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Edited Transcript of CESP6.SA earnings conference call or presentation 30-Apr-20 2:00pm GMT

Q1 2020 CESP Companhia Energetica de Sao Paulo Earnings Call

Sao Paulo May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of CESP Companhia Energetica de Sao Paulo earnings conference call or presentation Thursday, April 30, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marcelo Antonio de Jesus

CESP - Companhia Energética de São Paulo - CFO & Member of Management Board

* Mario Antonio Bertoncini

CESP - Companhia Energética de São Paulo - CEO, IR Officer & Member of Management Board

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Conference Call Participants

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* Andre Sampaio

Santander Investment Securities Inc., Research Division - Research Analyst

* Carolina Carneiro

Crédit Suisse AG, Research Division - Sector Head

* Gabriel Fonseca Francisco

XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A., Research Division - Energy, Oil & Gas Analyst

* Marcelo Sá

Itaú Corretora de Valores S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for holding. Welcome to CESP's Earnings Call for the First Quarter of 2020. We would like to inform you that this call is being recorded. (Operator Instructions) We are also on a live webcast with audio and slides, which can be accessed through the company's Investor Relations website at ri.cesp.com.br. The presentation will also be available for download there.

The following information will be presented in BRL according to the Brazilian legislation and accounting practices used in Brazil, BR GAAP. They are in full compliance with the international financial reporting standards, IFRS, unless stated otherwise.

Before we continue, we would like to clarify that any statements made during this conference call about the company's future business perspectives as well as projections, operational and financial goals and its potential growth are merely predictions based on the management's expectations on the company's future based on current information. Future considerations are not a performance guarantee. They involve risks, uncertainties and assumptions related to future events that depend on circumstances, which may or may not occur. Investors should understand that our industry's performance, Brazil's overall economic performance and other operational factors may lead to results that differ materially from the company's expectations.

We have with us today Mr. Mario Bertoncini, CEO and Investor Relations Officer; and Mr. Marcelo de Jesus, CFO. I would now like to give the floor to Mr. Mario Bertoncini, who will begin this presentation.

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Mario Antonio Bertoncini, CESP - Companhia Energética de São Paulo - CEO, IR Officer & Member of Management Board [2]

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Good morning, everyone, and thank you for joining us. For today's agenda during the first part of our conference call, we are going to be showing and presenting to you the status of CESP facing the pandemic. That will be the first topic in our agenda. Following that, we're going to give you a summary of the main deliveries we had for the first quarter of 2020. We're going to talk a bit about our contingencies, specifically our contingent liabilities and how they've evolved during the first quarter of 2020. We'll also have some comments on the energy market and our energy balance, the energy balance for CESP, which will be presented for 2020. And following that, Marcelo de Jesus is going to be presenting the financial performance for the company, and we'll wrap up by reiterating the main initiatives we have for this year. Following that, we'll have a Q&A session.

Starting on Page 4 of the presentation. This shows how we're doing in the new scenario facing the pandemic. Right now, 83% of our employees are working remotely from home. We have adopted all measures we could -- the appropriate measures to prevent the disease and to conserve our entire staff's health. That includes our own employees, our primary employees and also people who are right now working as outsourced personnel. Moreover, we reduced our maintenance activities as well as the corporate activities we've been taking, and we are advanced in our recovery plan even though there's no date set to start gradually, continuing our operations, stepping away from working from home right now.

Basically, several people who talk to us are asking about the main risks that CESP is facing under the scenario of the pandemic. I would basically say that we have 3 of them. One of them, of course, is the health and safety of our entire staff, and we're making sure that all operations are continuing because, of course, energy generation is an essential activity for the economy right now. Besides that, we've been monitoring closely our market and our clients. We've had continuous communication with our main clients about the impacts and any potential mitigation activities that they can have to offset the problem. And another risk that we're going to approach, which will be discussed during this presentation, is related to GSF. And the impact that GSF and other regulatory measures might have on our operations and our results.

On the left-hand side of the page, we are showing you our clients today, the clients who purchase energy and power from CESP. In the regulated market, sales for the energy electric power distributors in the regulated market are 22% of the sales contracted for 2020. And the 78% remaining is the free market. Out of the 78% in the free market, 43 percentage points are related to end consumers, let's say it like that. Basically, leaders in their own areas, in their own markets in Brazilian industry, specifically industrial and hospital, gas and mining and also construction materials and wood. It's a very robust client profile. They lead their own industries, and this has allowed us to communicate with them very closely with a lot of responsibility on the possible mitigation measures that we might need.

