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Edited Transcript of ENBR3.SA earnings conference call or presentation 23-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Edp Energias do Brasil SA Earnings Call

Sao Paulo Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of EDP Energias do Brasil SA earnings conference call or presentation Thursday, February 23, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Miguel Setas

EDP Energias do Brasil SA - CEO and IR Officer

* Henrique Freire

EDP Energias do Brasil SA - CFO

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Conference Call Participants

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* Kaique Vasconsellos

Citigroup - Analyst

* Carolina Carneiro

Santander - Analyst

* Pedro Manfredini

Itau BBA - Analyst

* Marcello Carbone

UBS - Analyst

* Henrique Peretti

JP Morgan - Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to the conference call of EDP Energias do Brasil to discuss the earnings of the fourth-quarter 2016. Right now, our participants are in listen-only mode. Later on, we are going to open for questions and answers and then we are going to give you further instructions. (Operator Instructions). This presentation, together with slides will be simultaneously webcast on the website www.edp.com.br/ir. In there, you will also be able to obtain the Company's earnings release.

Before going on, EDP Energias do Brasil would like to let you know that any statements made during this conference call relative to the Company's business outlook as well as projections, operating and financial goals relative to its potential growth are based on assumptions based on the Company's expectations with regard to the future of EDP Energias do Brasil. Forward-looking statements depend on the country's economic scenario, performance and regulation of the electric industry, in addition to other variables and therefore are subject to changes.

Now I'm going to turn the call to Miguel Setas, CEO, and Investor Relations Officer of EDP Energias do Brasil, to start the call. Please, Mr. Setas, you may go on.

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Miguel Setas, EDP Energias do Brasil SA - CEO and IR Officer [2]

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Hello, good afternoon everyone. I'd like to thank you for attending our earnings release of EDP Energias do Brasil regarding the fourth-quarter 2016 and the whole of the year of 2016. I am in this conference call with Henrique Freire, our CFO, and also with Marilia Nogueira, our Executive Manager for Investor Relations, in addition to other EDP officers that are present with us here today.

I would like you to turn to the presentation. We are going to have a brief explanation and then we are going to go into Q&A. So let's start with page 3, just to show you what we believe or the highlights for the year of 2016. The first highlight that I think that was quite striking in our performance was the completion of the hydropower plant Cachoeira Caldeirao. As you know, we delivered it eight months in advance our regulatory landmark. The first [serve] started in May in 2016 and the regulatory landmark expected for January 2017. And it wasn't the first time we did that. We had already advanced a plant in the delivery of Jari 3.5 months before time.

So it was just a confirmation that the management marble up the capacity of Company to diversify and manage risks is quite balanced which enabled us to once again deliver a plant within times and budget. The second point is Sao Manoel that closed the year with 83.4% of evolution. In a scenario, in which civil construction is more than 90% and the more complex so to speak part of the project which is the reverse diversion is already completed.

Once again here, I cannot fail to mention, later on we are going to talk about that, the impairment in the accounting register of Sao Manoel, we are going to see that later on with explanation of our CFO. I'd like to talk about Pecem as well. As you know, it was a plant that in the first two years was below what we expected in terms of operations but as of last year, in fact 2015 and now 2016, it's very close to the 90% availability which is our regulatory commitment. So we closed the year at 89% of availability which is very positive in our opinion.

It also enables that to close 2016 with EBITDA above BRL500 million. As you know, we have released guidance on Pecem results between BRL400 million and BRL500 million. And once again this year, our performance was above our guidance that we usually release when we talk to investors and analysts. Also I cannot fail to mention the hydrological situation in the state of Ceara. We know that the Castanhao reservoir is having a positive evolution in recent weeks.

We in the water consumption of the plant have been taking measures to try and reduce water needs. And therefore, the situation is still a situation that deserves attention. We are monitoring it very judiciously. But we have had some improvements in recent days, that has been positive and again later on we can give you a bit more color that in our Q&A session.

