Alupar Investimento SA

BOVESPA:ALUP4

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Alupar's teleconference to discuss the results of the fourth quarter of 2018. The audio and the slides of today's teleconference are being webcast, broadcast on the Internet and it can be accessed at www.alupar.com.br/ri, and the presentation is also available for download. [Operator Instructions]

Forward-looking statements said during this presentation are subject to risks and uncertainties, so they may or may not occur in the future or may differ from the expected outcome. These statements reflect the opinion of the company solely on the date they are made, and the company is not obliged to update them.

Here is today with us, Mr. José Luiz de Godoy Pereira, CFO and Investor Relation Director of Alupar; and Mr. Luiz Coimbra, Manager of Investor Relations.

I would now like to turn the conference over to Mr. Godoy, who will start the presentation. Please go ahead, sir.

[José de Godoy Pereira, executive]

Good morning, and thank you, everyone, for attending. I appreciate that you are here with us in the teleconference for the results of 2018. We will follow what we have been doing in previous presentations. So I will go over some highlights of the company, and then Luiz Coimbra is going to present the figures. Then later, we will open for Q&A.

In 2018, we even delayed the presentation of the results of 2018, and I'm going to mention that later, because there was a change in the accounting rules after CPC 47 was implemented. It is related to IFRS 15. So CPC 47 is a translation of IFRS 15. And there have been some changes in the accounting rules, and that had some impact, especially in the transmissions part.

So let me go over some of our highlights for 2018, and then I will talk about the CPC 47 issue. Starting on Page 4. We put into operation Energia dos Ventos Wind Farm I, II, III and IV and X. We had already started their commercial operator -- operation. However, the transmission line has not been implemented yet. It was hired by a company called Braxenergy, and they failed to comply with the contract. So there was a contract breach. And for about 2 or 2.5 years, we didn't have any transmission line to send the energy. But since we had sold a lot in CCR (sic) [ ACR ], 10% of what we didn't get with the price of the free market, and ANEEL did not agree in paying us for that or in accepting that. So now, when we will get this operation, we will be able to have additional energy provided in the wind farm, which accounts for additional 10% of our physical guarantee.

The second relevant point has to do with the issue of debentures, and this happened in the fourth quarter of 2018. We issued debentures for the attainment of 2 projects together with [ Griffin ], BRL 715 million ETB, and EDTE, the rest. And on Page 4 -- 5, you can see that as part of the amortization program, there is a grace period and also the rate that we signed this contract at.

So in terms of subsequent events, after the end of the fourth quarter, we had the installation license of EDTE. We also had the approval of the assets of the Eletrobrás auction, when we purchased part of that in assets, TME and AETE. Also, ESTE preliminary license was issued; also, the ETES. Our ratings were confirmed for the Fitch ratings. And also, the installation of the second part of ETB. That's the line of -- from Juazeiro III to Ourolândia II. We also obtained the operation license for ETAP; and the installation license for ETB is in its first segment, from Bom Jesus da Lapa II to Gentio do Ouro II. We also had the issue of the preliminary license for TSM; and also the installation license for TPE.

There is a chart here that shows, if you turn the page, you will see that on Page 8. So we put the current status of each one of the ongoing assets, so their current status regarding the relevant points. And so you see that all product, all products already have LIs (sic) [ ILs ]: ESTE and TCE in Colombia, ESTE in Brazil and TCE in Colombia. It will be part of ANEEL's schedule in 2020, so TSM and [ EATE ]. All the rest of them, we have installation licenses, and we have already started the construction.

Now on Page 9, you can also see something that has a major impact on the installation that has to do with the land negotiation. So we also state the current status of the land negotiation in all of them. So for ETAP, 100% of the land negotiation was made, so that is sold. That's true for ETC. And ETB and EDTE are almost fully purchased. So in case of ETB, just 3% has not. And TPE and TCC, we have 85% of the land acquired in TPE and 77% in TCC. ESTE is just a substation. There is basically a line there, so the impact is not so significant, just 5%. ESTE is not [indiscernible]. And TSM, we have 40% that has been acquired. In the case of TCE, the project in Colombia, we have not started the land negotiation yet because it has to do with environmental negotiations, and probably, we will start acquiring land as of June or July this year.

The status of the works, of the most advanced construction works are listed here, ETAP and ETC. ETAP is about to start operations. We are finalizing the commissioning stage, and we believe that maybe this week or next week, we will start working. And ETC is scheduled to start its operation in June. So the schedule is going as expected.

So let me talk now moving to Page 14. Initially, we have showed you some of the impacts related to the implementation of CPC 47. So we had a table here with the previous rule, so both the holding information and the consolidated information, and according to the current rule, showing the impact of the CPC 47 adoption.

