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 Conference, where we're going to discuss the results for the second quarter of 2020. [Operator Instructions] You should remember that this teleconference is being recorded. This presentation, followed by slides, will be simultaneously transmitted via Internet at www.engie.com.br-investors. A slide presentation in the company's earnings release are also available on the website. Before proceeding, I would like to clarify that all statements that may be made during the teleconference regarding business outlook of the company should be treated as forecast depending on the country's macroeconomic conditions, on the performance and regulation of the electric sector, among other variables, and therefore, are due to changes.
With that, we have Mr. Eduardo Sattamini, Chief Executive and Investor Relations Officer; Mr. Marcelo Malta, Chief Financial Officer; and Mr. Rafael Bosio, Investor Relations Manager, who will talk about the company's performance in the second quarter of 2020. Right after, we will have a Q&A session. We remind that journalists who wish to ask questions can do so by e-mail, sending them to the company's press office.
It is now my pleasure to turn the call over to Mr. Eduardo Sattamini. Please go ahead.
Good morning, everyone. It's a pleasure to be with you talking about the company's management capacity. And the capacity to guarantee good results, overcome difficulties. Our business has suffered a significant impact of COVID-19 and Brazilian economics. With our competence and the capacity of our managers, we have been able to achieve very satisfactory results. And of course, there was an impact of COVID-19 on our operations, and we'll see that later on. This impact represents this capacity in the company's resilience. It is also due to the company's growth strategy launched in 2016 with profitable investment. And we're now sharing our results with you.
So we start in Slide 5. On our net operational revenue, we had an increase of 23.4%. This increase is due to some organic factors, such as an increase in our mean price and increase in volume. But we also have some nonrecurring components. And that indicated to the market. In analytical terms, we had BRL 80 million. In addition to that, we had a small nonrecurring event from payments paid by insurers and contract line. But this all has do -- to do with the performance of our management team. We had a 36.1% increase in our EBITDA, and I would like to highlight the contribution of TAG. And if we compare it half of the year -- I guess, half of the year, you can see the value of BRL 1.431 billion, which is a significant contribution. This only demonstrates that investments in TAG was good and is providing a lot of value to our company. This will increase over time when our debt is set in half, and it will further improve in the next quarter. We also had an important impact of the reduction of inflation on our financial results. This led our net profit to have a significant positive impact. And also we had a correction or adjustment in our payable accounts. We had lower expenses. With that, we had an increase in our net profit of almost 100%. It was actually 98.7%. There are some important factors to be highlighted there.
We have not only TAG, but we also have some contribution for this next half of the year. We had a more generous allocation for the second quarter of 2020 than we had in 2019.
And also here in Slide 5, I would like to highlight the reduction of our net debt and the generation of cash in the company. We had lower electric energy production. And just to give you an idea, our electric power plant used to produce 60 -- or produced to 60%, actually, less than the same period in the previous year. We had some compensation by the thermoelectric plant, whose activity increased 10%. But overall, our energy production was 60% lower than what we had in the same quarter in 2019. This energy production is related to our hydroelectric power plant and do not represent a loss of revenue. And that is because we have an energy relocation system, which provides it to other networks in the same system, so we are receiving energy from the system.
And in other years, we had an inverted situation. We produced more and shared our energy with other power plants. I would also like to highlight that our number of employees have increased in this period of COVID-19 in 2020. We had a total amount for the second quarter in 2019 in the [indiscernible] Complex, and we have 3 large projects under construction. So you can see that we have also increased the number of employees on under construction plans. We will later talk more about this, about our activities in Bahia. We also have our wind plant actually in Bahia. We have production in Paraná, and we have another plant in Tocantins and Paraná. They were recently purchased and are under construction.
