CTEEP Companhia de Transmissao de Energia Eletrica Paulista

BOVESPA:TRPL4

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the conference call of ISA CTEEP, who will present the results of the third quarter 2020. We would like to inform that this presentation is being recorded. [Operator Instructions]

The audio and the slides of this conference call are being presented simultaneously over the internet at www.isacteep.com/ri. At that address, you may find the presentation for download.

Before proceeding, we would like to clarify that any forward-looking statements that may be made during this conference call related to the business perspectives of ISA CTEEP operational targets are beliefs and premises of the company's management as well as information currently available. They involve risks and uncertainties because they refer to future events and, therefore, depend on circumstances which may or may not occur. Investors should understand that general economic conditions and some operating factors may affect the performance of ISA CTEEP and lead to results that differ materially from those expressed in such forward-looking statements.

With us today are Mr. Rui Chammas, CEO; and Alessandro Gregori Filho, Finance and IR Officer; who will give the presentation. And other officers of the company will be available for the Q&A session.

Therefore, I would like to turn the call over to Mr. Rui Chammas, who'll start the presentation. You may proceed, sir.

[Rui Chammas, executive]

Good morning, everyone, and thank you for participating in the ISA CTEEP earnings conference call. So I'm going to present the results of the third quarter 2020 published yesterday, and we will make a presentation and an update on the main highlights of the company.

Let us please move on to Slide 3. We highlight the strong generation of cash in the quarter and the year, BRL 1.5 billion, due to the impact of RTP, the readjustment of RAP and the cost discipline we have. We recorded also the net revenue of BRL 821 million; adjusted EBITDA of BRL 679 million, with a margin of 82%; and regulatory net income of a bit over BRL 401 million.

The company has operated with a strict discipline in cost and expenses, which positively impacted the results for the quarter and for the year. PMSO was BRL 139 million in third quarter '20, 7% lower than the same period in 2019. The reduction attained throughout this year was 13%. The company has invested in improved -- in retrofitting projects that aim to guarantee the quality of the transmission service. Accumulated in the year, these investment totaled BRL 126 million, an increase of 75% related to the first month -- 9 months of 2019. For sustainable growth, efforts have been directed to continuously achieving efficiency with profitability.

With regard to greenfield projects we acquired in past auctions, the company's investment was BRL 794 million in the 9 months of 2020, an increase of 94% versus the first 9 months of 2019. In this pillar, we highlight the start of the commercial operation of the subsidiary, Itaquerê, with the CapEx of -- efficiency of 40% and 11 months in advance. IE Tibagi is in the commissioning phase and should be the next project to be started still in the fourth quarter of 2020.

Strong cash generation allowed advance in the growth strategy and also in the distribution of earnings. At yesterday's meeting, the company approved the distribution of BRL 344 million in dividends, which will be paid on November 13, 2020.

Sustainability permeates the company businesses since it directly contributes to the connection of renewable energy to large consumer centers. In line with the wish to leave a positive legacy beyond its business, the JAGUAR connection program was created, focusing on combating climate change, supporting biodiversity conservation and local development. We are very proud to get this program's recognition by the Environmental Finance as Best Corporate Offsetting Programme.

Still in the context of biodiversity conservation, we support the activities of Instituto Homem Pantaneiro to control the fire that devastated the wetland in Mato Grosso.

In the social sphere, in ISA CTEEP solidary with global and local issues and aware of the important role of companies in fighting the COVID-19 pandemic, we donated BRL 5 million to acquire serological tests and to build a vaccine center of the Butantan Institute. We actually officialized BRL 3.2 billion in this area.

In the governance pillar, we highlight the election of 3 statutory directors, thus completing our Executive Board, Gabriel Desire Executive Director of Operations; Silvia Wada, Executive Director of Strategy and Business Development; and [indiscernible] as Executive Project Director coming from our Colombian team.

We move on to Slide 4. The strong cash generation has enabled the company to advance its growth strategy. In the third quarter 2020, investments were 103% higher than the same period in 2019, totaling BRL 637 million. And accumulated in this year, investment increased 91% versus the first 9 months of last year, totaling BRL 920 million.

In retrofitting projects, we invested BRL 126 million in the 9 months of 2020, despite the delay in the projects due to pandemic in 2020. In 2020, we should reach BRL 200 million investment in these projects. We have the potential to double this level of investments in retrofits and will deliver gradual evolution. The company already has authorizations for more than BRL 1 billion in investments, which will be carried out in the coming years. The projection released by the 10-year energy plan estimates the need for investments for all the Brazilian system in improvements of BRL 74 billion, showing the potential of this kind of investments for the next 10 years and of course, for us.