It's worth highlighting that right now, at the end of April, we have not suffered any impact in our clients' portfolio, and we have not yet undertaken any negotiations on flexibility and changes to sales contracts. What we're showing on the lower right-hand side of the page is how consumption has been behaving in Brazil. The comparison we brought is with the first half of April last year. So as you can see, nationally, there was a reduction in the demand for electric power of 12.5% total, of which 12% is in the regulated market and 17% in the free market. In the Southeast region, our main submarket, this is following the same line, 13% decrease, which is split as you can see into 12% in the regulated market and 18% in the free market. It's not very different from the national average.

Moving on to Page 6. Here, we see the main highlights for this quarter, the first quarter of 2020. We generated in the first quarter 1.1 gigawatt -- average gigawatt of electric power. It's worth highlighting that this generation is 17% above our physical guarantees, which is in accordance to ONS guidance based on the energy availability index that they recommend. We operated during the first quarter at a level of 94% availability, which is slightly higher than the availability we had for the same period last year. It's also worth highlighting that we are maintaining all our operation at the highest availability levels possible. This is all available to the ONS. Our operations in the 3 plants was not interrupted at all, except for the planned maintenance stops that we already had. We have not had any discontinuances due to COVID-19.

In terms of financial performance, we had a very good quarter. It was a growth of 30% in our net operational revenue in the company, reaching BRL 461 million. Out of those, BRL 61 million, around 60% is related to the start of operations in our trading company. It started in January now. And the remainder of the difference is the conventional trade of the energy we produced. We finished the first quarter with an adjusted EBITDA of BRL 336 million. And there's an expressive increase, as you can see, in comparison to the first quarter of 2019. This is mainly due to a better management, better execution of our electric power balance in the first quarter. And due to that, we generated BRL 242 million in additional cash flow after paying debts.

This generation right here is the bottom line before 3 events. We have not included the payment of the main debt, which has no term right now. And we have also not included our contingent liability payments and dividends. So the cash conversion index for this operational -- operation was -- excuse me, was 72%.

Regarding power trade, as I said, in January, we started operating our trading company, and this is related to our trading strategy. And it was also helped by the volatility we've had in the market since we started.

Our MTM, our market-to-market (sic) [marking-to-market], in the trading operations is about -- at BRL 25 million in this quarter. It's a very good, very promising result. Following this, we're going to show you that when we consider the market GSF, the last one published by CCEE shows that we are basically at a good level in our energy balance. We're going to see this in detail later on. And during this quarter, there was also a significant reduction of 63% or BRL 141 million in the cost of energy bought. This is related to the possibility of having better planning and execution in our strategy to achieve net 0 energy balance, and that started in 2019 and continued in 2020.

Continuing to the next page, we are showing our contingent liabilities. It's a snapshot of the company's contingent liability on March 31, 2020. On the left-hand side, we see how our total contingencies have evolved. At the end of March, our total contingencies were BRL 11.7 billion, and this is basically due to the correction for inflation. It's based on the court's indexes, which resulted in an increase of BRL 457 million in this amount and a reduction on the other side of BRL 155 million, which has to do with movements and favorable decisions to CESP during the first 3 months of the year.

On the other hand, regarding our provisions, the provisioned amount in the BRL 11.7 billion was BRL 1.9 billion -- or rather BRL 1.89 billion, which is basically the same amount we had in December 2019, plus correction for inflation and interest during the period. Following that, I also think it's worth mentioning a bit about our contingent assets for Três Irmãos. There were no relevant news to share during the first quarter regarding these contingent assets. We're still waiting -- many of you will remember, those of you who are following, will remember that we are still waiting for the trial court judge to set the final hearings to hear the expert that was indicated by the judge and both parties so that after that, it is likely that they will have their trial court decision. Considering COVID-19, there will probably be some delays in how this moves forward. This is expected because of the contingencies we are having. And we're still waiting for a possible decision in 2020. It remains to be seen.

Moving on to Page 10. This is a brief summary of our energy market. On the left-hand side, we have the evolution of our daily ANE and our storage level in 2019 and the first months of 2020. We finished on March 31 with a storage level nationally of 55% since we'd had better affluence, a better rainfall period. And this is significantly higher than what we had in the first quarter of 2019, which was 34%. At the end of April, we are at 59% as you can see with the green line on the left-hand side graph versus 56% in the Southeast market.

