Engie Brasil Energia SA
BOVESPA:EGIE3
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Engie Brasil Energia SA
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Good morning. At this time, we would like to welcome you to ENGIE Brasil Energia's conference to discuss the results of the third quarter 2018. [Operator Instructions] We would like to remind you that this conference is being recorded. This presentation followed by slides will be simultaneously transmitted through the Internet through www.engieenergia.com.br in the Investors section. There, you will also be able to read the presentation and the company's earnings release.
Before proceeding, we would like to clarify that forward-looking statements made during this conference call regarding to the business outlook of the company should be treated as forecasts that depend on the country's macroeconomic condition and the performance and regulation of the electric sector besides other variables. They are, therefore, subject to changes.
With us today are Mr. Eduardo Sattamini, the CEO of ENGIE Brasil Energia; Carlos Freitas, Financial and Investor Relations Officer; and Rafael Bósio, Investor Relations Manager, who will talk about the company's performance in the third quarter 2018. And following this, we will have the question-and-answer session. [Operator Instructions]
It is now my pleasure to turn the call over to Mr. Eduardo Sattamini. You may proceed, sir.
Good morning to all of you. It is a pleasure to share our good results with you. We are going to begin on Slide #5 with the main financial and operational indices. During the quarter, we have the net operating revenue 50.4% higher because of our results from operations. Obviously, this is due to our installed capacity. We have Miranda and others that have already begun to work with wind farms also contributing to the net operating revenue. As a result, we had a significant increase in EBITDA with 43% higher vis-à-vis the previous semester and a better EBITDA margin by a drop vis-à-vis the same quarter in 2017.
In the semester '17 and '18, what we have been doing is to have that short-term recovery. We have a [ long ] position and, because of this, we end up doing short-term actions -- with positive actions but we are subject to the default in the energy markets.
We had a significant increase in our leverage during -- comparing the third quarter 2017 to 2018. We increased our net debt more than 4x due to our activities and due to the increase of investments that we are making. All of this, evidently, has an impact on our interest rates, and it reflects a growth for the period that is higher than the EBITDA.
We're going to go on to Slide #6 with the main highlights for the quarter. The company is commemorating in September 20 years of privatization, and we are now called ENGIE Brasil Energia. We had the operations for the acquisition of the remaining shares of ENGIE Geração Solar Distribuída, which means that we have greater freedom to have a more robust growth and to accelerate the pace. This is, of course, a way to have more satisfactory clients. We have 6 wind plants in the Campo Largo Wind Complex that began their commercial operation during this quarter. And in the month of October, we have each of these wind plants in operation, and we have others with assisted operation, not commercial operation, but assisted operation. We had the -- once again, the plants from Campo Largo have been completed. And of course, we're working with constant financing. This is something recurrent in wind energy, and we have made significant investments here. There should be a barrier of entrance for the small ones in the market. And we also had a partial drawdown of the National Economic and Social Development Bank.
In the next slide, Slide #7, we continue with our highlights. We have concluded the work of streamlining the digital control system for Machadinho hydroelectric power plant. For the ninth time, we have been awarded with the Transparency Trophy organized by Anefac, Fipecafi and Serasa Experian, this is thanks to our accountability and because we are a very transparent company with, of course, highly [ awarded efficiency ]. And we approved credit of interest on shareholders' equity in the amount of BRL 397 million of the -- and intermediate dividends that will be paid on January 4 and November 13 in 2018.
We now go on to the next slide that refers to ENGIE's shareholding structure. And of course, this is the structure that includes several companies, the holding company, specific companies where we are making financing or other systems that are connected to the national systems.
In the next slide, the only change that we have refers to the increased capacity because of the wind farms that have entered into operation and, of course, here you have our installed part and the plants that have already been completed and that are part of our portfolio.
In the next slide, #10, we are showing you our leadership in the market with 10.2 of installed capacity for energy. We showed you Umburanas, Pampa and, of course, the Campo Largo complex that will be coming into operation between now and the end of 2019. All of this enables us to have a very open dialogue with all of you and the possibility of continuing to make the most of market opportunities.
