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Edited Transcript of CMIG4.SA earnings conference call or presentation 12-Apr-17 5:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Companhia Energetica de Minas Gerais CEMIG Earnings Call

Belo Horizonte Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Companhia Energetica de Minas Gerais CEMIG earnings conference call or presentation Wednesday, April 12, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adezio de Almeida Lima

Companhia Energetica de Minas Gerais - Cemig - Chief Officer for Finance & IR and Member of Executive Board

* Antonio Carlos Velez Braga

Companhia Energetica de Minas Gerais - Cemig - Investor Relations Officer

* Paulo Eduardo Pereira Guimaraes

Companhia Energetica de Minas Gerais - Cemig - Head of Corporate Finance Management

* Leonardo George De Magalhaes

Companhia Energetica de Minas Gerais - Cemig - Controller

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Conference Call Participants

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* Caio Carvalho

Brasil Plural - Analyst

* Andre Sampaio

Santander, Equity Research - Research Analyst

* Vitor Sousa

Brasil Plural Corretora de Cambio, Titulose Valores Mobiliarios S.A., Research Division - Research Analyst

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Presentation

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Antonio Carlos Velez Braga, Companhia Energetica de Minas Gerais - Cemig - Investor Relations Officer [1]

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Good afternoon to all. My name is Antonio Carlos Velez Braga, Cemig's IR Officer. We'll start now our webcast with Cemig results relative to fourth quarter 2016. And here with us, we have Dr. Adezio de Almeida Lima, Chief Officer for Finance and IR; Dr. Leonardo George De Magalhaes, Controller; and Dr. Paulo Eduardo Pereira Guimaraes, Head of Corporate Finance Management. This broadcast may be followed on phones 55 (11) 2188-0155 or 55 (11) 2188-0188, and also on our site ri.cemig.com.br.

On Page 3 of our presentation of results, you can see net revenue, EBITDA and net profit. Net revenue dropped by 14.2%. EBITDA and net profit fell by, respectively, 52.4% and 86.4%. The main reasons for these reductions are listed here on that slide. Revenue -- the main mark -- the main cause for that was a difference in the CVA. We were building a lot of CVA in a positive territory in 2015, and in 2016 we had significant reductions. EBITDA and net profit are also explained in the drops by the operation of Sao Simao plant transferred to the Quota regime.

Also, we had the effects of more than BRL 1 billion of impairment on investments, one of which was relative to Renova and another impairment in Guanhaes.

On Page 4, we want to show a better comparison, especially regarding EBITDA and net profit in a more clean somehow way, better to compare. In EBITDA, we made adjustments, as you'll see, and reduction was 23% in net profit, a reduction of almost 40%.

Could you comment on that, especially on the adjustment we made this year, the main ones?

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Unidentified Company Representative [2]

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Yes. Good afternoon to all. As Dr. Velez already said, our EBITDA showed a reduction of 52%, but as we can see here, it falls to 23% in this comparison. That's not recurring. We have some positive points that increased our EBITDA, basically associated to the alliance in EBITDA. Our main effect was related to Renova. Renova is going to structuring or restructuring. It's been extending its investment calendar schedule, and because of issues that involve these investments, we'll have to proceed to a feasibility analysis. And there was -- this investment into 2 parts. One of them in Cemig itself that involved a lot of assets, and the other part directly by Renova, in the value of BRL 215 million. The 2 combined added up the Renova figures, as you can see, and through a subsidiary and also the Guanhaes impairment of almost BRL 100 million.

We had profit on sales of Taesa shares, it amounts to almost BRL 300 million. These are the main effects. And now, moving on to the next topic.

