AES Tiete SA ADR (OTCPK:AESAY) Q3 2018 Earnings Conference Call November 7, 2018 7:00 AM ET
Italo Freitas - CEO
Clarissa Sadock - CFO and IRO
Carlos Pompermaier - Legal Counselor
Carolina Carneiro - Credit Suisse
Andre Sampaio - Santander
Good morning, ladies and gentlemen. Welcome to the conference call of AES Tietê Energia in this conference, we will discuss the company's results for the third quarter 2018.
The IR area of AES Tietê Energia also informs that the release and the presentation of the earnings results are available on the company's website at ri.aestiete.com.br. [Operator Instructions] We would like to inform you that this conference is being recorded and is also being transmitted via webcast with access to the Investor Relations website of the company.
On behalf of AES Tietê Energia, we would like to clarify that any forward-looking statements that may be made during this conference call regarding the company's business prospects, projections and operational and financial goals of the company are mere forecasts based on current expectations. Such expectations may change due to variables such as market conditions, economic performance of the country and that of international market.
The presentation, which will be accompanied by slides and can be viewed in the webcast transmission, will be made by the CEO of the company, Mr. Italo Freitas; and the company's Vice President and IR officer, Ms. Clarissa Sadock. In the end, the officers will be available to answer any questions you may have.
I would now like to turn the call over to Mr. Italo Freitas. You may proceed, sir.
Thank you. Good morning, everyone. It's a pleasure to be with you once again to discuss the results of AES Tietê.
Before beginning the presentation, as all of you know, I would like to talk about an introduction to the call. Mr. Julian Nebreda, who used to be our CEO of AES Brasil, he assumed a new position. He is the CEO of AES América do Sul, South America, as it was announced to the market. And then I assumed the position of CEO of AES Brasil.
With me today is our CFO and IRO, Ms. Clarissa Sadock; as well as the Commercial Director of the company, Mr. Rogério Jorge; the Legal Counselor, Mr. Carlos Pompermaier; and other directors of the company that will be here with us to help us in this call.
Beginning the presentation on Slide 2. It's interesting to observe our three main pillars that we use to support our operations at AES Tietê. The first one is the pillar of growth and diversification. The other is portfolio management and the third, operational excellence. As all of you know, we have recently completed the acquisition of Guaimbê Solar Complex. This complex, which is located in the center of the state of São Paulo, brought an estimated EBITDA from BRL 75 million to BRL 85 million a year.
Another point that we would like to highlight for the quarter in this pillar was the completion of the expansion agreement that has been executed. And that contemplates six years as far as to finish the 20% of energy that we need to install remaining from the expansion obligation. The second pillar is the portfolio management. We would like to highlight the seasonality with the allocation of the energy. From the first quarter to the third quarter, it was very accurate, bringing about a benefit of BRL 64 million. Another highlight was the commercial strategy, the opportunities of commercial transactions that brought us a margin or a benefit of BRL 19 million.
The third pillar is operational excellence. And we maintained our level of availability of Alto Sertão II at 97%. And Guaimbê Solar Complex has been integrated. And from now on, it's part of our centralized operation at the operations center, which is located in Bauru City. On Slide 4, we have an update of our solar projects. These are projects which will contribute with an EBITDA from BRL 145 million to BRL 160 million to AES Tietê. And more specifically, we completed the acquisition of Guaimbê Solar Complex so the construction activities are 100% complete and it's fully operational.
And as you have observed as described on the slide, the average price of the PPA of this solar complex is BRL 234 per megawatt hour, an estimated EBITDA from BRL 75 million and BRL 85 million per year. The investment in this complex was BRL 607 million. And as I said, it's fully operational and it has been so since the acquisition. Another solar complex, we gave it another name which is now referred to as Ouroeste. I'm going to give some clarifications on how this complex was formed. This project was conceived in mid-2014, adjacent to Água Vermelha plant. And the purpose was to have a solar complex with 150 megawatts. In 2016, we prepared the project for the auction. And we were frustrated in 2016 because the auction did not occur.
And after this event, together with our team, we tried to find solutions so that we could implement this project. And the solution we found was the acquisition of an agreement that was located in Pernambuco. And this is what we refer to as Phase 1, amounting to 75 megawatts, half of the project of Ouroeste solar project. And as soon as we acquired this project, we transferred this project to the Ouroeste Solar Complex.
