CTEEP - Companhia de Transmissao de Energia Eletrica Paulista

BOVESPA:ISAE4

Q4-2022 Earnings Call

[Operator]

Good morning, everyone, and welcome to the web conference for the release of results of ISA CTEEP fourth quarter of 2022. Rui Chammas, CEO of ISA CTEEP; together with Carisa Portela Cristal, CFO, ISA CTEEP and other directors of the company are also joining the company. We inform you that this video conference is being recorded and will be made available on the company's IR website, where the complete material of our earnings release is available. [Operator Instructions].

We'd like to point out the information contained in this presentation and any statements that may be made during this video conference regarding the business prospects, projections and operational and financial goals of ISA CTEEP constitute beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions and depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors could affect ISA CTEEP's future results and could lead to results that differ materially from those expressed in such forward-looking statements. After the presentation, which will be conducted by the company there will be a Q&A session. [Operator Instructions]

I would now like to turn the call over to Rui Chammas, Chief Executive Officer of the company to start the presentation. Mr. Chammas, you may proceed, sir.

[Rui Chammas, executive]

Good morning, everyone. Thank you very much for attending ISA CTEEP's Fourth Quarter Earnings Conference Call. I am Rui Chammas, CEO of ISA CTEEP, and today here with me who are the executive officers of the company to present the results published yesterday and to provide you an update on the main issues of ISA CTEEP.

Please let's move to Slide #3. We closed 2022, crowning our operational action strategy focused on generating sustainable value. The plan established to achieve this goal is a tripartite or 3 strategic factors that supply the entire corporate strategy and support the decision-making of the company's management, create positive social and environmental impact, assure corporate longevity and generate value to shareholders. The generation of sustainable available -- value is visible and palpable when we deliver quality services to society, achieves the company's growth and consequently, share profit by paying dividends to our shareholders.

Thus, here are the main achievements of the company this year. In 2022, we inaugurated 5 new greenfield projects related to auctions that we had recently won. The energization of these projects added more than BRL 330 million to the company's annual revenue. We advanced in innovation with the initiation of the first large-scale battery energy storage project in the National Integrated System, an iconic development that is unique in the Southern coast of São Paulo that assures energy supply at consumption peaks in the region as it usually happens in the summer, has been recently tested at the end of the year.

In order to assure the comparable longevity of this asset that we have added to our portfolio to the new projects with annual permitted revenue of approximately BRL 30 million after successfully bidding in auction held by ANEEL in June last year. I also share with you the highlights of our economic and financial results. Here you can see a growth in revenue, EBITDA, net income and in investments, especially as you can see here in reinforcements and improvements, which grew 124%, reaching BRL 825 million in 2022.

Now we move to the next slide, where we will address elements of the company's growth. As you can see in the chart, in the last 3 years, we have maintained the pace of investments in greenfield projects at a level close to BRL 1.1 billion. The increase observed in the total amount invested, excluding investments and acquisitions, is driven very much on investments in reinforcements and improvements, which aim to assure the safety of electrical systems under our responsibility as well as to update them and increase the base of our regulatory assets.

It's worth remembering that the concession of renewable energy and its associated responsibility of updating assets, which is through investments in reinforcements and improvements, which permit enhancing our service reliability, reducing our costs, especially in maintenance, in addition to providing additional RAP.

Now on Slide #5. In 2022, we have had important achievements in the construction and delivery of projects. In this period, we energized 5 projects which we won in auctions in recent years, 3 of them: Aimorés, Paraguaçú and Ivaí are in partnership with TAESA at 50-50 share. And 2 of them, Três lagoas and Biguaçu are 100% controlled by our company. The start of operation of the projects enables the payment of additional RAP, the annual permitted revenue. In this manner, the operational RAP of the company has grown 31%, reaching BRL 1.4 billion.

Still in 2022, we energized the first large-scale battery storage project to store large-scale energy, a pioneering innovative project in Brazil carried out in the modality of reinforcement in our Contract 59 in the state of São Paulo. With these achievements in the last 3 years, we have energized 7 projects controlled 100% by ISA CTEEP with an average CapEx efficiency of 32% and average anticipation of 11 months in relation to ANEEL premises. Additionally, the positive results in recent auctions, in addition to creating value to our shareholders, assure corporate longevity, increasing not only the number of concessions in operation but also assuring longer average life of our revenue because our contracts are now granted for 30 additional years after the signature of the contracts.

