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Edited Transcript of EGIE3.SA earnings conference call or presentation 26-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Engie Brasil Energia SA Earnings Call

FLORIANÓPOLIS Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Engie Brasil Energia SA earnings conference call or presentation Wednesday, April 26, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Henrique Boquimpani de Freitas

Engie Brasil Energia S.A. - Chief Financial & IR Officer and Member of Management Board

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Conference Call Participants

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* Kaique Vasconcellos

* Thiago Silva

Santander, Equity Research - Research Analyst

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Presentation

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Operator [1]

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Good morning. This is the conference call of ENGIE Brasil Energia to announce the financials of the first quarter of 2017. (Operator Instructions) This conference call is being recorded.

This presentation, along with the slide deck, will be simultaneously transmitted on the Internet at the website, www.engieenergia.com.br in the Investors section. There, you will be able to find the slide deck and a copy of the company's press release.

Before clarifying, statements made during this conference call relative to the company's business prospects should be seen as forecasts, depending on the economic conditions of the country, on the performance and regulation of the electric industry, in addition to other variables; and therefore, they are subject to change.

Today, with us, we have Mr. Carlos de Freitas, CFO and IRO; and Mr. Rafael Bósio, Investor Relations Manager.

We're going to announce the results of ENGIE Energia and its performance during the first quarter of 2017. Afterwards, you may ask the questions that you want, and they will be available to answer. Journalists may ask questions via email to be sent to the company's [IR] press services.

Now I would like to turn the floor to Mr. Freitas. Please, Mr. Freitas, you may start.

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Carlos Henrique Boquimpani de Freitas, Engie Brasil Energia S.A. - Chief Financial & IR Officer and Member of Management Board [2]

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Thank you very much, operator. It's a pleasure to be with you here in this conference call. And I am assuming that you all have the materials that we made available to you last night, so we should start with our presentation, our slide deck, on Page #4 with the highlights of the quarter.

So the first thing to mention is the performance of energy sales, which is considerable, and it has been basically the same last year in spite of a slight increase of -- in the average price of 1.4%, and we have had a reduction in the volume of energy sold of 0.9%.

And so we're starting with a 1.4% price increase, and this is related to the sale of energies to free and regulated customers. So it's important to mention, in the free energy market, we used to have a high basis last year and the energy contracts that we [grew] last year to increase -- by high spot prices in 2014 and 2015, and which matured last year. So the comparison basis was high.

Just as an example, if you look at the material information -- correction, the earnings release for 2 years ago, we are going to see that there was an increase, and it was 16% in average sale prices. So the contracts that we have today in our financials for the first quarter of '17 at normal prices. So the comparison basis was slightly inflated because of the influence of high spot prices in 2014 and 2015, where the drop in construction of 0.9% is still the effect of the economic crisis that we have been going through over the past 2 years and has now started to dissipate.

We are seeing a better performance of the Brazilian economy this year, our performance, which is still very much influenced by the agri business and with the manufacturing industry slightly lagging behind. But this has not yet been enough to -- for us, to have a growth in sales. There was a slight reduction in sales. We're not really concerned about that. And for the rest of the year, we are hoping to have a better sales performance as we reactivate, as the economy picks up.

Another important thing to be mentioned on the space is the improvement, both in EBIT and EBITDA of the company, of 15.2% and 11.7%. The main factor here was the better short-term results by BRL 60 million.

So our performance was less than BRL 50 million last year. And the first quarter of this year, it was positive by about BRL 10 million. So a contribution of BRL 50 million in this quarter, basically because of the performance of the energy industry as a whole, especially in terms of secondary energy.

Last year, the GSF of the quarter was 12%, more or less, with a deficit of 12%. Now in the first half -- quarter of this year, in allocation, there was a strategy that generated secondary energy in the quarter, meaning that the market as a whole has allocated less energy in the first quarter and more energy along the year. Everyone, and ourselves included, an increase in spot prices along the year. So the industry as a whole has strongly allocated a little energy in the first quarter, which lags the secondary energy that is almost artificial because the rainfall was not wonderful. But it generated a secondary effect of 9.5%. So the secondary energy more than offset the fact that we were short on the buy side and the (inaudible). So the difference quarter-on-quarter explains the variations in EBIT and EBITDA that you can see on this chart.

Moreover, there was also a reduction in fuel because, last year, we still had a coal plant and regenerated some energy in the gas plant that was not dispatched this year. So there has been a reduction in fuel, also a reduction in the cost of royalty, not just because of less hydro generation this quarter, which is true, but also because of the reduction in the carries that -- on the fees that we pay for the warranty. And the reduction of costs as a whole, also including personnel, which improved our margins and a better performance of EBITDA this quarter.