Let's go to distribution. In distribution, basically the most sensitive point is the commercial losses. What we have to say is that we have had a gradual and consistent approximation to regulatory losses. Remember that in 2016, we had minus 0.62 percentage points in Bandeirante in the case of Sao Paulo and minus 1.39 percentage points in Escelsa in Espirito Santo. Important to say that, in Espirito Santo, we already had a difference in the regulatory curve compared to the regulatory curve of 8%. And we are at about 3 percentage points of difference. Of course, we want to get closer and closer and converge to the regulatory loss levels.

Another thing that is important is the 7th tariff cycle of Escelsa. We know that we are going to have several advances there and we believe they are quite positive. Remember that in addition to the losses, we also improve the technical losses. We had a reduction of cancellations from 14% to 1.3%. Again for regulatory effects, this is very important. And all that had an impact of more than BRL1 million in the regulatory EBITDA of the Company.

Again we believe it is a very fair verbal situation for the economic balance of this consumption. And finally, we have the tariff adjustments of Bandeirante of 9.5% in Component B and 25% in BRR that you are familiar with.

Now we are going to talk a bit about cost control and financial discipline. Remember that we had a capital increase of BRL1.5 billion. We had 100% of subscription as you know in our capital increase. And for us, this was a positive sign from the market and enabled us, as we mentioned, to have a short time agenda with financial optimization. We had the prepayment of the debts with the Inter-American Development Bank approximately in BRL922 million. But that was in dollar, but we converted it in Real that we paid in the end of the year.

And also that's with the holding -- from the holding with (inaudible) do Brazil. So the capital increase was very important and the agenda was completely met and in line with what we wanted. We optimized our financial situation. For in terms for Pecem, we are talking about a difference of 200 basis points of financial cost for Pecem. Also we had a net debt EBITDA in the end of the year of only 1.5 times which is quite balanced which is quite solid for any movements of growth we might have in the future.

Also I cannot fail to mention, Henrique is going to talk a bit more later on, but it's about PMTO. We had an increase of 3.2% between 2015 and 2016. And if we think of non-comparable excludes Pecem, which are non-comparable. And also, if we think of assets fully, the Company's capital structure excluding provision for doubtful debts, we have really a positive situation.

So this is a reflect of the projects we have been developing that has been quite successful and we are going to continue in line with the same projects for the years to come.

And just to close the highlights for 2016, I would like to talk a bit about the growth. We have the acquisition of Lot 24 in the transmission auction. We are going to the segment still very cautiously, but already showing our intention to move on investing in transmission. We are preparing for an auction in 2017. We are analyzing market opportunities. This is an area in which we want to focus on for the coming years.

And another comment about distributed solar energy in line with our energy services, but it is a new segment, we are not present in that segment so far and we see a growing opportunity in the Brazilian market for us to develop in the coming years.

All that with structured investments in distribution, we are going to see that in Henrique's presentation and also an increase of 50% in our net CapEx for distribution. This is very important as we are having a decrease in cancellation both in Bandeirante and at Escelsa, and now it gives us the possibility of work to grow without having losses, without having cancellations and really optimizing our capital.

So this was a year for us to have a CapEx agenda in distribution close to BRL500 million. It's quite ambitious that we want to continue with that in the coming year. I think this is the highlight I cannot fail to mention.

And now I'm going to turn the call to Henrique Freire that will give you a bit more color on the earnings of the fourth quarter and year of 2016.

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Henrique Freire, EDP Energias do Brasil SA - CFO [3]

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Well, good afternoon everyone. Let's start with slide number 4 then. Here we have the explanation of the gross margin of the Company for the year of 2016. I'm going to start on the left. So in 2015, we had BRL3.190 billion. We closed the year with BRL3.289 billion in 2016, so an increase of BRL99 million in gross margin.

