Earnings Call: Q2 2019

Aug 15, 2019

Good 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, I would like to thank you all for joining us in our second quarter conference call. As for our agenda for today, I'll start the conference call describing the highlights of this quarter, then I'll comment on our operating and financial results, give you an update on the development of the transmission projects, and finally, we will open the Q and A session. First, it's important to mention that this is the first quarter we are consolidating Equatorial Lagoas results. Also, as a communication strategy to strengthen Equatorial's brand and reposition ourselves in our concession areas, We have changed our names of all our districts within the group to Cotores Subriso and then the name of each state. As for the highlights of this quarter on Slide three. In the second quarter, Equatorial consolidated EBITDA reached BRL $943,000,000. This figure was mainly impacted by the consolidation of BOE and Enel Sao Jorge, both already posted positive EBITDA, but also the adoption of IFRS 16 for the transmission asset. I'll further disclose this impact on the next slide. In our results, we already received the regulatory parameter for quality and future effect, even the recently acquired concession of Piaui and Alagouas. In our most recent acquisition of Alagouas, the operational restructuring we are undergoing with the conclusion of the first voluntarily of program, representing a significant reduction in the company's total payroll. We concluded on our tariff review last week, RAP went up to BRL 5,000,000,000 and regulatory total losses increased to 27.5%. As for our sold volumes, Mariano and Pia, we kept growing, posting 1.73.1% increase in this quarter. On the other hand, despite positive growth of local advantage, Parade and Alagos posted drops of 2.427%, respectively. On the positive side, required energy grew in all of our concessions with the combined figure amount to 3.6%. As for the transmission projects, we secured 100% of the long term funding, having 44% of this funding already being spread. I'd like to highlight that SP8 has already reached 72 of work in progress, while SPs one and two are above 50%. In terms of EBITDA, if you were to consider only the results from the old assets, basically just Maranhao and Parac, we would have grown 20% year on year, reaching BRL516 million. Moving on to Slide five, consolidated volumes. Combined sales from our business in the group dropped by 4.4% in the quarter, strongly influenced by Alagoas. Since the first quarter controlling this company, we've adjusted some past billings, negatively affecting volumes in the quarter. Its impact in the quarter result is completely offset by the reverse of the delinquency provisions it was associated with. If we were to disregard this adjustment, the combined unit volume of the group would have grown by approximately 0.3%. Given our more interactive approach regarding loss of common collection, Para posted a drop of 2.4% year on year. This negative variation was partially offset by the growth of 1.7% in Maranhao and 3.1% in POE, mostly fueled by the residential growth in these regions. On Slide six, talking about regarding energy. The combined growth reached 3.6%. El Lago was posted the strongest growth of 7.8%, basically influenced by the lower rainfall in the period. The capital of the state, Maseo, which concentrates 47% of the load, had 23% less rain volume in the second quarter than the same quarter of last year. Maranhao also benefited from this lower rainfall, posting a 3.9% growth. In the same case in the case of Sao Luis, the capital of Maranhao had a 15% less rainfall compared to the same quarter of last year. In all this, the trucker strike and the slow industrial activity that Brazilian national team met in the World Cup last year had a minor influence over this reported growth. We estimated between 30 to 50 bps. On Slide seven, we show the total energy loss in our business. The level of energy losses in Maranhao and Parag have been impacted by the more integrated cost of loss conversion collection adopting concessions since the second half of twenty eighteen. In Para, after the tariff review was last week, the regulatory level for total losses went up to 27.5, following the increase in the level of technical losses recognized in the company's tariff structure. In theory, in other words, the level of losses in both companies is mainly impacted by the adjustment of billing procedures that has to be made once we arrive in these companies. It is worth mentioning that we assume the process of hiring and training new teams to come up to office, and we should expect improvements in the next quarters. Moving on to cost and fees on Slide eight. We show the cost indicators for Maranion Paracao Chile to be well below the rate of our targets. As for P and E, the recent increase in the recent quarters is a consequence of the adjustment in the way we measure debt since we arrived. This change should continue to affect the indicator until fourth quarter of this year since it's calculated using twelve month moving year. Same thing happened at Lagos, but with a much smaller impact in the final two years. Moving on to Slide nine in terms of the fact indicators. We are below regulatory targets in our districts, even in our recently acquired companies, Piawin and Aguas. On Slide nine, we show the evolution of the management expense in our distribution companies. Maranion posted an increase of 3.6%, growth of EBIT year on year, slightly above the twelve month inflation in this project same period, while Parac posted another decrease in management expense in the quarter, amounting