ISA Energía Brasil S.A. (ISAE4) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to ISA CTEEP Second Quarter 2020 Earnings Conference Call. We'd like to inform you that this event is being recorded [Operator Instructions]. The audio and the slide deck for this conference are also being simultaneously broadcast over the Internet at www.isacteep.com.br/ir. This deck is also available for download so that you can follow at your leisure. Before proceeding, we'd like to say that statements made during this conference call related to ISA CTEEP business prospects, projections, operational and financial targets are based on the company's management beliefs and assumptions as well as information currently available. They involve risks and uncertainties because they refer to future events. Therefore, they depend on circumstances that may or may not occur. Investors should understand the general economic conditions and other operational factors may affect the future performance of ISA CTEEP and may cause actual results to be materially different from those expressed in such forward-looking statements. Today with us, we have Mr. Rui Chammas, CEO; and Alessandro Gregori Filho, CFO and IRO, that will be presenting the call. Other company executives will be available during the Q&A. With that, I'd like to turn the call over to Mr. Rui Chammas that will start the presentation.

Good morning, everyone, and thank you for joining us. My name is Rui Chammas, and today, we're going to share our second quarter 2020 earnings results that were published yesterday. We are also going to address the major points of our company. So let's move to Slide #3. I'd like to start this presentation with the highlights. We have delivered one more quarter with a good result. So our first half presented 10% above the revenue from last year. We have worked with our teams so that we can ensure the services provided to society. It's a key service that we provide, and this is key for our day-to-day work. The pandemic has not affected the quality of services that we provide. We have a focus with a discipline on costs, productivity by using the digitalization and optimization of process. PMSO cost in the first half was 26% compared -- actually, 16% compared to last year, 26% in the first quarter. We negotiated land in our transmission [indiscernible] campus, and that was a negotiation with the city hall. So that allowed the city to start a urban mobility plan, and that allowed us to gain BRL 73 million. As for investment in 2020, we also see significant progress. To date, that account for BRL 76 million. So also, once again, we have more than doubled what we had last year, thanks to the works that we conduct. Later on, we're going to go over these numbers in detail. We also had the tariff review in our favor, particularly with the renewal of contract 059 and also with RBSE with the cost of equity. And that generated an adjustment amount of millions that will be received in the next 3 cycles. So from 2020 to 2023. So the amount was BRL 894 million. And we now have also 21% above what we had in 2019-2020. As for bids we won, we also had an increase by 7%. Now let me move to the next page. So here, we have details about accounting results with the periodic tariff review, as I mentioned, of our renewed contracts as well as RBSE. So I now also added the remuneration in this cycle, starting 2020. The amount that was not paid from 2017 to 2020 was updated by inflation, BRL 930 million, and this will be paid together or beyond the regular RAP from 2020 to 2023. We'll have an impact of BRL 72 million because of the inflation rate for that period. The definition of the regulatory work of 71% against 6.4% and the basis of regulatory remuneration with new price had an impact on the regulatory revenue from this company. So together with the DRE, the impact on [ RFS ] was also impacted by the prolongation for us to receive cash that should take place in 8 years, but now was extended according to the useful lifespan of our assets. As for O&M, we will have a decreased -- a gradual decrease in 5 years, totaling 17%. So CTEEP was a reference and an [ ANEEL model ] with an efficiency of 34% above its regular O&M cost. So BRL 8 million entered, and that is retroactive of that amount since 2018. Thus, consolidated impact in our RBSE achieved BRL 1.1 billion in the regulatory, BRL 894 million related to the tariff review. This cash generation will allow us to carry out our long-term strategy and also supported by the company. Now let me turn to Slide #5. It's important to discuss the capital earmark in order to ensure transmission services, particularly to contracts we have. And as for renewal, it allows us to have many investment opportunities and now has already authorized investments of more than BRL 700 million for renewable contracts. This growth modalities give us a greater opportunity with renewed contracts. These investments are remunerated by regulatory WACC. So they generate additional efficiency. So in the first semester, ISA CTEEP invested BRL 78 million in retrofit although we had some delays because of the pandemic. Looking ahead for our 10-year plan up to 2029, we foresee an opportunity to invest BRL 70 million -- BRL 70 billion, sorry, and BRL 38 billion in greenfield. And the company is well positioned in order to grow, both by retrofitting as well the greenfield project that will be auctioned. There will be an auction in 2020, probably at the end of the year, with an opportunity to invest BRL 6 billion. I'd like to say that our teams are already studying some other projects as part of this auction. So we will choose some projects in which we have a synergy aligned to our strategy. So we will carry out an in-depth detailed study in seeking for increasing our knowledge. Now let me go over to Slide #6. So here, I have an update of our greenfield projects. We can see the status of our installation licenses, also, the groundworks and how the project is progressing, considering 12 lots that are under construction. All these lots represent an ANEEL CapEx of BRL 5 billion and a RAP of BRL 577 million. Total CapEx already realized is BRL 1.4 billion. There is a potential impact on the scheduling of this project because of the pandemic. Some contractors had difficulties in keeping the work pace at working constructions and some other works. So our expectation is to energize these 4 projects in 2020. We also -- I'd like to highlight that we started operating our first synchronous compensator in Itaquere last week, and we expect to also run 2 new pieces of equipment to have them energized when we finish the project. We will inform the market as that happen. Now I'd like to turn it over to Alessandro. He's going to go over the results for the second quarter and the impact to cash generation. Please, Alessandro, you can go on.