The other half, obviously we decided to put it to the auction after the federal government announced that another auction would be performed. And we were then contemplated as the winner of the auction. And this gave rise to Phase 2, which is the AGV Solar Água Vermelha. This project has an average price of PPA BRL 232/megawatt hour and an estimated EBITDA from BRL 70 million and BRL 80 million a year. The total investment of Ouroeste is BRL 655 million. And we decided then because technically, it's a complex that can be expanded, there is an expansion capacity offered by this complex. And after those two phases, we understand it's the first shared plant in Brazil. So we are talking about a small solar plant which we can sell the energy to our client's shares or portions of the energy in the modality of net metering.
So this was evaluated. From eight to nine times is an excellent multiple vis-à-vis the current contracts that are being executed for solar energy. So since the beginning we brought the Ouroeste Solar Complex back in 2014 to this end, so these two complexes had another contribution, which was the opening of the negotiation to meet the expansion obligation requirement.
So on Slide 5, we can see that in this quarter, we had the final agreement of this expansion obligation. So the terms of the agreement were basically the following. We reached 317 megawatts, which will have been addressed 80%. Out of those, we can say that 2% of this amount was by means of [indiscernible] that are already installed in the state of São Paulo; part of the biomass agreement that we executed with third parties and major share by means of the two solar complexes, Ouroeste and Guaimbê, amounting to 80% of the obligation. So 20% was missing. And out of which, we can execute in the period of six years and we can also use distributed generation or free market.
So this 81 megawatt can bring about operational synergies in the state using those two complexes, Ouroeste and Guaimbê. And what's interesting about this agreement is that there will be no penalties related to delays since the obligation should have been complied with since 2008.
Moving on to Slide 7 now. And now talking about the portfolio management pillar, I would like to highlight the excellent performance of the market intelligence by adopting the strategy that was developed last year. The first event of this strategy was the seasonality strategy adopted for our hydropower plants. And this was something done at the end of the previous year. And with that, we've managed to project with the team. By means of using computing models and high-end technology, we could define annual seasonality for 2018 when we reallocated 109 megawatts on average from the first quarter to the third quarter.
And if you look at Slide 7, we can see two graphs comparing what would have been the strategy with the energy reference market and the strategy that we adopted for this quarter. If we had adopted the strategy for the energy reference market, we would have an open position of 120 megawatts of energy. Obviously, with this strategy that we actually adopted, we had an exposure of 59 megawatts. However, with this strategy adopted, we had a gain of 64 megawatts for the third quarter 2018. However, out of those 59 megawatts by means of commercial operations, we were able to close this exposure. And in addition, we had a benefit of BRL 19 million for the year. So that shows without a doubt that our strategy and our restructuring and investments in new technology and also with the training specialization of our team, all this brought about benefits to the company or AES Tietê.
On Slide 8, we can see the sequence of the strategy and we have the contracting level that for the third quarter was added to 2021 and 2022, 48 average megawatts for each year and the average increase of the contracts by 1%. If you look at the contracting level for the portfolio, we increased to 79% the contracting level and from 49% to 51% and for the years to come as well. And we already have contract for 2025.
The average price of our portfolio in the short term, as we have been announcing in the past, will have a range from BRL 140 to BRL 170 per megawatt in the short term. We can see the upper part of this range and in the long term, the lower part of this range. But if we look closely at the average price of our portfolio, we can see that all PPAs are included here, including the solar and wind project PPAs, in addition to the PPAs that we are executing in the short and medium term.
Therefore, I turn the call over to our CFO, Clarissa Sadock, to discuss the financial results of the company.
Thank you, Italo. Good morning, everyone. On Slide 10, we show the net margin and the expenses of AES Tietê. Net margin for this quarter was BRL 291 million, 28% or BRL 64 million better than the margin of the third quarter 2017. The main reason for this growth is explained by three factors: BRL 45 million of this comes from the hydro margin due to the seasonality strategy as well as the short-term commercial strategy, as mentioned by Italo. We also have a benefit in Alto Sertão II amounting to BRL 22 million, considering the effect of a massive fee. And also, Guaimbê Solar, that contributed with BRL 83 million.
