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Edited Transcript of CESP6.SA earnings conference call or presentation 29-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 CESP Companhia Energetica de Sao Paulo Earnings Call

Sao Paulo Mar 29, 2017 (Thomson StreetEvents) -- Edited Transcript of CESP Companhia Energetica de Sao Paulo earnings conference call or presentation Wednesday, March 29, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Almir Fernando Martins

CESP - Companhia Energética de São Paulo - Chief Financial & IR Officer and Member of Executive Board

* Mauro Guilherme Jardim Arce

CESP - Companhia Energética de São Paulo - CEO, President, Member of Executive Board and Director

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Conference Call Participants

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* Maria Carolina Carneiro

Santander, Equity Research - Head of Utilities

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Presentation

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Operator [1]

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Good morning, and thank you for waiting. Welcome to CESP's conference call to discuss the results for the fourth quarter and the year 2016.

Today with us, we have CESP board and advisers present. We inform you that this event is being recorded (Operator Instructions) This event is also being simultaneously transmitted through the Internet via webcast and can be accessed through the address ri.cesp.com.br, where you can find the presentation. The selection of the slides will be controlled by all participants.

We would like to inform you that this conference call is being simultaneously translated into English for the company's foreign investors. Please note that participants who are listening to the event in English may also ask questions during the Q&A session. The replay of this event will be available a few hours after closing.

Before proceeding, we would like to clarify that any forward-looking statements made during this conference call regarding CESP's business prospects, projections and operational and financial goals are beliefs and assumptions of the company's Board of Directors as well as information currently available. Future considerations are not a guarantee of performance. They involve risks, uncertainties and assumptions as they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that the general economic conditions, industry conditions and other operating factors may affect CESP's future performance and may lead to results that may differ materially from those expressed in such forward-looking statements.

Now we give the floor to the Executive Board of CESP. Gentlemen, you may proceed.

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Almir Fernando Martins, CESP - Companhia Energética de São Paulo - Chief Financial & IR Officer and Member of Executive Board [2]

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Good morning. This is Almir Martins speaking, CFO and Investors Relations Officer. I thank all of you for the participation in CESP's conference call. With us, we have Mr. Mauro Arce, CEO; Mituo Hirota, Director of Generation; Márcio Rea, Administrative Director.

We will start the presentation with Slide #2, please. The revenue achieved from energy sales in 2016 totaled BRL 2.46 billion and dropped 41.8% compared to 2015 mainly due to the reduction of the physical guarantee resulting from the end of the concession on July 2015 of the Ilha Solteira and Jupiá plants.

Sales in the regulated contracting environment, on the red part of the chart, you can see that while they totaled BRL 577 million, and this is a reduction of BRL 228 million in the year due to the expiration of contracts with distributors. In the ACL free contracting environment, the gray part of our chart, while sales totaled BRL 1.36 billion, 48.9% lower than what was registered in 2015.

In the year 2016, the company obtained BRL 48 million in the spot market, would be the black part of this chart, with a settlement of power in the EMR, Energy Reallocation Mechanism, and we accounted for more periods.

In the PLD, there were no worryings in the short-term markets because all CESP's energy had been contracted. The quota's regime, the yellow part of the chart, due to the assisted operation of Ilha Solteira and Jupiá plants in -- during the first half of 2016 provided revenues of BRL 385 million. During the second semester of 2015, the revenue was BRL 321 million with this operation.

On the right-hand side of the chart, we can see the net revenue of 2016, which totaled BRL 1,669,000,000, 43.5% lower than the previous year that was BRL 2,951,000,000.

Now revenue deductions totaled BRL 384 million in 2016. This is a drop of 33.2% over the previous year.

On Slide #3, on the left-hand side, we see the amount of energy sold in gigawatt hour per segment. We had 10,177 gigawatt hour in 2016 compared to 20,901 in 2015, a drop of 51.3% in the total traded volume, reflecting the expiration of the consensus of Ilha Solteira and Jupiá plants. On the right side, we can see that the average selling price per megawatt hour was 8% when compared to 2015, even though sales in the LDP (sic) [ PLD ] were at high prices during that year.

Now per segment, we can see that the average contract prices, both in the ACL and the ACR, increased due to the price adjustment by inflation indexes and the expiration of old contracts.

On Slide 4, we show the average levels of the reservoirs of the Southeast and Central West subsystem. Although 2016 levels started well above those in 2015, by the end of the year, they had 33.7% of their capacity in the beginning of 2017. The green line points out to a slight recovery, nevertheless, below that 2016 levels causing economic reflections and changes in our system.

Slide 5. This slide demonstrates the average values of the settlement fees PLD for the years 2014, 2015, 2016 and the beginning of 2017. In 2014, the PLD ceiling for its [ ballots ] for that year was BRL 822.83 and average prices were BRL 688.88. In 2015, by a decision of the granting authority, the PLD ceiling was reduced to BRL 388.04. The average price of year at CE -- CCEE was BRL 287.20. In 2016, the average price at the CCEE was BRL 94.10. During the last week of March of 2017, the PLD was BRL 235.67.