Let me explain what the change is about so that you can understand this part. With the adoption of CPC 47, our -- let me go back first. In the previous rule, when we implemented that in 2010 through, originally, the implementation of IFRIC 12, transmission was seen as a business in which you would build asset and then operate that asset throughout the operation period, and then this asset will be delivered at the end of the concession period based on a residual value. So then it was considered a financial asset so that it would fit the rules.

Back then, companies implemented that system, there were some differences in criteria according to the company. They made different calculations of that. So CPC 47 also was intended to make a uniform system to calculate that.

When we implemented IFR, we did not put a margin during the construction period or during operation and maintenance. But CPC 47 requires 3 main elements: first, that we added the margin and determine how much that margin -- construction margin will be; and in O&M, too; and that we should also work with the financial asset remuneration that will be fixed. So far -- until now, we would just make a forecast and put 0 margin in construction, 0 margin in operation and maintenance and a variable rate that would calculate it. So the rate would be variable. But that has changed. And we calculate the margin of construction, operation and maintenance, but the rate is fixed. As financial remuneration, we use that according to the bid. So we had that information for that year, for the bid. And we use this rate as the financial asset remuneration rate. The margin for construction and O&M is the same. We calculated that, bringing the net RAP to present value, deducted from CapEx and also O&M brought to present value. With that, we reached an amount that, divided by the sum of the other 2, provides the margin. So that was basically the criteria that we used, and most companies used the same criteria.

So the regulatory framework for the calculation of RAP for the margin of construction and O&M and also to calculate financial asset remuneration. So most companies of the transmission segment, at least the largest ones, adopted the same system.

That has led to some impact to us during the year that had a positive impact of BRL 64 million. So the difference in use in criteria between the old criteria and the new criteria adopted by CPC 47 led to a positive impact of BRL 64 million in the year. There was also an impact related to the impact until December 31, 2017. That was put as accumulated profit. I -- [ he corrects himself ] so when consolidated, we have the reserve in profit that rose to BRL 1.052 billion.

So I talked about IFRS 15 or CPC 47. And now Luiz Coimbra is going to explain some of our figures.

[Luiz Coimbra, executive]

Good afternoon, and thank you for attending our teleconference for 2018.

I'll start my presentation on Slide 16. Here, we explain variations in revenue, both related to regulatory information and also the IFR. So here, we see the BRL 632 million with a growth of almost 60%. So in the fourth quarter of '17, it was almost BRL 400 million. And this was part of the revenue in infrastructure, an increase of BRL 250 million, BRL 96 million related to CapEx in the transmission assets under implementation in Brazil and BRL 160 million related to the adoption of CPC 47. And now with this margin, this margin can be brought to our results.

In generation, there was a reduction, BRL 15 million, the main impact of about BRL 24 million at Queluz and Lavrinhas, which changed the way that we recognize some of the injunctions to protect SHPP against GSF. So that had a result. And in 2018, these results were part of the assets.

When we check the regulatory revenue, we totaled BRL 389 million. Last year was BRL 419 million. And the reduction is explained mainly by the reduction of BRL 50 million that we had in generation. There was a BRL 33.4 million drop in the ETEP (sic) [ EATE and ETEP ] transmission revenue because of decreasing 50% of the annual permitted revenue, the RAP, and the 15th anniversary of the startup of operations.

In the next, first, we're going to talk about EBITDA, the total BRL 401.9 million, with a 39.6% increase. The adjusted margin reached 76.3%, 0.6% superior to the 75.7% we had in the fourth quarter of 2017. The main impact on EBITDA was an increase of BRL 236.7 million in the net revenue. That has to do with the BRL 250 million increase. And there was an increase of BRL 90 million in infrastructure costs because of the investment we made in implementation. There was another relevant account that had to do with the BRL 121 million -- BRL 21 million in general and administrative expenses. This increase were divided as BRL 10 million in Alupar Holding, some projects were written off, they were part of new businesses; and also, BRL 7.3 million in La Virgen. We had some expenses we had capitalized during implementation of this project, and in this quarter, we reclassified some of these accounts. They are nonrecurrent then.

Now moving to the next slide, we show the regulatory EBITDA, a total of BRL 265.5 million against its BRL 327.7 million, the result of the fourth quarter of 2017. The variations here are the same as previously mentioned, except for the net revenue and infrastructure that would not apply to regulatory information. The net revenue had a drop of BRL 30 million basically because of EATE and ETEP and also because of the 15th anniversary of operation -- startup of operation I mentioned.

And on Slide 19, we show you the profit from BRL 92.9 million in the fourth quarter of 2017 and reached BRL 134.1 million in the fourth quarter of 2018. The main impact had to do with a BRL 114 million increase in EBITDA that I've just explained and also an increase in BRL 86.8 million in taxation. It is based ultimately in 2 factors: first, a 31% -- BRL 31 million increase in ENTE transmitter because in the fourth quarter of '17, there was a change in the rate. We got a SUDAM tax benefit back then. And also, there was an increase of BRL 55.5 million (sic) [ BRL 55.3 million ] in the transmitters related with the gains because of the CPC 47 adoption. So we have deferred value on this difference.

