Alupar Investimento SA

BOVESPA:ALUP4

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Alupar's webinar to discuss the results of quarter 3. Today, with us, we have Mr. Jose Luiz de Godoy Pereira, CFO and Investor Relations Officer; and Mr. Luiz Coimbra, Investor Relations Manager. We would like to inform you that this event is being recorded and has simultaneous translation into English. [Operator Instructions] During this event, all participants will be able to listen to the presentation. And afterwards, we will begin the question-and-answer session when further instructions will be given.

Before proceeding, let me mention that forward-looking statements that may be made during this presentation regarding the company's business prospects, operating and financial projections and goals are based on beliefs and assumptions of Alupar's management as well as on information currently available to the company. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they relate to future events and therefore, depend on circumstances that may or may not occur. General economic conditions, industry conditions and other operating factors may affect the company's future results and may lead to results that differ materially from those expressed in such forward-looking statements.

Now I would like to turn the conference over to Mr. Jose Luiz de Godoy Pereira, CFO and Investor Relations Officer. Mr. Pereira, you may proceed.

[José de Godoy Pereira, executive]

Hello, everyone. Good afternoon. Welcome to Alupar's presentation of quarter 3 2021 results. My name is Jose Luiz, and I have here with me today, Mr. Luiz Coimbra, our Investor Relations Manager. And we are going to organize this presentation, as we always do. I'm going to go over the material facts of the company, then Luiz is going to present the financial results and figures. And then we can open for questions. .

So let's start with the material facts, the material facts that we had in quarter 3 2021. And I would like to start by highlighting the first material fact which was the payment of the second installment of the dividends declared in the general assembly meeting. On August 30, we paid $0.30 per unit. This was the second installment of the declared dividend, and now we have an outstanding payment of the third installment, which is scheduled for November 30.

The second material fact that we recently announced was the entry into operation of the third generating unit of the La Virgen hydropower plant located in Peru. This has been a very challenging project for us and very challenging for the company. So I'm talking about the entry of operation of the third generating unit of the La Virgen hydro power plant. As I said, it's been a very challenging project for the company. And we have completed this project. It was a 93 megawatts of installed power project. And we just completed the third turbine on July 31, 2021.

Another relevant fact that we announced to the market was the acquisition of a minority interest from FI-FGTS. FI-FGTS used to hold 30% of the interest of the Foz do Rio Claro hydropower plant. With this buy, we had 70%, now have 100% and this comes from a shareholders agreement that we had with FI-FGTS, which provided for a put and a call option. And since we are approaching the deadline, we decided to exercise our call option and buy these shares.

We also had a material fact -- actually 2 material facts related with the same project, which was the TNE project, the Manaus-Boa Vista transmission system, which is also a very complex project. And the most lease advance was that we signed an amendment with ANEEL, the Brazilian Electric Power Authority. So we signed this amendment with ANEEL to include an arbitration commitment clause for establishment of the definitive RAP -- within a range of RAP. This amount that you see here the BRL 329 million is a provisional RAP and the definitive RAP will be defined in this arbitration process, but the minimum is this amount that you see here.

And we also had on October -- on September 28, we had the issuance of the environmental license for installation. We are now in the negotiation stage with indigenous communities to detail the plan -- the basic plan for compensation of indigenous population.

And finally, here is an update of the ongoing projects and the general status of the projects under construction. We have 3 projects under construction right now, TSM, ESTE and TCE. Here is the general status of each of these projects. For TSM, we are nearly finished. We are at the final stages. The works are 94% completed, and we expect the project to be 100% completed by the end of this month or the beginning of next month, which means that we are going at a very good pace for this project.

And ESTE, we also expect to finish this project by the end of the year. Differently from TSM, the ESTE project will be delivered on schedule on the official ANEEL schedule. Whereas for TSM, if we meet this date that we informed here, we will be accelerating the entry into operation by 7 months. But in the case of the ESTE project, we are right on time. Actually the schedule set February as the deadline, and maybe we will be able to anticipate that by about 30 days.