On the right, we showed the PMSO of BRL 83 million for the third quarter this year. This is the fourth quarter in a row where we maintain the expenses at this level. In the third quarter 2017, we did not have all the operation of Alto Sertão II and nor the adjustments of all the personnel. On Slide 11, we have the EBITDA and net income. The EBITDA amounted to BRL 208 million for this quarter. I had already explained the reason why BRL 48 million was increased in the EBITDA in the previous slide. The main reason is the growth of the hydro margin.
In relation to the graph to the right related to income, we have income of BRL 35 million for the quarter, and due to three main factors. BRL 48 million comes from the increase in the EBITDA. We had an additional BRL 12 million [ph] of expenses due to the increase of debt to phase out the growth of the company and we also had BRL 17 million as impact due to the impact of the injunction of GSF. The GSF injunction ended September with a balance of BRL 934 million. And the impact of the injunction happens due to difference of the CDI and IGP-M, one is for cash and the liabilities adjusted by the IGP-M.
In the third quarter 2017, there was a gain considering those two indicators. CDI was higher than IGP-M. And for this quarter, it was the opposite. We had expenses of BRL 7 million because IGP-M was higher than CDI. In relation to dividends, we announced on Monday the distribution of BRL 39 million, which amount to a payout of 111%. We reinforce our commitment to connect the growth of the company to the maintenance of the full distribution of our results.
Now on Slide 12, where we show the current situation of the company's capital structure. Along with AES Tietê's growth process, we have been making adjustments to reach an optimal level of indebtedness. Our net debt in the quarter reached BRL 2.9 billion and the leverage ratio was 2.98 times and this ratio is below our covenant of 3.85 times.
The growth of the leverage of this quarter in comparison to the previous year is related to the acquisition of Guaimbê Solar Complex. Even after 12 months, we have a stable term of 4.5 years due to the financing made during the year. Lastly, it's important to mention that in the amortization schedule, we do not have any major maturity, not this year nor next year.
I turn the floor back to Mr. Italo Freitas for his final considerations.
Thank you, Clarissa. It's important to highlight in this quarter, the third quarter that in those three pillars, we are in line with the objective of continuing growing the company. And I would also like to highlight that this growth of the company has to ensure good returns. Our purpose is to bring good projects, make the company grow, but working hard searching for projects with excellent returns. So by following those pillars, we are sure that we are going to reach this objective for the company.
So I would like to thank the team. And we are open to take any questions you might have. Thank you.
[Operator Instructions] The first question is from Carolina Carneiro with Credit Suisse.
I would like you to talk about the expansion obligation agreement that was signed with the state. Could you provide more details so that we can understand its strategy? You have six years to complete the remaining 20% out of the initial agreements. If I'm not mistaken, you mentioned 80 megawatts as the amount that is missing after you have implemented the solar complexes. I want to understand where your strategy stands. We heard some news about Alto Sertão III, which can also be a potential target for acquisition and add to the portfolio. But you also have this commitment of adding 81 megawatts to the state of São Paulo and maybe Alto Sertão III would not be considered. Could you provide more details about this expansion agreement for the state of São Paulo? Do you have a planned journey, itinerary? Or are you going to wait for the end of this period of six years to reach the target and in that case, Alto Sertão III could be an asset to be considered for you or if in fact you really would like to focus on meeting the requirements of the expansion? So I would like to understand what's in your mind in terms of capital allocation.
Carolina, this is Italo speaking. Let me explain the agreement. The agreement was signed with the government of the state of São Paulo. As you rightly understood, we have the remaining energy to be provided in the amount of 81 megawatt. So we have to meet this requirement in six years. We can use energy from the regulated market or we can use the free market. When we talk about free market, we have to consider a factor two [ph], which is the following, 1 megawatt in the free market is equivalent to 2 megawatts in the regulated market. So I can - in those six years, I can make the requirement with 40 megawatts. If I have a plant of 40 megawatts and I sell to an industrial client, for example, I will be able to meet those requirement on a definite basis in the period of six years, 40 megawatt for the solar energy. We are talking about 10 average megawatt as capacity factor in São Paulo.
So you have enough capacity, including - considering those 40 megawatts in two solar complexes, Guaimbê or Ouroeste.