And finally, another relevant account has to do with the participation of the minority shares. There was a reduction in BRL 12.7 million, BRL 24.9 million in ENTE and BRL 7.9 million at Queluz and Lavrinhas because of the different way we recognize the injunctions in GSF. And the other transmitters had an increase of BRL 19.8 million because of the adoption of CPC 47.

On Slide 20, we show variations in regulatory figures totaled BRL 40.9 million this quarter and last year was BRL 86.5 million. The main impact was the reduction in 62.6 -- BRL 62.2 million in EBITDA because of the drop in EATE and ETEP transmitters and also the administrative expense divided between La Virgen and the other.

Now moving to Slide 21, let us talk about dividends. The board recommended the distribution of BRL 184.6 million related to the -- equivalent to BRL 0.63 per unit. And we already consider that positive adjustment of BRL 64 million that José Luiz mentioned related to the adoption of CPC.

This year, because of the cash that is at the company, the board recommended a distribution of dividends. And we will assess this practice year-over-year to see how the results will respond and to see how we will distribute dividends in the future. So in total, we have BRL 0.21 per common and preferred share issued by the company or BRL 0.63 per unit. In December last year, it was BRL 0.06, and now we will also distribute BRL 0.45 over this year.

On Slide 22, let me talk about the debt profile of the holding company. The gross debt was BRL 680 million the end of the year, BRL 47 million less than what we had last year. Cash totaled BRL 745 million, so a reduction of -- when related to December 2017. The main impact for that was the amortization and payments in dividends over this year. We also paid BRL 211 million. We also made investments in projects that we implemented, totaling BRL 145 million. And from the subsidiary of one operation, we received BRL 370 million of dividends.

The debt profile was reduced in the short term from 11% to 4%, and that has to do with the amortization we had in the fourth issuance of debentures in the beginning of the year. So the composition, as mentioned, 2 issuance of debentures, and this is the total amount, BRL 160 million.

Now moving to Slide 23. We see the consolidated debt profile, BRL 6.4 billion, BRL 1.6 billion higher than BRL 4.8 billion we had in the fourth quarter of '17. If we look at cash, cash totaled BRL 3.6 billion. This has to do with the long-term upticks we got in transmission projects. So we got this investment over time.

Now looking at the lower chart. The main changes we had in the debt profile had to do with the long-term loans we got. Most of these loans were debt using IPCA as indexer. And when you compare that with the last year, this was 22%. But that's the difference in the long-term loan.

In the next slide, we see the debt amortization schedule. It continued and you see that 45% of our due date will be concentrated as of 2024. One important point is that you can see the bridges and how much they have been reduced when we compare that with BRL 880 million we had in the fourth quarter of '17. So this year, we will make this long-term loan, and over the year, we will work on the ones we still lack.

With that, this is what I had to talk in terms of figures. So I think we can open for the Q&A session.

[Operator]

[Operator Instructions] Our first question is from Carolina Carneiro from Crédit Suisse.

[Carolina Carneiro, analyst]

I have 2 questions. One has to do with this change in how you recognize the injunctions that protect this SHPP against GSF. Was it just an accounting measure? Or does it have to do with the content of the injunctions? Any interpretation that has led you to this change in recognition? And my second question is about the news about the Roraima transmission line that was bid in 2011 as one of the subsidiaries of Eletrobrás. You were the winners of that bid, but that was not developed any further. So is it -- do you -- if this project be unlocked at some point, is there any possibility of that? Or will this process be resumed, especially because of the rebalance of the contract? ANEEL has made some comments about that, but I'd like to understand what would be necessary so that is enough where it would make sense.

[José de Godoy Pereira, executive]

