Engie Brasil Energia SA
BOVESPA:EGIE3
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Engie Brasil Energia SA
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Good morning. This is the conference call for ENGIE Brasil Energia, the result of the second quarter of 2018. [Operator Instructions] This conference call is being recorded. This presentation, along with its slides, will be simultaneously transmitted on the Internet at the website www.engieenergia.com.br in a tab Investors. There you may also find a copy of the presentation and the company's earnings release.
Before continuing, I would like to clarify that statements made during this conference call relative to the company's business prospects should be considered as forecasts that depend on the economic scenario of the country on the performance and regulation of the electric industry and any other variables that therefore are subject to change.
Today with us, we have Mr. Eduardo Antonio Sattamini, CEO of ENGIE Energia; Carlos Freitas, CFO and IR Role; and Mr. Rafael Bósio, Investor Relations Manager. They are going to talk about the performance of ENGIE Energia in the second quarter of 2018. Right afterwards, they're going to answer any questions you may have. [Operator Instructions].
Now I give the floor to Eduardo Sattamini. Mr. Sattamini, you may start.
Good morning, everyone. It's a pleasure to be with you here again. Today I'm going to talk about the good results for the performance we have had in the quarter. We are going to start on Page 5. We had a quarter full of good news considering our business volume that had a significant increase in our net-operating revenue with a variation of 26.9% quarter-on-quarter or -- and 21.8%, if we compare the first half 2017 to 2018. We also had, EBITDA was BRL 42.4 million in the quarter, especially because of our portfolio management and obviously also because of the increase in the volume of contracts and prices.
Our net income had an increase of 20% in the quarter and year-to-date in the first half of the yearly increase of 14.5%, thereby showing how the company is performing well. They are obviously smaller than [indiscernible] because we have had the contribution of the debt in the acquisitions that led our debt to grow significantly from last year to this year. So our net debt -- total net debt in the second half of 2018 went to BRL 6.2 billion, approximately, that's in contrast to BRL 1.5 billion in the second half last year. So the net debt included and financial expenses and that's why our net result is slightly smaller than we have captured in EBIT.
We have an increase in the volume of energy sold that was significant to showing the continuation of our sales policy and the fact that we are the largest traders of energy in Brazil with a slight variation of 5.7%, thereby contributing to our results. We have had a total increase in the number of employees from the last year to this year of about 100 employees, but here we're talking about construction and our own employees. So construction work, as I said, are not yet generating revenue, but this increase in the number of employees that we have are going to end up with approximately 50 employees out of the 90 employees of Brazil Energy that comprise our company.
Now we're going to move to the second slide, Slide #6. Talking about the highlights. So we had the issuance of debentures for company Energetica Jaguar and in Miranda totaling BRL 1.8 billion and the longer debt profile comparing what was higher last year with a long debt. And we were very successful, and we had almost twice the offer in market payment. Also, as a result of the funding structure of Miranda, we had on the controlling company, controlling assets of Miranda in debentures with 1.7 superior or oversubscribed at a very competitive cost. Also, we have had in the quarter, part of the operations of the first plant of Campo Largo operations, Campo Largo VII with 29.7 nonconvention renewable energy, and this is the first complex piece of the generating blend of Campo Largo Complex and will be fully operational by the end of this year. So Campo Largo Wind Farm is close to Umburanas that is going to start operations as of January next year. And it might be slightly earlier considering what we are discussing with our suppliers. And we have also had the beginning of the full operations of Trairi Wind Complex. We are saving in operations and an improvement in the quality operations in our assets.
Now continue on the highlights on Slide #7. So a binding agreement has been signed for the acquisition of 50% shares that are still remaining of ENGIE Solar distributed that we started with a partner in early 2016. We had an investment plan that we reached early this year, 2018. We have come to a level that justifies the exercising our option to buy. Now it's 100% ours. And we are going to move towards the task of developing distributed solar energy as part of the transition that we think is happening, and we think will become faster over the next years.