And the TCE project, the Colombia project, we are now in the negotiation stage for the license. The license was issued with a restriction for the last 15 towers. We are already appealing and trying to agree on the alternative to be able to remove this restriction for these last 15 towers. Negotiations are advancing really well. So we believe that we will have environmental clearance for these last 15 towers that actually accounts for very little of the total towers, about 5% of the total towers. And we are working hard to get clearance for the last 15 towers. So this is the general status for these 3 projects.

And now I'm going to hand it over to Mr. Luiz Coimbra, our Investor Relations Manager, and he will present our financial highlights and numbers. At the end of his presentation, we can open for questions. Thank you very much.

[Luiz Coimbra, executive]

Good afternoon, everyone. Thank you for attending this conference call to announce the results of quarter 3 2021. I will start my presentation on Slide #10 with the financial highlights for IFRS numbers, and then I'm going to give you more details about regulatory numbers.

So let's start on Slide #10. The net -- total net revenue this quarter was BRL 1.168 billion compared to BRL 1.5 billion in the same period last year. Total net revenue this quarter -- I'm sorry, we're having technical problems. We're having audio problems right now. I apologize.

This reduction is explained by the BRL 714 million decrease that we had in the infrastructure revenue due to the entry into operation of the ETB transmission unit and TCC, which started operating in March this year. When we look at this chart, the bottom of the chart shows the EBITDA. The total EBITDA this quarter was BRL 902.8 million, up by 20.7% over the BRL 747.9 million recorded in quarter 3 2020. The main impact on these numbers were the BRL 464.6 million decrease in the revenue of the transmission segment that I just explained and also a reduction of BRL 489.9 million in the infrastructure costs due to lower investments this quarter, due to the entry into operation of the 3 transmission assets that I talked about.

Now looking at the top right corner. Here we see the composition of our net income. Total net income was BRL 240.3 million, up by 26.3% of the BRL 190.3 million recorded in quarter 3 last year. And the 2 impacts here were the BRL 154.9 million increase in the EBITDA and the BRL 190.6 million increase in our financial results.

Moving on to the next slide, Slide #11. Here, we have details of the regulatory numbers. Let's start with our net revenue. Total net revenue was BRL 716 million, 60.6% more than the BRL 445.4 million year-over-year.

So let's look at the regulatory numbers. And the 2 impacts on this calculation were the BRL 154.9 million increase in the EBITDA and the BRL 190.6 million increase in our financial results.

Now moving on to the next slide, Slide #11. I'm going to give you more details about our regulatory numbers. Let's start with our net revenue. The total net revenue was BRL 716 million, a 60.6% increase against the BRL 445.4 million recorded last year. This increase is basically due to the BRL 214.8 billion increase in the energy transmission revenue, BRL 152.5 million was the revenue of the 3 transmission units that were put into operation. And the revenue of the transmission unit was also impacted by the readjustment. We had an 8.06% readjustment for contract indexed by the IPCA and 37.6% for contracts indexed by the IGP-M, which represents a BRL 65.2 million increase in this calculation.

The generation segment had a BRL 85 million increase in its revenue due to the increase in the PLD for this quarter. For our power plants, it was about BRL 581, megawatts hours, again, the BRL 89 that we had in quarter 3 last year.

Now let's look at the EBITDA on the bottom of the page. The total EBITDA was BRL 570.1 million, a 67% increase against the BRL 341 million recorded in quarter 3 2020. And the main impact here was the BRL 299.8 million increase in the revenues as I just explained.

Now looking at the net income. Total net income this quarter was BRL 77.6 million, a 36.9% increase against the BRL 56.7 million recorded in quarter 3 last year. And the main impact here, first, the BRL 228 million increase in our EBITDA that I just explained and the BRL 190.7 million increase in our financial results. This was mainly due to the BRL 207 million increase in our financial expenses.