to 119,000,000. Cash flow dropped by BRL 1,000,000 in this case due to the reduction in headcount and 35 service dropped by BRL 6,000,000 due to a better operational efficiency. In this quarter, PLE was a reverse of expense from previous years that were transferred to CapEx amounting to 150,000,000. Adjusting for that, the recurring OpEx dropped by 37% compared to the same quarter of last year. Key to this reduction is the voluntary layoff program, including the first quarter of 'nineteen, when 30% of the personnel left the company. Malagos is still in the very early stage of the turnaround since we took the control in March. The company already posted a 14% reduction in expense this quarter, already adjusted for the military effects. Moving on to Slide 12. The good cost control shown in the previous slide reflects EBITDA growth that we're posting in the discourse. Mariana Para posted very healthy growth of roughly 20% each, amounting to BRL $248,000,000 and BRL $267,000,000, respectively. In BOE, following the already positive recurring EBITDA in the first quarter, the figure for the second quarter reached BRL 30,000,000 positive, already a strong number even before we complete one year controlling this company. And it's still before the actual net debtor preview had to occur in December. In Alagoas, with the first quarter, we are consolidating its results, which means the second quarter EBITDA is strongly impacted by several nonrecurring adjustments. Considering only the many of its fire events, adjusted EBITDA would have reached BRL 69,000,000. Moving on to Slide 13. We show the consolidated EBITDA for Equatorial. In the second quarter, it was BRL $943,000,000, adjusted EBITDA, benefiting from the consolidation of transmission assets in the newly acquired PISCO. For comparison purpose, if we exclude the results from the new assets, PLE, Alagroas, transmission assets and Intesa, consolidated EBITDA would have reached BRL $560,000,000 or an increase of 20% year on year. On Slide 14, we present a more recently scheduled new leverage for the company. Equatorial's leverage, considering the full consolidation of its assets, reached 3.6x in this quarter, following the consolidation of Ioannan Laguos, which contributed with 3,100,000,000.0 of net debt. It should be highlighted that this leverage of place is different than the one made for the covenants of the company. As we consider the last twelve months of the results from any acquired assets by the group in the peers. Ecopteria in the quarter was almost 5,500,000,000.0 in cash position, which is more than enough to cover the first two years of debt maturity. We believe we have a very comfortable debt structure to accommodate not only POE in our level of cash needs, but also the future CapEx for the transmission projects, considering that we have already secured long term debt for the group. On Slide 15, talking about CapEx. As can be seen, the investment in transmission segment has picked up in the recent quarters. Now we reached $687,000,000 in the quarter, following the start of the construction seven out of eight SPEs. And since the beginning of the development of these projects, we have already spent BRL 2,200,000,000.0. On Slide 16, we show the outcome of the tariff review for Parac. On August 7, the tariff in Bara was adjusted by 0.69%. RAP grew by 63 in the cycle, reaching BRL 5,000,000,000, which translated into almost BRL 1,100,000,000.0 in regulatory EBITDA. Adding the regulatory OpEx and delinquency provision, the total portion of this after reducing the other revenues amounts to BRL 1,800,000,000.0. Total regulatory losses amounted to 27.5% following the increase in the technical losses to 11.7% and a slightly decreased nontechnical losses to 33.5%. This final figure should drop by 50 bps every year until 2022. Lastly, FX factor was calculated 0.08. It's important to remember the recurring board, productivity tax PD and low tax trajectory, FXD, we have fixed for the whole cycle. Considering only these two factors, expected 0.36%. Moving on to Slide 18, talking about transmission. As we have obtained all the construction license for the projects, except for a small port of SP7, we have already started the construction of seven out of eight lines in our portfolio. I'd like to highlight that the evolution of the construction RFP, but especially in SB8, is the second biggest in our portfolio and the last one we won in the auction is twenty seventeen that have already reached 72% work in progress. SB one and two should also be mentioned as we already have 50% completion each. On Slide 19, we show the long term funding status for each SB. We have already secured 100% of the long term funding at fair capacity costs that should translate to the significant boost in terms of return on the risk reduction, not only in terms of liquidity but for the group, but also in terms of volatility as the long term funding is indexed to IPCA inflation, which is the same index of our revenues. It is important to mention that this was the result of a three year long fund raising effort from four different sources, CMBS, BNB, SBA and infrastructure debentures. Of the BRL 4,100,000,000.0 in fund in size, BRL1.8 billion or about 44% has already been exported. And this amount is pretty much in line with the CapEx already deployed. I believe now we can start the Q and A session. Thank you. Our first question comes from Andres Pompeo with Santander. Hi, guys. Good morning. I would like to make a quick question on the tariff provision of Cepiza. If you guys could give us more details on how the process is evolving and if you could have any new information on that. Thank you, Andrea. Well, there's nothing much