In terms of transmission, we're continuing on with our normal projects. We do have a project that is part of our project in the short term, and it is an energy line in Paraná.
In the next slide, you will observe our very diversified portfolio where we have 47% gas sent to the free contracting markets; 10% to traders and distributors. And in the short term, we have been selling more to traders because of the operations that we began in 2018. And of course, this was part of our activity to focus more on the market prices. And of course, this has enabled us to work with a better arbitrage and pricing in the short term.
Thanks to our diversification -- and as you can see, this is considerable diversification among several segments of industry and trade. Perhaps, the most representative is the food sector. And despite this, we still have a very low contracted energy. We have 10 megawatts in the free markets. There are variations semester after semester because it depends on the consumption of different industries.
We do have some contracts that enable us to create some flexibility. And of course, this has an impact on our sales, and we may have movements towards a decrease of activity. And what we are representing here is our average sales activity. And from the last quarter to this one, we have had a slight reduction of 210 megawatts, I believe.
If we go on to the next slide, which is the energy market. We're on Slide #15. This is our structural offers. And the prices during 2018 have been under pressure because of the energy crisis that we have had for many years already. In the month of October, we had a surge and spike, and this has enabled us good activity. And once again, we have had a greater presence of thermoelectric and hydroelectric run-of-river plants.
In the next slide, we speak about our commercial strategy. We work with commercial strategies that are well distributed through time. This eliminates the impacts of having a lack of energy through time. And one of our characteristics is to practice price variation. We do have increases and drops of prices, of course, but they are not very strong. To the left of the graph, we show you the uncontracted energy. As you can see, this year, we're at 10.7% and we show the increases for the coming years. And we do have a reserve volume to be able to deal with the hydrological risk. And you will then see the energy that we'll have for trading through the new contract that we have achieved or renewed.
In the next slide, we refer to our energy balance as of September 30. There are no great highlights here perhaps except to refer to the net volume of prices. We have not attached this to Cemig. We referred to the average price of selling and purchasing at the bottom of the table. We now have increased the information so that you can have a basis of comparison.
In the next slide, we would like to refer to our expansion. We're referring to Jirau that is still on a holding situation. Itau is going to evaluate the transfer. But so far, we have not received any news on the advance of this process. And once again, we have confirmed the decision on this while we await more information.
We go on to the slide referring to Pampa Sul where we have tested our main system. And despite the delay that we have in this construction work, we already have a term for operation that has been set for the beginning of '19. And we are focusing on the regulated market which is not shown here. Now the quality of our work and the systems that we have [ set ] have been highly satisfactory. Evidently, this will have an impact on the profitability of this asset, but this asset did have good initial profitability.
I'm going to give the floor to Carlos because I do have a very sore throat, and I will come back during the question-and-answer session.
Good morning to all of you, and thank you, Eduardo Sattamini.
I will continue now on Page 23 referring to the Campo Largo Wind Complex. As we have already mentioned, we have 6 wind farms that are in commercial operation. Yesterday, 2 additional wind farms came into operation where, since we're awaiting the release and until mid-December, we will have the entire complex operating 300-and-some megawatts in Bahia. This is our wind farm hub besides Umburanas. This is operating very well. And as you can see here, it is still operating below capacity and has come into commercial operation before the term expected. And we're simply waiting for the company to execute all of the projects.
Something very similar takes place on Page 24 with Umburanas Wind Complex. We have made good strides in the construction. The idea is to have 2 parts that will come into operation at the end of November, end of December. And until the second quarter of 2019, we will have an additional 360 megawatts of wind farms offering more [ EMF ] or wind energy through that company.
We go on to Page 25 for Gralha Azul. This is a project where we are still in the phase of environmental analysis, and we're preparing the RINA, which is the approval. We're still mapping out the land and beginning to negotiate the contracts with a CapEx value of BRL 1.7 billion, which means approximately 15% below the CapEx of ANEEL that was approved in December of 2017.