So we have to do all the technical analysis, of course. As I mentioned in the end of my presentation, we are looking for projects that would offer good returns. And this is the main strategy that we have been adopting. It's either 40 megawatts and good projects offering good returns. This is the major strategy we have established for the years to come, focusing on the growth of our company.
So in relation to the news that we heard about Alto Sertão III, I would like to know if this is an asset that you would be considering.
Alto Sertão III is a project which is out there in the market like many others. Naturally, it is together with our Alto Sertão II. And like other projects, we also analyze it to understand whether or not it will offer a good return.
[Operator Instructions] Next question comes from Andre Sampaio with Santander.
I would like to ask a question related to GSF. Could you provide us some information related to APINE injunction? Could you share with us the understanding of the company if this is going to be recovered? And what's the strategy of the company to make the payment if this is required to be fully paid?
Okay. In relation to the injunction, I'm going to pass the floor to our legal counsel. And then Clarissa and I will continue answering the question.
Andre, this is Carlos speaking. I'm going to try to be as summarized as possible without using the legalese language. The injunction issue, as you probably know, there was a decision in February. And the previous injunction was eliminated and we're still waiting for the definite decision that would confirm the effect on the GSF. However, later in May, there was another decision in the upper court that decided that the original injunction should be preserved. So GSF should not be settled in the period according to the previous injunction.
So the second decision that has been reverted by the President of the Justice Supreme Court, so from May up to October, it should have been settled all at once after a proper calculation and the business would continue operating. This, APINE appealed, and there were some contesting. We're asking to which period the decision referred to and there was a warrant. And both decisions were made yesterday, meaning that for this period, the GSF is related to the period from February 2018 and October 2018 is going to be settled, that is likely to happen in the beginning of November. In relation to the financial effect, I'm going turn the floor over to Clarissa so that she will provide you more accurate details.
Andre, the balance that we have related to GSF injunction of September was BRL 934 million. And this settlement that is going to happen in November will not reduce this amount because since we had the credit to receive from CCE, the net value will reduce the credit that I have to receive. So we are going to continue with this balance of BRL 934 million for the time being. Another settlement will happen long and short, and things will change on a month-by-month basis. If the injunction is lifted or if there is an agreement, we will have this cash that would be withheld for the company and the amount has been fully provisioned.
I think it's so clear. Thank you very much for the answer. I just would like to confirm something. The specific calculation on EBITDA would not be considering this payment. So the leverage would be a bit different in case you have to realize this BRL 934 million as payment. Am I correct?
Exactly that. If we have to pay the indebtedness net from the net cash of the company, it would be higher. But the results for the next quarters, but we will have to keep in mind that the EBITDA also grows due to the hydro - EBITDA related to the hydro project.
Only to add to what Clarissa was saying. We have to consider all the negotiations among the - let's say, the generators and the market. Two weeks ago, I got together with the CEOs of generating companies and we had the first meeting with ANEEL with a proposal which we referred to as infra-legal. This proposal has been announced by the media. And it's a proposal that describes different points. And one of them which I believe to be very important to highlight here is the payment of the debt installments in case there is a negotiation.
If there is a similar negotiation of what we saw in 2015 of ACR deregulated energy and as well as if we have another negotiation as infra-legal, together with that there is a new attempt from the Senate to pass the decree, a law that would describe the resolution of GSF with a payment installment. So there are two paths that are moving in parallel that can be a solution, either retroactively or there's also possibility of regulating this in the future.
Perfect. It was very clear. Let me just confirm a comment that you've just made related to the new settlement. Because you have credit, you would not have to disburse specifically?
Yes, exactly that.
Thank you very much for your explanations. Thank you.
[Operator Instructions] Ladies and gentlemen, if there are no further questions, I would like to turn the call over back to Mr. Freitas for his final considerations.
Well, thank you all for attending our conference call. I would like to point out our interest to grow our company, make this company grow and I also emphasize that our purpose is to bring as much return as possible to our shareholders with the best solutions to our clients. I would like to thank our team, our IR team that took part in this call. And we are available to take any questions, to solve any questions you might have. Thank you all. Good day, everyone.
AES Tietê conference call is completed. We would like to thank you for your participation, and have a nice day. Thank you very much for using Chorus Call.