So the installation of the special independent committee for transactions with related parties was approved for agreements that are part of the acquisition of the Transportadora Associada de Gás, the gas transportation company. So this is then with agreement with other parties, also with ENGIE International. And the idea is for us to be part of this group that controls this new asset. Right now, we can't say much about it because of injunctions. It's now at a standstill. We are waiting for a legal decision from the courts to move forward. But this company, along with the decision that we made last year, is a company that invests in infrastructure that will capture opportunities with good profitability and apply its features and skills of an investor in infrastructure depending on opportunities that come up. And this is our strategic direction as an investor of infrastructure in areas that are adjacent in the area that we already operate in, in generation and now we are going to gas. In this manner, we widen the array of opportunities that we can explore in a profitable way.
And lastly, we have approved, in our board meeting, the payout of interim dividends, 100%, corresponding to 100% of distributable net income for the first half of 2018 in the amount of BRL 1.1 billion. And this is going to be ex interim dividend on August 21, 2018. So we also mentioned that we have had the inclusion of our transition company in our shareholding structure and also our Wind Complex Umburanas that is our -- part of our structure. And soon, we are going to change from 50% to 100% ENGIE Geração Solar distributed so long as we finalize all our legal procedures. And this is going to be very soon, because we have met all requirements, so we're going to have 100% of this company as we said before.
In terms of portfolio, basically on Slide 9, we are still growing. Now we have grown 29-something installed megawatts for Campo Largo VII. And we are going to grow at a monthly rate so that we reach 326.7 just with the asset related to Campo Largo and the Campo Largo company. So we keep our strategy of growing in renewable energy and gradually decarbonizing our portfolio.
On Slide 10, you can see our relevant position among the private power producers.
So on Slide 11, we talk about our entry in transmission industry without any significant changes. We are just rounding out numbers, considering the last auction and unfortunately, we were not successful because of the aggressiveness of some other players.
On Slide 12, you can see our diversified portfolio and our position in terms of our customers. We have our distribution companies, free customers and trading companies. We have 16% in terms of trading companies considering the increase of our trading activities. So we have short-term trading activities that also permits us to have more flexibility to manage our energy portfolio and that's why our performance has improved significantly. So we have trading plus the more proactive actions in terms of exposures and this has provided this touch in terms of improving the management of our portfolio.
On Slide 13, you can see the segments where our customers are located on the free market. It's very important for us more and more, especially because now it's more open, so we need to pay attention at risks. We need also be paying attention to market growth even more so with significant growth of the market that is expected for the next few years.
On Slide 15, so you can see the energy market. So we have [indiscernible] prices in the spot market and apparently excess offers and this is driving prices up. And this has been the key tone over the past 5 or 6 years. So this excess of structural offers, but our dependence on rainfall leads prices to have great volatility and somehow we have been able to surf the waves and everything that has happened in the energy market over the past few years.
Now our sales strategy on Page 17. On the left-hand side you can see our uncontracted energy, so all cancellations. There have been short-term cancellations that buffer, or possible hydrological crisis that might come. So in 2018, we have 612 and still available in terms of average megawatts. And this is a good buffer for the hydrological risk. And this allows us to have consistent results for 2019, it's also '20. And we've been managing the short-term vision, as we say actively managing our portfolio. So whenever we understand that there is hydrological risk, we build the reserves as we find that it is necessary to reduce the volatility of our portfolio. On the right hand side, you are very familiar with this. You can have the uncontracted energy compared to the availability on a given year. So you can see the energy prices on specific years, considering the features of our market. In fact, it has price volatility. This also provides stability in our results, and it's the strategy that we're still using.
On #18, you can see the energy balance of June 30, 2018, for analysts to model the data you have on the company. If you look at the details you see that there has been considerable commercial activity in the second quarter. So good amount of energy for the years of 2019 to 2023, about 160, 170 average megawatts. It varies. In some years it's more or less. And for some years the total of sales is close to 230 average megawatts. So we have this tool for you to understand how we are structured in terms of sales and management of our assets.