Net income was even better, with a 30% increase in the net income this quarter, not just to the reasons that I have already explained for the EBITDA but an important effect, a reduction of BRL 44 million in the financial results as a whole in the company, in spite of some nonrecurring factors, both last year and this year. But if you want to focus on mortgage recurring, there has been a significant reduction in the cost of debt because part of the debt is IPCA.

IPCA has dropped. There's also an important factor here, which is monetary correction of our payments in -- for concessions. So all of this has led to a 44 -- a drop of BRL 44 million in the financial results in the quarter, which helps to explain the better performance of 30% in our net income.

The net debt has gone up slightly. So the gross debt has gone up to almost BRL 100 million, and the main reason for that was the withdrawal this quarter of BRL 220 million, an amount that we've withdrew from BNDES for Santa Mônica that is already in operation.

So the drop in generation I have explained was 16% in hydro generation, because of (inaudible) worst hydrology this quarter, for the reasons that I have already mentioned.

Another important point on the last line was the reduction of our headcount, about 7% drop in headcount, especially because of the voluntary dismissal plan that we implemented, that we started in November last year. So quarter-on-quarter, there has been a significant reduction in the company's headcount.

On Page 5, you can see nonfinancial highlights. The first point here is the confirmation by Fitch of our national rating. Long term, it's AAA, and the global scale at BB+, which is still 1 notch above sovereign rating because the company that operates in Brazil, having a rate above sovereign, is a major accomplishment that we should celebrate.

Another important point, on the right-hand side of the slide, Santa Mônica Complex is now fully operational, and it reached total capacity in April 2017. The company also approved the payout of dividend, complementary dividends, totaling 100% of the adjusted net income of last year, BRL 2.28 per share, and this amount of dividend will be paid soon.

On the next page, so we have completed the modernization work of Salto Santiago. It was a 4-year project to modernize the power plant, to expand its life cycle, which is important for the company. It also increased slightly the assured energy of this power plant. And this (inaudible) energy is important to keep the stability of our performance.

We are also proud to say that the Lages power plant completed its issuance cycle of Carbon Emissions Reduction Certificate of the United Nations. We were one of the first ones to have it here in Brazil 10 years ago, we started this.

And in terms of sustainability, we're also proud to say that we have a project that has been approved by Aneel for electrical chemical (sic) [electrochemical] batteries. And now we are looking into new technologies that will help us to evolve according to the market.

Now on the next slide, it shows how much our company has grown. There has been an increase of 60 megawatts, more or less, which was the 2 farms of Santa Mônica Complex that have become operational.

On Page 9, we are part of the largest group in Brazil, the largest independent power generation group. We are -- and we're building other power plants, which provide about 700 megawatts.

On Page 10, it is important to mention here quite a few things. First, this year, you can see here an increase, a significant increase, in the share of free customers, basically due to a large regulated contract that expired last year, 300 average megawatts, which was replaced in free market. But we are likely to go back to a fixed position between fixed and free market because, in 2017, the Campo Largo PPA will go in effect, as well as Pampa, and will, again, have a significant share or more -- a significant share in the distribution market.

It's also important to remember that this increase in the green bar with trading is due to the operations that we believe were conventional energy and we received the incentivized energy with those projects, and we can also sell to more customers energy with smaller volumes to gain margin.

This is the strategy that we have been using to lower the threshold of the volume sold to customers to have a broader customer base, and then we can do more energy trading.

And this is shown on Page 11 in our diversified portfolio, including free customers portfolio. We have 0 default for customers.

And now on Slide 13. The slide layout is slightly different, to reinforce the message that, today, we have excess assured energy within a short term. But very -- so we have energy available, which may be a theoretical availability, because there is an overestimation of projects that might possibly be built. But the fact is that, considering what we have today, the best -- largest power plant in the country, and considering the rainfall deficit, we have higher volatility in spot prices.

And so in spot prices, if you look at the last 4 weeks, it has varied greatly, really amazing great variation. So the system is sensitive to any change in parameter in rainfall. For this reason, we are setting aside a larger share of uncontracted energy this year, next year, too. So we have about 10% energy.

On Page 15, 9.6% of energy for potential sale, but it's not sold. And we are not likely to change this number very much during this year. It might change a little bit. But if we are to sell more energy, it's because we have decided to do so. We think that this volume of 9.6% of energy available for sale, but not sold, is a reasonable level, for us to face the uncertainties with regards to GSF, spot prices, and also considering that we have a GSF insurance before the share sold to regulated customers. It's important to remember that, today, in 2017, we have partial protection for regulated customers.