Carol, regarding your first question. It was just an accounting adjustment. This is something that we did along the year, in all quarters, and that has had a higher impact in the last quarter. But it was an accounting adjustment. There was no cash effect related to it. Regarding TNE, this is like a long story. So we don't have the license for that line since 2011. I think that the positive point about this project is that as of September -- or since September last year, the indigenous people of that region allowed us to get into their reserve, and then we did that. Because until then, we couldn't even visit the reserve. Our employees couldn't even go there to perform the studies or to make environmental impact mitigation plan. And then we would need IBAMA and FUNAI to allow them -- to allow us to build something. As of September last year, we had access to the reserve, and this happened only last year. These studies take 8 months to be completed. This is how long they have been done so far. They are still undergoing with the participation of the indigenous people that -- who live there with 40 different ethnic groups in that preservation area. So they are part of the discussions with us. I think this is a relevant point that has led to some change in the status since September. What we are doing is to talk to ANEEL, discuss with ANEEL because the projects of 2011 needed to have an economic rebalance because we believe that the license that should take 12 months maximum is taking longer than 9 years. So the economic impact was very relevant in this period. Since the day of the bid, when we bid it, the dollar exchange rate was BRL 1.7, now it's BRL 3.9. That has a major impact in the economic premises of the project and also because this is a project that was expected to be implemented in 14 months, and it will actually be implemented in 120 months because it takes a while for you to obtain the licenses and implement the construction work. So we are moving forward with the studies, with the indigenous people of that preservation area. We hope to complete them until May and then send them to FUNAI. Once FUNAI is okay with that -- and of course, we needed, first of all, to be approved by all 40 ethnic groups of the indigenous people. So that's the sequence. So the indigenous people, FUNAI and then IBAMA. The only point related to IBAMA is the indigenous issue, so to speak. All of the studies related to environmental impact, social economic impact or vegetation impact, this has been done years ago, and IBAMA had already approved that part. So the component related to the indigenous people is the only element that is lacking. So now it's up to ANEEL. Let us see how the economic rebalance is going to take place and whether that is going to make this project become feasible or not. So those are the 2 issues that we have at hand now.

[Operator]

[Operator Instructions] Andre Sampaio would like to ask a question.

[Andre Sampaio, analyst]

I would like to ask a question about Transminas. Could you just talk about the discussions and disputes on those assets?

[José de Godoy Pereira, executive]

The assets are bid by Eletrobrás, those assets. TAESA is a holder or the one who -- part of the projects with us. And our interpretation of the right of preference differs from TAESA's. TAESA has a very strong position about her understanding and believes that she is the one who is the sole person who has right over those shares. We disagree, and we are discussing that in trials because, of course, if you have divergent understandings, you need a third person or third party to determine what will be applicable. So this is what we are waiting for. We are waiting for this definition to settle this issue.

[Andre Sampaio, analyst]

I understand that this discussion has just started. But do you have an expectations regarding the timing of this decision?

[José de Godoy Pereira, executive]

Well, it depends how long the legal justice takes for its ruling. It's very difficult to determine when we will have a final resolution for that. I would need to talk to our lawyers to understand that. And I'm not familiar with the details of that legal process, but understanding that we want to understand whether we have right as part of those rights or not.

[Operator]

Our next question is from Rafael Dias from Banco do Brazil.

[Rafael Bezerra Dias, analyst]

Congratulations on the results. I would like to ask a question about a topic about CapEx and the revenue. In the case of revenue, I'd just like to confirm the RAP regulatory revenue. If this line gets into operation in the next year -- next week, we will have RAP in the next cycle in July. Or is this retroactive before July? And as to CapEx, BRL 110 million, if you add up 2016, 2017 and 2018 and also the results of the first quarter, do you have this figure? Or you're just going to disclose it when you disclose the results of the first quarter of 2019? Because I would like to understand the total CapEx that was spent.

[José de Godoy Pereira, executive]

Regarding revenue, once it is energized, we will start getting revenue automatically. The updated value of RAP is in the financial statements, but I think it was BRL 45 million. That was the original amount and the bid that was held in 2016, February 2016. And I 0 -- but I can't remember, but BRL 54 million was in the last cycle. As of July 2019, we have the update of IPCA for the cycle from July 2018 to '19, so that's what's going to be applicable for 2019 to 2020. Since we do not provide guidance of CapEx, I would rather not disclose that. But when it is in energized, well, it should have been energized by then -- by now, but we're still getting grass. And the substation, they're in the final stages. But we will communicate the CapEx later, the one that was actually spent.

[Rafael Bezerra Dias, analyst]

I would like to go back to the question of Carol related to the changes in the recognition of energy supply because of the injunction. The energy that needed to be purchased because of GSF, the revenue related to that energy is not being accounted as revenue?

[Luiz Coimbra, executive]

This is Luiz Coimbra. Well, in the past, since we had the injunction, there was a 10% impact on revenue. So I would work with a full revenue, not making a reduction in it. But now, if we have a 10% impact, the revenue is reduced by 10%. So that was the adjustment that we made and since the injunction is valid. When [indiscernible] injunction was not valid anymore, the auditors asked us to make this provision. But in terms of cash, there is no impact, not so far.

[Operator]

[Operator Instructions] The Q&A session is over. Now I'd like to turn it over to José Luiz Godoy for his final remarks.

[José de Godoy Pereira, executive]

Once again, thank you for attending our teleconference, and the company is open to any questions you may have or any additional clarifications you may need. Thank you very much, and good afternoon.

[Operator]

Alupar's conference call is now over. We'd like to thank you for your participation and wish you a nice day.