So moving on to the next slide. When we talk about the highlights, we want to reinforce the issue of the COVID-19. We have shared a lot of information about this. We reported the first quarter about a month ago. I would like to highlight that we had an impact -- a significant impact on our load, which impacted our generation scaling factor. And what to compensate the system are the power plants. When you have a low and it's intermittent, we use solar energy, wind energy and thermal energy. And then at the end of the day, this variation takes place with a hydroelectric power plant. This is something we've been discussing with the government. This is a service that the power plants provide to the system and is not paid for. They are harmed because they have less energy related to them whenever we have a situation like this, and we have decrease in the demand. They do not generate and do not get paid for being ready to provide energy to the system. The loss wasn't so significant right now because our PLD was okay in May. And then we had BRL 110, BRL 115 in June and an average our PLD was close to BRL 100. And so it did not impact us so drastically -- I'm sorry, it is BRL 75. I gave you the wrong number. We also had a NIM reduction of 7.8% in consumption. I'd like to remind you that we have some contract. And this conception only represented 5.5% in build energy of free customers. And this allowed us or actually, this led to some impact on our billing. But as you can see, it was very low. We were able to renegotiate. We renegotiated some bills with clients, provide some relief to clients who had more difficulties with the liquidity? And then we had a situation where we could meet their needs without affecting the results of the company. We made relevant investments. We invested in our employees in the communities we're at. We are confident about our creation. We did have to make some changes in our operation team, some of them were locked down to protect their health. But we were able to keep our operations going without any major problems. And then on the right side, we reinforced the different measures. We are working with widely adopted home office. We wanted to guarantee the safety of our employees and our subcontracted staff. We had a large volume of renegotiation payments to help our -- some of our clients, we made agreements with those who suffered the impact more harshly. If we look at our energy portfolio, we can see that there was a 10% change in compared to the market volume. And so we renegotiated with our clients. And just to give you an idea, we had some problems with default that they were contained in April. We renegotiated readjusted value. And then at the end of June, we went back to our historical default rates of about 10%, and it's never a permanent default. Sometimes clients have cash difficulty. They cannot pay or they have to -- have a better balance but resume payments the next month.
And moving on to the next slide with the highlights in Slide 7. We can see the TAG shares and so our participation went from 29.75% to 32% -- I'm sorry, 29% to 32%. And this will be seen in the third quarter with the contribution of TAG.
We also had effective business activities in this quarter. Our prices were very close to our portfolio, BRL 190. And uncontracted commercial capacity decreased around 100 average with megawatts in 2021 and 2022 and above 150 average megawatts from '23 to '25. Our business activities is giving a preference to longer contract. And so in '24 and '25 -- would have higher volume.
We have approved the distribution of entering dividend in a total amount of BRL 677.7 million. We were not conservative. We have BRL 7 billion of investment in the projects I've already mentioned to you, Campo Largo, Gralha Azul. And it is actually a conservative decision that will be reanalyzed later on according to our cash situation and the economic situation of the country. So this is our decision for payout in 2020. But it is a rather conservative stand.
In the next slide, we talk about a new product. Our business department is analyzing a market that is opening up with a totally different dynamics than we had in the past. And so we launched a project called E-conomiza, which is designed to help companies in the frame market with a reduction of tariffs by the company. And the representative of this contract before CCEE is [indiscernible] We have adequate flexibility for the client to have difficulty managing their energy portfolio. This is a product designed to facilitate the lives of our small consumer according to their management structure, and so this is what we do for them. This is a variation of the products that we had already launched last year. We have a standardization of the contract to facilitate negotiation, to facilitate the understanding of the contract by our clients. And then the next highlight is that the Campo Largo project is in its Phase 2. It was registered under the clean development mechanism and will contribute to a reduction of approximately 790,000 tonnes of CO2 emissions. This is a strategic objective of the company.
And now moving on to Slide 10. We haven't had any major changes. So we have announced our taxation. The information remained the same as in the previous quarter. And then in Slide 11, we also do not have any relevant changes, only some minor changes in the distributed solar generation. We have a significant production in the last half of the year because of COVID-19 but the clients were a bit more conservative in their activities in Slide 12. There is no major change. Except for some minor market share changes when compared to our competitors, but we remain with 6.3% in this market.
In the next slide, the only change we've had is regarding the percentage because of tax structure. We also obtained some information that was offered here. So we shared the information in the past, but this is just to give you an idea of what this asset represents. TAG is the largest pipeline operator in the country.