Thank you, Rui, and good morning, everybody. So as we said in the beginning of the presentation, the result of the second quarter of 2020 was driven by the accounting of the tariff review of the renewed Contract 059 and the compensation of financial component of RBSE by the cost of equity, generating an adjustment of BRL 894 million in the regulatory result that will be received in the next 3 cycles, meaning from 2020 to 2023. The focus of discipline in cost and expenses has led to a reduction in PMSO productivity gains in the year. Nonrecurring impacts in 2019 led to a drop in PMSO of 26% in the quarter and 16% in year-to-date numbers compared to the same period of 2019. The lower result in equity accounting because of recognition of provisions for IE Madeira was offset by the result of the first business in real estate and the favorable decision in a lawsuit for the compensation payment for this possession that generated BRL 75 million. On Slide #8, I would like to highlight the cash flow of ISA CTEEP and talking about the second quarter of 2020. The RAP of the renewed contract has had an evolution of 20% from the cycle '19-'20 to the cycle 2021. In addition to the adjustment based on inflation and revenue from new projects energized in the period, we had an impact, especially with the beginning of the compensation by Ke. The first installment of the adjustment with retroactive effect that will be received in 3 years and the reduction of the revenue. So the RAP for the renewed cycle is BRL 3.1 billion. Until the next area of review, RAP of O&M is going to scale down until it gets to 17% and will be updated by inflation and by the new investments energized in a period. The contracts that were bid had an increase, on average, of 7% from the cycle '19, '20 to 2021. In this manner, the RAP of ISA CTEEP, its controlled and affiliates, goes from BRL 3.7 billion to BRL 4.3 billion with a significant impact in cash generation in next few years. On Slide #9, you can see the return for shareholders. The company has already paid BRL 250 million in earnings, including interest on equity and dividends that are going to be included in the dividends that is mandatory for the year of 2020. Our budget also includes the announcement of earnings in October and December, the latter to be paid in 2021. The strong cash generation has made it possible for us to grow and pay out dividends. For 2020, ISA CTEEP still is going to meet the practice and announced of paying out at least 75% of its net equity. Now I give the floor back to Rui for his closing remarks.

I would like to thank you all very much for your attention. We had the opportunity of showing to you our results of our excellent operational efficiency in all assets with significant results and management of existing assets, especially in reinforcements and improvements that provide us gains in investments, at the same time as provide operating efficiency and cost reduction. We have a growth strategy through the execution of greenfield projects, potential new bidding in auctions and also M&A opportunities and also the beginning of the development of the new real estate business, with our first business completed. So this is very much in line with all the movements we have had this quarter with its growth strategy, always seeking robust cash management that enables us to grow continuously and to also pay out earnings. Thank you all very much for your participation, and I would like to turn to the Q&A session. Now I give the floor to our operator. Thank you.

[Operator Instructions] Our first question comes from Guilherme Lima from Santander.

I have two questions. The first one regards the line other participations in revenue. It had a negative impact of BRL 28.8 million in the quarter. Could you give us more color on the performance on that line? And also, a second question regarding the real estate operation. Do you see a potential of -- continue with the sort of operations in future quarters, and what are the prospects in terms of value generation from your standpoint?

Thank you, Guilherme, for your questions. I will comment the second question, and then I'll turn -- I'll give the floor to Alessandro to answer your first question. As to the real estate business, this is something that the company wants to explore in a structured manner. So we are assessing the total potential of this business. We have many plots of land, the significant amount in the city of São Paulo and we're studying its potential in order to explore it. As we evolve in our analysis, we will be disclosing that to you. As to your first question, I would like Alessandro to answer about the adjustment of BRL 28 million in the quarter. Alessandro, could you please answer Guilherme's question?

Guilherme, thank you for your question. This amount corresponds to PV and PA in the time. So these are the events that have generated BRL 28 million.