In ENGIE Geração Solar Distribuída, we have had a growth compared to the previous full year. The trend is to have somewhat greater, larger systems. This is still a very small business in Brazil evidently, but it is a market niche and a new sales channel that will enable us to continue to have commercial growth. And of course, at ENGIE, we will fulfill the free market that is still not being filled.
And to speak of growth, we go on to Page 27, where we show you the projects under development. As you can see here, we're still closing contracts, and we continue to sell energy through PPA for the long term. And what we're trying to do is to begin to enter this market. We remind you that Campo Largo and Umburanas on average have been contracted in 2/3 for the 3 contracting markets. And of course, we continue to call out business in the sector, and we have a significant volume of PPAs. And we will be making new investments in Campo Largo as well as in Umburanas. We hope to give you further notice very soon.
We now go on to the financial performance of the company. We're on Page 30 where we refer to the net operating revenue changes with a growth of 50% vis-à-vis the third quarter of '17. Basically, this year, because of the speed of [ training ] and because of the speed of sales and the trading operations, we have reached BRL 456 million additionally at the electrical energy trading board as well as in other areas. Once again, this compares to the year 2017. This, of course, despite the higher fuel price that has begun in early this year and an increase in sales. The revenues of Jaguara and Miranda that give us revenues month after month, what you'll see here are only 70% of what we could get from Jaguara and Miranda of BRL 430 million per year approximately and the 30% of Jaguara and Miranda in the free contracting markets are here as well.
When it comes to our EBITDA, we have had a significant change. Besides the contribution and the increase of sales prices, the net balance of the short-term markets that was BRL 188 million. We have also had an increase in sales volume and a minor saving when it comes to the cost for permits and materials.
And of course, everything that is there since the fees [indiscernible] and a lower cost of materials.
Now given the increase in fuels in the thermoelectric market, which is positive because this is simply a short-term impact and an increase in sales and sales to trading companies, giving us an increase of almost BRL 400 million and purchases of energy for trading and for our portfolio as a whole. Although the first quarter was quite complicated in hydrological terms, we did have an EBITDA performance that is higher than BRL 1 billion, BRL 1.21 billion.
When it comes to our net income, we do have a very important highlight in our financial results. A net expense of almost BRL [ 60 ] million, and first due to the increase of our debt. This is very obvious, of course. We have announced 100% of the purchase of Miranda with debt, and we have carried out drawdown from the BNDES for Campo Largo and Pampa during this quarter. This represents BRL 1,080,000,000 geared towards projects. And of course, there have been changes here but this wasn't the main reason.
The main reason was that, throughout the year, we had a significant increase. We have concessions to pay for thermoelectric clients like Cana Brava and others that are indexed to inflation. And in the case of Campo Largo and Cana Brava they're indexed to the [ IGMT ]. They represent BRL 12,800,000,000. And for the -- accumulated for the year until 10%, we had to pay 10%, I believe. And for the accrued period, for last year, they were negative.
What you can see here clearly is the greater impact of inflation. And in my opinion, the coming year, we will have an increase in the prices of PPA because a large part of our contracts are indexed to the general price indexes, the [ IGTM ].
We go on to Page 33, and you can see that we have a good return on the capital indexes and return on equity. We have a very strong financial situation, and we continue to look for projects that may be attractive for the company, as I mentioned.
On the next page, we have an increase in our debt. We reached 2.3 of gross debt, still at a very comfortable level for us. And considering our EBITDA, we do have a conservative hedge in the company. We can continue to uptake or increase the company debt, and it will continue to increase always based on our growth. We have very good projects in our pipeline, and we are going to achieve a large part of our growth through this debt and, of course, always on a very sound basis.
This debt is on Page 36, it's not causing any pressure on our cash, and we have pinned it at a very attractive cost and always in real and not pegged to the dollar, which gives us a great deal of tranquility and I will say a certain strength in terms of credits. And we are able to obtain it quickly and at a low price.
On Page 37, we referred to our CapEx. We still have significant volumes of CapEx in Umburanas, Pampa and Campo Largo for 2019. We're going to reach BRL 1.3 billion, and for Pampa transmission and Umburanas. And the main CapEx, once again, will help us in the environmental part and in the part that refers to land. Most of our CapEx will be spent in the year 2020 as you can see on the chart.