In Slide 14. Also, we had no significant changes except for the cancellation of the auction. We are analyzing projects to effectively participate in the next auction.
Distributed solar energy. We mentioned it on Slide 15. You can see the results here compared to 2019 in terms of installed capacity, and this result has to do with the economic deacceleration and nobody is really investing right now.
On Page 17. We talked about the energy markets. And as we mentioned, because of the reduction or the decrease in the economic activity, we also had a decrease in this market as well. We had a significant decrease in April. In May, there was a mild recovery. In June, it was significant. But we are still below the levels we had in 2019, but the percentage rate is much lower. You can see in April, it was 16%, 10% in May. And now we are 5% below.
In July, we can see that we are recovering satisfactorily. And the perspective is that I don't know whether it's a perspective or hope, but the way I see things is that we will exactly resume activities in July.
One of the changes we made to this graph on the left is that we are showing you what the effect of the SE was so -- I'm sorry, GSF. And you can see that even though we have excess offer. Whenever it doesn't happen, it regulates or stabilizes market prices.
And in Slide 19, we have our diversified portfolio. This is one of the reasons for our resilience. We have a very balanced position between the free market and the regulated market. In the free market, we have the end consumers and opportunities to have structured products in the areas of trading and the whole sales market.
In Slide 20, we have something new to share with you. We have a diversified client base, there are no significant changes here. This is also very important to show that our diversification guaranteed a decreased demand, which is more aligned with what's going on with the economy. It did not suffer as much as, for example, the auto parts sector.
And then this slide, on the right, you can see that there is a migration taking place. We need to be prepared, and we have prepared to more and more meet the needs of a larger number of clients. We will need to have a different business structure and approach.
And Slide 21. As we already mentioned, we have a very comfortable position in terms of our portfolio, they're totally higher into 2022. We always have thing about 10% of our total energy, which is not contracted, so that we can deal with the fluctuations. We have -- so that we have some energy available. So you can see for 2023, we have some energy available. And we have some contracts ranging between 3, 4 and 7 years. And so in a 5-year average, we will always have to recontract and reorganize our active business activities so that we can protect our portfolio. This is very important because then you're not subject to a large volume of the contract in a specific year. Here in the next slide, we have the energy balance as of June 30, so that you can see our results.
Now in Slide 24, we talked about our expansion. We have made adjustments to the project. It is a very complex project. It has been in the hands of controller, and so we do not have any definitions regarding the transfer. From the very beginning of the implementation, it was anticipated. But because of some difficulties because of the GSF, cash difficulties and other problem we had during the construction. The controller was conservative.
Ladies and gentlemen, please wait.
[Technical Difficulty]
I'm sorry. Our line was disconnected. So I was talking about this very complex project. And the controller was -- is watchful. And once the risks are mitigated, we will move on. This is our vision. We want to have a project with a higher level of complexity and the GSF is working strongly. We or actually the controller has not made any decisions about this. We're waiting. We're waiting for a decision of the controller regarding this project.
And now we go on to Slide 26. This is where we talk about our wind project under construction in Campo Largo.
It is a project where we had a lot of problems to overcome. In case of Campo Largo II, we had 82 days of construction interruption, and it will have an impact on our schedule of about 60 days. We're always conservative. We always take into account some delay in construction. Our schedule is being more aggressive than we usually have in our business model. So this delay will -- even though it happened, it will allow us to obtain results as expected. It has not generated any harmful impact on our results yet.
In Gralha Azul, we had one single event in the city of P&L, but the construction moves on. We have different work fronts, but we had an agreement with the municipality in an operations protocol, which is safe and was agreed upon with our cities, authority. In the Novo Estado project, we suffered the impact of COVID in terms of mobilization, but we renegotiated with our sub contracted. And we are in a comfortable position to guarantee operations at the end of 2021, as previously anticipated. Regarding project standard development, the new thinking here is the development of the photovoltaic project in Campo Largo.
We are already in the licensing process. We will have 400 installed megawatts of solar panels in that region. The advantage will be that we will have some synergies with the current infrastructure that we have in our wind energy complex. We have some infrastructure facilities that are being used by this new installation. And of course, we haven't made a decision about installing these panels, but it is an option for growth of our portfolio. I will now turn over to Marcelo. He will talk about the financial performance of the company.