On Page 5, we have consolidated net revenue, an evolution of the supply, the volumes sold consolidated. As we said, the main event explaining the reduction of net revenue is the difference in constitution of CVA. You can see that it was negative in 2016. Also, the Sao Simao plant was transferred to the Quota regime. (inaudible) of Sao Simao, and our generation revenue amounts to BRL 250 million. Also, the amount of available energy for the spot market in 2015 was much bigger, as you can see in the numbers, and the average price for 2015 was BRL 288 million, and 2016 to BRL 93.77 spot price. We can consider in it also added to that the decrease in supply of energy associated to a decreased consumption by industry.

As for operational expenses, Page 6. The global value presented a 14% drop, and this reduction is explained basically -- it was related to the reduction of a purchase of energy at the distributor, basically. But we should highlight a few points regarding the controllable company. You can see that the voluntary retirement program in 2016, we have 749 employees joining. That results in a total cost of BRL 93 million. Expected savings amounting to BRL 200 million per year. Another PDD or voluntary retirement program is also planned for 2017, as of May this year. It's also important to stress the fact the provisions for losses on investments, we have the 3 cases on Parati and SAAG. Increases of BRL 54 million in the case of Parati, and an increase also of BRL 48 million in SAAG. Other items here was pretty stable, reflecting our effort to improve our operational efficiency.

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Antonio Carlos Velez Braga, Companhia Energetica de Minas Gerais - Cemig - Investor Relations Officer [3]

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On Page 7, we have the profile of consolidated debt, and Paulo Eduardo, my colleague, will speak about that and how this has evolved.

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Paulo Eduardo Pereira Guimaraes, Companhia Energetica de Minas Gerais - Cemig - Head of Corporate Finance Management [4]

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Thank you, Dr. Velez. Good afternoon. Talking a little about Cemig business, our debt. Our net debt is around BRL 13 billion. It concentrates strongly over the next 2 or 3 years. This is something that we are trying to revert -- or reverse with the rolling over of our debt, seeking funding of a longer term. And Cemig Distribution in the first semester last year, and our generation in the second semester last year, we could see the capacity to roll over the debt. In the case of distribution, we added another 4 years in generation distribution up to 5 years. Despite the difficulties found now in the market and other issues involving Cemig, we could do successfully this rolling over of our debt. We can see that last year, our debt was basically kept stable, if you consider the volume that we captured and the number that we amortized. As we will see later, at Cemig GT we had pretty much substantial capacity to capture or funding through the option, and we paid the granting of Sao Simao under our short-term 27 notes scheme. Part of that was already rolled over for 5 years.

Although despite this concentration in the short-term, we are trying to elongate that profile so that we can have less pressure on this. We transferred that due on 2016 to 2019, 2021, years where our financial commitment are lesser. You can see that relation in CDI, that's most of this pie chart here. In the capital markets we had lesser access to the pension funds and other traditional sources. So this market, for sure, the loan money is in the CDI as an . This is higher than the history of our indexers due to the levers of Cemig and the market conditions, but we have the commitment to do this investment and divert funds from the divestment to reduce our debt. Not only reducing and elevating the timetable for amortization, but also trying to take profit of those cycle of reduced tax rates by the Brazilian Central Bank.

In terms of leverage, we can see that levels were a little higher than usual, but if we talk about net debt over stockholders' equity, you can see that the figures are at adequate levels.

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Unidentified Company Representative [5]

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Thank you, Paulo, about your comments on our consolidated debt portfolio. It's also interesting to comment, to say that if you consider the adjusted EBITDA, you can see the figures are pretty much reasonable.

On Page 8, talking a little bit about results of Cemig GT. As we have mentioned already, the operation of Sao Simao are being transferred to the Quota regime will have an impact from this, and also a lesser amount of available energy in 2016 as compared to 2015, and the prices in 2016 were -- well, energy was sold for about 1/3 of what it had been in the previous year. So in Renova, also, the Renova it also impacted EBITDA, as you can see, but it's important that our seasonal strategy adopted last year was very successful. Also, the debt profile for Cemig GT. Paolo, would you have any remarks about this?