On Slide 20, you have Jirau and nothing new about it. We're still not yet paying great attention to the transfer that we were expecting for 2018. And we have many challenges in 2018. We're having many challenges this year. For some reason, we cannot pay the due attention and our share in Jirau, we are at home. And GSF has been factored, generation companies as a whole, but we are not in a hurry to accelerate transfer. Transfer will be something providing the least risk possible, and we don't think this is likely to take place in 2018, maybe more like 2019. This is the perception of an affiliate and, of course, it's going to depend on the controlling company.
As to the distributed solar energy or rather ENGIE Geração Solar Distribuída, there has been a growth in this market. The scale is important. We have made agreements with the federations of industry in the state to increase the reach of our small- and medium-sized customers. So we are replicating what we did before in Rio Grande do Sul and Mato Grosso and I think that we will soon announce new agreements with federations of industry.
So we have Gralha Azul, nothing new about this project. It's moving on as expected with environmental licensing and definition of project and everything that needs to be done. And in the first phase, 2 years into the project, when there's not much to say except for the environmental licensing and the construction that we will be able to see more or less in 2020.
So we have Pampa Sul project. It's going fast. The only remarks here is that we are having some scheduling issues. So the start of operation will be on the second half of 2019, most likely, and we had already seen that possibility when we had already negotiated the cancelation of part of the contract in the regulated market so that we were not exposed to the sale of energy in the first half of 2019. So we have already negotiated everything, determining a new date for the beginning of some contracts. It doesn't have a significant impact, but this is what we have to say about Campo on the upside, so we have had a test of our coal transportation and we -- in May, we tested -- we had the hydrostatic testing of the boiler and it was successful. And there were no leaks. This is really unusual in the boilers that is as big as the boiler that we have built in there. So we have good quality and quality is what we are expecting. Obviously -- and difficulties that we are finding, and we had to delay a little bit, but we continue seeking to minimize as much as possible the impact.
As to Campo Largo Wind Complex, so we have gone live. So we have Campo Largo VII is now live and operational. So I think next month is -- and by the end of August, and then we -- all these wind farms will begin to operate in this year of 2018. Umburanas Wind Complex also is moving forward at a fast pace, and our commitment is to start operations in January. And we are working so that in November, December, some plants will already be operational. The main features of these wind complexes in contract with Trairi, they have metal towers, which is much faster than concrete towers. For concrete towers, there is a local logistic complexities, it's difficult and it takes much longer. So while it takes 3 days to assemble a metal tower, for a concrete tower it takes almost 2 months to be built. So it's completely different from the previous wind farms that we built in Ceará. The reason for it to be concrete and in Ceará, the towers had to be very high and this required them being built in concrete, it's different features of the wind complexes that we have in Ceará and in Bahia. And we have a set of projects under development, nothing new here.
I'm going to give the conference over to Carlos Freitas, who is going to share with you the financial performance of the company.
Thank you. Good morning, everyone. So on Page 29, we have a summary of the company's financial performance. In the first half of the year, net sales came to BRL 2.1 billion, a significant growth of 27% as compared to the second quarter last year. EBITDA grew even more, it grew 42% almost BRL 1 billion in this quarter. It's a growth not just compared to Q2 last year, but also along this year we've seen a significant growth this quarter. As a reminder the first quarter this year, it was BRL 1.046 billion. Net income has grown slightly less, because of what we already explained, but still growing 20% as compared to the second quarter last year.
Now we're going to break down and give you more details of where this growth came from. So on Page 30, regarding the net-operating revenue of the company, this increase has come because of 7% in sales. So 7.9% in businesses in this quarter, so the combined effect of higher prices with higher volumes added to a good result. We have also had a contribution of the power plants of Jaguara and Miranda HPPs that provided a good contribution. As a reminder, 70% of these 2 power plants are in the quotas sustaining long-term contracts with RGSF and also regulated in terms of O&M and improvement.
