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

Good morning, everyone, and thank you for waiting. Welcome to the conference call to announce the results of the Third Quarter of 2024 of ISA CTEEP. [Operator Instructions] This conference call is being recorded and will be available on the company's Investor Relations website at www.isacteep.com.br/ri, where you can find all the materials for our earnings release. You can download the presentation from the chat icon in English, too. [Operator Instructions] Statements made in this conference call about ISA CTEEP's business prospects, projections and growth potential are mere assumptions based on the expectations of the company's management for the future of the company. Such expectations are highly dependent on market changes, overall economic performance of the country, industry and international markets and, therefore, are subject to change. Forward-looking statements are not guarantee of performance because they involve risks, uncertainties and assumptions because they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic scenario, market conditions and other operational factors may affect the future performance of ISA CTEEP and may lead to results that will be materially different from those expressed in such forward-looking estimates. Today with us, we have the executive officers of the company, Rui Chammas, CEO of ISA CTEEP, together with Silvia Diniz Wada, IRO. We also have all the other executive officers of the company. And now I'll give the floor to Mr. Rui Chammas. Please you may start.

Good morning. Thank you for attending the conference call of ISA CTEEP to announce the third quarter of 2024. I'm Rui Chammas, CEO of the company. And today, we have our executive officers so that together we may present the results published yesterday and provide an update on the main topics of ISA CTEEP. Please let's go to Slide #3. We ended the first 9 months of 2024 reaffirming our strategy of creating sustainable value based on 3 pillars that in balance guide the decisions of the company's management. Thus, we generate sustainable value for our shareholders, being recognized as good payers of dividends or profits while ensuring corporate longevity by investing in our assets such as in the projects that we won in auctions and creating positive social environmental impact by playing a key role in the energy transition, connecting the generation of energy from renewable sources to energy-consuming centers. Now I'd like to address a few highlights of the quarter before we delve into the economic and financial results. I'll highlight the completion of the tariff review process of our concession in São Paulo, the Contract 059 that was in July. And among other positive points, we remain as a cost reference incorporated the incremental asset base for reinforcement and improvement projects with efficiency in terms of the price database. As you could see in July, Eletrobras sold 93 million preferred shares issued by the ISA CTEEP in a public offering, also known as a follow-on. With this move, it's reduced its stake in the company and now holds 29% of the preferred shares and 22% of the company's total capital. I would like to reinforce that this corporate move does not impact our governance, neither our corporate strategy. We continue to advance in our investment agenda with emphasis on the evolution of CapEx in reinforcement and improvement projects and greenfield projects like Piraquê, Minuano and Riacho Grande, which are under construction, and have received investments amounting to BRL 400 million this quarter. In the financial highlights, I share with you the company's net revenue, which grew 8% in the quarter, while EBITDA grew 9% in the quarter, 19% in year-to-date. Net income for the quarter went down by 9%, impacted by the temporary effects of the periodical tariff review. Even so, the year-to-date net income grew 22%. These results will be further addressed by our CFO later on. As I mentioned in the beginning, we also continued to invest at a fast pace with total CapEx of BRL 868 million in the quarter, a growth of 64% compared to the last period. Now on Slide #4. So I will start talking about the reinforcement and improvement projects. We receive accumulated investment of BRL 960 million in September, a growth of 22.4%. In this period, we energized 56 projects that had a CapEx corresponding to BRL 477 million. It's worth remembering that our investment portfolio has about 5 million (sic) [ BRL 5 billion ] authorization for projects to be carried out between '24 and '28 in reinforcements and improvements. As you can see on the graph on the left, the volume investment in these projects has grown. It's worth reinforcing that demand for investments in reinforcements and improvements are concentrated in renewed contracts such as our São Paulo concession Contract 059. These projects increase the safety and reliability of the network while reducing the risks of equipment failures and maintenance costs and update our grid, which is fundamental for us to provide good-quality services to our area in addition to adding our RAP, an amount that varies between 12% to 17% of the investment made. Investments in greenfield projects to ensure the company's longevity with real leverage shareholder return rates of double digits are represented in the chart on the right. The amount invested grew again with the progress of the constructions of Piraquê, Minuano and Riacho Grande projects. Our portfolio also has 7 projects under construction and 10 million (sic) [ BRL 10 billion ] to be realized. When energized, these projects will enable BRL 1 billion additional annual revenue. Now I would like to give the floor to our CFO, Silvia Diniz Wada, who will give you details about our financial performance in Q3 '24. Silvia, please.

