Engie Brasil Energia SA
BOVESPA:EGIE3
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Engie Brasil Energia SA
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Good morning. This is ENGIE Brasil Energia's Conference Call, where we will discuss the results for the first quarter 2018. [Operator Instructions] We should remember that this conference call is being recorded. The presentation, followed by slides, will be simultaneously transmitted through the Internet through website www.engieenergia.com.br at the Investors section. A slide presentation and the company's earnings release are also available on that website.
Before proceeding, I would like to clarify that all statements made during this conference call regarding the business outlook of the company should be treated as forecasts that depend on the country's macroeconomic conditions on the performance and regulation of the electric sector, besides other variables. Therefore, they are all subject to change.
With us today, we have Mr. Carlos Freitas, the Financial and Investor Relations Officer; and Mr. Rafael Bósio, Investor Relations Manager, who will talk about the company's performance for the first quarter of 2018.
Immediately thereafter, there will be a question-and-answer session. We would like to remind journalists who wish to ask questions to please do so by e-mail sending their questions to the company's press office.
It is now my pleasure to turn the call over to Mr. Carlos Freitas. You may proceed, sir.
Good morning, operator. Thank you. Good morning to all of you. It is a pleasure to release the results for the first quarter for ENGIE Brasil Energia. I hope that you all have the material that we have on the site. And on Page #5, we're going to speak about the financial highlights for this quarter. It was a good quarter in general, with a net income of BRL 260 million, a 16% increase, perhaps a little less than half of this due to Jaguara and Miranda that contributed for the first time in this quarter. I would like to remind you that we took on this operation at the end of last year. This began to operate in November, and they now have given us a positive contribution, Jaguara and Miranda. The regulated revenues because 70% are quotas represented BRL 113 million. The additional BRL 140 million that we have as growth, most of this came from a better performance in the short-term market. The average PLD increased BRL 50 ratcheted to BRL 200 this year. And as was announced during this quarter, we had a great deal of secondary energy which means that the market as a whole sub-allocated energy for the quarter. We're referring to insured energy that reached 100% -- 115%, once again, based on secondary energy which, of course, may revert during the year, but we do hope to have reasonable amount of energy. This is perhaps not as strong as last year where it represented more than 20%. We're expecting 13% to 14% this year. We also had an increase in revenues due to the increase in sales volume. The market is resuming. It already has come back. We will have significant increases in the medium term. We're referring to 300 megawatts for the medium term. And of course, this has led to an increase in revenues as well. The company EBITDA had a growth of 18.2% for the reasons already explained, basically. Now the net income grew only "8.6%" basically because the financial expenses of the company increased. As you know, we funded 100% of our acquisitions with the company's gross debt from one quarter to the other. From March to March of this year, the net debt more than doubled once again due to the financial expenses and due to a lower financial revenue. The cash in the company is lower vis-à-vis last year due to the acquisitions and the native investment in Miranda and [ Umburanas ] and others that I will comment on subsequently. Another highlight that is interesting is the slight drop in the generation of energy, hybrid and solar, and this means that we have less royalties to pay. And perhaps this is iconic. This quarter we no longer have the gas plants operating. It generated energy in the last quarter of 2017. This is also another important highlight for us at present.
We now go on to the next Slide #6 to speak about the highlights of the company. I have already mentioned as a first point, we were able to sell approximately 300 average megawatts for the medium term. And this is in line of our -- for our strategy of a gradual contracting strategy. We have seen a great deal of interest for this in the market. And as mentioned, we're the main player in the energy market. Jaguara and Miranda for the first time contributed in the regulated market. And besides having 100% in the free market, it also contributed somewhat to the enhancement of our results in assured energy. Another important point is the maintenance of the rating of the company as AAA per the Brazilian scale. Fitch had lowered the company's long-term international rating to a BB. However, at the local sphere, which is our source of funding for local market and funding, we continue to be a prime company with a AAA rating. We signed the concession contract for the transmission auction now in March and beginning in March, therefore, beginning as of this moment, we have a maximum term of 5 years. And as mentioned before, we do have the alternative of anticipating this line in at least 2 months.
On the following page, another important highlight refer to the possible sale of our carbon assets: the Pampa Sul and Jorge Lacerda Thermoelectric Complex. Once again, we were negotiating with ContourGlobal as we had announced we have not been able come to an agreement, and we are now assessing how to continue on with this profit. We're going to analyze other alternatives in terms of the decarbonization of the company's portfolio. Yesterday at the Board of Directors meeting, the acquisition of the 50% remaining shares of ENGIE Geração Solar Distribuída was approved. This is a company that will tend to grow in the future, which is a way of entering this segment. And another highlight was the approval at the Annual General Meeting 2 weeks ago of complementary dividend representing BRL 637 million that will be paid at the end of the semester. With this, we will be able to obtain that 100% payout with a remaining -- well, it was BRL 2 billion, part of this paid last year, the rest will be paid this year. And we will continue to attempt to pay all of this, and perhaps it will come down a bit. But as you all know, our intention is always to pay as much as possible in terms of the dividend payout.