And today, in 2017, we have also free customers. That's why we decided to have a share of uncontracted energy, where unsold energy serves as a buffer security margin. And today, considering the high spot prices and the expected high spot prices for next year, we use this strategy and we are -- because we're expecting an increase in average prices in the energy market. We used to see, for example, that for next year -- a few months ago, energy was below BRL 200; today, it's BRL 220. So energy to be delivered next year.

So for this year, spot price is very high. It's written above BRL 300. And midterm market is going back to a more normal level. And we're expecting prices to normalize in the long term, and it is very much influenced by the midterm spot prices, which is very high this year. And it was high last year. And we are expecting that next year they will be slightly higher than they were last year, but still lower than this year.

So all of this has translated in sales strategies that we execute, and we sell more when we think that prices are better for us to sell and when we think there's more margin.

Now on Page 17, this is just an overall status. You already know Jirau is already in operation since last year. It is generating according to expected. Generation is quite efficient. And we are, in fact, waiting for the beginning of the process. We hope that this process starts this year. We do not yet have an estimated date, but we hope that it starts effectively soon. And it's not definitely going to be -- to end this year because it's really long, and it will certainly require the approval of Aneel, CADE and BNDES. But we hope it will start in a few months, and then we will be able to assess in a committee how this asset could be included into the company's portfolio.

Now talking about the assets that are already in our assets, Pages 17 to 23. First, Pampa Sul. As you can see, its work on the site is 55% complete and the filling of the reservoir has begun. It's a reservoir to keep water for the power plant, and so the cables and the stringing of cables at 49 of the 51 transmission line towers are complete.

We can say the same about Campo Largo Phase 1, on Page 20. This is the company's largest wind project today, to be sold -- with energy being sold both in free and regulated market. So most of the distribution is -- installations are ready. We are completing the generation, so that this project is in Bahia, and its evolving as scheduled and as budgeted. And it will go live next year -- towards the end of next year.

The Assú Photovoltaic Center in Rio Grande do Norte, the company's first centralized solar energy project sold to the regulated market. Work on the site started on March 2017, and it's scheduled to end or to be completed by the end of next year. So our intention is to complete this construction by the end of the year.

And lastly, on Page 22, our debut in the incipient market of decentralized solar energy generation. It's a project in Santa Catarina, where there was a demand for residential solar panels that was 11x greater than the originally estimated. So we started the first major step. It was the most relevant in this segment.

And lastly, on Page 23, our pipeline of projects that will be triggered depending on the market. All the (inaudible) projects that are being prepared, we always leave them sort of ready to meet the market demand, both the regulated and free markets. So we have Santa Mônica, Pampa, solar energy, wind energy and gas -- natural gas power plants. And they will be activated whenever we see good opportunities.

Well, talking more about the financial performance on Page 25. You can see our flat performance in terms of revenue, but with significant improvements in EBITDA and net income over the quarters, which have been consistent along the years.

So going to more detail about each one of the effects on Page 26. So there has been an increase in average sales prices and a reduction in sales volume by almost BRL 80 million. So this sales increase took place because of short term, so the players were reallocated in the first quarter of the year, thereby creating this artificial surplus of secondary energy.

So in spite of us being short in terms of allocated energies, we had the benefit of BRL 15 million in our revenue because of ST trading at the CCEE. So we had GSF in the first quarter last year and 9.5% in terms of secondary energy in the first quarter this year. The reduction in fuel of BRL 24 million, and once again, not just because of the reduction in energy but also because of reduction in royalty fees to be paid. And that's why we have a better performance of our EBITDA.

On the next page, the financial results of BRL 77 million better than last year. And this is explained by the reduction in the cost of debt, reduction in monetary correction, and also because of our investments in [Apetin], in Campo Largo and Pampa. And for this reason, we have a smaller financial income, offset by more income tax. That's why we have higher provisions of income tax.

On Page 29, here, you can see a slight increase in our net debt, most of this because of BNDES to Santa Mônica. In terms of cash, similar level as December last year, with a slight increase in the net debt. Net debt, which is still low at 0.4x our EBITDA. We also have lots of room to improve this, to become more efficient in our balance sheet, and we are going to make it more efficient through growth.

Growth in transmission, for example, because there has been a transmission auction just last Monday. Unfortunately, we could not win any Lots, but at the end, it was a very good process. We were competitive. For example, Lot 1, we went to the live auction, contending with the winners, and we lost it by a very little. So this was our very participation.

The last time we bid in an auction, and we almost got there, so we learned how to do it. And whenever possible, we will participate in the future, in future transmission auctions. And I think we will be able to do that.

So we're really considering our entry in any transmissions. We may also consider M&A with the purchase of Jirau. And its amount is also going to increase along this year, because all our CapEx for this year will be funded by debt.