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Paulo Eduardo Pereira Guimaraes, Companhia Energetica de Minas Gerais - Cemig - Head of Corporate Finance Management [6]

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Well, I gave you an idea already about how we dealt with our debt in the other segments of Cemig, but I'd like to stress the fact that the Cemig GT maturities timetable, you can see the number of 2017, we have already paid BRL 629 million of debt early this year.

On Page 10, very quickly about Cemig Distribution results, much of what we've seen already, the impact of CVA -- negative CVA on net revenue, EBITDA that Cemig for EBITDA, but what really impacted our distributor was that in 2016, we had a strong deterioration in terms of our commercial losses and a higher default. As you can see in our division's note, you can see how the BRL 200 million increase in 2016 as opposed to the previous year. That had a lot of impact of -- on EBITDA of Cemig Distribution. Also commercial losses, another BRL 200 million of interest into net profits. It also impacted EBITDA. And also, the consumer market, the captive consumer market, saw a reduction in consumption. We're talking about reductions that amount to almost BRL 100 million. That amounts to around BRL 600 million altogether considering all these factors.

We are making all the efforts possible to reduce the fall and to fight commercial losses. We expect a much better situation by the end of this year. In that regard in our mature debt, however, results on the first quarter will point at some improvement. When we talked about expenses or the retirement -- early retirement program that was pretty much like (inaudible). In most case, the workforce is allocated to Cemig GT. So more than 500 employees in Cemig Distribution opted for their early retirement. And the total cost is BRL 64 million.

What about debt profile of Cemig D? Following the lines of the other segment and Cemig GT, there is this concentration also on the upcoming years that, as I have already explained, we're trying to redesign this debt profile, trying to elongate it and leverage consider net debt and EBITDA, you can see a higher number here, but that's a result of the (inaudible) EBITDA, as commented by our colleague.

On Page 12, we show you our investments for 2016. We can see that what was realized was pretty much near to what had been planned. We can see investments on other events -- or concessions, rather. We won in 2016 that D lot with our plants that Cemig operating until the end of the grant of concessions and we won the auction. And that was in excess of BRL 2.2 billion from this auction. There's a recurrent amount in here, and those who follow us closely, we can see investments on Cemig GT. It's around BRL 1 billion. Last year, BRL 1.1 billion approximately. And in 2017, we expect a similar figure.

On Page 13, we have the cash flow. I'll ask Dr. Leonardo to describe to us this diagram.

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Leonardo George De Magalhaes, Companhia Energetica de Minas Gerais - Cemig - Controller [7]

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We started on cash start near BRL 2 million -- BRL 2 billion. We broke down the year the movements or the cash with provisions, investments, et cetera. You can see the significant numbers, a very strong cash generation. Investment activity this year was very substantial. A lot the investment we had to make, then also injections of capital in Renova. And in May, we will show that in more detail to investors having the year 2017. But it was -- it's going to be lower than 2016 because of the BRL 2 billion that we invested on the grants have already been generating cash and that helped our distribution -- our activity of distribution of energy.

In terms of financing, our debts saw no chance -- no change, rather. You can see it's more of the same level in the near-term. In long-term, we have plans for that. On Cemig D, we managed to reduce potentially our debt considering the capital amount on the year and the amount paid on amortizations. This will reflect our commitment to reduced investments. We had a more attraction of capital in Cemig GT but that had to do with the grants that we have already mentioned.

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Antonio Carlos Velez Braga, Companhia Energetica de Minas Gerais - Cemig - Investor Relations Officer [8]

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Now moving on to Page 14. Proposal for allocation of net profit. In December last year, our board has already decided for [ BRL 330 million ]. There, you can see the numbers on the figures for dividend. Now the board will submit to the shareholders' meeting a proposal to pay BRL 204 million, that's to preferred shares, minimum mandatory dividend. This will represent some BRL 0.25 per preferred share. Also, another amount of BRL 161 million held in retained earnings reserve and BRL 7 million held in tax incentives reserves.