So 2 highlights here. First, we had a BRL 131.4 million increase due to the 3 transmission units that were put into operation. And we had a BRL 43.3 million increase in projects outside of Brazil. And here, we had a foreign exchange rate variation between the 2 quarters.

Moving on to the next slide, Slide #12. Here is the indebtedness of the holding company. The gross debt was BRL 663.8 million, BRL 153 million less than the BRL 816.8 million recorded in December 2020. And this reduction was mostly due to the settlement of the 6 issuance of debentures that took place in April this year. The holding that is only one that now the seventh debenture issuance, which was 100% fixed by the CDI and maturation in 2024 and '25.

Next slide. Here, we see the consolidated debt profile. The gross debt was BRL 9.395 billion with a cash position of BRL 1.612 billion, with a total net debt of BRL 7.782 billion. When we look at the structure of this debt, there was no significant variation. And most of our indebtedness, 54% is IPCA indexed, followed by CDI accounting for 25%.

The Colombian projects. The debt corresponding to the Colombia and Peru project accounts for 12% of the total debt of the company.

On the next chart, we see the amortization schedule. So the consolidated debt profile is still very prolonged. We have 37% of the maturation date after 2026. The holding has the maturation of the seventh issuance of debentures throughout 2024 and '25, and transmission and generation assets have their maturation dates distributed over the years according to the cash generation expectation for each project.

Now moving on to our next slide. It's our last slide, Slide #14, where we have the performance of the company's share. Based on yesterday's closing of the market, the Alupar's unit had a devaluation of 6.16% against a devaluation of 7.87% in the IEE and 11.33% in the IBOVESPA index.

Now in respect to the financial volume, we had an average of BRL 22 million in the accumulated numbers for this year and BRL 24 million in the period right after the follow-on of the exit of FI-FGTS.

This is the end of this presentation, and we can now open for questions. Thank you.

[Operator]

Before we open for questions, we would like to apologize for the quality of the audio. We know there were some pauses in the audio in presentation. We had some technical problems, which have now been solved.

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

[Marcelo Sá, analyst]

I have 2 questions. My first question, I want to better understand the company's strategy to negotiate the contracted units that you have for next year -- the contracted enterprise that you have for next year for GSS considering the rainfall, which was above expected in October and substantially changed the price perspective. So how do you see this outlook for 2022?

And my other question is about the M&A market. We see some very relevant movements in the generation M&A, the buy of [indiscernible] Energia, for example. So what is your plan in terms of -- for the generation market? Are you planning to buy other companies? Or are you still planning to grow through greenfield projects such as the Potiguar project that you have? And so you have -- you would like to be under contracted to close better prices looking forward, since the conditions today are not the most to achieve.

[José de Godoy Pereira, executive]

Yes, we have available and unavailable energy every year that we negotiate in anticipation of the next year. For next year, we still have about 80 megawatts, which accounts for about 20% or a little under 20% between 15% to 20% of our total physical guarantee. And this will be actually lower because starting 2023, we will have the entry of PPA in the regulated market, which we already sold. And then we're going to have an increase -- capacity increase in 2023. We have contracts that we are already negotiating for '23, '24 and '25. And that's how we plan to work.

We always leave a part of this contracted due to our strategy due to GSF and everything related with that with GSF. So we are contracting. We are structuring the company. We've been much more active in the free market. We're negotiating different PPAs in the free market with shorter terms. The idea is to work with terms between 3 to 5 years for sales contracts. And next year, the average price of the year even with this outlook that you decide even with this change in the new ways, the industry has to pause and think because the PLD price today is totally artificial. If this was truly the price, this should come from thermal power plants.

If you look at the PLD this week, it doesn't make sense to keep thermal plants on. This is only making the energy more expensive for consumers, whereas those who should be paying for that are those who are under-contracted or discontracted. So there should be a change in this sense, and we should encourage contracting. And when you have more encouragement to contracting, you end up having more incentive to an increment in supply. These very long PPAs will cause prices to drop because you have very few offtakers and it's very difficult for a company to plan in a volatile country like Brazil.