Now let's move to the next slide, please. Currently, we have 6 projects being developed in the South and Southeast regions of Brazil, a lot of them, 100% controlled by ISA CTEEP. And when completed, will add more than BRL 500 million to our annual permitted revenue. Of the projects under construction, Itaúnas is advanced and will be energized soon. The Triângulo Mineiro project is also advanced and will be energized in 2023. I'll also highlight the projects Piraquê and Jacarandá which we won in the auction in June 2022 with an evolution that is fully aligned with our expectations.

Now I would like to give the floor to Carisa Cristal, our CFO, who's going to provide you the details of the financial performance in Q4 2022. Carisa, please?

[Carisa Portela Cristal, executive]

Thank you, Rui. Good morning, everyone. I will start my presentation on Slide 7. The company's net operating revenue, which excludes the RBSE grew 37% in the fourth quarter 2022, amounting to BRL 511 million. This growth was driven by operational events such as the positive adjustments of the RBSE on the RAP in the '21-'22 cycle, the start of reinforcement improvement projects as well as greenfield projects and the higher value of adjustment installments. These were also the factors that boosted the company's net operating revenues throughout the full year, which grew 20.4% to BRL 1.9 billion.

If we consider ISA CTEEP's share in the subsidiaries revenue, as shown in the top right graph, the growth was 21.5%. Additionally, as of July 2022, we have a partial recomposition of RBSE revenue after the reprofiling of the financial component in 2021. This is a topic we have been discussing since last year, and it impacted the '21- '22 tariff cycle and continues to impact at lower level, the '22 - '23 cycle, which will end in June '23. Despite the 17.1% growth in our manageable PMSO in the fourth quarter 2022, our continuous pursuit of efficiency and cost management, allow the efficiency measured by the ratio of manageable PMSO to net operating revenue to decrease by 7 percentage points in the period.

The growth in PMSO is mainly explained by the higher personnel costs due to the increase in headcount to cope with the company's growth and the signing of the collective bargaining agreement with retroactive effect back to the third quarter 2022. Also contributing to the growth of the PMSO, higher maintenance expenses increased in [indiscernible] rates and attorney fees and consulting expenses. As a result, EBITDA grew 37.1% in the fourth quarter 2022 and 4.6% in 2022, amounting to BRL 635 million and BRL 2.5 billion, respectively.

Let's move on to Slide 8. On this slide, it bring a snapshot of the company's debt. We ended 2022 with a gross debt of BRL 8 billion and net debt of BRL 7.2 billion. As a result, the company's leverage ratio measured by the net debt over EBITDA ratio ended the year at 2.99x (sic) [ 2.92x ]. On December 31, our debt had an average term of 6.9 years and an average cost of 1.8%. And it's worth recalling that in July, Fitch reaffirmed our investment grade on a local scale with AAA rating.

The company continues to constantly evaluate its capital structure and growth opportunity with the aim of maximizing shareholder value generation. In addition, the results presented reinforced the good prospectives we have in relation to our operating cash generation, which should continue to advance with the energization of both greenfield projects and reinforcement and equipment projects and also with the recomposition of the RBSE.

In 2022, our cash generation was enough to fund 65% of the BRL 1.9 billion invested in the year, as mentioned by Rui. In the fourth quarter 2022, the lower inflation measured by the IPCA, which indexes 54% of the company's debt contributed to the reduction of the monetary variation of the debt, consequently, improving our quarterly financial results. The annual result was impacted by the interests and financial charges that increased due to the higher gross debt position and the 450 bps increase in the Selic rate target in the period.

Let's move on to the next slide, please. In this graph, we show the performance of the net income throughout the year. In 2022, we reported a 7% growth in the net income in the period, which added up to BRL 937 million, driven by the higher consolidated operating results and by the results of the companies with shared control, which were higher than the financial expenses and the impact caused by the reprofiling of the RBSE. The graph shows the evolution of the earnings paid by us since the company's privatization and shows that here at ISA CTEEP we managed to balance investments in growth with a high-level earnings distribution.