Thank you, Rui. Good morning, everyone. Before talking about the financial results of the quarter, I would like to address the periodical tariff review on Slide #5. As Rui said, the periodical tariff review was a positive milestone by ratifying the value generation of the investments made under Contract 055 (sic) [ 059 ], which contains the transmission assets in the state of São Paulo. Among other parameters, the RTP involves the updating of the prices and reappraisal of energized reinforcements and improvements in the last 5-year cycle according to updated prices. Says -- in the RTP, assets are booked in the regulatory compensation base with the value of their revaluation with revenue adjusted. That said, the highlight of this RTP was the revaluation of the investments made in reinforcements and improvements between 2018 and 2022 in the incremental asset base whose value recognized based on the updated price database was 89% higher than historical numbers. Thus, during this period, we energized projects with investments amounting to BRL 1.3 billion, which were revaluated to BRL 2.4 billion. And these projects generate an annual revenue of BRL 369 million. As a result, our net regulatory compensation base grew 2% compared to the last RTP and reached BRL 6.6 billion. We remain as a benchmark in efficiency in operating and maintenance costs, and we are going to receive an 8% premium on our costs until the next RTP. In addition to the highlights that I mentioned, the RTP also brought an adjustment already expected, which reduced our revenue due to the movement in the basic rate of the existing system, reducing BRL 349 million from the RAP for the economic component of the RBSE. On the right side, you can view the time effects of our RTP on this quarter. Here are the 3 most relevant impacts. The first impact was the booking of all adjustment installments defined in the periodical tariff review, increasing the quarter's revenue by BRL 86 million. The table on the right-hand side shows the cash flow of these with the installments referring to the postponement being paid or received in 12 months, and the installment referring to the retroactive periods will be received in 48 months. The revaluation of the assets that I just mentioned in addition to recognizing the efficiency of 89% on the price bank resulted in 2 other noncash retroactive effects with negative impact in the results quarter: increase in depreciation of these assets between 2018 and 2022 amounting to BRL 87 million; increase in the value of the assets written off in the period amounting to BRL 15 million. In this manner, the nonrecurring effect of the RTP had a positive impact in EBITDA of BRL 71 million and a negative impact in our net income of BRL 11 million. Now on the next slide. The company's net revenue grew by 8% in Q3 to BRL 1.2 billion. In the first 9 months of 2024, this growth was even greater, up 18% to BRL 3.4 billion. This performance was driven by several factors, most notably the incorporation of the effect of the RTP contract as of July with an increase in the net regulatory asset base and full recognition of its adjustment portions; cycle readjustment with correction by the IPCA index; receiving the allowed annual revenue for large reinforcements and improvements energized in the '23-'24 cycle and small reinforcements and improvements energized between 2018 and 2022 recognized in the periodical tariff review; start-up of the greenfield projects, Itaúnas, which received 100% of its RAP in November '23, and Triângulo Mineiro in August 2023. I would also point out that the ex-RBSE RAP for Contract 059 grew by 23.4% for the '24-'25 cycle. In Q3, net revenue considering consolidated plus nonconsolidated subsidiaries grew by BRL 97 million or 7.7% compared to the same period last year, a total of around BRL 1.4 billion. The growth in net revenue from nonconsolidated projects was favored not only by the effect of updating RAP by the IPCA index for the '24-'25 cycle but also by start-up of reinforcement projects in Garanhuns in Q4 '23 and enabling 100% of Ivaí's RAP after obtaining the delivery and acceptance terms in Q1. We can move to Slide 7, please. In addition to the growth seen in revenue, consolidated EBITDA also benefited from the sale of a plot of land in Jundiaí in the state of São Paulo to the amount of BRL 20 million. We will continue to map opportunities for new real estate businesses as a way of generating value. Personnel, materials and services costs grew, mainly keeping up with the company's growth with an increase in the workforce and an annual payroll readjustment in Q3 due to a collective bargaining agreement. These increases were partially offset by more hours capitalized in reinforcement and improvement projects. As a result, the company's consolidated EBITDA grew by 9.4% in Q3, totaling BRL 959 million with a 1.1 percentage point increase in margin to 81.3%. EBITDA for nonconsolidated subsidiaries also grew, rising 6.3% to BRL 163 million in the quarter with Ivaí and Garanhuns standing out. In the first 9 months of 2024, consolidated EBITDA grew 19.3% versus the first 9 months of 2023. The EBITDA of nonconsolidated subsidiaries increased by 9.5% in the same period. Next slide, please. I would like to highlight the 21.6% growth in net profit -- net income accumulated up to September, a result of BRL 225 million higher than what was recorded in the first 9 months of 2023. In addition to the operating results presented and the nonrecurring effects, mostly noncash related to the RTP, the company's net income for the third quarter was impacted by an increase in financial expenses due to a higher gross debt position to cope with the contracted growth. As a result, net profit for Q3 was BRL 431.6 million. The next slide shows the company's debt position as of September 30, 2024. We ended Q3 with a gross debt of BRL 11.5 billion and net debt of BRL 9.5 billion. This increase since December 31, 2023, can be explained by new funding to cover the company's investments such as the 15th and 16th debenture issues carried out in the first half of the year, which totaled BRL 2.8 billion. As a result, the company's leverage ratio measured by the net debt-to-EBITDA ratio ended this period at 2.49x. I would also like to point out that we have just carried out the 17th issue of debentures to the amount of BRL 1.8 billion in 2 series. The first one, BRL 0.5 billion, has a term of 12 years and a cost of 6.71%, the same cost as NTN-B 2040. And the second series was BRL 750 million with a term of 15 years and a cost of 6.6%, 10 bps below the sovereign cost. The first series of this issue has an innovative feature with interest payments only in the 11th and 12th year together with the amortization of the main debt instead of paying interest every 6 months as is the case with the second series. The average nominal cost of our debt is currently 10.79%, down from 11.06% in December 2023. This is equivalent to the IPCA cost plus 6.28% per year. In July, Fitch reaffirmed our corporate rating at AAA on a local scale with a stable outlook, highlighting the predictability and security of our cash generation with revenue protected against inflation. I would like to stress that we continue to maintain a balance between sustainable growth, financial discipline and distribution of earnings so that we can grow responsibly and profitably with good access to capital and maintain our practice of distributing at least 75% of the regulatory net income. Next slide, please. I'd like to take a look at the performance of our role in the capital market, and I'll start with ADTV, which is the average daily trading volume, where we've seen significant growth over the last few years, practically doubling from BRL 37 million in 2021 to BRL 74 million in 2024. This growth has enabled our preferred shares to enter the mean Brazilian indices such as IBrX 100 and IBOVESPA. Continuing on the right-hand side, we see our position in B3's trading ranking. And we ended Q3 in 59 out of 450 shares traded on the exchange. As a result, our accumulated negotiability index continues to advance and currently stands at 76%, 9 percentage points higher than what is required to join IBOVESPA. I end my presentation here and give the floor back to Rui.