to disclose at this moment. The only thing that's important on the schedule, we are concluding the appraisal for the new rep that we want to present to one out, right? It should probably be the next week. But it's too early to say what's going be the final outcome because there are lots of discussions going on right now regarding the methodology we're going to use to have a full review of the rep. If you remember, we have said that we asked for a full review of the rep because we believe there are lots of assets that were not included in the past, right? And that could potentially boost this number. But it's still there are many details that need to be discussed before we can say which way it's going to go. So but what I can say is like, so far, the analysis we've made give us confidence that the number that was presented before should be at least at or above, but it's just a by our knowledge and it's hard to understand, right? Our next question comes from Marcelo Sa with Itau. I have one question. I mean you mentioned in the release the reversal of million in personal provisions that will now be booked as investments. I just want to confirm if this is likely to be recognized as asset base for Cepiza? That's the first question. And the other question is regarding the discussions on the regulatory walk. So far, no one else has initiated the discussions on the regulatory walk for generation and transmission, but not yet for distribution. I'd like to know if you have a view or more details on the discussions that will start on the regulatory walk for distribution. You, Marcelo. Starting from the last question regarding the walk, no, we don't have yet guidance or such that we can say how the discussion is going to go. The discussion, as you know, it was proposed to have to occur at the same time with first generation transmission. But then again, everyone saw that it was important to separate the discussions because they are different in a way. You shouldn't calculate risk and the impact on that, the spread that you should have from different segments. I believe like this discussion needs to be needs to stop, say, soon, so that we can have time to properly, let's say, review and have a deep discussion to year end. Otherwise, it's going to be hard the regulator to apply the new work for the next years that are for build. So what I can say is like our expectation that our discussion should restart soon regarding the work. As for Piaui, yes, that's already part of the work we are doing to prepare the appraisal, right? But like I said in the previous question, it's too early to say what's going to be the final number, right? Because there are many fees regarding the methodology that the regulator wants to adopt to have the full upgrade or even for some of the fees that we saw, how the robot is going to consider to say what's going to be the impact, right? What I can say is like what we did was trying to have similar equal methodologies in terms of how we consider CapEx, right, when we are doing an appraisal of existing companies, Maranhao and Parac. But to say exactly what's going to be the impact in CLE at the end of the day, I think it's early. Perfect. It's very clear. If I may, I have another question regarding the discussion on the fiscal fees and NVATE tax. Basically, you booked a gain in the first Q related to the discussion. And I just want to confirm if you guys had a chance to talk to Anel, if you if Anel has a view if these games are going to be the games of the company are going to have to be shared with the consumer just to get a better understanding on how are these discussions, if you can share with us. Thank you. Well, regarding physical fees, yes, I believe like there's a deep discussion in the sector. Citizens already like present that case to Anel. So we are now talking about how we should proceed, right? In our case, specifically, we have won the case for two of the companies, but we still have to have, how can I say, the final numbers approved by the Brazilian IRS, right? Because before that, we cannot use the credit. So in our case, it's just like a way, right? As for how much we're going to share or not, there are at least two or three ways that you can have discussion. Each, we can follow strictly the law, right, dealing with how you deal with consumers and and suppliers or can be the way you do it from a regulatory perspective? Or at the end of the day, could be simply following the law regarding how long can you extract, right, chart something that related to civil contracts. But it's how in the end we're going to why? What I can say is like the way we approve the passage in the liabilities, I believe we are in the most conservative scenario. Okay? Okay. Do you think Canel can, for example, see as an alternative, consider this as other revenues and then let's say, let 40% be with the company, 60% with the consumer if this is an alternative that, you know, Anel might be discussing? Well, that could be a scenario like sharing the way they share all the revenues like 6% to consumers, 40% to companies. That's a good scenario. Okay. Okay. Thank you. 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 properties to our shareholders through exceptional financial operating results. We also like to highlight our divisions to the highest level of transparency and corporate governance and reassure that both me and our Investor Relations team are available if have any further questions. Thank you all again for taking part in our second conference call, and have a good day. That does conclude Equatorial's audio conference for today. Thank you very much for your participation. Have a good day, and thank you for using Chorus Call.