In December, we announced a distribution of BRL 700 million in interest on equity. This amount will be paid in April and corresponds to 75% of the regulatory net income for 2022, in line with our practice of distributing earnings, which provides for the distribution of at least 75% of the regulatory result linked to the leverage of 3 times net debt -- or net debt over EBITDA.

I turn the floor back to Rui.

[Rui Chammas, executive]

Thank you, Carisa. Before completing our presentation, I would like to provide you an update of our ESG agenda. Now let's move to Slide 10, please. Always guided by our strategy of generating sustainable value, we made advances in our ESG practices throughout 2022. Advances that were recognized through the inclusion of our shares in 5 trading indices in São Paulo Stock Exchange. These indices are composed of shares of companies we also -- that also have recognized the ESG practices and other awards and certificates related to the subject.

In addition to the indices, Financial Times Sustainability for Good and TEVA Women in Leadership in Q4 2022 were recognized and started to make up the portfolio of 3 new indices of sustainable companies. B3 Corporate Sustainability Index, ISE , which reflects the average performance of the shares of company selected for their recognized commitment to corporate sustainability. ICO2, an index composed of shares of companies that are part of B3's Ibx 100, which report transparently their emissions of greenhouse effect gases.

And finally, the Bloomberg Gender-Equality Index, which measures the performance of listed companies committed to transparency in dissemination of our gender equality metrics considering 5 pillars -- 5 pipelines, pipeline of leadership and talent, equal pay and gender pay parity, inclusive culture, practices and policies against sexual harassment and external brand.

Also in Q4, ISA CTEEP achieved a A- score in the Carbon Disclosure Project's climate change questionnaire. This result represents a leap in the company's overall ranking compared to 2021, which had, had a C, in a very significant advance in our practice to control CO2 emissions. We also won for the third consecutive the Gold Seal of the Brazilian GHG Protocol Program developed by Getúlio Vargas Foundation, in partnership with the Ministry of Environment regarding the publication of data on greenhouse gas emissions. We are the first power company to complete a Green Loan with BNDES sustainability. The funds raised will support more than 250 projects and provide the expansion of energy transmission from low-carbon sources in our country to consumer centers.

Now let's move to the next slide. On this slide, we are presenting the main indicators showing the evolution of aspects of our ESG culture. I'll start with a message that safety, a nonnegotiable value for the company, and which has been the focus of increasing efforts in its evolution, and which have enabled us to reduce the frequency of accidents, both with our own employees and also with contracted employees.

Here are some of the other main ESG indicators. You can see that the following significant evolutions have happened. Significant reduction in the losses of SF6, an important gas with isolation properties but also with high potential for the generation of greenhouse gas effect. In the fourth quarter alone, the losses with SF6 gas leaks decreased almost 34%. This reduction helped us a lot to reduce our carbon footprint, reaching a reduction of 6,000 tons in CO2 emissions in last year alone.

When we talk about greenhouse gases, we continue to make progress in reducing emissions and we compare '21 to '22, we had a total reduction of 29%. The growth in water consumption that here is shown as a negative item in the company's performance is explained by the energization of new substations and the company's growth as well as by the resumption of in-person work, which took place in the beginning of 2022, and we'll continue to monitor this indicator, of course.

Now let's move to the next slide. So to conclude our presentation, we are summarizing on Slide 12, other important highlights of the company that we have already mentioned during the presentation and who's objective is to demonstrate the maximization of sustainable value to the company and to share with you our shareholders and other stakeholders.

We believe that with the presentation of results, we have -- we could materialize the strategy that we have presented to you along the last few years. And the company continues -- committed to the evolution of ESG criteria and operational excellence and based on that on very clear growth pillars in the delivery of greenfield projects in a disciplined and profitable way, winning new greenfield projects and a pipeline of growth investments in reinforcement and improvement projects.

All of this providing a growth and a positive improvement in the company's financial performance. And I know that based on the results that we are presenting here, everything that we say in our presentation, the company's strategic mission become more tangible and clear to all of you.

I would like to close the presentation, and I give the floor back to the operator for the Q&A session. Thank you all very much.

