CTEEP - Companhia de Transmissao de Energia Eletrica Paulista

BOVESPA:ISAE4

Q2-2023 Earnings Call

[Operator]

Good morning, everybody, and thank you for holding. Welcome to the earnings results release call for the second quarter '23 for ISA CTEEP. [Operator Instructions] We would like to inform you that this conference is being recorded and will be made available at www.isacteep.com.br/ir, where the material for the earnings is also available. [Operator Instructions].

The forward-looking statements contained in this presentation and those made during the conference referring to the business outlook projections and operational and financial goals of CTEEP are based on the beliefs and assumptions of the company management as well as on information currently available. These forward-looking statements are no guarantee as they involve uncertainties and risks as they refer to future events and therefore, depend on circumstances which may or may not occur. Investors should understand that overall economic conditions, market conditions and other operating factors could impact the performance of ISA CTEEP and lead to results that differ materially from those included in the forward-looking statements.

Today, we have the company executives, Rui Chammas, the CEO; along with Carisa Portela Cristal, the CFO; and other executive directors. I will now give the floor to Mr. Rui Chammas.

[Rui Chammas, executive]

Good morning, everybody, and thank you for participating in our earnings call release for the second quarter '23. I am Rui Chammas, the ISA CTEEP CEO, and I would like to present the results published yesterday and to provide an update on CTEEP's business evolution.

Let's proceed to Slide 3. This quarter was a period of many achievements that are directly aligned with our strategy of sustainable value creation. At the beginning of July, we had the annual adjustment of the RAP which, for the '23-'24 cycle, updated the values by 22%, increasing our potential RAP by BRL 1.1 billion. This adjustment brought a 16% growth in the RAP of the bidding contracts and 26% in the RAP of our renewed contract, positively impacted by the resumption of the payment of the RBSE financial component.

I also highlight our results in the June auction, in which we won 2 of the 9 lots representing 50% of the investment offered, increasing the RAP by BRL 226 million. I also bring you the financial results, the details of which will be deepened by the CFO. All the main figures continued to show positive performance with advances of 16.1% and 23.8% in EBITDA, 252.6% in net income and 47% in investments in reinforcements and improvements.

Let's go on to the next slide to go deeper into these topics. At the beginning of July, ANEEL published the resolution 3,216, which was ratified and it establishes the new RAPs ISA CTEEP values for '23-'24 cycle. The graph on the left shows the factors that boosted our potential RAP to BRL 5.9 billion. The main positive effects were the entry into operation of new reinforcement and improvement projects and the RAP of the 2 lots we won in the June auction. Another positive impact was the updating of contracts by the inflation for the period.

The resolution also brings the total recovery of the RAP of the financial component, RBSE. After these updates, the composition of our RAP is now represented by 62% of the revenue from our renewed contract, Contract 059, from the state of São Paulo, 26% by bidding contracts that have already started operations and 12% in bidding contracts that will still come into operation in coming years.

Let's go on to the next slide, please. As we can see on the chart to the left, our investments in greenfield projects decreased by 31.5% year-on-year. This reduction is due to the lower number of projects in the final construction phase. Since the beginning of 2022, we have energized 6 greenfield projects. We also have 5 other projects under construction. One in Triângulo Mineiro, which is in the final stage of construction and requires more intensive investment. We completed 7 projects that will enable us to receive BRL 730 million of additional RAP.

Additionally, we continue to increase investments in reinforcements and improvements. We continue the capacity increase and modernization of our assets that we started in 2020. We invested BRL 477 million and energized 25 projects only in 2023 alone.

Let's go on to Slide #6. Our success at the June auction was a result of hard work and value from our team that sought to identify, measure and evaluate the risks of each project to find investment possibilities and thus generating value for the shareholders and increasing corporate longevity. The lots awarded will add 500 kilometers of transmission lines and 1.88O MVAs of transformation capacity. We also increased our potential RAP by BRL 226 million, an increase of 4%, reaching BRL 5.9 billion. This RAP will come in return for the execution and operation of the projects that have planned investments of BRL 2.4 billion.