In greenfield projects, we invested BRL 794 million in the first 9 months of 2020. The expectation is to end the year with investments in excess of BRL 1 billion. We have already concluded 2 projects with CapEx efficiency of 45% and average anticipation of 15 months. Itapura Bauru, third quarter '19; and Itaquerê, Third Quarter 2020. IE Tibagi is in the commissioning phase and should start operating in the fourth quarter 2020, and it will be the next project. The company expects to energize or start-up 2 more projects in addition to Tibagi at the end of the year.

The PDE projection for investments in greenfield projects is BRL 30 billion for the next 10 years. The auction scheduled for December 2020 has an estimated investment of BRL 7 billion, with 12 lots in 9 states, which will add 2,000 kilometers of transmission lines and -- plus 6,000 megawatts of capacity. This auction has different characteristics from the previous ones. It will not be allowed to change control before energizing the project. Next, the need date, not for all the projects, will be actually anticipated. Some of them are closer to the construction term, giving possibility of anticipating and energizing. And the closing of the interest curve may alienate or actually withdraw financial investors that seek actually further or more gains.

Now we move on to Slide 5. We present the details of our Itaquerê project and the start-up. The project consists in the installation of 3 pieces of equipment in the Araraquara 2 substation, which strengthens the national interconnected system, bringing more robustness to the country's energy infrastructure and better condition of the voltage and stability control. Thus, it contributes to harmonization of intermittent renewable energies. The equipment, can see in this slide, we have 3 devices similar to these, and they are called synchronous compensators. So the RAP for 2021 cycle will be BRL 52 million, and expected EBITDA margin, 95%.

With regard to financing, we have highlighted captured 74% of the amount invested in the ISA CTEEP balance sheet through green debentures at a very competitive IPCA plus 3.5% and IPCA plus 4.7% per year, and thus, increased the project's service funds. So it shows the project's leverage.

Now I move on to Slide 6, where I'm going to update you of the other greenfield projects under construction. In these bars, you can see the status of obtaining the installation license, the progress in the land use and the project of each one of the start-up projects. And I consider the other projects, even with the impact of the pandemic, we are on schedule and on budget. We have already announced the energization of Itaquerê in the third quarter; IE Tibagi, as I've just mentioned, being commissioned; and the expectation is of the start of operations of Aguapei, that should be the third project.

Now I give the floor to Alessandro, who's going to give you the financial results. Please, Alessandro, you can proceed.

[Alessandro Filho, executive]

Thanks, Rui. Good morning, everyone. On Slide 7, I present a summary of the impacts of the tariff review of the renewed contract and the update of RBSE on the company's results. The amounts recorded in the 2Q 2020 were calculated based on preliminary information disclosed by ANEEL, which were revised and whose adjustments were recorded in the third quarter '20 results.

ANEELs included Ke's financial component for the Ke in the RAP cycle from 2020. The amount not received in the last 3 years was updated by inflation in the amount of BRL 943 million, and will be paid through an adjustment portion from 2020 to 2023. In IFRS, the impact of BRL 84 million is due to the update of the value for inflation from 2017 to 2020.

The second item talks about the definition of the regulatory WACC at 7.71% versus 6.64%, and the definition of the regulatory remuneration base with a new price bank impacted the regulatory result by BRL 106 million. In addition to this impact, the result was impacted by some more extended flow of receivables of the economic component of RBSE, which was previously expected to take place in the 9 years.

The third item is the OEM revenue, and we'll have a staggered reduction over the 5 years of the 17% cycle. We highlight that ISA CTEEP was the reference company in the ANEEL model and recorded 34% efficiency award. We recorded a negative impact of BRL 80 million on the regulatory result of IFRS related to the retroactive adjustment of the adoption of RTP. And the consolidated impact of IFRS accounting was BRL 1.2 billion, and the regulatory result was BRL 969 million. This cash generation will allow for the execution of the growth strategy with the generation of sustainable value and distribution of earnings in accordance with the practice announced by the company.

Moving on to Slide 8, I point out the operational and financial highlights. It was another quarter of operational excellence with a drop in the indicator of nonsupplied energy and low PV. As a result, we recorded a net regulatory revenue of BRL 821 million in the quarter, an increase of 20% (sic) [ 25% ] over the same period of last year and an increase of 50% in the year. The regulatory net income was BRL 401 million in the 3Q '20 and BRL 1.6 billion year-to-date, an increase of 86% compared to the same period of the previous year.