On Page 38, our dividend payout. We announced a payout on the third semester. And yesterday as well, we announced interest on our own -- on shareholders' equity at the price of BRL 1 per share, BRL 50 million approximately. But we have already announced for this year a payout in dividends. And this enabled us to maintain a very interesting policy in the payout of dividends besides the growth that we have in the country, significant contracted growth with Umburanas and others. And we see some room to continue to do this. This is not a promise that we're making. Also then we do not have the intention of accumulating cash or keeping cash and don't spend. We're spending our CapEx on projects but also maintaining our dividend payout policy.
With this, I would like to conclude the presentation and we open the floor for questions.
[Operator Instructions] Our first question comes from Mr. [ Bob Consuelo ] from [indiscernible].
I have 2 questions. The first if you could speak more about Pampa Sul that will go into operation in the second quarter of 2019. [ How many servings for HCs? ] When will they come into operation? And how long will you carry out tests until the commercial operation? My second question refers to Slide 27 where you mentioned your project portfolio. With the last phases of Umburanas and Campo Largo that will be coming into operation until the beginning of 2019, which is your project that you're going to work in the free contracting markets, the non-regulated market, long-term contracts? What is it that you are thinking out for these?
Now, the first question refers to Pampa Sul. We have 300 megawatts of installed capacity, and the idea is to begin operation already in January of 2019. Once again, we're undergoing test operation. But the intention is to begin operations approximately in the second quarter. The process for the sale of the assets, we took the decision of incorporating it again. We are, of course, still are ridden with uncertainty, but we're quite confident in terms of the quality of this farm. And in pair of months, the situation will be much better, so that we can give the buyer the certainty that this asset will be fully operational. When it comes to our growth in terms of renewable energy, as we're developing Campo Largo Phase II for the free contracting markets. We're going to begin contracting suppliers and consultants and much more. We will have a new installed capacity. And of course, we will work with long-term contracts. And we're very optimistic that we will be able to make a decision for the beginning of construction until the end of this year. We're at the end of negotiation of a new area very close to Umburanas and Campo Largo. And evidently, we're going to look for satisfactory profitability conditions. We're not going to enter the regulated market if they don't allow us to have the profitability conditions that we expect. Now we're going to keep working in the free regulated -- the free contracting environment. It's a regulated market as well. Now you have 6 months more of operation. I'm sorry, I did not hear the name of the plant. It is very probable that we will intensify the process for sales and, of course, everything will depend on how much time we need for the evaluation and much more. And it could be that the closing will take place only in 2020. We already have some interested parties. And we have decided to take on the construction risk until the end to do away with all of these discrepancies. And all interested parties have to do is place an offer. And if we can do the closing before we will do this in 2019. But being very conservative, I can say that until 2020, we can't conclude the sale of this asset.
Our next question is from Mr. Andre Sampaio from Santander.
And I would like to ask a question about the future transmission auctions, which are your expectations in this field? And another question on GSF, the generation scaling factor, what do you expect from the discussion that has been held in the Congress, if you believe that this will be approved this year or if you will have problems if it is denied or turned down.
The transmission auction, which was the first question. We're expecting that we will increase our investments based on what was carried out in the auction. And we will have another auction in December. And this is an auction that will hold good investment opportunities. And it will allow us the opportunity to compete. As you know, we're very aware, investors, they carry out their calculations and they offer an amount that will be compatible with the return of the project. We will be there, of course, because we're interested. And we are going to participate to be competitive. We're already working towards this. We do have some specific interest. And what we want to do, decrease the level of contingency and uncertainty. And GSF, the generation scaling factor, they were talking about fines for energy, but there will be a new amendment that will be sent to Congress. And we understand this as being a signal that this was not voted because it was [ part of the ] adoption and that refers to privatization that was not the right moment. This -- during the first round of election, and I think that what we have gotten to is a consensus. Some new measures were set forth to be able to resolve the situation, to perhaps focus on the short-term market. And we think that there's a good opportunity that we will be able to get to a consensus quickly among the House of Representatives. Now -- and now we're looking forward, trying to resolve the exposure of the hydrological risk. And I think that this will end up being a novelty, something that will give greater stability to the energy market in the future.