In addition of these 2 new lots, this increases the revenue weighted average life by 1 year to 22 years, ex RBSE. And once again, we will reach the 22 years. Among the assumptions that I would like to highlight, we have the possibility of anticipating from 12 to 24 months, the annual deadline; the possibility of optimizing costs and hedge contracts to mitigate commodity and exchange rate variations; leverage between 80% and 85% with real leverage throughout the concession; EBITDA margin between 90% and 95%; and the incidence of tax benefits as part of the projects in the regions where they are found.

It is worth remembering that most of the investment in greenfield projects takes place in the third year of construction. We foresee CapEx disbursement curve 5% in 2024 and '25, 60% in '26 and 30% in 2027.

Let's move on to Slide #7, please. In addition to increasing the RAP through greenfield projects, we could also grow organically through investments in reinforcement and improvement projects that have been growing since 2020. It is worth remembering that the renewed concession contracts brings the responsibility and opportunity to maintain and update the assets, which is done through investments in reinforcement and improvements, to perform our service reliably and reduce the company's operation and maintenance cost.

We already have received authorization to execute several reinvestments and improvements from ANEEL of approximately BRL 5 billion that will be carried out until 2027. The execution and energization of these projects brings an expected RAP between BRL 600 million and BRL 850 million. According to the characteristics of the authorized projects, 63% of this RAP will be received from the 2028 periodic tariff review, while the remaining 37% will be received as the projects are energized.

I would like to give the floor to Carisa Cristal, our CFO, who will explain in detail the financial results.

[Carisa Portela Cristal, executive]

Thank you, Rui. Good morning, everyone. I'll start my presentation on Slide 8.

The company's net operating revenue, which excludes the RBSE, grew 16.1% in the second quarter of 2023 to BRL 512 million. This growth was driven by events related to the company's operation, which were the start-up of retrofitting projects and greenfield projects and also the positive IPCA on the RAP of the '21-'22 cycle. The chart on the upper right corner shows the growth in net revenue ex RBSE, considering ISA CTEEP's share and revenue of jointly owned subsidiaries, which was 28.8%.

I would like to point out that as of July 2022, we had a partial recomposition of RBSE in the amount of BRL 90 million per quarter, which is the financial component that was reprofiled in 2021. This is a topic we have been discussing since the last year and impacted in 2022 and 2023 tariff cycles, which ended in July 2023, with the tariff adjustment as previously mentioned by Rui. Our continued search for efficiency and cost management allow the ratio of manageable PMSO and net operating revenue of ex RBSE to present an efficiency of 0.3 percentage points in the second quarter of '23, even with the growth of 14.7% in our manageable PMSO to BRL 168 million in the period.

The growth is explained by the higher cost due to the increase in head count to cope with the company's growth and the signing of collective bargaining agreement in the period. In addition, higher expenses with majority in maintenance services also contributed to the growth. As a result, our EBITDA grew 23.8% in the second quarter of 2023 amounting to BRL 687 million.

On Slide 9, I highlight that in this quarter, in addition to the operating result, our net income was also positively impacted by lower financial expenses due to the deacceleration of IPCA, which indexes 51% of our debt, and also due to the result of the equity method, which reached a new level after the start of the commercial operation of the jointly controlled project in last year, such as Aimorés, Paraguacu and Ivaí, with a growth of BRL 78 million. As a result, we ended the second quarter of 2023 with a net income of BRL 261 million, an increase of 252% when compared to the second quarter of 2022.

On Slide 10, I'm breaking a snapshot of the company's leverage. We ended the second quarter of 2023 with a gross debt of BRL 8.8 billion and a net debt of BRL 7.3 billion, and the company's leverage ratio measured by the net debt over EBITDA ratio of 2.65x. On June 30, our debt had an average term of 6.1 years and an average cost of 11.83%.

I'd also like to point out that in July, Fitch reaffirmed our local scale rating with AAA rating. The company continues to evaluate its capital structure and growth opportunities with the aim of maximizing shareholders' value generation.

It's worth mentioning that the results presented materialize our commitment to delivering sustainable value and reinforce our good prospects in relation to operating cash generation, which should continue to evolve with amortization of both greenfield projects and retrofitting projects.