We continue on in our presentation. We're going to go straight to Page #12. We have had a growth in terms of our energy. What we do is to buy and sell energy to traders, simply to complement our portfolio, not only in terms of conventional energy but also in terms of renewable energy, incentivized energy. There are periods where we sell conventional energy with a premium and then when we buy incentivated energy, which we distribute in the free contracting environment because of the advantages that this allows us in the market. This mechanism at present represents 12% of our sales in the trading market. And if you look at the situation, approximately 50% of the revenues come from direct clients in the commercial area and 50% from PPAs and the regulated markets.
We continue on -- we go on to Page 17, which is a slide that is worthwhile mentioning: our sales strategy. If we compare one quarter with another, we do have an important change, which is the volume sold. If we contain -- compare, I'm sorry, quarter-on-quarter, in 2020, we have 370 megas, 371 and so on and so forth, approximately 300-and-some megawatts for these 3 years. The rest that is uncontracted in 2018 is very similar to what we had in the previous quarter, it was 12% approximately. We believe that this is a reasonable amount to be able to face the risks that we have going forward. For the coming year, we have 12.3%. We will see which is the evolution of the hydrological risk. And of course, we will inform you during the rest of this year. For the time being, it stands at 12%, and the trend is to remain at that level in the medium term to be able to mitigate the risks with specific clients and to have greater cash stability in the company cash flow.
On Page 23, it is important to also underscore the new transmission system, Gralha Azul, that we have selected for this first slot. It has a CapEx of BRL 2 billion, and we're reducing the CapEx 5%, the CapEx of Aneel. And we are confident that we will be able to work with this line in 12 months with a 12-months difference or perhaps even before.
When it comes to Pampa Sul on Page 24, the work is proceeding adequately. The intention is to enter into operation in the first quarter of 2019. This is a very complex work that we are proceeding with very adequately. And as I mentioned, as part of our decarbonization process, we're going to continue seeking alternatives for this asset. It could be sold now, it could be sold in the future, perhaps, not sold. Once again, we are open to solutions in general.
We go to Page 25, the Campo Largo Wind Complex, Phase 1, once again doing very well. We have already started on the commissioning of 11 wind farms each with approximately 30 megawatts, which means that we're putting 90 megas into operation until the end of June approximately. And the forecast is for the last part to come into operation at the end of the year, beginning of 2019, which means that in a period of 6 months, between June and December, we're going to be having 300 megawatts from Campo Largo following our scheduling and somewhat below what was budgeted. The conditions are highly positive, and it is part of our work to execute and build wind farms. We mentioned this last year, we have Campo Largo in Bahia.
And on Page 26, we are repeating all of this process with the Umburanas Wind Complex, 360 megawatts, once again part of the energy sold in the regulated market. And we have worked with the foundation. The wind turbines have already been built, and this will come into operation at the very beginning of the coming year. So throughout the third semester of the coming year, we will have an addition of 360 megawatts of eolic energy. And we have another pipeline going forward as you see on Page 27. We're going to trigger all of this when it becomes worthwhile investing considering the market as it is at present. In the auction that we had a few days ago, we did not participate. We decided that it would not be worthwhile participating in that auction considering the supply and demand conditions. So once again, you see our pipeline that we will trigger as it becomes worthwhile doing so.
Financial performance on Page 29. I have already referred to the figures of this quarter, but you can observe the trend year after year. It is a trend of growth. We have significant growth last year with our asset portfolio. And this year, this will continue as well. Once again, we have Jaguara in the second semester, we will have solar energy coming in.
On Page 30, here we have a breakdown of our net operating revenue of BRL 60 million. Thanks to Jaguara and Miranda for the regulated environment in the short term. Part refers to Jaguara and Miranda and other part refers to the secondary market. We have the stock prices and an increase in the sales volume as you can observe on the chart as well.
When it comes to our EBITDA on Page 31. Besides the BRL 113 million for Jaguara and Miranda, we have an EBITDA impact in the short-term market of BRL 80 million, positive of course, not only because of the secondary energy but because of the very active management of our portfolio that we tend to carry out.
We have an increase of BRL 6 million due to the closedown of Jorge [indiscernible]. We also have the purchase of energy for resale of BRL 80 million, which offsets the performance in the short term. And as I mentioned, we are increasing our trading volume to be able to complement our portfolio.