What we see here on the right-hand side of the page is basically the projections that ONS has set for the loads, and the green line shows how it had behaved in 2019. The dotted yellow line is showing the original load prediction that ONS had put out. This was, of course, before COVID-19. After the pandemic, the ONS has already reviewed these loads. It's reviewed at 5% below the initial prediction, and this reviewed load is shown in the red-dotted line in the right-hand side graph. As a reminder, this revision showing a 5% lower line is presupposing a drop of 11% in the second quarter of 2020, April to June, and a further 4% reduction in the third quarter of 2020. These revisions basically process our estimated GSF, and they reach a GSF for the year of 81.2%.

The next page has a comment, showing that we are assuming a GDP growth of 0%. If we consider a possible recession according to the focus published, it can be below what we had foreseen. It would be around a reduction of 9%. And that would also have an impact on GSF, which will be shown on the next page.

So moving on to Page 11, we are showing the energy balance for CESP estimated for 2020. This is a group of graphs that many of you are already familiar with. What we see on graph number one, the upper-left graph, is basically the physical guarantees that we have at CESP adjusted for our estimated GSF. Here, we are estimating the GSF according to the last one published by CCEE, 81% for the entire year. And the GSF factor alone would generate an onus or an energy deficit of 118 average megawatts, which is in the last column of the first graph. If we add to this deficit a conventional deficit for the trade that CESP had in the past, the combined amount would be originally 277 average megawatts. This is in the last column of graph #2.

Following that, on graph 3, we are showing our energy purchase regime, which started in 2019. And it shows how much was bought in average megawatts. So the white bars are showing the monthly energy deficit and the green bars are showing our purchases at the prices listed above them in the small circles. The prices are shown in BRL per megawatt hour. So based on this 81% GSF, we basically zeroed out our energy balance, and the result is shown on graph 4. There is still some deficit, as you can see, for April and May. This is related to the revision of the GSF projections, and it's a balanced situation for the year. It's worth highlighting that basically, if we consider a recession, not 0 growth but a recession according to the focus article published and the projections based on that, our GSF should be below 81%. It would probably be around 77% to 78%.

As a reminder, based on the information we are communicating on Page 11, any of the analysts that look at the CESP figures can't estimate the impact of GSF. It's basically a percentage on the gross physical guarantees that the company has based on -- shown on graph 1, the 912 average megawatts for the year. It's also worth highlighting to facilitate this estimate that each percentage GSF that drops based on the current energy prices have an impact of BRL 9 million in CESP's results. So that's for the yearly regime equivalent to the 12 months of the entire year.

So to continue, Marcelo de Jesus will speak, and he'll give us the financial performance that CESP has had.

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Marcelo Antonio de Jesus, CESP - Companhia Energética de São Paulo - CFO & Member of Management Board [3]

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Thank you, Mario. Good morning, everyone. So continuing our results call, we're going to go to Slide 13 where we will be discussing our cost discipline. Before I talk about figures, I think it's important to clarify that the first quarter of 2020 -- or the comparison between this first quarter with the first quarter of 2019 will give a good reflection of the implementation and the transformation that CESP has had throughout 2019. During the first quarter of 2020, most initiatives have been implemented. So this is the new cost level that CESP has, while the first quarter of 2019 still did not have these initiatives.

So we start with the expenses, purchasing power. When we compare the first quarter of this year with the first quarter of 2019, we can see a reduction of 63%, which is equivalent to BRL 141 million. When we look at that into detail, it's clear that this is the result of the new management strategy for our energy balance, the seasonality strategy that was adopted during the first quarter, which resulted first in a reduction in the need for energy to be purchased. In comparison with the first quarter of 2019, we purchased 209 average megawatts, while in the first quarter of 2019, we had to buy 374 average megawatts. So this difference in volume was a reduction of BRL 82 million. And when we look at the price set, our trading team found some windows of opportunity for purchasing. So we identified a reduction in the average purchasing price in the first quarter of 2019 from BRL 299 per megawatt hour to BRL 182 per megawatt hour this quarter.