If you think of business, let's talk about hydro generation first. Hydrological risk, especially with the provision for bad debt, GSF was not that different, 87% versus 75%. But the provision was much lower, BRL94 million compared to BRL288 million and that had a relief. When we compare 2015 to 2016, it produced an improving margin of BRL192 million.

Remember that in the end of 2015 we had a bad hydrological risk. Especially in the end of the year, if you remember in December, we had an impact of BRL40 million in the main plant and along 2016 we have a necessity. And as the year moved on, we had a better situation and we had a positive impact of BRL28 million in 2016. So these were the events that we had for hydro generation. The main event.

Then we have energy contract generation that was a bit loss. We have the end of a 10-year contract of energy that was replaced in the market at a lower price but some losses there. Pecem, our thermal plant, we closed the year with an EBITDA of more than BRL500 million. And when we compare to 2015, we had a better position but remember that this was the full year of Pecem with an impact of BRL33 million. So although, we had events as you know in terms of logistics of coals and emergency load that did effect our result, especially until the end of the year, but we still had a positive impact.

In distribution, I tried to put together the main events that impacted 2016 compared to 2015. First tariff, especially Escelsa because of the tariff revision and that was a positive effect because we had the correction of inflation and the market that had almost set at BRL40 million impact, BRL39 million negative. Remember that Bandeirante is 0.8% and in Escelsa 10% and that impacted our results.

The over contracting, when we compare to 2015, over contracting worsens our margin of BRL80 million. In 2015, we had a plus of BRL35 million and this year we closed the year with a negative contribution of BRL45 million, BRL36 million in Sao Paolo and BRL9 million in Espirito Santo.

Then we had the VNR. We had an extraordinary updating. You will remember, you know that we have the normal update and then you have a revision period and we had an impact in 2016 of a BRL190 million and in 2015 of approximately BRL150 million. So that is an impact in the margin of BRL42 million.

Losses, we continue to reduce our losses. Commercial losses, as it was mentioned, continues to narrow the gap to the regulatory landmark and that gives us positive effects of BRL20 million. And finally, as for services commercialization, as you know, commercialization had a more difficult year. I would just like to highlight that despite the negative impact, when we compare 2016 to 2015 of BRL31 million, in the first half of the year was a negative margin of BRL7 million, but we had an improve to BRL33 million in the second term, so this is already getting better.

So basically, we are going now to slide number 5 where I show you a bit of explanation on our EBITDA. We know that last year 2015, we closed at BRL2.960 billion and we closed the 2016 with BRL2.3 billion. Gross margin BRL99 million as I mentioned. PMTO, I'm going to talk about that, but I would like to mention something about the variation. You know, we have the provision for bad debt. This is something that is very important. We had an increase of provision comparing 2016 to 2015 of BRL28 million. But if we took the first term and the second term, in the first it was BRL79 million and in the second it was only BRL34 million.

So we almost reduced by half the added value of this provision in the second term compared to the first term. So that again shows that our management could have some impact to control this variable, which is a variable (inaudible), but then so there is a lot more control. Then we have the gain on asset sale, the acquisition of investments. Remember that we had Pecem in 2015 and this year we had [sentinel] and also in 2015 we had the Renovaveis which are not accounted for in 2016.

As for our net income, we closed the year with net income with BRL667 million compared to BRL1.266 billion. The explanation of EBITDA we had the investments of Pecem. And in our equity, we had several events related to that in this result of minus 2, for instance we had the result from our corporate participation and it has to do with an event that we had in Sao Manoel.

Remember that last year we had the Pecem with a negative contribution and this year it did not happen, so the consolidated effect is minus 2 but we had this loss that I talked about Sao Manoel of approximately BRL100 million. Financial results, the emerging line with last year a bit worse but we had an increase of capital. We are going to reduce the debts and we can talk about that later on but anyway. Then income tax and social contribution, which are better because we have a lesser result and therefore we have less to pay.