When it comes to our net income, on Page 32, as you can see, besides the EBITDA variation, we have 2 highlights here. The most important is the reduction of financial results vis-à-vis the fourth quarter in 2017 of BRL 85 million. Despite the drop of the interest rate, as I mentioned, we did have a significant increase in the company's indebtedness and another highlight, perhaps, a minor one. Less expenses on depreciation and amortization and an important part from Jaguara and Miranda. In terms of our return on equity 20% and the return over invested capital as well. We're growing as a company but maintaining a good payout and of course, good growth.
And to conclude, I would like to refer somewhat more to our debt and investment part: CapEx. This is an illustration of what I have already mentioned to you a year ago. Our debt was somewhat more than BRL 3 billion. Our net debt, it is now BRL 6.7 million. Our cash has had a reduction. Our gross debt and net debt are very similar. Now we have 1.6x EBITDA in net debt -- in net debt ratio, which is a rather comfortable ratio as we have evaluated. And our intention is to increase this indicator throughout this year because part of our CapEx will be funded with debt, through debt.
On the next page, here we have the bridge of the evolution of our net debt. Basically, the net debt increased between September and March of this year. It increased BRL 1.3 billion, which was the amount that was paid in dividend. We paid out dividends in March, approximately BRL 1 million, perhaps somewhat less and BRL 300-and-some million in June and January, which adds up to BRL 1.357 million. The operational cash flow, BRL 1 million, was spent on investment on CapEx to pay income tax and so forth and the variation of the net debt also is what it is due to the reduction in cash.
The debt profile on Page 36. We still have an excessive volume to be paid in the short term, BRL 3 billion this year. Part of it is connected to the acquisition of Jaguara and Miranda, others are company's debt. We're already focusing on this, and the illustration at the end of June will show you a shorter bar when it refers to the short-term debt. Another very important point is the cost of the debt that has dropped. It used to represent 10% in the first quarter of 2017. At present, it has dropped to 7.9% and the percentage of CDI, which is a very low percentage as you can observe, and this will reduce the average weighted cost of our debt.
And finally, on Page 37, the company's investment plan. Last year, over BRL 5.5 billion in Jaguara and Miranda. This year, the amount will be BRL 3.6 billion, of which BRL 2.7 billion will be funded through debt. This BRL 3.6 billion, we have Pampa, Umburanas and Campo Largo. And perhaps minor CapEx for our day-to-day work, but most of this will go in Umburanas and Campo Largo. Our CapEx truly begins to decrease in 2020.
To end the presentation, we'll go to Page 38. A yield of 8.6% with a record of dividends paid out, once again attempting to hold true to our commitment of being a very balanced company that grows in a responsible fashion and that pays out dividends when we see that there is not a better use for other resources, and this has been the trend in the last few years. And we did have sufficient debt, we should not take more. We're going to -- well, we have a great deal of breath to continue on in this fashion.
In summary, this was what I wanted to present to all of you. I would like to offer you the floor for questions and answers. Thank you.
[Operator Instructions] Our first question comes from Mr. Thiago Silva from Santander Bank.
I have 2 questions. The first refers to the price of energy. Is there any guidance regarding your strategy, simply to have an idea of what you consider as being the energy price in the long term. And if you will comment on the auction minus 4, if there's room for renewable energy and if there is room to reduce the price in the long term. The second question, you want to grow more, you want to expand more. Do you prefer to work in brownfield? What is it that you foresee as a growth strategy for the coming years?
Very well. Let's begin with the second comment that you made. Yes, of course, we have the intention of growing in terms of transmission and in generation. And we can do this through mergers and acquisitions or not. Generally, we tend to be more competitive when we work with greenfield. Why? Because you need to manage some risks in the greenfield projects, the environmental risk, the construction risk, the EPC risks and so on and so forth. And this is our core business, I would say, therefore, if we're able to manage those risks, we can obtain greater returns. If we acquire a line that has already been constructed and funded, it is very probable that we will be less competitive, therefore, we're going to allocate our resources where we have a better chance of growing. It could be brownfield, which is the case of Umburanas, Umburanas was not a brownfield per se. It did not have the construction, but it already had the contract, a pre-contract from third-party that had a great deal. We took on this project, and it has ended up being a very interesting deal for us. Once again, it could be a brownfield in the future. And this is more probable than acquiring something that is ready-made. And to respond to your first question, the long-term energy price, we continue with a vision of the long-term price of BRL 150, 170. This is the range that we're working with for the long term. For the short term, it will be above that, it could be. And this is what we expect in terms of the spot prices this year. But for the long term, it's what we mentioned in the previous quarter. The auction for solar and wind energy at lower prices [indiscernible]. We don't see that there will be an immediate impact in the long-term prices. And we have had valid questions from many people that this will not be a trend if there will not be a pressure in the future sale of energy. We believe that the price of energy in the future will be a mixture of multiple issues. On the one hand, we have solar and wind energy that could be sold in a context of availability where the risks tend to be quite low and with a range of options for supply. It would be one of the lowest, Brazil as a whole. Nevertheless, we'll not depend on solar and wind energy exclusively. It does have a very large base of electrical power that it will have several decades still in the country and thermal energy, of course. And with this mix of forces of energy, I do not deem that there will be an impact. In fact, that will reduce the prices. Now if the trend continues as is, we will have low prices until there is a readjustment we saw in 2011, 2012 auction for wind energy that had very low prices. There were problems. And well, this is a cycle that is repeated, that is ongoing. But for the long term, once again, our vision is not to grow just for the sake of growing but to grow in a sustainable way. This is the company vision.