These 3 sources of regulated revenues add BRL 133 million in one quarter. Moreover, there is the 3 parts of the power plants, which is distributed in terms of sales, volume and in a spot market too. We do not usually breakdown exactly the EBITDA per project, and you can do the calculations, it's not so hard to do it, and you can see that these 2 power plants are providing quite a significant positive impact for the company. In the spot market, in addition to the impact of Jaguara and Miranda, we have had a significant effect of energy allocation and increase as compared to before. But also a small impact in terms of additional thermal power generation, but this is very much related to the company's portfolio management. Despite all the difficult or challenging scenarios with great volatility in terms of GSF and spot prices, we have had active management, and even more active than we used to do in the past, and this is proving to be good strategy with positive impact on the company's bottom line.
Lastly, we have had a non-recurring event with an impact of BRL 17 million. This was something that happened 2 years ago. And now it's been regulated and also our fine that we negotiated because of a construction that -- of a power plant. These 2 non-recurring events added BRL 17 million in this quarter.
As to EBITDA, it has -- the margin EBITDA growth -- grew significantly this quarter. The EBITDA grew 42% in addition to the 3 affects that I have already mentioned. On EBITDA, we have also had a slight increase and some costs of materials and third parties and services, but the main differential in this quarter is reversed provision that we had made last year for an agreement, for the power plant, we had a partial agreement and then we reversed the provision. This has had an impact. So there was a negative effect, because it didn't have the effect this year. Now the main significant events this quarter has been the greater volume of purchases for resales. As we are more active in the market, there is more trading, and we have been more active management on the portfolio. We are buying and selling more energy, so this increased in the short term. Plus, the increase in sales volume of 139% has been partially set off by the increase in cost for purchases for resale, totally BRL 138 million. But there was also something significant of about BRL 315 million in EBITDA this quarter.
And net income on Page 22 (sic) [ 32 ]. In addition to the EBITDA, we have had a slight effect because of a gas power plant that we are operating. So there was an adjustment in the book value of this asset. There has been an increase in the financial costs of almost BRL 180 million. And here, we have funded 100% of the purchase of Jaguara and Miranda last year with that. So clearly, it has a financial impact. And it's a good financial impact. We translated in higher financial expenses of about BRL 180 million and plus income tax, because the income has increased so a net increase of 20% increase in our net income.
On Page 33, so we still have our excellent levels of return on equity and return of our invested capital. So thereby is an evidence of our financial discipline of reinvesting capital. As I said many times, we don't want to grow just for the sake of growing, we are going to do it as we think it's worthwhile. So this has been translated in good return on equity and good return on invested capital. And also because we pay out good dividend.
As to debt, just for you to give you an idea, on Page 34, the debt has come to the end of the quarter the net debt of BRL 7.5 billion. So most of the difference comes for funding for Jaguara and Miranda. And we have also loans for Campo Largo that we have ready withdrawn. We have withdrawn BRL 500 million at the end of July and also for Campo. So the volume of debt of BRL 7,500. So we had a net debt over EBITDA of just 1.5x, because it used to be like 1 -- more or less BRL 6 billion. So we have a conservative management of our debt, and it still see room for us to increase our indebtedness in the long term.
And is evolution of net debt that you can see on Page 35. Basically showing that along the second quarter, our investment and the payout of dividend that we did in June, most of them were funded by cash generated by the company -- in the company, the company's operational cash. So our operational cash was BRL 1.150 billion in the quarter. And the reduction of net debt along the quarter was also high. And this debt has an interesting profile, the company is AAA rating. So we can issue for Jaguara and Miranda that we did in late July. So we issue a debt of BRL 1.800 billion that was used to refund the long-term debt that was in the short term. And if you look at the snapshot of the debt at the end of the first half, the short-term debt was BRL 3 billion, so we had BRL 1.8 billion in Jaguara and Miranda. And so we have had bilateral banking transactions. So thereby, we have amendments to reduce the volume of debt this year to about BRL 600 million, half BNDES and BRL 300 million for Jaguara and Miranda that will be paid in November.