How can you plan its consumption in 10, 15 years? It's very difficult for companies to plan their production structure for such a long term. So that's how we are working with this market in the midterm and negotiating contracts in the market. So this -- our strategy, particularly at this time, is to have a very strong presence in this market with smaller offtakers with not so long terms, but they have middle terms for using this energy.

[Marcelo Sá, analyst]

But do you have any expectation, for example, GSF for '22, you talked about 3- to 5-year long contracts. You have any price range for the contracts that you're signing now that you can share with us? And my other question was about growth. In terms of growth, will you focus more on greenfields than M&A? And how do you see the M&A market considering that many large transactions have just been announced, the [indiscernible] transaction, [indiscernible] with Eco-Energy, the Omega merger, there's many things happening in this market.

[José de Godoy Pereira, executive]

I think it's more for development. I don't know. We've been evaluating the possibilities. We have the capital course of the company. We have to follow this capital course. We see some time some transactions in the market, but we have a capital cost that is higher so we always have to look for the best options that will bring the highest possible returns. And we need to have time. We're working with the portfolio so we need to have time to negotiate this energy, always maintaining a part of it discontracted to cover for the GSF and working on greenfield as well.

So I think the industry has a very high demand for renewables and the pressure for energy from hydrocarbons in general tend to increase further in the future. The COP26 was a milestone. Despite the very high resistance, it will become clearer and clearer that this will be the future and the demand for renewable energy will be huge, particularly now with this opening of the market. I think we will be seeing demand from investors and from the large industrial companies to zero their emissions when buying energy as well. So the demand will be growing in the future.

And there's also the incentives that we expect to have starting 2024. The [indiscernible] discount and this incentive will have a relevant influence on the tariff. And consequently, the sales of renewables will have an increment -- the price will have an increment starting in 2024. So this is one more scenario in which we will be able to grow organically and not through M&As. We will be able to stack different projects which will give us enough time for the sales area to sell these projects.

[Operator]

The next question is from Carolina Carneiro.

[Carolina Carneiro, analyst]

I have 2 questions. First, about the TNE. What are the next steps for ANEEL and the company regarding the arbitration, the terms for definition of the new revenues, the estimated calendar for completion of the works and the updated CapEx? The second question about the renewable project portfolio, wind energy and PCH. Can you please give us an update about the plans for development, the market for sales of this energy and the projects and scenarios and price scenarios for these projects?

[José de Godoy Pereira, executive]

Okay. So you have different questions. First about the TNE. We are now submitting the rebalancing request with the new financial adviser with ANEEL. This is part of the project. This is part of the process. I don't know what ANEEL will decide, but that's what we are submitting right now. And if we don't reach a common agreement in terms of the revenue with ANEEL, that's why we created the possibility of having this defined through an arbitration process, which will be conducted by the International Chamber of Commerce and according to the rules of the chamber of Paris to define what will be the final tariff for the RAP.

Now with respect to the execution of the works, IBAMA has issued the environmental license. However, we don't have the final contract signed with the indigenous communities. IBAMA issued this license based only on the environmental -- indigenous environmental impact study. So now we have to agree on the final details with the indigenous communities. And this entails negotiation, not just for the TNE because the indigenous leaders are -- have a lot of claims, a lot of requests. And some of these risk requests are not related with the TNE project, but still, that's what they are presenting to us right now.

And without judging the merit of the issue, I think each of these requests have to be reviewed and each of us will have to be held accountable for the part -- for their part of the work. So that's what we're waiting for. We're waiting for an agreement between the indigenous community and the Brazilian government to remedy all the impacts and all the losses they were subjected to at least in the past 100 years. So we're forming a committee, and we will negotiate with the indigenous communities to come to this agreement. So that's what's happening right now with the TNE.

