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Edited Transcript of LIGT3.SA earnings conference call or presentation 24-Mar-17 6:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Light SA Earnings Call

RIO DE JANEIRO Mar 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Light SA earnings conference call or presentation Friday, March 24, 2017 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ana Marta Veloso

Light SA - CEO, Chief Business Development & IR Officer

* Felipe Sa

Light SA - Head of Participations and IR

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Conference Call Participants

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* Marcelo Sa

UBS - Analyst

* Vinicius Canheu

Credit Suisse - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Welcome to Light's Q4 earnings conference call. Today with us we have from Light SA Mrs. Ana Marta Veloso, CEO and Chief Business Development and Investor Relations Officer. We inform the participants that the presentation is available for download at our website http://ir.light.com.br/. We would like to inform that the participants will be in the listen-only mode during the presentation. After Light's remarks, there will be a Q&A session when more instructions will be supplied. (Operator Instructions).

Before proceeding, let me mention that forward-looking statements that are based on beliefs and assumptions of Light's management and on information currently available to the company will be mentioned here. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur as we said. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Light and could cause results to differ materially from those expressed in such forward-looking statements. Now, I'd like to turn the conference over to Mrs. Ana Marta Veloso who will begin the presentation. Madam, you have the floor.

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Ana Marta Veloso, Light SA - CEO, Chief Business Development & IR Officer [2]

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Thank you, good afternoon. Today, it's been almost a year since the first earnings conference call that I had with Light. When I talked to you for the first time commenting on the results of 2015, I mentioned some priorities of our management: the reduction of losses, [an end to] tariff review anticipation as well as operational improvement. Let us really cover these topics with a good sensation that we did our homework. Concerning the tariff review, the process began in last February and was certified approved on March 14, in line with our original request. This means an extra BRL600 million in the EBITDA during the next 12 months coming from first, a higher percentage of losses included in the tariff from 30% to 36.06%, a higher level of technical losses recognized in the tariff from 5.4% to 6.3% in the load. With these two indicators, they represent a loss that is embedded in the tariff of 20% of the load. Since Light closed 2016 with losses of 22.54%, we trust that in this cycle we may surprise the market presenting actual losses below the regulatory losses apart from the new compensation basis, BRL8.5 billion reflecting investments made after November 2013 when we had the new review.

We had a regulatory [denial] of only 3% of our investments and comparison with 12% previously. Thus our basis is the largest basis of assets among all distributors in Brazil. Regulatory delinquency went from a fixed value which represented 0.6% of gross revenue of the last year to a fixed percentage of 1.4% of gross revenue to be reviewed annually based on the update of the revenue. Together with the tariff review, we signed an amendment or extension to the contract of our concession aligned with the new rules of concession recently made. In spite of the [expiry of our concession continued in 2026] with these amendments we are more confident, everything is more compatible with the activity of distribution.

Another innovation are the quality goals of supply and also financial economic sustainability of the Company. If they are not met, they will bring more penalties to the utility. Our investment plan and management actions were adjusted to reach these quality goals always with focus on the best financial management of the resources. Now, in the case of economic financial indicators, we trust that we will reach the goals even because they are less restricted than the current financial covenants. The greatest highlight of the year in terms of operations was the reduction of losses. As we said, they reached 22.54% of the load in December, the lowest level since 2012. This result is the result of the new strategy fighting energy theft. We recovered [382 gigawatts] in 2016, four times more than we recovered in all of the year of 2015. Another important result of the strategy to fight losses is the formalization of clients. We included more than 120 extra clients to our basis ending the year with 4.4 million clients in the distribution company. Apart from the drop in losses, the volume of energy recovered had an impact on the growth of the energy build by the distribution company, increasing by [BRL450 million] of gross revenue. The trend with the evolution of the program to fight losses is that the volume of energy incorporated will become more and more important as energy recovered. Light has worked strongly in the locations that we call Possible Areas where we can operate without safety problems. In these areas that represent 51% of our commercial losses and 90% of the load, total loss is around 15.8% of load, a drop of 1.8 percentage point since March 2016 when we began the new strategy.

This program would not have been possible without the support of the civil police, military police, and also the police stations in the suburbs. So this was an integrated effort with the Company and the police who gave us support at all times. We [continue firm in recovering that] the market discipline in our area of concession even with the recognition of the losses in tariff, Light continues really to be above the regulatory requirements.

Even with the recession in 2016, we see that our billing improved by 2 percentage points closing the year at 96.3%. So if we dis-consider the impact of recovered energy, this increase in collection would be superior to [4.4 percentage points reaching 99.1%].

Now, concerning the debts of the transportation utility, we continue compensating the losses with taxes ICMS and now this debt is being paid by the state government, but they have already accumulated another debt of BRL34 million. Concerning the debt of the state government from [January 2015 to April 2016] worth BRL153 million, so we are compensating these bills with taxes -- offsetting them with taxes. And in [July], the first of 29 installments was compensated in August. So this debt of the state government which began in May 2016 closed the year at a BRL100 million. Both in the case of the utility and in the case of the state government, we continue charging and collecting the amounts owed to us. In Q4, the total billed market was in line with Q4 2015 although we had a drop in temperature in all the quarters. This happened because of the residential segment, which grew 9% as a result of the volume of energy recovered from losses. If we hadn't had this effect, the residential consumption and billing would have dropped by 7%.

The other segments dropped basically due to the lower temperature which affects a lot our billing and also the drop in the economy. Now concerning the level of the electricity that we have, we closed the year with 106.2%, little above the regulatory limit of 105%. This happened due to the drop in temperature which frustrated our projection for the load for the year with temperatures lower than in 2015 during nine of the 12 months.