So basically this has been distributed, and today it is distributed between IPCA and the long-term interest rate to base the nominal cost of debt is 8.2%. It's a significant decrease compared to last year that was 9.4%. So the trend reinforces our AAA rating. And the debt, as I said, is going to increase a little bit along this year and next year too. So on Page 37, you can see that for 2018, we are expecting to have a CapEx of about BRL 3,000,700,000 (sic) [ BRL 3.7 billion ] more or less distributed between Umburanas, Campo Largo and [ Tambas ]. And they are funded by debt. So one part is in the company's cash and the rest is going to go. And next year, our CapEx is BRL 1 billion, also distributed between Campo, Umburanas and transmission. The CapEx only starts a little bit next year and more in 2020. And we are going to have more debt in 2019, also most of it with BNDES. In this manner, we are going to increase net debt of the company, the net debt over EBITDA. Saturation is going to increase, but we are going to try to work within the ranges that we have already agreed. So 2.5, a little bit less or more. So if there is enough projects is going to operation, it might change. We don't have a very restrictive quality regarding this, but it is conservative, so that we have a confidence to have room in the balance, it's in our any market opportunity for us to grow.
And finally, all of this keep a good payout that was confirmed that 100% of the net income of the first half of the year at a level of 4.7% in the first half of 2018. So as we usually see -- say, our policy is sensitive when it is more favorable with a 100% when the environment is not so favorable, and we want to retain more cash, we review these numbers. So right now, in early August [indiscernible] to – decided to announce that they have 100% for the first half of this year is BRL 1.76 per share. And so this was all I had to say about the financial aspects.
Now I would like to open for questions and answers.
[Operator Instructions] Our first question comes from Mr. Andre Sampaio from Santander.
I would like to ask about testing auction. So have you made any decision about the participation? And I also have a question about the debt with the company's increasing exposure to the TJLP for long-term interest rate. So [indiscernible] interesting asset?
So we need to look database and information for [indiscernible] for that. So yes, it's internally, and we're going to make a position -- to make a decision on our position in a minute. To answer your second question, we think that the long-term interest rate is interesting, because there, the cost that was bought in terms of [indiscernible] of TJLP or in terms of its real break. But in our understanding, it is still within our portfolio. In our portfolio, it has a much smaller share. So it has risk diversification, so today in our mind theories, no intention of taking TJLP out from our financial cost. As to the composition of the debt, we're trying to work with short-term debt index by the CDI, especially because we are investing in CDI target of BRL 1 million to BRL 3 million in CDI, but the mid-and long-term are either in IPCA, which is our natural hedging on TJLP, trying to avoid too much risk. But in that case, it's a long time, it has behaved almost as [indiscernible]. And as I said, the rates today are higher than we would like to see. [indiscernible] and today, we do not have the intention of changing from TJLP to anything else. Under the new debt of the company, we always think carefully and try to balance also considering funds.
Our next question comes from Maria Carolina Carneiro from Credit Suisse.
I have 2 questions. First is an update, if you can, about the contracting so far. I don't -- you don't give guidance is also because of your strategy, but we have noted that you have closed the contracts for 2018 up to 2023. So it looks like other companies have also slightly longer contracts moving towards more 5 years rather than just 3 years that you used to have. So I would like to confirm whether my understanding is accurate in terms of your trend towards having longer contracts? And the other question is that you have said the company has approved in this independent committee for related parties to access potential participation in the acquisition of [indiscernible]. If you could tell us what would be your strategic interest? So what is the rationale for you to be analyzing this project? So what are the advantages of this asset as compared to other assets, even your core or related in generation and transmission? And just if you could give us your idea of your stake there? So would you be on a par with the controller? Or would it be different?