We will move on to Slide 31 now. This slide clearly shows a consistent growth over the years. And when we compare the last 2 quarters, we've seen some significant variations in our operational results. And as mentioned by Sattamini, we have a growth, which is due to nonrecurring events. It results from a trend based on a litigation, which added BRL 30 million to our net operational revenue and BRL 63 million to our financial revenue, BRL 63 million is the update of this amount. And therefore, this event has added BRL 153 million to our results. We also had another nonrecurring event. It was the inclusion of a credit -- tax credit related to asset earnings. This added BRL 72 million to our EBITDA.
But you will see in the next slide. That even so, we still had some significant increases in our net profit. You can see the margin of 32% in the first graph. We show the distribution which is usually consistent among the different quarters. It doesn't happen when we have a nonrecurring event or when we have a PLD and GSF significant impact. But under normal conditions, the results are distributed over the quarters. The graph below, we have a variation of our net operational revenue. You can see the values for the second quarter of 2019. It was BRL 277 million in the second quarter of 2020. This variation is due, as I mentioned before, to the recovery of taxes, because of a litigation we have. It was in the order of BRL 80 million, and then we had a renegotiation of our sales. And this added BRL 37 million to our revenue and the sales volume also increased. It is due to the operation of Santa so and was compensated with the recurring consumption reduction and it has to do with the decrease in economic activity caused by COVID-19.
In the second quarter, we also had some changes due to penalties charge. We added BRL 20 million to our operational revenue. The financial asset payment, basically interest rates and exchange rate variation. We had a decrease of inflation, there was a negative impact in our operational revenue. We also had a negative effect of BRL 10 million in our revenues. But on the other hand, we had increased costs and that generated a negative impact of BRL 18 million. So the combination of some positive effects and some negative effects led to our results, the positive one, where the generation of our plant in [indiscernible] We had some restrictions in this period, partially caused by the activities in the southern region of Brazil and another event, a productive event in this half of the year was that we had a detachment of the North and Southeast market that generated a negative impact in the second quarter of last year. And then this year, it wasn't so significant in terms of the negative events in CCEE. We have GSF. It generated a relevant impact. But there was a significant decrease of PLD. So there was a balance there. We also had a significant impact of MRE. It was motivated by the drought in the south, which led to significant changes in hydroelectric generation in this region.
We had a negative impact in trading in the operating revenue. But then on the other hand, we had a cost securing of BRL 19 million. This made or led to a positive result of BRL 4 million. Then we have recurring revenue. We can see with identified in costs and then construction. So here in revenue, we had BRL 411 million that has a significant impact of 24%. So then on the other hand, we had an impact on cost of BRL 332 million and that result in impact of BRL 18 million in our EBITDA. This business was significantly impacted by the economic downturn in the quarter. To compensate, we had a significant decrease of our costs as well. Our cost was also significantly reduced and BRL 12 million. And this may or this led to an impact of BRL 3 million negative in our EBITDA.
Moving on to the next slide. Here, we show our TAG results. The operating revenue of TAG was BRL 1.414 billion and the financial results was BRL 346 million, income tax is EUR 168 million. And as mentioned before, credit on tax incentives were in the order of BRL 246 million, and that was identified now. And then we have a net income of BRL 552 million, with a contribution of BRL 162 million to EBE and EBITDA.
So if we deduct the taxes and the credit on tax incentives, we have a nonrecurring revenue of BRL 72 million, which is our share.
And then in the next slide in the first graph, we have a distribution according to the different quarters, and you can see the variations of EBITDA in the second quarter of 2019. And then it was [ BRL 21.432 million. ] So there was an increase of 33% between 1 quarter and the other. And if we take into account the nonrecurring events, as mentioned before, it was BRL 80 million. The impact of credit was BRL 72 million, our EBITDA would have grown about 22%.
And so I will talk a little bit about each one of these impacts on EBITDA, the recovery of credit, price and volume of BRL 73 million.
