical losses over low voltage markets, it grew by 8.1% to 8.1% in the period, still below the regulatory targets. Again, in this quarter, both was indicators that, in fact, continue to be reasonably below regulatory targets, having dropped to thirteen hours and 6.6x, respectively. Moving on to Slide nine. Cellbus energy losses ended the quarter 29.2%, a 0.9 percentage point increase in the quarter. And so far, like I said before, losses, they were impacted by the new loss combat and collection strategy that I have mentioned. It's also important to remember that according to our now, CELPA is the most complex concessionaire in Brazil. CEMA, for example, is considered the fourth most complex under the same ranking. Quality indicators continue to be below regulatory targets for both PAC and PAC. Moving on to Slide 10. In the second quarter reporting set business figures, total losses reached 28.2%, a slight increase from fourth quarter 'eighteen. Company's debt increased twenty seven point nine hours, basically due to a correction in the measurement we made after our arrival. This change should continue to impact the indicators since it's calculated as a twelve month moving average for the window. Moving on to Slide 12, we show management expense. FEMA posted a 5% growth year on year, slightly above inflation for the same period, while sales up both the slight decrease in terms of management expense amounting to BRL122 million. As for CPESA, we are able to reduce its recurring OpEx by more than 40% compared to third quarter and fourth quarter of last year. Important to highlight that the second quarter since we took control of the company. The main cause for this drop was the voluntary layoff program that was concluded in the first quarter of this year, coupled with the restructuring of third party service in line with our best practice. Moving on to Slide 13. The good cost control shown in the previous slide reflects an EBITDA growth we report in the discourse. CEMA posted EBITDA growth of 20% amounting to BRL200 million, basically due to volume growth and Parcel B growth. As for CELPA, the 27% EBITDA growth is based on force of the growth, the cost control and also the reduction in delinquency. And for CELPA, in this quarter, we're focused very tight cost control. We have all already posted the first positive EBITDA of BRL 35,000,000. Going to slide 14, we show the consolidated EBITDA per Equatorial. Equatorial posted $6.00 4,000,000 adjusted EBITDA. This figure is considering the results being consolidated under the quarter of the new positions, if we exclude by this new asset, Visa, transmission, MTESA, leaving only Ceman itself and the company, the EBITDA would have reached BRL403 million or 28% growth year on year. It's worth highlighting that Alagua's results should only start to be consolidated as a material in terms of results for the second quarter only, despite the fact that we have already consolidated balance sheet in the first quarter. Moving on to Slide 15. We present the debt amortization schedule 11 for the company. Equatorial's leverage, considering the full consolidation of its assets, reached 3.8x net debt to EBITDA, already including CPEs and Alagoas, which contributed almost $2,900,000,000 additional debt net debt with close to zero EBITDA. It should it's worth highlighting that this leverage calculation is different from the one we have in our covenants for Equatorial. And in the covenants for Equatorial, we consider the twelve months of the results from the new assets acquired by the group in the period. In terms of cash position, we ended the BRL5 billion of cash position with enough to cover more than two years of debt maturity. We believe we have a very comfortable debt structure to accommodate this and our goal of cash needs as well as the future CapEx for the transmission projects considering that we have secured in the past few quarters most of our long term debt needs for these investors. Moving on to Slide 16, we show the main CapEx made by Equatorial. As can be seen, the investment in transmission have picked up in the recent quarters and reached the BRL 600,000,000 in the first quarter following the start of the construction of all of SPEs. Since the beginning of the development of this transmission project, we have already spent about BRL1.6 billion. Moving on to Slide 18, talking about transmission. As can be seen, we have already obtained the environmental license for all of the projects except for a very small port of SP 7. And we have already started construction for all the lines. I would like to highlight the evolution of the construction of SP, but especially in SP 8. That's the second longest in our portfolio and the last one acquired in twenty seventeen auction, which has already reached 56% progress. Moving on to Slide 20. As we expect to have bigger CapEx per month following the start of the construction of the lines, it's important to highlight the long term funding you already secured. As I have said in April, we signed with BNDF financing for SPs four and six amounting to BRL 1,200,000,000.0 with a twenty four year maturity. The only pending funding as of now is the additional funding for SPs five seventy eight with which represents nearly 10% of the total funding needed for the transmission line. So, now we have already secured 90% of the the BNS loan. We mentioned 90% of all the long term funding for the lines. It's important that all these efforts secure not only liquidity but also good returns as this long term financing is indexed to IPCA inflation, which is the same index of our revenues. I believe like now, we can start the Q and A session. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from Carolina Carneiro with Credit Suisse. Hi. Hello, everyone. Thank you for the call. I have two questions. First, starting with the news that you gave in the press release of the results regarding the dismissal program in Cepiza and Ciale, your expectation of roughly reducing labor force in around 30%. If you can comment, and give us a little bit more detail here, does it, goes in line with your initial expectations or it's different? And how does it compare with, previous layoff programs that you had in the units you acquired back on the date after the privatization, so Ceopa and Cemar? And second question, in regards to the tariff revision, extraordinary tariff revision process for CPSA. Do we have any updates in regarding to the process of evaluation of the initial asset base and the request of such a tariff revision process for Anil? Do we have any updates on that process? Thank you, Carolina. Regarding the turnaround specifically for Sapir Dacao, I can say that it's so far, it's in line what we expected, maybe a little bit advanced to what for the first quarter, second quarter of the turnaround. And that's why we highlighted, right, the reduction we were already able to do in terms of, eligible costs at the Visa. Right? Of course, partly just for the layoff, but also part of part of it is related to the way we hire the third party service that allow us to have the best price in terms of efficiency. Right? So what I can say is, like, what we expected to deliver by the time we acquired those assets last year. So far, I cannot say that we are off track and actually dropped. We are really on track of delivering what we we expected. In terms of the the business tariff review, it's too early to say. Should they we just have some meetings regarding how should be the methodology to to reassess the asset base. Right? Remember that we have requested full appraisal for the asset base. And what what I can say in terms of a feeling than what we have found so far is like, our diagnosis, that we we made before, the technician is like a there are too many assets that we were able to spot. Physical assets that, for some reason, they are not considering the rep in the previous tariff reviews. Right? So that does give us confidence that, we should be able to include some of this in the next tariff review. But to say by how much and exactly which assets we're gonna be able or not to include, I believe, like, first, we need to conclude all the assessments, right, in order to really have something firmer, let's say, to say. It's still, like, early in the process to to provide any kind of guidance regarding this. Okay. Okay. Okay. That's perfect. No problem. Just if you can remind us, what's the deadline for this process of appraisal? It's May? No. It's, June. Remember, our tariff review is in December, so six months prior. Right? So the tariff review, we need to conclude all the investments to be included in the rep. And they are afraid that specifically, probably the dates that we're going to have to deliver is going to be August. Okay. That's perfect. Thank you. Thank you. Our next question comes from Marcelo Sa, Banco UBS. I actually have two questions regarding cell plus terfirisat. Last week, the regulator disclosed a technical note with the preliminary figures for Celtas tariff reset. And there are two points that are not really clear to me. I would like you guys to comment if possible. First is on the energy losses. The regulator is proposing an increase of close to a 100 basis points in losses, but I thought that the increase would be higher. So I'd like to understand if there is room to for further improvement. And, also, in the calculation of the key component of the x factor, there is something that I I didn't really understand is that the regulator is assuming that self occurring OpEx is around a 100, sorry, is around 850,000,000, which is completely different than the actual cost of the company. That should be more in line with the 600,000,000 reais. And this is important because this is part of the calculation of the key component of the x factor. So I want to understand if you think that this calculation could be eventually wrong of the key component. Thank you. Marcelo, just exactly the the second question. What key components that I I couldn't understand? Yes. Because in in in the key component that was proposed, it's minus 1.18. But when you do this calculation, you compare. You you can also compare the target of the OPEX with the actual cost of the company. And when there is a difference of above 20%, you need to share part of this this difference with the consumer. But then because the the reference that Anel is using, instead of being the 600,000,000 reais, that's actually the the the actual cost structure of Selpa, it's using 856,000,000 reais. Then this ratio is much lower than the 20%, which means that you don't need to share anything to the consumer. So this is something that was a little bit weird to me. Okay. Okay. Well, regarding this question, it's easy, the answer. So we we in our in our simulation, we we continue to remain within the 220% band, right, range. So we we we don't see a change to this scenario in a sense. And regarding the the losses, the the technical one, we believe there are room to improve. Right? It's still of course, now it's a the wage company is much more confident than it was, let's say, two, three, four years ago. You have to run lots of simulations and very, very heavy ones, but we believe there are rules to improve. And as for the path recognition, like, in all scenarios that we run, we we remain, so far, within the 120% range. So Okay. So so so you think that that wouldn't be necessary, you know, to have this adjustment in the T component because you are below this 120%. That that's what you're saying. Right? Yes. Yes. Because okay. Okay. Because what I understood is that you would have to compare the 600,000,000 reais with the 720 or some 730,000,000 reais that would be the target of OpEx. And then if you have more than a 120%, then you would have to to share that. That's the comparison. Alright? Yeah. You're right. It's basically like you get the actual cost of $16.17 adjusted to the tariff review date. Right? You compare that number to the what should be the benchmark, right, for you? Uh-huh. Would be the range? They have to start with the the the lower range of the benchmark. Right? That's that's gonna be the closest one. Okay? Because we we are running below. Right? Yes. And then if you are if you have a if you're within the 120%, right, so you you don't share anything else. And that's that's the way. So you're right. Okay. Got it. Thanks. Thank you. This concludes today's question and answer session. I would like to invite Mr. Hayama to proceed with his closing statements. Please go ahead, sir. To sum up, we would like to reinforce our commitment delivering differentiated appreciation to our shareholders through exceptional financial and operating results. We also like to highlight our adherence to the highest level of transparent corporate governance And I reassure that both me and our Investor Relations team are available should have any further questions. Thank you all again for taking part in our first quarter conference call, and have a good day. That does conclude Equatorial's audio conference call for today. Thank you very much for your participation. Have a good day, and thank you for using Chorus Call.