[Operator]

[Operator Instructions] Our first question comes from Ricardo, buy-side analyst. In 2022, you energized 5 projects, and you have 6 other projects under construction. What are the status of those projects? And how many energizations are we expecting in 2023?

[Dayron Urrego Moreno, executive]

Thank you, Ricardo. I'm the Director of Projects of ISA CTEEP. Yes, as you have mentioned, in 2022, we energized 5 projects and the battery projects for 2023. In the portfolio, we have 5 projects. We are going to energize our 2 projects in Itaúnas, which is in the final stage. And we are in the commissioning stage and is likely to be energized in the next few weeks. The Triângulo Mineiro project, we are at the launch phase of the cables, of the lines, and soon we are going to start the commissioning phase. So these are the 2 projects that we are going to energize in 2023.

The other projects, Piraquê and Jacarandá are in the execution projects, and we are waiting for the environmental permits so that we can start the construction of the lines. The substations are already under construction. Riacho is at this stage of project design and the environmental permitting in Piraquê and Jacarandá which were the projects that whose auction we won at the design stage. For this year, in addition to those, we are going to continue focusing on the reinforcement and improvement projects as we have done in the previous year.

[Operator]

Our next question comes from [indiscernible], individual investor.

[Unknown Attendee]

Congratulations on the results. Looking into the future after July 2023, RBSE will be completely recomposed, but it will lessen till 2028. Will the company look at the reduction of the leverage since the interests are not likely to fall? Or are they going to maintain the present levels so that in 2028, we have an increased RAP that will justify the end of RBSE? And how is the earnings going to happen along those years?

[Carisa Portela Cristal, executive]

Thank you very much for the question. When we look at this side, it's important to reaffirm the commitment of the company to grow with the generation of value in the long term. The company is looking for the longevity of the business. So we are always looking into both the growth and reinforcements and improvements, as well as new businesses related to auctions. And we're always looking for the balance between the growth and the payment of earnings to the shareholders. So what we see for the future is to have this balance and maintaining this practice of paying 75% of the regulatory net income for the period. And we are combining the 2 lines of growth, both looking at the profitability and growth for the better shareholder value.

[Operator]

Our next question comes from [ Gustave Oberthur ], investor.

[Unknown Attendee]

Considering the high level of capital, how is the company looking at the conventional situation and continue taking part in the ANEEL options for 2023 and 2024 as well as the winners of those auctions?

[Silvia Wada, executive]

This is Silvia Wada, New Business Director. It's just natural that considering all the changes in the macroeconomic scenarios, the players they take part and the auctions will update the capital cost. So this is something that is always taken into consideration when analyzing all the competitors. So basically, this is a condition that's applied to all. And we are more likely to expect to 2-digit rates that not all auctions are considered, that it's possible to see profitability considering both these environments.

[Operator]

Our next question comes from [indiscernible] investor.

[Unknown Attendee]

How are you going to look at the amortization of nearly BRL 2 billion for 2024? Will there any -- will the dividends be affected?

[Carisa Portela Cristal, executive]

If we look at the prospective of the company in the future and this is what we have been showing the results that have been materializing, the company has a high level of investments and we can see this -- can see during the record investments in reinforcement improvements in -- at the level of [ BRL 100 million ]. And all the projects that are underway that will ensure an RAP growth of about BRL 500 million for the future. This added to the RBSE recomposition that will surpass BRL 1 billion level. So we understand that we're -- we'll face no difficulties considering the settlement that we have for 2024. And we always have to take into consideration that we can rule out a debt, then in order to ensure the growth of the company as well as the payment of the earnings, as we have done according to our current practice.

[Operator]

Our next question comes from [indiscernible], investor.

[Unknown Attendee]

Considering the positive results, is it possible to consider agenda for the distribution of the dividends considering the amount that they are going to be delivered?

[Operator]

Maybe [indiscernible] has a connection problem. Carisa, can you answer this?

[Carisa Portela Cristal, executive]

Yes, of course. As we have been mentioning in relation to the dividend payment, the company has a commitment with, [indiscernible] we do not have a fixed pipeline. We do not have this in our practice. Although we have our commitment to maintain the practice of paying at least 75% of the income.