Another relevant fact regarding the GSF, the generating scaling factor, which can be seen on Slide 6. On Slide 6, we can see, per quarter, the evolution of the GSF behavior. On average, during the year, the 2016 GSF stood at 0.869. This represents 2.6 percentage points above the 2015 figure that was 0.843 causing in cost buying energy from the CCEE. Now the GSF, although higher in 2016, impacted CESP by a lower amount than in 2015. This is due to a lower average price of the PLD, as we saw in the former slide and also due to the protection of hydrological risk on energy sold in the regulated markets.

Let's see the following slide, Slide 7. Energy purchased in 2016 totaled BRL 124 million, 20% below the previous

(technical difficulty)

energy regulated market. We can see that in 2015, there were BRL 402 million in expenses with purchased energy to be resold. This was necessary to substitute energy this year.

On Slide 8, we can see that the operating expenses in 2016 totaled BRL 1.3 billion, 31% less than the same period in 2015, representing 78% of the net revenues. The manageable and non-manageable items presented respectively, a drop of 19% and 33%. On the right-hand side of the slide, you can see that there was an increase in the provision for legal risks, 32% higher than 2015, mainly due to the monetary adjustment of the balance of provision. The expenses that were reduced were third-party services with a reduction of 25% due to the reduction in contracting also caused by the transfer of Ilha Solteira and Jupiá plants, to the -- we have energy purchased on sectorial charges, minus 53%, mainly due to energy purchased to resell in 2015 at a lower cost of the use of the basic transmission network. Depreciation, minus 34%, due to the maturity of the concessions of Ilha Solteira and Jupiá plants.

The next slide, Slide #9, the adjusted EBITDA totaled BRL 165 million during the fourth quarter of 2016. That is 52.8% lower than the same period of the past year. During 2016, the adjusted EBITDA reached BRL 912 million, a drop of 47.6% compared to 2015. The adjusted EBITDA margin during the fourth quarter of 2016 was 47.9%. And in 2016, it was 54.6%. These margins are lower than the same period of the previous years. The reductions in 2016 were mainly due to the operation of the Ilha Solteira and Jupiá plants.

On Slide 10, well, we can see that in 2016, financial revenues totaled BRL 101 million, 38.7% lower than the BRL 165 million in 2015, mainly due to the reduction in cash and cash equivalents. Total financial expenses for the year, including debt charges and other financial expenses, were BRL 75 million, 51.3% lower than 2015, reflecting the reduction of the company's indebtedness. Monetary variations dropped 58.9%, totaling BRL 25 million, mainly due to the reduction of indebtedness. The exchange rate variation had a positive balance of BRL 133 million due to the 16.5% drop in the exchange rate against expenses of BRL 310 million in 2015. Thus, the financial results reached a positive of BRL 135 million against expenses of BRL 359 million during the previous year.

On Slide 11, we have a proposal for the allocation of profits based on the income for the year of BRL 305 million. We would allocate BRL 15 million to legal reserves; there is also the realization of profit reserves of BRL 31 million; and the depreciation realization of BRL 26 million, which are part of the adjusted income of BRL 295 million. The proposal, therefore, considers to allocate BRL 140 million as interest on equity already distributed as well as the announcement of dividends of BRL 154.8 million, both of which correspond to 100% of the adjusted income.

Now on the bottom side of the slide, we describe the proposal for the distribution of interest on equity and dividends. Proposal of BRL 140 million of your, okay, interest on equity and dividends already paid given preemptive right to the PNA shares according to our bylaws, which establishes that the dividends or interest of our own equity be distributed primarily to Class A preferred share, identified as CESP5 calculated at 10% of the paid-in capital stock of this class of shares. This way, the PNA shares received BRL 1.82 per share. We would like to remind you that PNA represents 2.2% of our social capital -- social equity. And the proposal of payout of dividends of BRL 154.8 million where the ON shares, called CESP3, and the PNB shares, known as CESP6, will receive BRL 0.48 per share, totaling dividends of BRL 0.87 per share pursuant to the proposal being presented to the general shareholders assembly -- or meeting, which is responsible for deciding and approving this matter.

On Slide 12, well, it show a significant reduction of the company's indebtedness. The financial debt on December 31, 2016, was BRL 809 million. This is 51.9% lower than December 31, 2015. Considering the cash and subordinate shares that we have in our funds totaling BRL 587 million, the net debt at the end of December of 2016 was BRL 222 million. Our foreign currency debt accounted for BRL 170 million -- $170 million at the end of 2016.

The next slide, Slide 13, we have the projection of the company's financial debt maturity, which is systematically decreasing.