Energy purchased for the portfolio. We had an increase of purchases in the second half of 2019, and this was done to supply energy in Pampa Sul because we had a delay in the business operation there. We also had a decrease in the cost of steel, and we had a decrease in the consumption TL in Latera. There was also an impact of BRL 24 million with a lower hydroelectric generation caused by the drought in the southern region. We had BRL 20 million of penalties paid by providers. We also had the Miranda asset, which decreased our results in BRL 37 million.
Third-party services, provisions and other revenues were recurring. And basically, we had an increase in the operating cost in Pampa Sul. This was an operation that we had in the second quarter of 2019. There was also an increase in costs in the business operations in Pampa. And as I mentioned before, we had an expensive impact of BRL 3 million because of the economic downturn, the transmission assets. As I already mentioned before, we can see the results of BRL 18 million in the EBITDA. Then our results for 2019, we had some negative results in 2019. And then we can see the results for the second quarter of this year, where we had 172 million. So this -- of this BRL 188 million here, we have BRL 72 million that result from nonrecurring events because of the credit we had.
Moving on to Slide 35. On the graph below, you can see a significant evolution of our net profit of 98.7% in the EBITDA as a nonrecurring event. We had BRL 80 million plus the BRL 72 million resulting from the litigation, the payment obligation. And that in addition to the 1 non recurring BRL 72 million regarding our tax participation. So we have an expressive impact of nonrecurring events in the EBITDA.
For the financial results, we had an update because of the victory in our mitigation which led to a positive impact. Now in terms of income taxes, we had increased social contribution and in terms of the variation regarding taxes, and we also have to take into account the depreciation and amortization. And that results from the Pampa Sul activity. Sorry, if we take into account the nonrecurring effect on EBITDA. And the credit we had in TAG in the order of BRL 72 million and also the effect on the financial results related to the amounts we made from our litigation, we would still have an increase in our net profit. It is a positive impact of our exchange rate over our debt, which was of about BRL 76 million. And also, we have recurring tax.
In the next slide, Slide 36. We have consistent financial indicators. We had some increase in ROE. It resulted because of the increase in our net profit. We also had an increase where we had a larger growth than in invested capital. In the next slide, Slide 37, we can see our debt overview between 2019 and 2020. We have 2.8 increase. There was a mild decrease in our debt. This is basically due to the increase we had in our cash of BRL 4.799 million. We closed the quarter with a gross debt of BRL 30.823 million and a net debt of BRL 10.772 billion.
And then in the next slide, Slide 38, you can see the net debt change with a highlight to our operating activity and the cash flow generated by our operating activity of BRL 1.237 billion in this quarter. We also had dividends of BRL 322 million. We had variation of operating capital and an expensive part of this amount is the financial asset transmission which ended more than BRL 400 million to our revenue.
In addition to that, we had the credit resulting from the BRL 163 million that we received. We are still waiting for the approval of our tax revenue and we hope that it will take place in the next quarter so that we can compensate this credit. Also in this quarter, we had the payment of interest over capital with an impact on taxes of about BRL 9 million.
We made investments of BRL 104 million in Campo Largo II, and we also have the effect in the evolution of the debt. In the next slide, Slide 39, you can see our debt profile and composition. For the next 3 years, we have a significant amount of debt maturity, and they have to do with short-term operations. You can see the payments until 2022, and we have the negotiation of BRL 1 billion for the next year. And then on the other graph, we have a breakdown of our debt. It is pretty balanced and are related to IPCA, TJLP and CDI.
On the graph below, we can see a significant reduction in our debt of about 8% in the second quarter of 2019 and it is now 5.8% in the second quarter of 2020. This is a result of the last contract we had in terms of debt management. In the next slide, you can see a significant increase over the years on our CapEx. In 2020, we have BRL 4.437 billion of anticipated investments in Novo Estado. The estimated amount is [ BRL 1.7 billion ] [indiscernible] to BRL 1 billion. And in Pampa Sul, we have BRL 200 million.
In Gralha Azul, we have [ BRL 6 million ] in Campo Lagos II, BRL 300 million.