And we started in 2015 an operation where we identified several events and we mobilized basically the whole of the Company. The idea is to have a base zero budget. And the idea is not to cut cost of preventive maintenance, for instance, for you to pay the bill later on, but rather to allocate money right with control, with focus on the business variables. And for the year, we identified more than 100 initiatives, more than BRL84 million in gains in our base zero budget.

At the same time, we had important reinforcements in our OpEx. We had an increase of 35% in the cost. The provision, as I said for bad debt, had a decrease between the second term of 2016 and the first term. We increased our fights against frauds and to try to meet regulatory targets. Remember that in 2016, we had more difficult meteorological conditions then 2015 and that worsens our position, but we had an increase in the pruning of trees of 33% and with that we could meet the targets of ANEEL in terms of [sides and size].

So statements are very difficult, but if you think of the consolidated basis if I do not consider Pecem, but even in Pecem, the costs went down from 2015 to 2016. And what we can see then from 2015 to 2016, we had an improvement of 3.2%, but if we go from 2014 to 2016, we have an improvement of 6.9% compared to an inflation that was accumulated of 17.6%.

So we had 10% of real gain which has to do with the gain of BRL84 million that I mentioned with the BRL100 million implemented in (inaudible). So this is in a way, a way to evidence how successful this cost control program was. And now we are going on to the next slide.

Here we have some information of our CapEx. First we have our CapEx evolution. This chart first shows the investments that we had in the companies in which we have some kind of shares Jari, Cachoeira, Sao Manoel, and also the investments that we have in our distributors and generators.

We see in 2015 we invested BRL972 million and this year we invested BRL1.149 billion. There is a bit of a change in our mix last year. Cachoeira and Sao Manoel were in constructing in 2016. Sao Manoel was completed, so we increased the mix of investment in distribution.

To the right, you can see that our investment in distribution. We went from BRL320 million to BRL481 million, almost 50% increase. And this increase can be explained because the network was expanded and this is a need that we have -- we already had in 2015. And in the bottom part, if you see the breakdown of our investments, we also increased a lot effort on network improvement, that is automatic reconnectors, cables, investments that in the long-term will also have an impact in terms of efficiency or quality and also a reduction of OpEx.

So in this sense and following our strategy to gain efficiency, we had this increased investment. And this was then in a scenario of controlled debt. If you go to slide 8, you can see our debts levels. We closed the year with net debt of BRL3.55 billion with a net debt to EBITDA ratio of 1.5 times and some highlights in the evolution are: so we have a capital increase, I already told you about. But in addition to that, we changed our debt structure. We deleveraged the holding. We prepaid a debt of BRL300 million that we have with the holding right after the capital increase.

And in December, after some arrangements with IDB, we also prepaid to the debt with IDB of BRL923 million in Pecem. So these were debts that were quite costly, they were in dollars with a flawed hedge coverage and that had high cost. In Pecem, we issued new debt of [BRL570 million] that happened in the last-quarter 2016.

This [BRL570 million] are with two banks with maturity of five years and reimbursement in four and five years. So continuing our rationale of privileging the leveraging of our companies because of tax purposes also we increased the debt. We had an addition of BRL350 million in Enerpeixe in the end of 2016 followed by a reduction of capital of distributors and shareholders.

Furnas went to a BRL140 million and our holding BRL210 million. So from the last quarter from September to to-date, we had a slight increase of the debt but this is just an effect of consolidation. Based on the different indexes today, we do not have the exchange rate risk. You see that the exchange rate with the dollar is 4%. This is basically because of Bandeirante and Escelsa in completely hedged operation. So they are in dollar but they do the CDI risk. So we are not really exposed to dollar.

As far maturity, you see that we are in a very -- you see that we are very comfortable position. We have a cash of BRL2 billion, four maturities of that of BRL1.455 billion.

So this is the end of the financial part and I am going to go back to Miguel.