[Operator]

Our next question comes from [indiscernible] investor.

[Unknown Attendee]

How do you evaluate the project of energized batteries? Do you see any possibility of having projects similar to those?

[Rui Chammas, executive]

This is Rui speaking. Yes, we see this project as a excellent example of what innovation can bring about in order to provide more reliability to the system because this was the first project to start energy at larger scale in the interconnected system in Brazil, and it started in November 2022, and it may supply at least 2 hours in the peak of consumption. These type of projects has some advantages, such as the capacity of immediate response, it has modularity, so much so that it can be scalable. You can adjust the size according to the needs that may vary along the time.

And it also has some mobility. So it may be taken to different places depending on the demand. So there are different advantages especially when you consider a context of growing demand of flexibility for the operations in the network. So this innovation is going to be necessary in this context, both considering technology, operation in the system and in regulation. And this can also bring other sources of revenues for us in other businesses.

An example of this is the auction for reserve of capacity that is scheduled to be held in November this year. And our expectation is that -- we are going to find some technological neutrality. In other words, different from the auction of capacity reserve of 2021, where only the thermo power plants could take place. The idea is that in this particular auction, the needs are going to be established for the system, and we are going to be able to offer any type of technology provided if you meet all the requirements of the system. And if this materializes, we intend on our side to try to find a solution related to batteries.

[Operator]

Our next question comes from [indiscernible] sell-side analyst with Bank of America.

[Unknown Analyst]

How CTEEP looks at the transmission supply chain for 2023 and 2024? Some articles talk about difficulties of project companies to deliver the projects for the next years.

[Dayron Urrego Moreno, executive]

This is the Project Director of ISA CTEEP. If in the next auction -- the next auctions are going to be larger starting in June where the expectation is to have investments higher than [ BRL 15 billion]. We see that for this first auction, the supply chain would be enough for this auction, at least for the auction of June this year. And then for those of December or in the first half of next year, we understand that supply chain may be a little bit affected because of the high demand. In addition to that, the construction talk about the project company, it's a very important point to consider for the following or the auctions in the future.

[Operator]

Our next question comes from [indiscernible], investor.

[Unknown Attendee]

You talk about court fees. Is there any tax contest of relevant amount?

[Unknown Executive]

[indiscernible] Legal Director of the company. I'm going to divide the answer into 2. Your question comes as a result of the recent decision of the STF that is considered to be a breach of the unappealable decisions. In relation to the recent decision of the breach of the unappealable decision, I can say that there is no situation that would be included in this category. So we do not have this risk.

And it is common for many companies in Brazil, the companies have done some lawsuits that have been accompanied by our external advisers and also by the internal personnel of the company, but we are not exposed to this recent decision that was made by the higher court that is related to the breach of the unappealable decisions.

[Operator]

Our next question comes from [indiscernible], an investor. How does the company think to make up for the RAP losses due to the concessions that will end towards the end of the decade, taking into account the levels of indebtedness and competition?

[Rui Chammas, executive]

Well, we should make it clear that in the many concessions of the company, only 1 will mature at the end of decade. It's a smaller concession with a low revenue. At the same time today, the company has in its portfolio, in addition to the projects that were energized last year that totaled BRL 338 million of additional revenue and BRL 30 million for the batteries. Today in the portfolio, we have 6 greenfield projects that will add BRL 331 million additional revenue, which are projects that have a concession lasting for 30 years, and will mature in 2050, 2052, providing the company's longevity that is very significant.

We imagine that competition in auctions will continue fierce, and the company will seek to grow in a way that is disciplined, using all its competitive elements so that we can add new concessions to our portfolio. Of course, in addition to the concessions that we already have in the state of São Paulo, the 059 contract providing revenue and profitability to ISA CTEEP.

[Operator]

Now our next question comes from [indiscernible], investor.

[Unknown Attendee]

I would like to know if the impact of the FX rate in the projects going on in ISA CTEEP is significant? Does the company do FX hedging for international acquisitions?