Now I'd like to move to -- to hand the floor to our Finance Officer.

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Adezio de Almeida Lima, Companhia Energetica de Minas Gerais - Cemig - Chief Officer for Finance & IR and Member of Executive Board [9]

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Good afternoon to all. I think that all the figures have been conveyed, and we'll be available for questions. But I'd like to add that I've been with the company for 1.5 months, a company that has always been a benchmark to us, always a very positive image of the company and the board has made a few considerations for 2017, 2018. The main topic to be tackled and will try all our focus and energy is a better performance of our own equity and third-party capital, especially our debt financing and banking loans that has -- well, it has been pretty much explained. And also, that coupled with the sale of assets. It is crucial for us to get to a level of liquidity that's better than what we have today. Also this investment -- investments, rather, are scheduled for this year. We think that -- well, the legal issue involving our -- the plants we see that we are entitled to keeping, but the granting powers from authority has already publicized an auction for September, auction of these plants. So for 2017 and 2018, we expect that the interest rates are coming down. (inaudible) is coming down. But for each point of Cemig, we reduce what comes down, we reduce our debt by BRL 700 million. So the less cash required to really pay our debts. So I'll be available now to you for any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Caio Carvalho, Brasil Plural.

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Caio Carvalho, Brasil Plural - Analyst [2]

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I'd like to try to understand a little better this investment plan for 2017. We know that it's part of the plan of the company, perhaps you could give an update of the initiatives' net result over the year. But more specific also talking a little bit more about Santo Antonio. The media has mentioned a possible interruption on negotiations. I'd like to know how that stands. And still about Santo Antonio, if the partners agree on the model for sale, would there be any position expected from the accounts tribunal of the state?

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Adezio de Almeida Lima, Companhia Energetica de Minas Gerais - Cemig - Chief Officer for Finance & IR and Member of Executive Board [3]

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Certainly. This is Dr. Adezio talking with Mr. Caio Carvalho. About this investment plan, our board has approved at the March meeting these investments that we'll be proceeding to. Santo Antonio is the first case you mentioned, we've already had an advancement and evaluation. We have disclosed with potential investors. We haven't come yet at a final agreement, therefore we will be back to the table for the date. There was a counterproposal made and that's now being reviewed. So that's a priority for us to sell Santo Antonio to recompose our cash, and it's not an investment that we are interested in keeping in our portfolio.

You also asked about any restriction about the accounts tribunal with regard to the sale of Santo Antonio. No, no disparity whatsoever. We'll manage to achieve a just and fair price for that. Other (inaudible) this investment, I'll fell mention a few. Cemig Telecom, already at evaluation stage and some potential investors. Today we had a meeting with one of them. They are interested in the assets. The (inaudible) that's (inaudible) transmission line that are part of Cemig, that are identified and to (inaudible) who is a partner in terms of transmission. It's interested in managing those lines.

Also selling of Gasmig, it's in discussion should we sell 49% according to the (inaudible) Mitsui model? Mitsui kept 49% through a shareholders' agreement. The company has been announcing that this investment of our things that are not part of our core business. We're actively negotiating them. So we are discussing it, and that's not closed, nothing's closed at this point. And the company has been making efforts to really arrive at the end of the year with these eliminations. So these are the criteria. No relevant stake and also out of our core business.

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Caio Carvalho, Brasil Plural - Analyst [4]

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What about the timing? You mentioned -- you gave an example, or perhaps it's not comprehensive. I mean, that Santo Antonio transmission lines, is it cheaper though to expect that it will be done within this year? And what's the timing? What's your target in terms of this project?

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Unidentified Company Representative [5]

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Yes, we think that we are (inaudible) audit. Again, we will be valuing our efforts, but strategically we intend to sell all of them by October. We want to have the cash already internalized. It's not closing the deal, but we want negotiations to be go on by October. We have a team dedicated to this aspect of selling efforts.