Now about the renewable energy. I already talked about this in my previous answer, how we're structuring the negotiations, and I think things are moving. Now that we have this opening of the market, we're going to work in the free market which will more and more be reaching lower demand consumers until it reaches the level of household consumers. This is a new market that is now opening up for us in a new way for the industry to operate. We see a lot of opportunities related with that. And the smaller consumers who are not the large consumers, these smaller consumers have shorter-term contracts that do not reach the 10-year period. It's very rare to have this predictability. These are midterm contracts between 3 and 5 years. What we have in our portfolio, we have some wind power projects. We have the Potiguar project in Rio Grande Do Norte.

[Technical Difficulty]

[Operator]

Ladies and gentlemen, please stay connected. Alupar's conference call will return in a few minutes.

[José de Godoy Pereira, executive]

When you look at the flow of our entire project, you see that they are self-exercisable because the flow of the dividends that you received since they are discounted from the volume, the BU will follow -- will fall and then it gets closer to 0. We are discounting the flow of the exercise of the call option. And that's how the project was set up.

The original idea -- and the original idea of the call option was exercised over the course of 8 years, reducing the BU of the shares and we would exercise at BRL 0 or very close to BRL 0 per share.

The only thing that will make us study the possibility of anticipating the exercise of this call is the financial cost. Because in 2016, the cost of the debt was very attractive at the time. And today, the comps of the call, the cost of debt is not so attractive, not as much as it was in the past. Of course, there are some options to make this cost lower, but there's a downside because as soon as you exercise this call, you have an increment in the leverage.

I don't have the exact number or the order of magnitude, but it's about BRL 100 million to exercise all the calls. I had checked this number, but maybe it's not the same now. Maybe I'll have to check again because we had the payment of the dividend, then there's an update, so I'll have to recheck. But one important fact for those of you who are looking at our balance sheet, this year, we had an impact in September, which was very relevant in the financial expenses items. You see that we had a relevant increase in our EBITDA, but also a relevant impact on our financial expenses. And this was basically due to the increase in the IPCA index.

So it would be even better to analyze an even IFRS because we have a stock of contracted revenue that is adjusted by the IPCA. But when we look at the regulatory balance sheet, we update our debt stock, but we don't update our receivables stock, which is also IPCA indexed. So there's this mismatch when we look at our balance sheet in the financial expenses vis-a-vis what we see in our receivables -- our future receivables, which is much higher than the debt stock that we have now, and it's being readjusted based on the IPCA. Although this is not shown in the regulatory balance sheet, it's only showing the IFRS balance sheet. So that's how we have to look at things. We have to look at things from both sides.

[Operator]

The next question is from Gabriel [indiscernible].

[Unknown Analyst]

I'd like to know whether the company has any expectation in terms of when the construction will be completed with the regulatory deadline of February 2022? So the question is, whether the company will be able to meet the deadline -- the regulatory deadline since the ESTE's project seems to be delayed? Are you expecting to have any problems with this delivery? And we see from the results from quarter 3 that you still have 9% to go.

[José de Godoy Pereira, executive]

Well, the ESTE project, it doesn't make sense to anticipate the delivery. The deadline is February 2022. It wouldn't make sense to accelerate this project and never made sense to accelerate this project. Because in order for the project to have systemic benefits, we will only have revenue if this project is generating systemic benefits. And this project connects to a substation from a different agent, and we are running late with that -- they are running late with that other projects. So if we anticipate we would run the risk of having to anticipate the disbursement of the CapEx, and then we would be -- we are going to deliver it on time. There's only 9% to go.

This is only related with the execution. We will meet the deadline defined by ANEEL. And after we deliver and based on ANEEL schedule, we are entitled to revenue regardless of the other agent having completed the substation to which we are connected. But if we didn't anticipate, that would be the developer's risk. If the developer decides to accelerate or anticipate, it will take on the risk of a third party, which can delay their own project. And this project is a project that will allow for the systemic benefit. So there's a connection that we will make at a certain point and if this connection is not made, our project cannot be used. So in this project, it doesn't make any sense to accelerate.