Simply to complement this. A new item that was included in the [ PEC ] for fines. The fact it was rejected as part of what [ SEC has ] distributed, if this could lead to a legal impediment but including it was a very similar opinion within this new project.
I'm not an expert in this type of process, but my perception is that the benefits of [indiscernible] is not stretching on this and there must be a legal basis to be able to proceed as you explained.
Our next question is from Mr. Marcelo Sá from UBS.
I have a question on this resolution of GSF. The discussion I believe will be according to the same format as was described in the [ PEC ]. And if this is the case, a comment or some news that has come up that the government won't have to pay BRL 4 billion of the Cemig to the plants that have already been returned. If you can comment on how this promotion would work out? And another question referred to using your reserve volume. It would make very much sense as the cost of [ rebuild ] will be of BRL 20 and it would make more sense to buy with a hedging in the market. And too the company would end up losing because of they say we'll gain something on the price. Wouldn't it make more sense for each market to buy based on hedging?
You have made several topics. The first thing is that the solution for the GSF is -- well, it contains the conditions. So release these accounts now and so recover them hence going forward. And regarding that [ specific ] article, both sides had a concession, retained they will no longer be included in their [ CO ] amendments. And this is what is different compared to the previous [ PEC ]. Now, which were your other questions?
In terms of the annual solution, you're right. Now this discussion is still underway. And we agree that to protect ourselves through hedging will end up being cheaper using our own energy, our reserve volumes, our own capacity. This, of course, will be cheaper. But once again, this discussion is underway. And there was an indication to present a counterproposal that will have the same content but, of course, will end up being an advantage for the market as a whole. Once again, this is a discussion that is underway. And we can see there now is concern in finding solution for these risks, risks that go beyond the normal operation with the hydroelectric plant.
Well, a large amount would have to be disbursed or financed by the person who is entitled to receive this credit. Would this -- the financing offered by the consumer this would have an impact?
We're not thinking of this discussion because all of our accounts are up to date. I think that most of the companies do have resources in cash. They will have no problem in raising money for these payments. And I still believe that this will be analyzed case by case and the government does have a favorable position, and it is attempting to help these companies to fulfill their obligations. As far as I know, there is nothing in the discussion that refers to a generalized action. And I think this will be dealt with case by case.
Now in your case, as you have said you have no pending account, do you understand that for ENGIE, this part that refers to the free contracting market would also be entitled to this concession or will they supply only to those companies that have ordinances?
I think that we have gone beyond this discussion. Well, we're talking about the free contracting environment. And for those companies that have made an agreement, there will be a different treatment. And one of the points that we've discussed in the past was this one and the amendment to the PEC that was presented recently already dealt with this issue in that fashion.
Our next question comes from HSBC, Vinicius.
Recently, there was a report that ENGIE is spreading projects to store gas in Brazil in the Northeast. I would like to know if ENGIE Brasil Energia will participate in these projects or if this will be lifted for the parent company?
We do have a project that is under analysis, this is true. It's in São Francisco do Sul. And this along with a company that operates a storage facility as an anchor for one of our plants that is in [indiscernible]. So this is what is in our pipeline. And perhaps there will be a crowd participation at the terminal and then at our plant. Now ENGIE Brasil is going to work with terminal operators and storage operators if it makes sense for us. We still have to assess it in the market. And of course, we will do this with ENGIE Brasil Energia and perhaps ENGIE will enter this market directly. And ENGIE might make a decision to work with this either inside the company or externally. I don't know if this answers your question?
Yes, you did. As a follow-up, so for this project, to go forward, we will have to have an auction, and in that case, we will enter and the entire project will then get developed?
Yes, unless we have a tailwind of regulated market. It doesn't make sense to work on a free contracting market. We wouldn't have competitiveness. And we need to have the capacity to maintain this and for it to be feasible and viable.