I end my presentation here. I will give the floor back to Rui.

[Rui Chammas, executive]

Thank you, Carisa. Before concluding our presentation, I would like to provide an update on our ESG agenda. Please let's move on to Slide 11.

Always guided by our strategy to generating sustainable value, we made advances in our ESG practice in the analyzed period. We released our annual sustainability report, which, for the first time, also includes content in audio format. I would like to invite you to read it so that you can learn more about the activity of the company.

We announced the first project for reducing emissions from deforestation the forest degradation, known as REDD+, in the Pantanal region in Brazil. We started our zero plastic journey in all of our units. We also signed an agreement with the government of the state of São Paulo to promote actions to prevent and combat forest fires. We signed a letter of adherence to the forum of companies of the LGBT+ rights and started to compose a list of more than 170 companies that assume 10 commitments for the promotion of the LGBTI+ human rights.

Continue to present other main ESG indicators. And in addition to the growth that we observed in the second quarter of 2023, the SF6 losses decreased by 11.7% in the accumulated results. Furthermore, our energy and water consumption decreased by 2.1% and 5% in the first half, respectively. Regarding the diversity topic, the Executive Board maintained a rate of 60% of women in its composition. Our staff now comprises 26% of black people, an increase of 3 percentage points in the last year.

Next slide, please. The last slide of our presentation before we start the Q&A session. To conclude the presentation, we summarize, on Slide 10, all the important highlights of ISA CTEEP, which we have already mentioned during the presentation. And we are into the service of the society, and we show an important growth with new opportunities of greenfield projects, reinforcements and improvement. We bring profitability in the results from an operational efficiency of all the assets we have under our management.

Discipline in executing the CapEx in order to have profitability to the shareholder and in addition to the projects that we have been developing. And with this, we have innovation as one of our values. We continue generating cash in a very important way, maintaining our practice of paying dividends with a minimum value of 75% of the regulatory net income, and we have to have confirmed our classification in the Fitch as a AAA, as mentioned by Carisa.

I end my presentation, and I would like to thank you for the presentation. I turn the call back to the operator. And if you have any questions, let us know. We are going to answer all those questions by our Executive Board who are also present here. Thank you.

[Operator]

[Operator Instructions] Our first question comes from [ Fabio Guilherme ], individual investor. And this is his question.

Without providing guidance, please provide information about the expectations for the third quarter and for the second half of 2023 in terms of income. Is there any opportunity of distribution of earnings?

[Unknown Executive]

Fabio, thank you for the question. The expectations for 2023 are very positive. When we look at the status of the company in the past few years, we can see that the company has been growing. Our EBITDA for this year grew by 23%, operating revenue grew by 28%. And for the second half of the year, when we end the year, the expectations continue to be very positive. If you look at what we have been doing so far in terms of the tariff cycle for '23-'24 and the RAP that you start receiving as of July '23, we see that there's an operating increase in the amount of BRL 1 billion.

In addition to that, we also have, in this year, Itaúnas and Triângulo Mineiro coming into operation with an additional RAP of nearly BRL 100 million. If we add all these expectations of RAP increasing with our financial discipline, as we have seen that our PMSO has been growing lower than the operating revenue of the company, we noticed that the expectations in terms of EBITDA for the end of the year is very positive, as I said.

And I can say that the company maintains the present practice of dividends when we pay 75% of the regulatory net income in the amount of 3x net debt over EBITDA. And when we see the leverage of the company, we see that it stands at 2.65x. And this growth that I already mentioned about the EBITDA shows that we are in a very comfortable position in terms of leverage so that we can do our declaration of dividends to be paid at the end of the year.

[Operator]

Our next question comes from Julia Zaniolo, sell-side analyst with Santander. And this is her question.

Good morning, everyone, and thank you very much for the call. I would like to say what you expect in terms of the timing for the decision related to RBSE and what's your expectation in relation to this topic?