Thank you, Silvia. Let's move on to the next slide, please. Before closing our presentation, I'd like to mention our progress in the sustainability agenda. The accumulated result for the year shows a reduction of SF6 gas emissions, which have a major impact in the generation of greenhouse gases in the atmosphere, while at the same time, we have reduced some efficiency and energy consumption, partially offset by lower water consumption. The highlight was the -- this time was the Jaguar Connection program, which provides technical and financial support for carbon projects in priority areas for the preservation of jaguar corridors. In September, we announced a new REDD+ Rio Maru environmental conservation project, which will conserve about 40,000 hectares of forest on the banks of the Maru river in Acre within the Amazon biome. Finally, to conclude the presentation, we continue on the next slide. Slide 12 summarizes the values that underpin ISA CTEEP's strategy as well as the topics covered during the presentation, which aim to maximize sustainable value for our shareholders and other stakeholders. Our belief is that the company's work is based on the values that we have. Generating sustainable and environmental value must be able to generate through innovation and operational efficiency pillars that are anchored across 3 dimensions: profitable growth; discipline in using capital to ensure that the company is perceived as able to capture resources competitively as we've been doing; and paying dividends to our shareholders with a minimum of 75% of regulatory net income. So we are sure that we are creating value for our society and for shareholders. Finally, I would like to invite everyone to take part in our Investor Day, which will be held on November 12. I'll end the presentation and hand the floor back to the operator for the Q&A session. We're at your disposal, and thank you again for being here. Thank you.