For the TSM project, the project will be delivered on time. By the end of the year, the project should be energized. And if we deliver by the end of the year, this will be an acceleration by 7 months against the original plan. If you look at the projects being delivered by other companies in the market, many companies talked about accelerating their projects by 1, 2, 3 years. But you see that mainly due to what happened in recent years, particularly in 2020 and lastly 2021, which was the COVID pandemic, the COVID pandemic had an impact on all the schedules and the deadlines of the lines that were under construction. There were many restrictions where we could not work. And even with all these restrictions, we still are being able to accelerate most of our projects.

[Operator]

Next question is from [ Fabio Hawaii ].

[Unknown Analyst]

I'd like to know what is the -- do you expect to be able to improve the RAP?

[José de Godoy Pereira, executive]

Yes. I already touched on this. We are requesting a rebalancing. There's a range of values and the minimum value is what you saw in our chart. I think it was BRL 397 million RAP. So this is what we will discuss in the arbitration process. The base date is 2019. The BRL 329 million is for March this year. The BRL 396 million has a base date of March 2019, if not mistaken. I don't remember exactly what the date was, but this is the range in which we will have the arbitration process.

[Operator]

Question from Wesley Zanoni.

[Unknown Analyst]

Are you expecting any increase in your payout in the coming years?

[José de Godoy Pereira, executive]

Well, this is something we are already doing. If you look at our numbers, we've been increasing our payout year after year. And after this very relevant cycle of investments, this is something that will happen naturally and is already happening. When you look at our flow, our dividend payout flow, you see that this is already happening.

In November, we went from BRL 150 million 3 or 4 years ago to BRL 300 million or nearly BRL 300 million this year. So this means that the payout is increasing every year. And next year, we will be completing the very relevant cycle of investments for the company and there will be an increase. It will certainly be higher than it was this year, and this is something that you will be continuing -- we will continue to see year after year.

[Operator]

The next question is from [ Gochi Gabriel ].

[Unknown Analyst]

Can you please give us an update of the option emphasized with TAESA?

[José de Godoy Pereira, executive]

Well, that depends greatly on TAESA. I understand that TAESA has a restriction [indiscernible] had announced that it was selling TAESA shares. They have some problems. I think they have some political problems and the process is now on hold from what I know. So maybe they will review this process in the future. We're not sure, but we are always open to discuss with TAESA to reach an agreement that is good for both parties, to reach the best agreement for both companies. We're looking at all the alternatives possible.

And I think it lost momentum due to the sale of TAESA and some political issues. There were some things that were challenged in the Minas Gerais family, house of the predicative. So they decided to put this process on hold for now. To make this process clearer maybe to clarify some things, answer questions and discuss, this is the best way to do this. If -- and it makes sense for the need to be doing things this way.

[Operator]

The next question is from [ Felipe Molina ].

[Unknown Analyst]

Can you comment on your expectation to receive with TCE RAP?

[José de Godoy Pereira, executive]

TCE? Okay. The TCE is the project in Colombia. This should start taking place as of January next year. We already submitted a request. Because the way it works, you request a waiver. We have a mediator company that works for the government bodies and monitor the schedule. The license there was issued, but there was a restriction for the last 15 towers. We are now negotiating to get clearance for the last 15 towers, but we should start the construction work in January. And with the waiver, we will start to generate revenue as of January as well.

Just one final comment. It is now under administrative negotiations. We already requested the waiver. The mediator company already gave us their permit and now we're waiting for them. And with the waiver, we will be able to start generating revenue starting January, which is also the contractual term to start generating revenue.

[Operator]

Since we have no further questions, we are now closing this question-and-answer session. Now I hand the conference over to José Luiz for his final remarks.

[José de Godoy Pereira, executive]

Thank you all for participating in this call today. And as I always say, we are totally at your service should you have any questions. Should you need any clarifications, you can reach us at any time. Have a great afternoon, and we'll see you in our next conference call with the presentation of the numbers for quarter 4. Thank you, and have a great afternoon.

[Operator]

This webinar is now over. Have a great afternoon, and you may disconnect your lines now.

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