We highlight the focus on cost and expense discipline. The PMSO decreased by 7% in the quarter and a 13% decrease in the year. The company should continue to show a PMSO level of about BRL 140 million per quarter. The adjusted EBITDA margin in the quarter was 82% versus 77% in the third Q 2019. Year-to-date, the adjusted EBITDA margin went from 79% in the first 9 months of 2019 to 88% in the first 9 months of 2020.

The company's gross debt totaled BRL 3.3 billion at the end of September, with a cash of BRL 1 billion and a leverage of 0.9x net debt over adjusted EBITDA.

On Slide 9, we highlight the return for the shareholder. The company has already approved a payment of BRL 594 million in earnings, which will be added to the mandatory dividends related to the fiscal year 2020. Our budget provides for another announcement of earnings in December with payments in 2021.

Even in a difficult year, the strong cash generation has allowed for growth and significant distribution of earnings, keeping the leverage at lower levels. This financial solidity was confirmed by the rating in Fitch in August. For 2020, ISA CTEEP intends to comply with the announced practice of distribution of at least 75% of the regulatory network without impacting on the company's growth.

I will turn the floor to Rui for his final remarks.

[Rui Chammas, executive]

Thank you, Alessandro. To conclude, I'm going to ask you to show you this slide. So a strong basis of excellent operational efficiency with very strong management in terms of the current maintenance and also in the important increase of investment in retrofitting and reliability and reduction of future maintenance costs as a basis for growth in greenfield projects that have been carried out that will be sought as long as they represent growth, with value-added and potential M&A projects in addition to the exploration of new businesses and especially the use of land bank of the company through real estate projects that is being implemented.

I now would like to close the earnings results of ISA CTEEP. And I close my talk, and I return the floor to the operator so that we can conduct the Q&A session, thanking you all for your time during the session. Thank you very much.

[Operator]

[Operator Instructions] Our first question is from Marcelo Sá from Itaú Bank.

[Marcelo Sá, analyst]

I have two questions. The first question is regarding the auction of December. If you think this change in the rules of not being able to -- the project start operation, if it will affect the operations? First question.

And if you could give further details on the interest you have on this auction. If you have certain module specific that you're looking into? And JCP, you declared very little, but you have spaces paying much more. And the RTP, the idea is for you to pay as much as possible of JCP or interest on equity?

[Rui Chammas, executive]

Thank you very much, Marcelo, for the question. I'd like to suggest first that Alessandro answers the second part of your question, and then I'll address the auction that you've asked about. Alessandro?

[Alessandro Filho, executive]

Thank you, Marcelo. The strategy that you've mentioned, as we have evolved on our results, we're going to calculate the limit for us to declare on 2020. And we should do this until our last statement in December to have the benefits of this kind of payment of earnings. So they will be paid and -- stated in December, and paid in early 2021.

[Marcelo Sá, analyst]

What about the interest on equity JCP? Just IOE, the amount of IOE that you could pay could be close BRL 600 million. That would be the maximum you would pay?

[Alessandro Filho, executive]

Yes, we have to calculate based on the earnings and the JLP. We have to evaluate and consider all the indices, and the volume is quite significant. Part of it, we've already done early this year, BRL 100 million of IOE in the beginning of the year. And so now we should evaluate the remaining volume for payment in the end of the year.

[Rui Chammas, executive]

Marcelo, your question regarding the auction, each auction is a different story. This auction has some features that are very specific. One is that you mentioned, so it withdraws financial investors that are trying to bring a project, eliminate their first risk. So we remove a kind of player. Perhaps the interest curve is a bit flatter, that would actually withdraw investors that are trying to benefit from the compression of the rates. And some projects do not have urgent completion date. And some projects, you have the advantage of being able to have them earlier implemented, and you can get an advantage.

This creates a specific dynamic, and I believe investors that are strategic will be absent. And it's a very competitive process, and the companies try to see what is their best and their strengths. We are studying some lots, and we see there is synergy and that -- we see that we can be competitive and trying to do diligent work of knowledge and advanced studies of these lots.

This process started early this year. Early in February, March, we actually got to know some project. That was the first auction that was expected to be in July, and that's what we're doing. We're preparing to take part, as always, seeking competitive advantage so that we can take part, seeking sustainable and profitable growth. I don't know if I've answered your question.

[Operator]

Our next question is from webcast. It's from [indiscernible], he asks the following: "I'd like to know if during fiscal year 2020, it will be exercise prices of distribution of 35% of the regulatory net income, since up until now, only 37% has been distributed."

