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

Auction 01/2022. In this conference call, we will present the main economic and financial assumptions, the lot selection criteria and the company's strategic guidelines. We would like to inform that this event is being recorded. [Operator Instructions] This event is also being broadcast simultaneously over the internet via webcast and can be accessed at www.www.isacteep.com.br/ri where the respective presentation is available for download. The selection of the slides will be controlled by you. The replay of this event will be available soon after it is over. Before proceeding, let me mention that any forward-looking statements made during this conference call regarding ISA CTEEP business prospects, financial and operational projections and goals constitute beliefs and premises of the company's management as well as information currently available to ISA CTEEP. Forward-looking statements are no guarantee of performance and they involve risks, uncertainties and assumptions, and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that general economic conditions, industry 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. We have here today with us, Mr. Rui Chammas, Chief Executive Officer; Carisa Portela Cristal, Executive Director of Finance and Investor Relations; Silvia Diniz Wada, Executive Director of Strategy and Business Development; and Dayron Esteban Urrego Moreno, Executive Director of Project Execution, who will deliver the presentation. At the end of the presentation, we will open the Q&A session. I would now like to give the floor to Mr. Rui Chammas, who will start the presentation. Mr. Chammas, you may proceed. Thank you very much.

Welcome, everyone. Thank you for your interest in this presentation of ANEEL auction #1, 2022. Let's get started on Slide #3. On Slide 3, you can see the company's projects that are currently in operation. Here, you can see all of the company's operating assets, 19,000 kilometers of transmission lines, 71,700 MVA of transforming capacity, 126 of stations and BRL 3.3 billion in permitted annual revenue. In orange, you can see transmission lines, 100% ISA CTEEP. And we have 3 projects in shared control in our portfolio. The Electric Madeira and [ Garanhuns ] and [ Biguaçú ] in which our company shares the control of the project with an affiliate and a recently energized point of Aimorés with a 50% share control with TAESA. Now on the next slide, you can see the projects under construction at the moment. You can see 5 projects that are 100% ISA CTEEP in orange and 2 projects in Ivaí and Paraguaçú that our company is building together with TAESA. We plan to energize 4 of them by the end of the year. In total, these projects under construction have 1,400 kilometers of transmission lines, 10,000 MVA in transforming capacity, a CapEx of BRL 4.5 billion and a permitted annual revenue of BRL 480 million. We'll give you further details about these numbers later on. Now something that you all probably know, information about the 13 lots that were auctioned today by ANEEL, 5,300,000 kilometers of line with a CapEx estimated of BRL 13 billion and BRL 2.2 billion in awarded permitted annual revenue. We are glad to announce that we won Lot #3 in Minas Gerais and Espírito Santo and lot #6 in the State of São Paulo. Now on the next slide. You can see the lots, and I'd like to invite our project manager to give you further information about them. Dayron, you have the floor.

Hello, everyone. So yes, as we just announced, we won the third lot that has assets in the states of Minas Gerais and Espírito Santo, around 1,000 kilometers of new transmission lines and a new investment of approximately BRL 3.9 billion. The second lot that we won is located in the state of São Paulo. The permitted annual revenue that this project is going to bring to our company is around BRL 300 million. The lots have a discount of around 37.5%, yes. Well, before I tell you about the impact of this new infrastructure on ISA CTEEP, I would like to mention that -- I'm sorry, different projects can be anticipated be delivered before the planned deadline. After incorporating these lots, we're going to have a 7.9% increment to our current permitted annual revenue. And we're going to add 3 new substations. We already have 136 substations. So we're going to have 2 new substations in lot 3 and 1 new substation in lot 6. Our transforming capacity would be added by 3.5% going from 81,000 to 84,000 MVA in transforming capacity approximately. Our lines would go from 20,707 kilometers to 21,734 kilometers, which represents a 5% increase in the total kilometers of transmission lines we have in operations.