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Operator [6]

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Our next question comes from Andre Sampaio, Santander.

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Andre Sampaio, Santander, Equity Research - Research Analyst [7]

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I have a quick question about distribution. What's your strategy to improve and make up for the losses?

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Unidentified Company Representative [8]

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We already are making up for these losses. By yesterday, we had recovered already BRL 98 million in cash. We had an agreement of BRL 140 million of [ room ]. So we have all that figured out for reducing our losses and recovering liquidity. Yesterday, for example, we included 500,000 bad payers or default payers, which should help the credit control situation. Another important piece of news about Cemig D is that we'll have in May 2018 the tax recomposition. We'll present to the national agency of energy, ANEEL. We expect to have okay -- a good -- not tax, but rate recomposition for 2018. You talked more about the increased efficiency of distribution. We have run programs for cost reduction, early retirement programs last year, involved about 700 employees. It had very good effects. And we'll implement this year another such program, and we expect a substantial number of employees to adhere.

All these movements by the company go along the line of hitting -- reaching regulatory benchmark, reducing our cost and debt. That's for the year. We want to reach this regulatory framework, but we'll have the opportunity to discuss with ANEEL what are the costs incurred by the company, and the rates and we're reducing of personnel costs. We expect distribution -- the Cemig Distribution will increase its profitability. 2016, as commented upon, was a hard -- a difficult year with a cycling market, high levels of deferral, but our revenue in 2017, we'll call that the fruits of our efforts.

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Andre Sampaio, Santander, Equity Research - Research Analyst [9]

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Another question about PDD. Do you have another estimation of how many employees will adhere to the early retirement program?

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Unidentified Company Representative [10]

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No, because this will land until October, we would rather not risk -- guess. We don't know -- we expect a substantial number but we don't risk a figure.

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Operator [11]

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(Operator Instructions) Next question from Vitor Sousa, Brasil Plural.

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Vitor Sousa, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliarios S.A., Research Division - Research Analyst [12]

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I have a question relative to Light. Do you still have two, first, of the put option of Light by November 2017. What's your strategy with regard to that theme?

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Unidentified Company Representative [13]

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Yes. We have time until November for the put option. (inaudible) liquidation. It's well-structured, well-organized, well-planned. And our -- you're also allowed not to buy those shares. It's a complex issue with regards -- we have a substantial volume of shares with the money we have available and we expect clear actions over 2017, but we have money enough to buy back.

In case of a liquidation, then we will have more than 50% of the company. Sounding like first publicly held acquisition of Light. However, we have 26% by (inaudible) but 26% are in electric, these are the [ 2 ] stakeholders of Light. But if we buy this other part, then we will be above 50%, as you see. But we have until November to prevent that from happening. I cannot at this point, due to confidentiality issues, I cannot open up too much in terms of the events in the capital market, we are too early for that, but we assure, we've gone the stage of approval by the board. But there'll be no (inaudible) with that, but I don't want it to become a state company, but events in the upcoming market -- in the upcoming month, rather, electrifies our put option, we are in position to prevent that at the same time.

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Operator [14]

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(Operator Instructions) We'll now close our questions-and-answers session. Would now like to hand the floor over to Adezio de Almeida Lima, our Chief Officer for Finance and IR.

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Adezio de Almeida Lima, Companhia Energetica de Minas Gerais - Cemig - Chief Officer for Finance & IR and Member of Executive Board [15]

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Thank you, all, for participating, and we look forward to further opportunities to discuss and solve any doubts in the (inaudible) advancements as we move through 2017. If you need any further information, we're all here available to you. Me, (inaudible), Leonardo, Paulo, we will be available to you for any doubt that you may have over in the course of the year. But there will be other opportunities to discuss and even meet you personally. Thank you.

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Operator [16]

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So this webcast with results of the fourth quarter 2016 of Cemig is now closed. Thank you, and have a good afternoon.

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Editor [17]

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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.