This reduction contributed with BRL 59 million in the reduction of energy costs, and this is also applicable to personnel and administrative staff. There was a reduction of 46% in this item, which is -- which represents BRL 18 million, basically due to the reduction of the number of employees, which, as you might recall, is due to our voluntary dismissal program, which was very successful in this year. And here, there was also a reduction in rent, services and outsourced parties, a 50% reduction, which is equivalent to BRL 8 million. This is mostly due to process reviews and contract negotiations. So we had a reduction of 43% in our expenses, which equals BRL 168 million. It's important to highlight here that this reduction is offsetting an increase that we had in the amortization and depreciation value due to the payment in our authorization last year, renewing the concession of the utility, the [OBP] fee and tax and a revision of the lifespan of our Porto Primavera assets. If we were to exclude that from our amortization, the reduction would have been BRL 190 million or 46%, which is very close to 50%, which we had seen in the previous items.

Continuing the presentation on Slide 14. In the upper left-hand side of the slide, we see how our revenue has evolved. It increased by 30% or BRL 105 million, of which BRL 65 million basically come from our trading company, which started its operations in 2020. On the right-hand side, we see how our adjusted EBITDA evolved. It grew by BRL 294 million, which is made up of this revenue increase of BRL 105 million as well as the reduction of BRL 190 million in costs and expenses total, which was that I mentioned during the previous slide. So the resulting EBITDA for the first quarter of 2020 was BRL 336 million. This EBITDA was converted into operating additional cash flow of BRL 249 million, which is a conversion ratio of 72%, which is quite substantial. This operational cash after subtracting the withdrawal of the legal deposit resulted in a free cash flow of BRL 209 million. Just as a note, these contingencies are payments for labor lawsuits and some installments for agreements that we had in the previous year, which were to be paid during the first quarter of this year. So this free cash flow of BRL 209 million has contributed to the levels that we reached at the end of the first quarter of 2020, BRL 950 million, nearly BRL 1 billion.

Slide #15 presents our company's capital structure, which, as you can see, is quite robust. Here, we see the company's net debt, which was BRL 1.067 billion. This was mainly due to our cash balance, which was presented in the previous slide, nearly BRL 1 billion, which offsets our debt for debentures, which was BRL 1.8 billion. And this resulted in a leverage of 1x net debt to EBITDA, which also shows that our EBITDA for the next 12 months has already reached around BRL 1 billion. So we have that leverage of 1x net debt to EBITDA, which is a comfortable level of leverage.

When we look at the amortization program for our debenture program, BRL 1.8 billion, we can see that the first debt amortization will start from July 2022, meaning that we have 2 years ahead of us without any amortizations of the main debt. And when we add that to the leverage that we have, 1x net debt to EBITDA and the cash that we finished in March with BRL 950 million, this leaves us a very comfortable position to face the COVID-19 crisis. And as was said before, we are not seeing a significant impact will happen to our future cash flow and how our revenue is generated. Of course, we will follow it up closely to see what will happen.

We're going to have to be very close to our clients and so on, but I think the fact is that, once again, considering the cash balance for the first quarter and the fact that we don't have any commitments to -- have any amortization for our debts for the next 2 years, our cash level is leaving us at a very comfortable position and is making us feel safe that, even during the crisis, we'll be able to honor all our commitments as we've done in paying dividends on the 22nd of about BRL 405 million.

So Mario will speak again to tell us about the main initiatives for 2020. Mario, you may go on.

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Mario Antonio Bertoncini, CESP - Companhia Energética de São Paulo - CEO, IR Officer & Member of Management Board [4]

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Thanks, Marcelo. Continuing with Page 17, we conclude with the main initiatives for 2020. Starting with our operation. The main priority we have right now is advancing our health and work safety agenda. Our goal is to make CESP a benchmark for power generators in Brazil. Moreover, we are continuing to manage our operational costs in many fronts, and we've also advanced significantly in our process, automation and digitalization program. So we want to have the company at a new level of speed and agility in managing its many fronts.

Regarding our contingencies. With regard to the COVID crisis, we are maintaining the main negotiations open with all other parties. And I am here referring to our contingent liabilities. These negotiations are continuing. And at the right time, at the right levels, we will be prepared to conclude some of them during the year. Of course, given how critical this moment is, given the uncertainties we face, we are going to have to wait for a better scenario in which we can see with some more clarity, how we'll step out of the crisis so that we can use our resources in the best way possible during this negotiation.