[Unknown Executive]

Thank you for the question, Julia. We do not have any expectations in relation to the timing for the decision of the RBSE. It's important to mention, though, that we are expecting a final decision from the Board of ANEEL for the payment of the debt. And ANEEL has been complying with the timing decision for the payment of the revenue. And what's being discussing today has not been defined yet.

[Operator]

Our next question comes from [ Manuel dos Santos ], individual investor. He has 2 questions, and the first one is the following. I noticed that reduction in the capital CapEx for construction purposes. Can you explain this evolution, please?

And the second question is the following. I was surprised when I saw the slide related to reinforcement improvements and the potential of growth in this line of revenue. Could you provide more details about it?

[Dayron Urrego Moreno, executive]

Thank you, [ Manuel ], for your questions. I'm the Director of Projects of ISA CTEEP. As you have noticed, during this year, we had a decrease in execution of our CapEx, which is as expected, considering the place of the project. Last year, we had some major projects in execution that demanded higher flow of cash. This year, we have projects in different phases.

We have 2 projects, which were new -- which are new that came from the auction. We have 2 constructions underway. We also have 2 projects for licensing purposes [indiscernible]. And we are in the last part of the Triângulo Mineiro project. That means that the investments from the cash in this half of the year has been lower considering the nature of the project.

And the second question, [ Manuel ], that you asked in relation to the reinforcements improvement. At this moment, we have a portfolio of BRL 5 million related to projects which are under execution. And out of those projects, on a yearly basis, we estimate the CapEx and we have our projections for this year. And we have about BRL 200 million RAP in the portfolio. And this is a portfolio that has been developing quite well. We have 25 projects of reinforcements and improvements also planned for this year.

[Unknown Executive]

And to add to your answer, I would like to complement with this information in relation to Slide 7. There is something that I would like to mention, which is related to the RAP. Since the RAP is not linear, it's important to mention that reinforcement improvements have some [ big clarities ] to be mentioned. Since this is going to be at the RAP of BRL 680 million, and this is going to be materialized along the years. So we are going to start at a lower value in 2023, and it will go up to 2027. Why? Because all those projects of reinforcement improvements are only going to be materialized in terms of RAP in the next tariff cycle, which is going to happen in the '28.

So there's an expansion for materialization in cash in the RTP of 2028, and 37% will follow this flow that we've mentioned in the graph below, with a higher concentration in '24 and '26. To make it clear, the 37% are referred to reinforcements of large magnitude, and we will start receiving RAP adds from its energization.

[Operator]

Let's go on to the next question from [ Leticia Braga ], an individual investor. I realized there is an issue when it comes to the renewal of concession contracts and this will not impact the indexation of the IGP-M. Which is the company's stance regarding this? And could this negatively impact the company revenues?

[Unknown Executive]

Well, thank you for the question. I would simply like to mention that we have only 1 contract indexed to IGP-M and it represents less than 1% of the company revenues. Therefore, the impact on the company results if the IGP-M expands will not be very expressive.

Now we're speaking about the renewal of concession contracts. ISA CTEEP has a portfolio with different periods of renewal for the rest of the concessions that have to be transformed. And only one of them will mature in the coming years. And it is that contract that is indexed to the IGP-M and represents only 1% of the company revenue. The impact of the IGP-M and the impact of the maturity of contracts will not be relevant differently from what happens to other companies.

[Operator]

Our next question comes from [ Rafael Costa ], a private investor. Congratulations for the results during the period and the presentation. Are you intending to participate in the next auction in 2023? And will this have an impact on the company cash?

[Unknown Executive]

Well, thank you for the question. The company is in the permanent quest for projects where it can create value in a sustainable way. Now in this auction, we did select some projects for survey, and we will define our position before the auction. For the auction in December, we are going to participate for a project that has a relevant size and we're considering that it makes more sense to invest in the projects that we won in July. And yes, of course, we are serving some minor projects that will be present in the December auction without guaranteeing our participation.

[Operator]

Our next question comes from [ Alexandre Duarte ], a private investor. Is there any negotiation with Eletrobras underway regarding new partnerships?

[Unknown Executive]

Thank you for the question. And the answer is no. No, there is nothing. Once again, there is no negotiation underway with Eletrobras or any other type of negotiation.