The next slide, Slide 14, we can see that from the balance of 2015 of BRL 2,790,000,000, we have BRL 436 million of monetary restatement and legal interest. Our net reversal of provisions of BRL 99 million, resulting from the reclassification of a lawsuit by our attorneys. We have payments of BRL 83 million with lawsuits, and the reclassification of a claim referring to the danger with a liability of BRL 170 million. On December 31, 2016, our balance was BRL 2,874,000,000, an increase of 3%. Now regarding these lawsuits, there are legal deposits that totaled BRL 841 million, a historic cost.

This way, we conclude our presentation, and we thank all of you for your participation. And now we will have a Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Carolina Carneiro from Santander would like to ask a question.

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Maria Carolina Carneiro, Santander, Equity Research - Head of Utilities [2]

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I have 2 questions. The first one would be regarding the probability of loss and gains because of your lawsuits just so we can better visualize the scenario for this year because last year, there was a great variation regarding these accounts. I know it's very difficult to give us these provisions in advance, but I would like to know if you have a perception of a possible drop in provisions and with the end of these concession contracts or the officialized transfer, so the new operation has already assumed. And the second question, I know that it is not within the company's scope directly, it is within the state scope regarding the decision of privatization. I would like to know if there has been an update regarding this process. I remember that during the last call, you said that there was an expectation of the provision of the reports. I don't know if you have an update regarding the timing of this entire process, if there is something new regarding the publication of the assessment report or if documents will be published regarding the price any type of privatization.

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Almir Fernando Martins, CESP - Companhia Energética de São Paulo - Chief Financial & IR Officer and Member of Executive Board [3]

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Carolina, regarding legal lawsuits, well, our view is that the year of 2016 was a very stable year. No relevant lawsuits emerged in the same way. We did not observe any major variation on the assessment from our attorneys -- our legal consultants that would cause significant changes that could unfavor the company. So what we saw during the year 2016, there was effect of BRL 400 million throughout the entire year. And this is a result of a legal obligation that we have regarding lawsuits. And what we have to do is to carry out the monetary update and follow it up with interest rate regarding the ongoing legal lawsuits. So in a simple fashion, what we can say is that legal lawsuits, they increased at BRL 100 million per quarter due to monetary update. Now this year, we -- there was a positive ruling in favor of our company. This is from a mining company. It was a lawsuit that was classified as a possible loss because -- and this was valid BRL 1 billion. And this lawsuit was reclassified as a probable loss. No, I'm sorry. [He says he apologizes]. No, it's good that I have the right people beside me to remind me of the wrong things that I say. Now I would like to ratify, so as a possible loss, there's a remote loss of BRL 1 billion. Now within our assessment, this classification is positive. The assessment of lawsuits are being consistent. What we have adopted is that we have been dealing with these lawsuits and doing what is possible to be able to appeal. And in most of our cases, we have been very successful in our lawsuits. Mauro Arce had just reminded me of a BRL 2.8 billion lawsuit from Camargo Corrêa, but was transferred in 2015. Perfect. During the first quarter towards the second quarter of 2016, we had an important reclassification of a lawsuit of 2 -- of over BRL 2 billion, and now it was lowered. So during the past moment, it was considered a remote loss. And we -- and they were eliminated from our lawsuit processes. Now regarding the lawsuits of the plants that were transferred to a third party, in all of these parties, we carried out forecast. And we said that CESP is no longer responsible for these plants. And this depends on the judiciary things. It is not a very significant value, but I believe that this represents around BRL 380 million approximately. We're talking about lawsuits regarding the other plants. Now regarding your second question that is regarding the privatization process, I will give the floor to Mauro Arce.

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Mauro Guilherme Jardim Arce, CESP - Companhia Energética de São Paulo - CEO, President, Member of Executive Board and Director [4]

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As you know, the process of sale of the company, with the sale process, the Finance Secretariat of -- people are working on this matter right now in the government. Now especially on the position of the work, I will tell you what the Financial State Secretariat issued yesterday. He said that the sales process of CESP is being prepared, waiting for the approval of the federal government to continue the union, analyze the privatization model with a concession plan of 30 year that was defended by the state of São Paulo. And we are working together with people from the Ministry of Finance and the Finance and Energy Secretariat because we want a final decision for this.

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Operator [5]

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(Operator Instructions) We would like to remind you that now, we will answer the questions from press. Mr. [ Reinaldo Perez ] would like to ask a question. (Operator Instructions) Well, we have no further questions. We bring our Q&A session to the end. So we would like to give the floor back to CESP for their final remarks.

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Almir Fernando Martins, CESP - Companhia Energética de São Paulo - Chief Financial & IR Officer and Member of Executive Board [6]

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We would like to thank everyone for their participation. And our results release and financial statements are available in our websites with Investor Relations. Our Investor Relation team is at your disposal. Thank you very much.

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Operator [7]

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CESP's conference call comes to an end. And we would like to thank all of you for your participation, and have a very good day.