There's also an effort to release some legal deposits to reinforce continuously CESP's liquidity position. I don't need to say that we are continuing to monitor the Três Irmãos suit. And if there are any news regarding how it develops at the trial court, we will be informing the market.

Finally, this is a year to start and to consolidate our trading company. We are continuously optimizing our energy balance, especially due to some modulations we'll have with GSF, as we mentioned some pages ago. Also, once the company's energy balance has been resolved for 2020, we will be focusing much more on the medium and long-term exposures for the company, any deficits we might have for the next 2 years, 2021 and 2022, and our contracted position for the sale of electric power after 2022.

So that concludes the first part of our presentation, and we can now move on to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Andre Sampaio, Santander.

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Andre Sampaio, Santander Investment Securities Inc., Research Division - Research Analyst [2]

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I actually have 2 questions. The first of which is about cash generation. We really saw exceptional level of cash generation for this quarter. So looking towards the future, we see that we really have the strategy to utilize this cash, but at the same time, that left some questions in my mind. So can you shed some more light on that? Can you tell us about what the plans are that you have for this excessive positive cash generation we saw in the first quarter? We just want to know if you can tell us a bit more about your growth strategy or if, right now, your strategy is really to hold this for now.

The second question is about the exposures you had on the medium and long term. We saw that for 2015, you were able to solve most of the problems you had in terms of exposure, and we'd like to understand a bit more about your situation for 2021. If you could talk some more about that. We understand that this reduction in price could show an opportunity, maybe we can buy this energy with a better price. So if you can tell us a bit more about your liquidity in this market, I'd just like to take this moment of low prices to reduce our expenses. So that's my question.

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Mario Antonio Bertoncini, CESP - Companhia Energética de São Paulo - CEO, IR Officer & Member of Management Board [3]

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Thank you, Andre. This is Mario. So your first question is related to cash generation and allocation. Our strategy remains the same right now, Andre. We do have some strong capacity to generate cash. This is an opportunity right now. But our allocation is related to our strategy to allocate the right amount of capital so that we can continue to reduce our contingent liabilities. This is the strategy that we have for our capital in the company today. As you know, our CapEx is used for maintenance and modernizing. It is not a huge amount. It should be close to BRL 16 million, BRL 17 million. It's not significant. And the company has prioritized, as we recently informed, the dividend payouts. Most of it has been paid in April. And there's also a part for October -- to be paid in October. So it is not the moment to look at expansion right now. We always monitor the market. We see the main things happening, but our immediate strategy still does not include expansion. We're preparing the company for a second phase, but this is not our priority right now. We're not focused on that.

Now your second question on exposure, that's true. As we've always informed the market, we have some exposure, which was reduced this year, and we still have some exposure because of the deficit we have in energy for 2020 and 2021. So this is something that we've been looking at in stages. There is a strategy behind it for 2020 and 2021. There's a number of goals that we have. And for 2021, we see that there will be some impact for energy. But for the long term, those prices will not be as impacted once the COVID situation is passed. So we see -- it will affect 2020 and 2021 to some extent, but whenever we can, we will disclose our strategy. And we hope that we will be successful in executing its strategy as well.

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Andre Sampaio, Santander Investment Securities Inc., Research Division - Research Analyst [4]

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And once again, congratulations for your cash generation this quarter.

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Operator [5]

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The next question is from Gabriel Francisco, XP Investments.

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Gabriel Fonseca Francisco, XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A., Research Division - Energy, Oil & Gas Analyst [6]

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Congratulations on the excellent work you've had this quarter. I have a couple of questions, and I'll try to be quick. First, the Três Irmãos contingencies. I'd just like to understand something. You said that when you correct it for inflation, it's below your capital cost. Would it be worth trying to talk to the government, see if there are any negotiations that can be had to try to ensure that this cash flow comes in as soon as possible because we know that the fiscal situation and the government is doing worse and worse. So that would be my first question.

My second question is about your client profile in the free market. If you could give us some detail on this kind of client and if you could tell us if some clients have been engaging with CESP about that's -- any deferred payments if they're being requested. And what measures have you had with clients bilaterally in the free market if they've engaged with you?