[Alessandro Filho, executive]

Well, [indiscernible], it's Alessandro. The company aims at this practice, indeed. The goal is to state the volume of earnings to be paid and with a settlement in January. So this practice of distributing 75% of the regulatory earnings or net income. Thank you for your question.

[Operator]

Our next question is from the webcast from [ Gustavo Costa ]. He asks the following: how has the schedule of projects being impacted by the pandemic?

[Unknown Executive]

Well, Gustavo, thank you for your question. We've had slow delays -- or little delays in the projects, and the construction works continue normally. In none of our projects, we had any delays that would hinder both our business case and the date of ANEEL. The company keeps on moving forward. We've just announced the start-up of Itaquerê project that was shown in the presentation. We are about commissioning the Tibagi project, and we expect to start it up next week. In the fourth quarter, we still have another one that's called Aguapei that was featured in slideshow today. And it's quite advanced, and we expect to start it up within the fourth quarter of 2020.

[Operator]

Our next question also comes from the webcast and from [indiscernible]. He's asking: do you have any idea of the amount you're going to make available to take part in the transmission auction that will happen at the end of the year?

[Unknown Executive]

I don't know. We do not have this information available at the time. As I was just saying, we have to carry out a deep study of that lot, and we believe that the company have competitive advantages so that we can put forward a good proposal in the auction. We do not have objective to invest a lot of resources. We want to purchase lots that will bring sustainable growth to the company.

[Operator]

[indiscernible] continues the question, asking the following: are we going -- are you going to announce any further dividend announcements, as we had last year?

[Unknown Executive]

As I answered before, the answer is yes. We plan to have the announcement of another dividend in December to be paid in January 2021.

[Operator]

Our next question comes from webcast. [ Erico Salut ] asks the following: the auctions that were won by the company in the past 2 years has a reduction of 68%. How will the company keep the high ROE in the next auctions?

[Unknown Executive]

Thank you for your question. What we do is to get the plot deeply, learning about the competitive advantages of the project, and then we have a greenfield investment of BRL 5 million, and that would provide conditions to be connected with the major equipment suppliers. And we also study whether the advantages will come. And also considering the schedule of the project, we make an offer that would bring about good returns.

So this is what we do, what we have done in the past. We delivered 2 projects, one in 2019 and another one in 2021. One of them was announced today, by the way. And this is what we search for. And we are going to be working diligently with discipline, looking for sustainable projects and growth projects.

[Operator]

Our next question is from webcast, Mr. [indiscernible]. Do you consider that the change of rules in the next auction will reduce the interest of engineering companies and investment funds in the competition -- in the auction?

[Unknown Executive]

You're asking whether -- I understand the changing rules may change the behavior. Some companies may be interested, some other companies may have to adapt. But I want to make it clear that what's important for our company is what we do with our project. The auction has an interesting competitive aspect. But for us, winning a project is -- involves planning and developing a profitable project in order to meet the demands of our shareholders. The behavior of other players is something interesting to be observed, but that does not change our search for profitability.

[Operator]

Our next question comes from Lily Yang, also from webcast, with HSBC. Could you talk about M&A opportunities, the appetite to acquire brown and greenfields?

[Rui Chammas, executive]

Thank you, Lilyanna. I would like our officer Silvia answer this question. SIlvia, could you answer this question, please?

[Silvia Diniz Wada, executive]

Yes. Thank you, Rui. Well, we are always on the lookout for opportunities with technical, economic conditions to our profit profile, whether brownfield or greenfield. We are always looking for opportunities that would show us synergetic potential that is relevant, considering our existing assets. Therefore, we can have a competitive advantage in those processes of sale.

Something that I would like to point out is that the evaluation process of all these assets includes comprehensive diligence, considering the financial, legal, administrative aspects in order to ensure a risk/return ratio that can be adequate considering the investment we're going to make.

[Rui Chammas, executive]

Thank you, Silvia.

[Operator]

If there are no further questions, I would like to turn the call back to Mr. Rui Chammas for his final considerations. You may proceed, sir.

[Rui Chammas, executive]

I would like to thank you all for being interested in the strategies of the company, our growth strategy and all the projects that have been delivered and the financial performance of ISA CTEEP. Our IR team is available, should you have any additional questions. And we hope to see you again in future events when we discuss the results of our company. Have a nice weekend, everyone.

[Operator]

The conference call of ISA CTEEP has come to an end. We'd like to thank you all for attending it, and have a good day you all. Thank you.

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