[Operator Instructions] Our next question is from Mr. Marcelo Sá from UBS.
I would like to know if you have a forecast of when we're going to judge the ordinance of [indiscernible] last year, this refers to this year or the coming year? And the consortia that you have created with the fund apparently offered a proposal. What I understood from the article was that the other competitors also have the possibility of winning this but that you would have the right of preference. If I could understand what your reading is and what is happening in Brazil.
Second is now this process is a process that was won by Petrobras. The preferential grantor has the right to negotiate the terms. The term of validity and, of course, the amounts that we pay. And once this is done, the conditions will be presented to all of the other offerers. And this will be discussed once again with the preferential buyer. It's in the hands of Petrobras, so in short, if this process goes forward in the coming months, and we're not sure when this will take place, if there will be a legal action or not. Once again, we're not sure when this issue of the injunction will be resumed. But as far as I know, the contractual conditions are well advanced. And then there will be a deadline to present this to all of the other competing offers and this should lead us to having a transaction not before February or March of 2019. Once again, if we are able to resume this discussion in the month of November. Carlos, would you like to add anything?
When this discussion is resumed, it will take at least 3 months until this is discussed at the Extraordinary General Assembly. Here as well, we need to hold this Extraordinary General Assembly and when it comes to the amount, the partners and so on. This has not been defined. We truly have nothing to say and will not be able to say anything now. [indiscernible] is in process. They had an EBITDA of BRL 4,000. Now in our group of companies, the idea is for nobody to control anything. We're not going to have the position of a controller. We're going to -- or consolidate inventory, [ BRL 50,000] income sales for the time being.
If you could dissipate one of my doubts of this company was [ prod retention ]. And of course, the whole situation with Petrobras has not been made very clear.
Now the contracts that they have with the gas [ primes ] are different contracts with different prices and with different -- very different capacities. As far as I know, there isn't a single line in terms of how this contract will be made and there are great uncertainties about the company's EBITDA in the future.
Now if eventually, you will come into this or Petrobras, will there be a very clear line in terms of how all of this will be renewed or will this be defined going forward.
There are several contracts for the transportation of gas. We have a very short one that expires now that is not considerable. And there is another medium and long-term contract. Perhaps the shortest one expires in 2025. And they're all based on fixed prices, based on gas volumes. These are old contracts made up for Petrobras. And nowadays, there had been kind of in-house but they already have a legal framework for their renewals and for any future business because this is a regulated business. And the [ NT ] will define how this process will be carried out. There will be a discussion on the WACC, and this discussion is already underway. And in [ GLG ], we're discussing this, bringing gas from Bolivia and there are 8 contracts at [ GLG ] that expire at the end of 2019, which means that throughout 2019, there will be a regulatory process to redefine what is happening with [ GLG ] and there already is a public hearing to be able to do this. Now if you compare this with electrical energy where we know what the WACC, there is an economics logic that prevails. And this is something that will be contracted only in 7 years, but the regulatory framework has already been clearly defined.
And who will do the regulations? This is one of the questions. And the other question is looking forward by doing some simulation of the WACC and the amount of the assets under discussion, if you see the possibility of downsizing the average cost of the contracts or if it would be more similar with what you normally do. Simply a reference for us during the renewal of contracts.
The regulator is ENGIE, and we have a very conservative way, our own way of evaluating contracts. I can share with you, how we do this, how we increase prices or not. But I will say that this is something that pertains to the controller and the company. Now look at the regulatory work of GLG, how it was put together. And this will be -- give you an idea of how we're going to model all of this.
[Operator Instructions] At this moment, we would like to end the question-and-answer session. I will return the floor to Mr. Eduardo Sattamini and Carlos Freitas for their closing remarks. You may proceed.
I would like to thank all of you for your participation. Thank you for your questions that has enabled us to clarify our operations and the main projects that we are involved in. And we'd like to remind you that, at the end of the year, we hope to have some novelties for you. Thank you very much.
The ENGIE Brasil Energia conference ends here. We would like to thank all of you for your participation. Have a good day, and thank you for using Voitel.