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Miguel Setas, EDP Energias do Brasil SA - CEO and IR Officer [4]

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Well, very briefly on page 9, just for you to know what our challenges are going to be for the year of 2017. Well, these are things that you know very well. In generation, we want to advance the operation of Sao Manoel. As you know, it should start in May 2018, but we are working with CTG and Furnas our partners to try and have the plans in operation in the last quarter of 2017. So this is our objective even with the change of contractors that we had in the end of the year.

For Pecem, the hydrological situation is the most critical topic. It demands our attention and basically we have been constantly focusing on this problem to try and find solution, not only physical but also economic and regulatory solutions to mitigate the risk.

I would say these are the main points for generation. As for distribution you also are very much aware, we went to get closer to the losses and defaults of the regulatory landmarks. We went really to shorten the difference this year of 2017. Of course, this new cycle of CapEx that we talked about should be maintained. We are going to have a reinforced CapEx in distribution of a ground BRL500 million and this is going to be maintained for 2017.

As for commercialization and services, we want to restore our gross margin in commercialization and also expand our energy services, especially in distributed solar services where we see a clear oopportunity in the Brazilian market.

As for transmission, we went obviously to take part in the auction that is going to take in place in the month of April. We want a larger share than what we had last auction. So we are the studying the 34 batches that are -- should be studied and we are thinking of situations and regions that have better fits with our strategy.

As for corporate, we are going to continue our zero budget project. We had cost control with OBZ 0.0 then 2.0 and now we went 3.0 in 2017. Again focus on corporates and distribution, manage the energy -- energetic risks that have to do with our activity both for generation, compensation and distribution. So it cross-cuts throughout our business.

And two points that I would like to mention, which I generally don't mention in our earnings release, is to implement a digital agenda. Today we have dedicated teams to digitalize our value chain, especially shared services. We are having very interesting results. We are following a project with regard to this in 2017.

And another point that is very important, which is a internal culture project for EBITDA. You know that EBITDA is a sum of several companies and it's very important to have a common denominator. And these are points that generally we do not approach in our financial releases, but they are very important for our performance, which is to engage people.

We are having record levels of engagement and also safety. This is the first time that we had no fatal accidents with our own employees or contractors. So when we talk about balance sheet, when we talk about P&L, we do not talk about that, but they are behind the results that we deliver.

With that, I would like to close my presentation and we are available for your questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Any questions in English are going to be answered in Portuguese and they are going to be translated into English by the simultaneous translators.

Kaique Vasconsellos, Citigroup.

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Kaique Vasconsellos, Citigroup - Analyst [2]

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Just going back to Pecem. Could you give us an update about the water tariff? You did mention that in the call, but I would like to know what's going on with the ANEEL, what are the next steps and when we are going to have news in this product? Thank you very much.

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Miguel Setas, EDP Energias do Brasil SA - CEO and IR Officer [3]

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As for tariffs, I have several comments. First, as you know, we entered with two actions, one in Brazil and one in Ceara. In Brazil, for us to pass on emergency tariffs and in Ceara, challenging the amount of this tariff. We were successful in one, but not successful in the other. So Brazil denied our injunction, but Ceara accepted it. So what the judge said in Ceara was to suspend the payment of the emergency tariff. With that, legally we would be protected from this collection.

That leads us to use this court decision as an objective. Today we are talking to the state government, with the government of Ceara, to try and find a point of balance that can relieve us from this critical situation we are in terms of water supply. So we have a legal support not to pay, but of course we have to work in partnership with the state administration and we want to try and find a solution to withdraw additional water.

And we are under negotiation, but what I feel from our negotiations with the ministry, we had a meeting with the minister of mines and energy, with the regulators. Tomorrow we are going to talk to the regulators once again and also the talks to the governor of Ceara, and it seems that all the parts are trying to seek a balanced solution. So I'm quite optimistic about what can happen with regard to this negotiation. So the news in our opinion are good for us to get to a balanced situation, our point of balance with the government of Ceara.

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Kaique Vasconsellos, Citigroup - Analyst [4]

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So today you are not asking -- paying the over-fee?