[Rui Chammas, executive]

Yes, the company works for auctions as a whole in general. Whenever there's a project when the company is studying the project, we try to see the main suppliers and to preestablish them. When we do the process, this also includes any future oscillations. The company always tries to hedge itself and to mitigate any future oscillation as much as possible. This includes FX rates and commodities. Whenever there is a project that there is any exposure in terms of FX rate or commodities operation, the company tries to hedge its operation to mitigate as much as possible any kind of exposure.

[Operator]

Our next question comes from Ricardo, investor.

[Unknown Attendee]

What is the expected RTP for this year?

[Rui Chammas, executive]

Ricardo, well, actually, the RTP that was, that we had planned for this year was expected. ANEEL said that this is going to be postponed to 2024, which does not cause any significant impact for the company and everything that would be booked this year, will be fully booked next year with their updates. On the other hand, it would be very interesting if the -- we had the RTP this year because we have had a significant volume of investments in reinforcements and improvements.

And the RTP would be the materialization of the RAP where the definitive RTP is decided only by the RTP, which takes place at every 5 years. But at any rate, as I said before, there is no loss in value for the company, and this is going to be fully booked in 2024.

[Operator]

Our next question comes from Leonardo [indiscernible], investor.

[Unknown Attendee]

Congratulations to the CEO and CFO and other employees for the results of the fourth quarter 2022. Any prospects for investment in solar or wind projects?

[Rui Chammas, executive]

Leonardo, right now, we don't have any prospects of bidding in these types of auctions.

[Operator]

And our next question comes from [ Bruno Ferreira ], investor.

[Unknown Attendee]

You have attained growth through greenfield projects and reinforcements and improvements. Is the company planning to grow in projects already in operation, does the company identify a favorable environment for acquisitions?

[Rui Chammas, executive]

Well, we also assess prospects or possibilities of acquisition of operational assets. What we consider are different risk profiles that -- and they also have different profitability profiles. So if the environment is more favorable for acquisitions, it depends on a lot. So on one hand, we have a macroeconomic environment, raising capital cost, both our own and third parties. At the same time, we can have more opportunities for improvement and players with appetite and capacity for contracts, and this might be different than it was a few years ago. So there are many aspects to be factored in, and we are always monitoring opportunities, and we try to take informed decisions in terms of return and risk according to the profile of the projects. So we consider the 3 possibilities that we have for growth, reinforcement and improvements, auctions and M&A, each one with their own features and to diversify our portfolio.

[Operator]

Silvia, our next question comes from Victor, [indiscernible] investor.

[Unknown Attendee]

Comparing the IFRS accounting results and the regulatory results, there is a discrepancy in net income between one statement and the other. How does this impact the company's decision-making with regards to profitability? Does the business, does that prefer to make decisions based on which metric?

[Silvia Wada, executive]

Victor, yes, there is a significant difference or discrepancy. This is because, according to the IFRS methodology, which is very accounting-based, it considers in the metric all revenue that we are going to receive until the end of concession and brings this to present value, and then considers the construction of projects and works. And we look at ISA CTEEP, the company that is constant in investing in new projects, in reinforcements and improvements, IFRS will always be higher than the regulatory result. On the other hand, regulatory results is the best proxy for cash. It's much closer to cash and easier to handle. So when we look at profitability and day-to-day management, we use the regulatory result.

[Operator]

If there are no further questions, we now end our questions-and-answer session. Now I would like to give the floor back for the final considerations of the company.

[Rui Chammas, executive]

Well, before anything, I would like to thank you all for your interest in the presentation of our results, in the presentation of our strategy, there is materialized in growth through the contracts that we have in São Paulo and investments in auction projects that we have been conducting. And the company continues to work to seek profitable growth, all of this based on concepts and values related to absolute sustainability starting with the safety of our workers and contracted workers, also monitoring CO2 and controlling it. We want to be carbon neutral as we have been trying ever since 2019, making up for losses and also seeking -- so positive social impact. Thank you very much.

Our Investor Relations team is available. If you have any questions later, please do not hesitate to get in touch with us. Greetings, and have a nice weekend.

[Operator]

The conference call to announce the results of the fourth quarter of 2022 for ISA CTEEP has now ended. Our Investor Relations department is available to answer any questions you may have. Thank you very much for your attendance and have a good day.

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