[Operator]

Our next question comes from [ Fabiano da Silva ], who asked the following. Congratulations for the very good results. The RBSE issue. After you receive RBSE, what are you going to do to replenish these revenues?

[Unknown Executive]

Well, Fabiano, a very good question. Well, this refers to the payment of assets that have not been depreciated because of the concession renewal in 2012. They will be paid in 2020, and this will end in 2021. What we do to guarantee the company growth and ensure that it will be sustainable is precisely what we presented here. Profitable investments in reinforcements and improvements. You will see this on Page 7.

Only this will represent an additional RAP of BRL 650 million. And of course, projects from auctions that are being presented quarter-on-quarter with results that are very positive as we have already presented. And to replenish that value means that we can continue to grow sustainably in terms of the company results.

[Operator]

Our next question is from [ Vinicius Boscolo ], a private investor. Which is the forecast for the delivery of the coming projects and additional RAPs?

[Unknown Executive]

Thank you, [ Vinicius ]. As we have mentioned in the coming weeks, we will be concluding the Triângulo Mineiro project that will bring the company a RAP of BRL 42 million. We're in the final stage of the Itau (sic) [ Itaúnas ] project, and we should receive 30% of RAP in the coming weeks as well for the project Itaúnas. And the next payment that we have for the energization of the project will only be the coming year -- at the beginning of the coming year.

And we have the reinforcement and improvements mentioned by Carisa that will represent 32% of those BRL 600 million that were presented on Slide #7. That is the expectation for RAP, thanks to the reinforcements and improvements.

[Operator]

Our next question is from [ Gabriel Gustavo ], a sell-side investor and an independent analyst. At the last auction, there is a consortium that still needs to present documents to be able to obtain the Lot 1. How to proceed with this?

[Unknown Executive]

Good question, [ Gabriel ]. Well, in fact, all of those that won in the transmission auction are under the obligation of showing documents that prove their ability to participate. Last week, ANEEL approved all of the winners with the exception of one, the person -- the company that had won Lots 1 and 8. And while the request was to present additional documentation to carry out the analysis of the standing of the company, it is now up to ANEEL to conclude this process. And before any final decision is made, any comment from ISA CTEEP would be somewhat premature.

Now all of the evaluations that were carried out for the lots for which we presented offers, there were 7 lots that we presented offers for, for the 2023 auction, to create value for the company, given our ability to analyze and our discipline when implementing the projects. But once again, it is time to allow the regulator to play its role, and we will wait for the process as was foreseen by the auction process itself.

[Operator]

[Operator Instructions] [indiscernible] private investor. What do you see as the main challenges for the company for the next few years and decades?

[Unknown Executive]

Thank you for the question, [indiscernible]. The result of this quarter for us shows that we have achieved what we have been doing in terms of results. The company continues to operate and to maintain the kilometers of lines under its responsibility, ensuring the quality service to the society and following a discipline, generating value to the company, ensuring investments in the existing assets and the new assets, delivering new concessions as we have seen in the past few years, innovating such as the new projects. All this considering that we are creating environmental, social value, helping society evolve in an important way.

When I look into the future, we are going to continue with the same discipline -- with the same financial discipline, creating value to the shareholders and therefore, following providing earnings to our shareholders and growing at the same time, providing sustainability to the company and impacting society in a very positive way. This is our ambition. This is our challenge, and this is how we are going to continue working with a lot of dedication and attention.

[Operator]

And now I would like to inform you that the Q&A session has come to an end. I would now like to turn the floor back to Rui Chammas, who will make the final remarks.

[Rui Chammas, executive]

Thank you, Louis, for coordinating this event. I would like to thank everyone for their interest in the presentation of earnings results of the company. All the questions have been very fruitful and enriching. And I would like to say once again that our IR team is available should you have any questions in relation to the positioning and the evolution of the company. Once again, thank you all, and have a good day, everyone.

[Operator]

The conference call related to ISA CTEEP's results has come to an end. The IR department is available to answer any questions you should have. I would like to thank everyone for having participating, and have a good day, everyone.

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