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Miguel Setas, EDP Energias do Brasil SA - CEO and IR Officer [5]

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No, we are not. We had provisions of BRL36 million for this payment, as you know, but today we haven't really effective paid. And what we want to negotiate is thinking of a relationship with the normal tariff. The [emergency] tariff is 8% to 10% higher than the regular tariff and we are negotiating a much lower percentage.

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Operator [6]

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Carolina Carneiro, Santander.

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Carolina Carneiro, Santander - Analyst [7]

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I have two questions. The first, you did talk about the balance sheet. You talked about your appetite for the transmission auctions. I would like to know what your expectation would be for the terms of the auctions especially with regard to BNDES funding, if you're expecting that and how much?

And second is about GSF. We know that the Company is protected with hedge to some level with the regulated markets. But just to understand the market as a whole, what is your expectation with regard to GSF for this year? We already have an idea of the wet period, so I would like to know what your expectations are? And based on your expectations, what do you think is going to happen with the GSF discussion in Brazil this year?

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Miguel Setas, EDP Energias do Brasil SA - CEO and IR Officer [8]

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Well, Carol, thanks for your question. I'm going to start with the GSF. Well, the model that we have run internally tell us a GSF about 85%. We have several scenarios, but between 85% and 90%, but closer to 85%. This is what we are working with for the year of 2017, with spot prices at around BRL160 per megawatt hour, BRL150 per megawatt hour. So as we do it, GSF spot prices are two variables that have an impact in our activity and these are the numbers that we are considering.

As for BNDES funding, as you know, there are discussions going on about that right now. Our assumption is that conditions are not going to be changed substantially. But I'm going to turn the call to Henrique for him to give you a bit more detail on that.

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Henrique Freire, EDP Energias do Brasil SA - CFO [9]

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We are just following the discussion with BNDES funding. We know that there is a trend to limit investment in TJLP. But we believe that if the rules are clear, there is no impediments on that. I think that what we have to understand is what the terms are going to be and then it is I think okay, we have to understand what rates are. What the problem that happens with BNDES funding is that it's established one way and then it changes and this is the worst scenario for us.

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Operator [10]

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Pedro Manfredini, Itau.

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Pedro Manfredini, Itau BBA - Analyst [11]

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This is Pedro Manfredini. Thanks Miguel for the call. I would like to ask you a question about the growth outside transmission. I think this is a hot topic in the last month. We are seeing Eletrobras talking about investments. We know that you have a stake in there with Furnas and others, and there are other opportunities of investment. And I would like to know if you're interested in a stake of (inaudible)?

And also last week, we heard of investments in coal plants. There is a new project in the south of Brazil and also (inaudible) said that. And you are one of the few operators of thermal coal plants. Are you interested in them? Are you looking into a possible M&A there?

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Miguel Setas, EDP Energias do Brasil SA - CEO and IR Officer [12]

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Well, Pedro, thanks for your question. Well, about Eletrobras, I think I have said that publicly before, we are interested. Electrobras has three shares in our asset, as you said in a share based Lajeado and also (inaudible). Obviously, we would like to consider the three of them, not each one of them in isolation. So we already voiced our interested in Eletrobras. We had already made concrete proposals, but we haven't reached an agreement yet to communicate anything to the market. So we don't have an agreement yet, but the interest is there.

As for [MG] being very direct and concrete, we are not interested in coal assets. Because as you know we have a coal plant, we have a focus to manage this plant as well as possible with the best profitability and the best operational efficiency, but coal is not a technology in which we want to invest our portfolio. The only operation in terms of synergy could be interesting for EBITDA would be Pecem II. But again, it would start with a decrease in the share of Pecem I for us not to go over the limit in terms of shares. So there we have less than 30% of impulse capacity in coal and we do not want to invest in this model to no one.

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Pedro Manfredini, Itau BBA - Analyst [13]

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Okay, Miguel, very straight to the point. Thank you very much for your answers.