Moving on to Slide 41. You can see our dividend policy. We distributed 55% of our results. And then at the end of the year, if we can maintain a more definitive position in our cash flow, we will evaluate more accurately what the payout is going to be for 2020. And here, we have a competitive advantage graph and with this, I close my presentation on the financial indicators and make myself available to clarify or answer eventual questions.
[Operator Instructions] Our first question is from Marcelo Sá from Itaú.
I have a couple of questions. One of them is regarding sales prices that you mentioned. In the beginning, you said that you were able to keep an average price of BRL 190 free from taxes. So I'd like to confirm if this price was really at this level? And I would like to know how you can sell at this level of price. I don't know whether you are taking into account the incentivated energy in the current scenario that caught my attention. And another thing I wanted to understand are regarding the cool assets that you have I want to know if you have an ongoing sales process, and if you could give us some more details?
Marcelo, thank you for your question. The first question or the first answer is actually easy to give. We're talking about average price. We had very large activities of incentivated energies. So you end up selling for a higher price than the conventional you see in the market. With that, you know that this discount is relevant. We were able to keep price levels that were compatible with our portfolio. This is the first answer. The second answer regarding cost. We do not have any sales the directions we are looking for solutions. As you know, we mentioned in the previous quarter, we have a series of adjustments. Whenever the operation is running more smoothly. We will we start our sales process. It is a more active and more complex activity. We have analyzed different possibilities. We have talked to potential interested parties, but we still have not found a solution, a solution that is a satisfactory to us. In the meantime, we continue operating as we can, generating cash in a profitable manner, it is a plant that does not drain any resources.
Our next question is from Henrique Peretti from JPMorgan.
The question is about the effect of the flexibilization. Could you give us an idea of how the load and consumption distribution takes place in July? And also for the rest of the year, the second question is about information that you shared today on the strategic guidelines for Engie with investments in renewable energy and also in investment. Does -- is there any practical implication or not related to it?
Thank you, Henrique. Your sound was not so clear, but I will try to answer, as I understood you. In terms of the flexibilization, we tried to offer our partners and our clients, some type of cash flexibilization. Some clients consumed about below the safer pay. So some time, when it happened, they had the benefit to receive energy. And now it was lower, but we understand that the cash difficulty allowed -- or led to the need to support them. We try to provide cost as compatible with the client risk, and we tried to help our clients overcome this moment of difficulty. This is what we did in terms of flexibilization. With others, we escalated it for longer periods of the contract and others for shorter periods, so that we would not impact the cash. Each client, according to the client's need and capacity did what they could, we discussed the profitability to have more flexible contracts, always looking at trying to be flexible. And this led to good results which did not have an impact on the results for the quarter. And regarding your second question basically, it defines a focus on renewable energy and infrastructure. And this is what we do today in Brazil. For us, the impact is really minor, but we did to provide this information to the market.
We are reassessing solutions to clients and our negotiation. And for example, we have a significant participation abroad. In [indiscernible] we have 30%. So the idea is for the group to detach from these operations, which are not essential to us so that we can continue growing and investing in renewable energy and structure or energy. And in our case, more specifically, we have invested in transmission and gas transportation in the pipelines. And so for us, it's a reinforcement of our strategy, and we have an expectation of expansion.
Thank you. I would like to follow-up the first question. Do you -- have you felt any effect of the flexibilization on your cash in June and in the second half of the year or not?
Well yes, we have that. It was a decrease of BRL 30 million. This will be recovered in the next 3 to 6 months. This is basically what the flexibilization represented in terms of cash. We issued debt note and clients will pay us with interest rates that are adequate to the risk of the client.
We now close our Q&A session. I now turn over to Mr. Eduardo Sattamini for his final consideration. Please proceed.
Well I'd like to thank you all for your participation. We've had a difficult year. The group and the team is working hard. We're working suffer less impact on our operations so that we can set on our collaborators and the communities where we live in. I expect that at the end of the year, we'll be stronger and better and better prepared face future crisis than we were right now.
Thank you all very much, and I see you next quarter.
Thank you. Engie Brasil Energia Teleconference is now over. We thank you all for your participation. Have a good afternoon. And thank you for using Voitel.