First question of pricing, that is easier one. Price. Sometimes prices might be higher or lower, and this does not define whether you're going to cancel contracts or not. And you can see what would be a short, medium and long-term prices. So under the pressure of that hydrology in 2018, this gradually goes down until in the midterm and has a price level that is not different from what we have been seeing that would have been 150 per megawatt-hour. And people say, well our company is selling wind air power for less than that. And I said okay, but then it's in the Northeast, it's not flat energy. So there are many things that make a difference in terms of price and not just this. So I think that there are variations in any capacity to manage the portfolio and a generator that is concentrated on one source, and it's capacity to absorb the market variation. It's always important to remind our people who are listening and then when there is a pressure from our customers to lower our prices. Of course, we resist this movement because we know that there are risks because we provide more convenience for these customers. Now a little bit about price and longer times. As a reminder, we have [ Jirau ] 1917. It leads to a change in source attribute. And a source that is the energy backup and differences in that. This leads to question in the minds of consumers and what is ahead with the regulation changes. So if we need to contact energy in the future, whether it is fuel or energy, you need to think about that. So I think that this is what consumers are trying to do and are sticking in order to reduce uncertainty, and it's important for the productive chain. So whenever there is a contract, it doesn't matter whether they are buying gold, plastic or power, they want to guard themselves against any changes in regulation. So my perception is, this is an important component for longer contracts. And long contracts -- they are not so long. We're always talking about 5, 6 years, no more than that. And we're seeing contracts to be delivered in 2020, 2023, not much later than that. And then there are a very few customers who sometimes want longer contracts, but this is not usual. Now the rationale for our independent committee for transactions with related parties, I cannot say much about that. I am on a secrecy agreement. So I cannot reveal all discussions. And right now, we have stopped because there is an injunction that has been filed, and it should not move forward until there is a decision. But the rationale is, as I said before, the company has the possibility of becoming a platform for investment in infrastructure. We see that the opportunities come up in the 3 of energy, oil and gas too. And there are sometimes very competitive conditions. We have -- we are generating cash, and if we can invest it in profitable investments whenever we see the possibility of going into areas with significant profitability we see that this is related to our historical equity and this is the rationale. And to our stake, we will have a share that we will assure some power within the shareholding infrastructure. It needs to make sense for us, and we're moving in that direction. Thank you very much.
Our next question comes from Fernando [indiscernible] from UBS.
This is Marcelo actually. I have a question about the discussion of GSF. There was Electobras PL that was approved in the lower half, but not approved in the senate, but was to compensate companies for the delays in structuring projects. Today there are some companies that weren't totally in the [ tree ] , like [ TSA and Lydes ] that there is an injunction going on because of GSF. And if this project really becomes a loss, there will be a disbursement, and they are going to have an extension in the concession. My question is, for companies such as yourself that have energy in the regulated and free-market, you [ adheres ] to the regulated, so you think you could still receive the benefit for the share of the energy that was in the free market? Do you think you could win anything if it becomes a law? And do you have an idea of how this impact could be?
Well, this was a broad discussion involving many parties and the ideas [indiscernible] for the companies that weren't on the regulated market. And it's a new market solution for the 3 markets and in this manner, it is our understanding and it is written in the law, the law -- the bill that is being voted in the senate, not just because of GSF, but also related to privatization of state distribution companies on a year of elections. But we are involved, and we will be entitled to have the extension that is equivalent to the value in a free market that represented the generation outside the order of merit. As to amount, I can't say about that. There are many calculations that have been made within the philosophy that obviously the negotiator needed to understand what was the compensation and what were the values involved. And I don't want to say which one it is. So there's a guidance that may be wrong, but on the whole cap of the energy in a regulated market and have 3. And then you can take that ratio 50-50 in terms of the total capacity for hydropower together with GSF, and then you can do the math for average megawatt. And then you may come to the formula, but I don't want to say it.
I just wanted to understand the concept whether you thought you were entitled or not, because the market also did this for [ TSA and Lydes], but I did not see how much the other companies could win.
[Operator Instructions] We are now closing our Q&A session. I would like to turn the conference over to Mr. Eduardo Sattamini for final remarks. Please Mr. Sattamini, you may continue.
I would like to thank everyone for your participation. This is another quarter that we have been working very hard in every area, and we have had success in all fronts, financial and with the leverage of the company, with the development in terms of executing and opportunities and the capacity to fund the growth, in the operation – with an operation that is increasingly more efficient. And so there are no cuts in cost in terms of portfolio management and the change of mindset also in dealing with the market that is completely different with a growing authorization. So I would say that you are to be praised and the company as a whole needs to thank the support of the market. Also with this interpretation, the performance has been very good.
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