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Operator [14]

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Marcello Carbone, UBS.

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Marcello Carbone, UBS - Analyst [15]

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I have a question with regards to Sao Manoel. What changes did you have in assumption to try and decrease the impairments? Was it a higher CapEx? And also I would like to try and understand what do you think for prices of energy in the long term? Do you see any changes in scenario? Are prices going up? Are they stable? I would like to know a bit more about that. Thank you.

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Henrique Freire, EDP Energias do Brasil SA - CFO [16]

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This is Henrique. I'm going to answer Sao Manoel first. As you know in the end of last year, we had a change in Sao Manoel. You know that our construction is within times. We changed contractors last year. We closed 2016 with 86% of our work completed. But there was a bit of an over cost in terms of CapEx and that added to a macro situation with higher interest rates and et cetera, led us to have a more demanding meeting with auditors and more tight discount rates. And therefore in our financial statements, we believe that there was an amount that would not be recoverable in the assets of Sao Manoel.

And that represented an impact of BRL300 million in the profit of Sao Manoel. Then we have the equity equivalents and these are the numbers that we have there. I don't know if I answered your question, but that was the rationale.

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Marcello Carbone, UBS - Analyst [17]

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Okay, thank you very much.

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Henrique Freire, EDP Energias do Brasil SA - CFO [18]

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As for energy prices, we are working with a BRL150 per megawatt hour. From what we know this is the price for the general expansion of the system. So it seems that the whole of the system is converging to this amount. What we see is a bit of a normality in the history. We have a premium of incentivized energy that is higher. In the past, it was BRL15, BRL20 up to BRL30, but now we are seeing BRL70. But for normal contracts, we are working at BRL150 per megawatt hour.

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Operator [19]

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Henrique Peretti, JP Morgan.

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Henrique Peretti, JP Morgan - Analyst [20]

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I would like to go back to the transmission auction. How do you see the competition in this auction? ANEEL published the invitation to tender in Portuguese, Spanish and English, and we believe that it's going to be quite competitive which could lead to lower returns since you're going to have more competition. What do you think about that? And also what would be the availability of construction companies help you with this auction? We know the whole sector is going through a crisis, so would it be difficult for you to find a company to build the plants?

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Unidentified Company Representative [21]

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I think you're right with regard to competition. I think it's very clear that this is an appealing segment with good profitability and therefore I think we are going to have more competition than we had in the previous auction. In fact, the main players in the segments that were not quite represented in the best auction may be part of this auction now. So we are effectively expecting the competitive scenario in April to be more intensive. This is what we also interpret from the market and let's see what that translates into profitability. But I think you are reading the scenario right.

As for contractors, I think you are also addressing a very important point. We are all challenging the capacity of the market to respond to the initiatives that the market is going through. I have -- we are analyzing two strategies here as alternatives. One is to diversify different contractors. We have this experience in the construction of plants in which we do not work with a one large contractor. We try to work with smaller contractors and this may be a possibility based on what work we have seen in the media.

So diversification is interesting, you work with smaller contractors that have a better risk profile than those major contractors we are just used to. And another alternative is to internalize part of the work with our workforce. Again this is an alternative strategy to deal in this case not with the contractors, but to have a partial internalization of work, that is we ourselves producing part of the contraction to protect ourselves.

So once again I think that you are touching a crucial point. Perhaps the market is underestimating the risk of contractors to work with such large undertaking. And we have two strategists for that; diversification and internalization of services. Of course, not everything but part of the services that would be performed by contractors would be performed by ourselves.

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Henrique Peretti, JP Morgan - Analyst [22]

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Okay, very clear. Thank you very much.

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Operator [23]

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Since there are no more questions, EDP's conference call to discuss the earnings of the fourth-quarter 2016 is now closed. Questions taken on the webcast are going to be later answered by the IR team. We thank you very much for attending and wish you a good afternoon. Bye.

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Editor [24]

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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.