[Operator Instructions] Our first question comes from João Pedro Herrero sell-side analyst from Santander. First of all, congratulations on the results. Could you talk about the adjustment installment? Which part was booked? Which is cash? And what is the term to receive that? Could you also talk a little bit more about the sale of the land in Jundiaí? In addition to this plot of land, is it possible that you sell other properties in future quarters?

Thank you for your question. So as to the PA, we have the details on Slide 5 of the presentations that you've just seen. But giving you a little bit more detail, we have 3 main components. We have the share which is the deferral or the postponement that should have been reduced in 2023, but it was deferred to 2024. And these are the amounts of minus BRL 378 million plus BRL 104 million of RBSE. And these will be received and paid along the '24-'25 cycle, 12 months. Other adjustments, same thing. Now as to the retroactive share of reinforcements and improvements which comprises the reinforcement and projects that are small sized that had a retroactive revenue that was only booked in a tariff review. So when they were -- they went live, they -- we didn't receive the revenue immediately. This is going to be received in the next 4 tariff cycles. So BRL 89 million each year and the last installment will be in the cycle '27-'28 totaling BRL 356 million. This is for the PA. As to the sale of the land in Jundiaí, this was one of the opportunities that we mapped in our real estate portfolio, which basically seeks to monetize assets that the company owns and that are not necessary for our transmission operations. So we could sell it for BRL 22 million. It has an accounting cost of BRL 2 million. So it provides a net revenue of BRL 22 million this quarter, and this amount was fully received in this quarter. As to other opportunities, well, we have met them. We are seeking to find other things that we can do in the next quarter and future years, but different amounts. We have things like this amount, in a smaller amount and bigger projects, too, that will take slightly longer until they mature. So this is an upside that we are always seeking.

Now we have a question from Edson Mota, buy-side analyst. As to 4819 SEFAZ, could you update the status of the negotiation?

Thank you for your question. Well, this is an attempt of a settlement that is going to be led by the court of conflict settlement and conflict settlement at the quarter and the Superior Court of Justice. And there is an agenda of meetings, debates and other elements for each one of the parties, and then we are going to go into the negotiation. In this negotiation, the lawyers of each of the parties need to be present and other representatives in trying to settle specific themes and trying to find an appropriate [indiscernible] that is good for everyone.

Now our next question is from [indiscernible]. With the fires in September and October, was any substation or transmission pole damaged?

Well, thank you for your question. This is the Operations Officer of the company. As to the fires in September and October, this is a period that we know we have intense fires. However, for the transmission assets, no damages, neither in substations or in transmission towers.

[Operator Instructions] Our next question comes from Edson Mota, buy-side analyst. Congratulations on your performance. Could you please give us an update on the execution of greenfield projects?

Edson, thank you for your question. And this is the Director of -- ISA CTEEP Projects Officer. So ISA CTEEP right now, we have 7 projects being execution that we won in auctions. 5 of them are under construction and 2 are obtaining the permits. Of the 5 projects in construction, there is one that is being energized, the Minuano project. We have one project in execution in the city of São Paulo, Riacho Grande. And it's an underground project that is going, advancing very fast with more than 75% completion. We have the first of the macro projects of ISA CTEEP, Piraquê, that started in the state of Minas Gerais. That is going on very well with a large number of towers already implemented. And we have Água Vermelha and Jacarandá, 2 smaller projects that are going very well. The other 2 projects are Serra Dourada, Itatiaia. And we have 2 projects we are currently under the process of obtaining the permit, and everything is going as our plans. Thank you very much for your question.

Our next question comes from Paulo Sergio Miranda. Which are the prospects of the company for the 2 transmission auctions that are going to take place in 2025 in September and March? What can you tell us today before those invitations to bid are published?

Paulo, so the expectations, so there is just one transmission auction. And then in 2026, we go back to our schedule of 2 auctions a year. So today, I don't think we have much to expect about these auctions because we are focusing on execution. So any opportunity along next year is going to be assessed within a logic of profitability and financial discipline.

Our next question comes from [ Jose Paulo ] buy-side analyst. Is ISA CTEEP thinking of bidding in the battery auction? How do you see this opportunity?