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Mario Antonio Bertoncini, CESP - Companhia Energética de São Paulo - CEO, IR Officer & Member of Management Board [7]

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Gabriel, this is Mario again. Thank you for your questions. So starting with the first one, the Três Irmãos contingency. This is a very successful strategical process for CESP. We monitor it closely. And we understand, Gabriel, that for any decisions there, we need to wait for the trial court decision. We talked about how that has been delayed. I think it's, of course, because of COVID. We do expect some timing issues there, but there's still no reason to believe that this will be different from what we expected. We do want to hear for a decision in the trial court, and this is a strategic process for us. It's very important. We are fully aware of it. We have a very good in-company team as well as hired lawyers. So this is something that we are looking at, and we will keep you informed as we continue learning about it. But the next step would be to wait for the first hearings, which have not -- or excuse me, the final hearings, which have not been happening yet. So that should be the natural step in order to have the first decision.

Regarding your second question, client profile. We have very good clients that are appropriate for this moment. So 22% are treated in the regulated market, and it will continue. Of course, any movements there will depend on preapprovals, and all the efforts that we have been having should be approved by the distribution sector. Now with the free market, which was what you asked, these are clients in different areas. Six of them have a good concentration, and they account for 90% of sales in 2020 in the free market. And these are industries which are basically mining, precious and basic metals, which is not something that has changed a lot. And they've actually had a positive impact in the recent months. We also have one client in (inaudible) in primary inputs, and there is one client in forestry and processing as well as construction materials. So these are all leading clients in their respective segments. Considering the impacts of the pandemic, we do not expect to have long-term interruptions with these clients. There were no compensations. Based on the best information available to me right now, my perception is that it will be absorbed by the market. We don't expect to have any major impacts or any material impacts at CESP's results. So that's what I can tell you right now, Gabriel.

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Gabriel Fonseca Francisco, XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A., Research Division - Energy, Oil & Gas Analyst [8]

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Great. Just referring back to the first part, when the company has a favorable decision and when you start receiving it, how would that be done operationally? How would these receivables be processed?

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Mario Antonio Bertoncini, CESP - Companhia Energética de São Paulo - CEO, IR Officer & Member of Management Board [9]

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With regard to that, basically, in 2014, and this was supported by ordinances, we would be paid in cash and it would be a 7-year payment in monthly installments, corrected by SELIC from the start of payment until it was concluded. So that's how it would be corrected for inflation. So it would be paid in 7 years after the decision. This was what was decided by CESP in the past, and this is also supported by the ministry's guidance.

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Operator [10]

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The next question is from Carolina Carneiro, Crédit Suisse.

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Carolina Carneiro, Crédit Suisse AG, Research Division - Sector Head [11]

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I have 2 questions. First, about the trading company. We understand that the main goal is to reduce the risk of exposure that you might have because of rainfall and the contracts that you have right now. But if you could tell us a bit about the scope for the future, what is the plan that you have for the trading company? Are you expecting to expand to a greater scope? What have you seen? Can this be a business line for the company?

And another question, although you haven't received any requests as you were saying for contract renegotiation or flexibility right now, I'd just like to understand how this would work in the case of your contracts because you mentioned in the income item, BRL 29 million in the industrials line because of flexibility. So I think this was in the past and it was reverted into more income right now. But how does it work in your case if it happens? Do you have a commitment for a certain number of months to receive it again? How would it work?

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Mario Antonio Bertoncini, CESP - Companhia Energética de São Paulo - CEO, IR Officer & Member of Management Board [12]

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Great. Thank you, Carolina, for your questions. So let me answer the first question on the trading company. And after that, Marcelo will answer your second question on the flexibility of our contracts.

Regarding the trading company, the trading company starts with 3 mandates and then a fourth long-term mandate. So what are the first 3? The first is really to manage our energy balance better. We had some deficits in -- which are expected for '20, '21 and '22. So the way in which we plan our execution is essential, and this is what will allow us to have considerable gains for CESP on the long term. So there is a possible savings to be made there, and that's the focus of our trading company. And this is also related to our definition or an internal discussion, which involves our long-term trading policy, and of course, our strategy for 2022 and 2023. Our expectation is to intensify this process from 2024 on. So the definition of this strategy also plays in an essential role in this discussion to foster and to replace plans. And there's a third aspect, which is credit. We're trying to contact the market. We're trying to develop robust intelligence, and that requires some experience in trading, which is what we're willing to do. And we've had good results in the first quarter. Of course, it was helped by the volatility that we saw not only because of the situation in January and February, but now also because of COVID-19. This is, of course, affecting us but not our entire strategy. We managed to get a good result, but we do not expect this -- we will not expect this kind of result again for the next quarters.