Our next question comes from Vinicius Tsubone from HSBC.
I would like to know if you have a cost estimate for the plant and if you have insurance for certain events, I believe [indiscernible].
Good point, I think. At the end of March -- around March 20, we have a blackout that affected the Northeast of Brazil. The North system was isolated. And during some seconds -- almost 1 minute, there was no energy flow at the plant and 18 machines stopped from -- impacted, others were even more impact, and were slowly returning to operate with these 8 machines during this month and the coming months. We already have 1 machine into operation. At the end of the month, we will have an additional 2 machines, which means 3 machines that will be coming into operation and then 3 plus 3. At the end of May, all of our machines should be operational. Regarding the second part of your question, the insurance. Yes, we do have insurance for this. And as we work with third party, we're undergoing conversations with the government to speak about up-time and see what happens with other units. We don't expect greater effects, the material and physical cost. This problem was not that steep. It's simply a matter of time, perhaps.
Our next question comes from Mr. Pedro Manfredini from Itaú BBA.
I have 3 questions if you allow me. The first, well, the first 2 questions about Jorge Lacerda. What is the sales process of Jorge Lacerda, and how did this impact your energy allocation strategy for 2018? Are you imagining a different allocation vis-à-vis other years because you decided no longer to count upon this asset throughout the year? The second question, you talk about alternative for Jorge Lacerda. I entered the call in the middle. If you could perhaps refer to some of these alternatives. And if an alternative includes, once again, negotiating with ContourGlobal, who has shown interest in this asset. And the third question, being very specific, we saw that SESC published something in May and the sale could happen this year. Is this part of the radar, part of what you are planning on doing? You spoke about M&A and perhaps, you could have something to add. SESC through this new contract has new capacity, and it will have uncontracted energy going forward. Is this is part of your strategy? Or if your strategy continues to be to focus on wind energy and Jaguara and Miranda, once again, which is your growth strategy going forward?
Thank you, Pedro, for your excellent questions. We begin from the beginning. Jorge Lacerda and the allocation of energy, the Lacerda complex, until it is sold, continues to be ours. In our energy allocation for this year, we have considered that we are owners of the complex wholly ours. This is a process that takes time. We have to undergo that process of negotiation. And in fact, even if we have come to an agreement, the transfer would not be made this year. What is more important, nevertheless, is that this asset is potentially under sale. And up to present, what has been happening truly does not make sense. Jorge Lacerda continues in our portfolio this year, continues to be part of our portfolio in 2019 and other years, we do know that if we sell Jorge Lacerda -- and this is the more probable case. We could carry out a PPA in transition during 2 years or 3 years, we will still have energy that would be ours. And this will be a scaled transition based on a contract, which would be very positive for us and will also be very positive for the buyer. So when it comes to the allocation, well, alternatives, we mentioned them during the call. And as I mentioned, we are at present back at the negotiating table, thinking about our next step. I still cannot remark who this would be with and how this would be. We have agreement that we cannot comment on, but we're not standing still. We are yet again reassessing alternatives, not only for Jorge Lacerda but for Pampa as well. When it comes to safety, our stance continues to be as it was at the beginning of the year. [indiscernible] has received an additional 20-year extension and this makes it ever more interesting. We're waiting for the -- well, this will depend a great deal on the conditions in terms of the liabilities and whatever exists at present at [indiscernible]. Once again, this is part of our radar, but it will depend on how complicated [indiscernible] we consider this business. Thank you very much and simply to conclude this, when this process began last year, did you assess this asset, and I suppose that since then, as it was part of your radar, you have had sufficient time to assess all of the possibilities. I think these are some of the critical points that are part of the purchase of [indiscernible], or do you have to wait for that public notice first? Well, you have time to carry out a more in-depth analysis considering that, that public notice should be out in 30 days. The only thing I can repeat once again is that it is in our radar. I cannot give you any further details.
[Operator Instructions] At this point, we end the question-and-answer session. I would like to return the floor to Mr. Carlos Freitas for his closing remarks. You have the floor, Mr. Freitas
I would like to thank all of you for your time and for your confidence in the company in the last few years. And should you have any further doubts or comments, we are at your entire disposal. Thank you very much once again, and have a good day. The conference call for ENGIE Brasil Energia ends here. We would like to thank all of you for your participation. Have a good day. And thank you for using Voitel.