Also, on Page 30, it's important to mention that the payment of dividends in our investment were almost all funded in the first quarter with operational cash flow. So only about BRL 200 million went through the withdrawal from BNDES, as I mentioned before.

On Page 31, the highlight is the reduction on the face value of the debt, which is 11.2% last year; and to date, it's 10.1%. It's a cheap debt, more than 2/3 with BNDES and with the [fresh]loans flow fund.

So on Page 32, as I said before, we already contracted CapEx for 2017 for investments in Pampa, Campo Largo and Assú. And the one that was missing for Santa Mônica will be funded by debt, by debt at the level of the project. So here, there is a BRL 2 billion growth. So the debt, to date is BRL 3.300 billion, more or less, will get to BRL 5.300 billion by the end of the year.

So gradually, we are going to improve the efficiency of our balance sheet. But we still have room to increase our leverage, even more through growth in M&A or both in generation and distribution.

Lastly, on Page 33. We paid 100% of our dividends. Because of the economic crisis, we were paying less. We tried to hold some cash. But now, since we have leveraged capacity in company, we are paying 100% for 2016 again. So our commitment is to have, as a minimum payout, 60% of the net income and to always pay more whenever possible.

So when we have more CapEx, we might reduce if it's more difficult to finance the CapEx. Now as we can do it, we are going to pay the dividends. Let's see what the future has for us, but we have leveraged capacity to improve the company's financial.

So this was all I had to say. Now I would like to open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Kaique Vasconcellos from Safra Bank.

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Kaique Vasconcellos, [2]

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I would like to understand your strategy in the auction. You said you were bidding in Lot 1. I would like to know your assumption. Was it the CapEx reduction? So you told me that you went all the way to the live auction. Could you give us more details?

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Carlos Henrique Boquimpani de Freitas, Engie Brasil Energia S.A. - Chief Financial & IR Officer and Member of Management Board [3]

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We looked at some Lots and we bid in some of them and drew each lot. We, and other players, we have assumptions regarding the real CapEx of the work, construction time, the environmental deadlines too, so we make -- each one will make their own assumptions. We studied some Lots, and the largest one we bid in was the first one. So the first one needs -- we offered for one of the closed lots. And in the auction, if there was a difference of 5% between the best offer and the next one, you could bid in the live auction, and we did. We made an offer for a closed lot with another player, and another did. And in the end, we were disputing or fighting in the live auction, and it went down gradually million by million, and we bid for a few rounds. And we went all the way to our limit, the limit that we considered reasonable. We got there. So each one is free to make their own choices. And we used a few assumptions in terms of CapEx reduction and with regards to our construction schedules, but someone made different assumptions. We have our own logic according to what we thought was reasonable. We went all the way to our limits. But each company is free to make its own assumptions. We wanted to go all the way to the reasonable limit in order to add value. We didn't want to go beyond that limit. We don't want to grow just for the sake of growing. We want to grow with margin, so we thought what was reasonable in terms of CapEx and timing.

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Operator [4]

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(Operator Instructions) Our next question comes from Thiago Silva from Banco Santander.

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Thiago Silva, Santander, Equity Research - Research Analyst [5]

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About Jirau, I know you've said that you're going to make a transfer this year. Could you give us an overview or an outlook in terms of how this transfer is going to take place in terms of the balance sheet?

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Carlos Henrique Boquimpani de Freitas, Engie Brasil Energia S.A. - Chief Financial & IR Officer and Member of Management Board [6]

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Thank you for the question. But for now, I can't say anything to you. I cannot disclose anything. This is going to be analyzed in the committee of related parties. We still need to conduct a very intelligent analysis about the pros and cons of each alternative, the alternative that will clearly increase the company's leverage. That might be a combination of debt with actions. So as a reminder, in the past, there was a debt. And now when you sell a small asset, part of it will be encashed now, and parts will be later. All of this is going to be assessed, and everything will be assessed for us in the committee. And again, the committee is going to be led by independent members, and we are going to review the pros and cons of each alternative. But for the time being, I can't say anything. All I can say is that we have room to increase the company's leverage, although this is not new. We can improve the efficiency of our balance sheet. But with regards to Jirau, I can't disclose much more yet.

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Operator [7]

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(Operator Instructions) We now end our Q&A session. I would like to turn the conference over to Mr. Freitas for his closing remarks.

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Carlos Henrique Boquimpani de Freitas, Engie Brasil Energia S.A. - Chief Financial & IR Officer and Member of Management Board [8]

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Thank you all very much for your presence today. If you have any other questions or comments, we are available to answer on the email or over the telephone. Thank you very much, and have a good day.

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Operator [9]

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The conference call of ENGIE Brasil Energia has now ended. We thank you all for your participation, and have a good day. Thank you very much for using Voitel.