Finally, there's a fourth long-term mandate, which is to develop the energy market for CESP on the long term. So finding niches and markets which we will delve into, what kind of service we can bring to our consumers and our clients. So this is the strategy that we have already started. We've started this debate this year, and we are going to define our long-term commercial strategy related to each market. So this would be for 2023 fall. So we hope that this adds value to CESP on the long term.

Now I'll let Marcelo answer your second question. Thank you.

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Marcelo Antonio de Jesus, CESP - Companhia Energética de São Paulo - CFO & Member of Management Board [13]

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Thank you. So regarding flexibilization of contracts, let me characterize this. We have it for free clients, free trade markets, which represent around 78% of our revenue. We have one contract, which represents about 15%, 16% of our total sales, less than that with flexibility. And normally, it can be (inaudible), which would have an impact of 5% a year. So if this is used, it can be used. But over the year, it will not create a variation higher than 5%. That's how it works, and this is determined by our contracts.

You mentioned that you saw a gain with CESP, but I think there was an increase in volume in the contracts due to the trading company that started working now.

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Operator [14]

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(Operator Instructions) The next question comes from Mr. Marcelo Sá, Itaú Bank.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [15]

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I have a question about the hedge, which was not as clear to me. You mentioned that a part of the free market has its price listed in U.S. dollars. And last year, it was hedged to cover this position and to remove this risk. But after this hedge, when the U.S. dollar was at BRL 4.3, the BRL has dropped significantly. So I imagine there was a big impact in terms of hedge. So what I would like to understand is if the difference in rate that is used for the result is different from what you recognized your balance sheet. One of them has the average and the other one has the end-of-the-year rate in U.S. dollars.

The second question is, looking at your free market portfolio, you said that you had a hedge for 2020 and 2021. So I'd just like to understand if your free market contracts for 2022 and 2023 still have any U.S. dollar components. So if you could benefit from a better exchange rate in the future from 2022 on.

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Mario Antonio Bertoncini, CESP - Companhia Energética de São Paulo - CEO, IR Officer & Member of Management Board [16]

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Okay. So let me start with your first question. The rate is always the same, okay? What you see in the results is always the rate we use. What's important to clarify here is the effect you see in the U.S. dollar difference. If the dollar goes up, this is already seen in the contract as higher revenue. For the contracts that have not been carried out, we also reflect that loss. So the amount is already seen there net, so there's no difference between contracts. What you see in the balance sheet is the market effect for the future of these contracts. So again, just to clarify, the effect you see in the company's EBITDA is the effect of revenue and the loss in hedging. So the EBITDA is calculated in the right way.

For 2022, what happens is, just to give you an idea, about 78% of our contracts are in free market clients, as we said. And among them, 30% had U.S. dollar contracts. For 2022, we don't have any contracts with hedging. We have some contracts which are still in U.S. dollars. But this year, we did not hedge them. So depending if the U.S. dollar goes up, we would have to have that operation.

So to help you out, what was the average rate we use for hedging? 4.25 for 2020 and 4.62 for 2021.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [17]

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So just to confirm, from what I understand, from '21 to '23, the energy contracted in the market still has a U.S. dollar component. So if the exchange rate stays at this level, you're going to have an impact to your EBITDA because everything that was at 4-point something was what you hedged, and you would see a negative impact if it goes in any other direction. But in the future, you can have a positive effect, right?

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Mario Antonio Bertoncini, CESP - Companhia Energética de São Paulo - CEO, IR Officer & Member of Management Board [18]

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Exactly. So for the contracts we have from 2022 forwards, yes, that can happen.

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Operator [19]

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So if there are no further questions, I'd like to pass the floor to the company's closing remarks.

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Mario Antonio Bertoncini, CESP - Companhia Energética de São Paulo - CEO, IR Officer & Member of Management Board [20]

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Thank you, everyone. This is Mario. Thank you for listening in to our earnings call. I think we were able to give you a lot of information, and we'd just like to say that we are completely open to the market here in the Investor Relations area for any additional details you should require. Thank you. Keep safe. And we'll talk soon.

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Operator [21]

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This concludes CESP's earnings call. Thank you for participating, and have a nice day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]