Now I'd like to invite you to go on to the next slide, but let me tell you about the general assumptions of the lots that we want, starting with the CapEx. As Dayron has just mentioned, in order for the company to bid on the lots today, we did a previous engineering analysis to have an optimal technical analysis. And we see that the best stretch is not only the shortest one, but that would avoid environmental problems, such as crossing, environmental protection areas, indigenous lands, [ quilombola ] lands, airports or runways. So that was all analyzed in order to optimize the project. We also analyzed the commodities negotiated with suppliers in order to have a deep knowledge of special contingencies. We purchased materials taking advantage of the global contracts we have at ISA companies. In addition to the great consumption that we already have in Brazil of equipment in order to construct transmission lines among the ISA companies in Colombia, Peru, Chile and other company -- other countries, we can also make the most of the global contracts that we have. We firmly believe in the capacity to reduce CapEx. Our history as of 33%. We have contracts with the main suppliers of materials and construction and infrastructure suppliers. We expect 14% of expenses in '23 -- 27% in '24, and only 5% in '26 when we add up both lots. When it comes to the time line, we foresee a possibility of delivering lot 3 before ANEEL's announced deadline. And in lot 3, we can see the possibilities of partial deliveries. There are many segmentations. So there is a possibility of performing partial deliveries, and that was considered in our business case, our track record in delivering before the deadline is at 7 months. It's worth mentioning that in the case of lot 3, that has the possibility of an early delivery as compared to ANEEL's deadline. It is a lot that enables us to have a balance between time line and CapEx. On the other hand, on lot #6, which is a lot that we do not foresee the possibility of delivering early. This balance is more towards CapEx reduction. The purchasing of equipment would benefit from the global contracts, as I mentioned earlier. When it comes to financing, we would like to issue infrastructure debentures to finance -- to optimize the company's capital structure with an estimated leverage of projects of around 80%. When it comes to operational efficiency, the lots were designed in order to make the most of synergies of operating costs and administrative expenses, making the most of the scale we already have at ISA CTEEP and an EBITDA margin between 90% and 95%. It's also worth mentioning that we will have tax efficiency. Lot 3 has an important encouraged area at Sudene, 84% of the lot is within an encouraged or incentivized area. And the tax regime would be actual profit. In lot 6, there is no original incentive or encouragement. However, due to its size, it would be within the tax regime of presumed profit. So I complete the presentation by reinforcing our eco story, why invest at ISA CTEEP? What is the rationale of investing in ISA CTEEP? ISA CTEEP is a company that has been growing since its creation in 2006 when it was acquired by ISA's Group, with growth opportunities in reinforcement and improvement projects, greenfields, just like we just presented, M&As that were conducted last year. And we are also a company that has practiced a minimum payout of dividends of 75% of regulatory net income. We continue to be a strong cash generator with profitability in all of our businesses, the investment grade according to Fitch is AAA for Brazil. And our reason for being as a transmission company is to focus on innovation, either in operations, maintenance or new projects like the one we have just presented to you today. Having said that, I would like to turn the floor over back to the operator to open the Q&A session. Thank you very much for your attention and your interest once again.

[Operator Instructions] We have a question made by us [ Artos Zanelli ]. [Operator Instructions] We have a question from Daniel Travitzky with Banco Safra. Safra Bank.

Could you provide more information about the assumptions of debt for this project, especially lot 1. Could you provide more information in terms of leverage, costs, terms of the funding you would like to have for this project. This would be very useful for us.

Hello. Good evening. Thank you very much for the question. When we look at this project, the company see this as an opportunity. We see an infrastructure debenture than incentivized debenture, long-term debenture. And we are at the leverage from approximately 80% for the project.

Do you have an idea of what the cost would be for those lines?

It's difficult to say anything now because as you saw during the presentation, the main disbursements would be in the third or fourth years. So it's -- all we talk about is something related to the future. So what I'm talking about is what we have today available in the market now, considering the companies that are similar to CTEEP AAA rating.

Next question comes from Herbert Suede with XP.

Hello. Good evening, everyone. Thank you very much for the call. Was not able to see the presentation because I'm using my cell phone. So I would like to know what would be the percentage, percentage for the lots that were gained. And I understood that you would see if it's possible to bring forward lot 3, but that would not be possible for lot 6, and you would need more focus on the reduction of the CapEx. Is that it?

Thank you very much for the question. I'll go back to the text and then I'll provide you with an answer. We believe that we can reduce the CapEx and going forward, the newest term. As to lot 3, and by the way, we're not providing a guidance for the lot. Lot 3 is a possibility to be brought forward. So we can optimize the result. And lot 6, on the other hand, we are not going to bring forward at ANEEL's term. So it's a lot that we referred to as back ended. We are going to work with a captive flow close to this legislation, and it may have a CapEx reduction because entering this balance. And it's going to be more important, considering the purchase of equipment and the cost of installation. We are not providing a guidance, but this is the color that we can give in relation to the 2 lots.

[Operator Instructions] We now close the question-and-answer session. I would like to give the floor to Mr. Rui Chammas for his final remarks. Mr. Chammas, you may proceed.

Once again, I would like to thank you for your interest in and taking part in this call where we presented important elements for the company's growth strategy. And with the creation of sustainable values that we meant to use with analysts and investors. We hope we help to understand the strategy that we had when we purchased the lots, and we are available. Should you have any questions in relation to this aspect or in relation to any questions you have in relation to the company. Once again, I would like to thank you for attending this call, and we keep on being at your service.

ISA CTEEP conference call is now completed. Thank you for your participation. Have a good evening, and thank you for using Chorus Call.