In our area of concession, we have one of the largest load volatilities and normally we try to buy a little over our needs, but below the regulatory limits and we don't want to be surprised by heat wave. This strategy aims at sub-contracting and this could bring more severe penalties in our case. As a result of this, [we over-hired 105%] and so we have an accrual of BRL29 million for CVA.

The final decision of the regulatory agency concerning the distribution companies buying more still has not been decided. Maybe this accrual might be reversed. For this year, our expectation is to be within 100% and 105%. In the quality indicators, we continue to have good improvements, 7.2% in DEC versus 2015 and FEC was stable in 6.48 times. These results were reached without the increase in the resources invested, which shows the impact of a better management. With the signing of the amendment to the concession contract, the follow-up of these quality indicators will continue and become even stronger as a result of the sanction from the regulating agency are now, the sanctions they can impose if we don't reach the goals agreed for 2018/2022. These goals follow rational limits which were agreed upon with the results plan and we defined goals for DEC from 2016 to 2019.

The result of the quality in 2016 was within the limit agreed upon with the regulating agency, which reinforces our trust that we're on the right track to continue reaching the quality goals in the next few years. The net debt closed the year at BRL6.2 billion, [8.7%] above September 2016. This happened not only due to the loans, but also as a result of our working capital. Our covenant, net debt/EBITDA dropped from 3.85 times to 3.72 times within the limit of 3.75 times during the year. With the approval of the tariff review, this indicator will come back to a more sustainable level.

For 2017, we have approximately BRL1.6 billion in debt amortizations. These debts that will now mature in the first semester will be paid and we will wait a better moment in the market with expectations of a drop in interest rates to pay off the remaining debt.

Now talking about operational efficiency in the last quarter, consolidated PMSO dropped 11%, the distribution company dropped 12.6% with a highlight to PDD accruals and personnel.

In the quarter, we reversed an accrual of BRL145 million concerning a penalty in 2005 related to credit restrictions of ICMS tax on fixed assets. Now it is more favorable that it will be granted. The PDD also had a relevant reduction [BRL37 million or 70%] due to strong work in collections. The PDD of the distribution company closed the year 1.3% of gross revenue in comparison with the percentage of 1.4% that we have embedded in our tariff as of the review. In the case of personnel, we had a reduction in the number of employees, [242 employees less, closing the year with 4,085 employees, 5.6%] less than in 2015 although personnel was in line with Q4 2015. If we do not consider the impact of cost with the reduction, the number of employees including the fostering of retirement and other costs with dismissal, we would have a reduction of 7%. Concerning the participations, the acquisitions made in [2011 and 2014] we had a negative result which hurt our results with an equity by BRL224 million with a negative impact on Light's results. We are open to proposals to optimize this portfolio. We have the following evolutions in the quarter. In the case of Renova, we are concluding negotiations for the sale of Alto Sertao II to AES.

We continue open to proposals of those interested in the other projects and also our participation in the company. EDF decided not to continue with the transaction Itaocara. We are contacting other interested parties. There are negotiations in progress concerning a new project of the company in different stages and we will talk about them as they become relevant. Now, I will pass the floor to Felipe Sa and he will give us more details about our results. Then we will have the Q&A session and I have directors to help me answer the questions.

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Felipe Sa, Light SA - Head of Participations and IR [3]

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Thank you, Ana Marta. Good afternoon. So let's go over to the results of Q4 2016. On page two, we have the highlights where we begin with operating results. Disco's total billed market 6,533 gigawatts, an increase of 0.6% concerning Q4 2015. Total losses on grid load 22.54% in December, a drop of 0.85 percentage points in comparison to September 2016. Collections rate 92.1% until December, a drop of 1.1 percentage points in relation to Q4 2015. PCLD 12 months reached 1.3% of Disco's gross revenue, an extra 0.3 percentage points in relation to Q4 2015, but below the regulatory level. DEC 12 months, 11.70 hours with a drop of 7.2% in relation to 2015 and FEC 12 months reached 6.48 times, an increase of 0.6% in stable in relation to 2015.

The financial highlights comparing also with Q4 2016 with Q4 2015, net revenue reached BRL2.222 billion, a drop of 11% excluding construction revenue. Costs and expenses reached BRL1.8535 billion, a drop of 17%. Adjusted EBITDA reached BRL494 million, an increase of 29.8%, and the net result, a net loss of BRL194 million in comparison to a net loss of BRL71 million in Q4 2015. Net debt BRL6.2 billion with an increase of 2.1% compared to September 2016 and investments including those in Q4, BRL238 million with a drop of 19.1% concerning Q4 2015.

Well, as Ana Marta mentioned, the operating issues, let's go on to slide number seven where we begin with consolidated EBITDA, Q4 2016 went up here in relation to Q4 2015, BRL494 million, 29.8% in the distribution company, an increase and positive impacts in reduction in losses, accruals, and PMSO. In the generation company, an increase of sold energy in ACL, 38.5% both explained by new sale contracts in ACL and also the hydrological hedge in 2016 that didn't happen in 2015.

Now slide number eight, consolidated results, we went from a loss of BRL71 million in Q4 2015 to a loss of BRL194 million in Q4 2016. So in spite of the positive variation of BRL113 million in EBITDA, we had negative impacts of BRL123 million in financial results by updating CVA and exchange rate variation plus debt and a negative variation of BRL81 million in equity pickup.

Actually if we dis-consider the losses in equity pickup, this loss of BRL194 million would represent a profit of [BRL31 million, a profit of BRL23.1 million in the year].

Now, indebtedness, net debt went from BRL5.7 billion to BRL6.2 billion in Q4 2016, but the covenant of the net debt dropped from 3.85 to 3.72, below the limit of 3.75. As Ana mentioned, we have already extended these loans and we are waiting for the right time to work with those of the second semester with lower interest rates.

On slide 10, the year-to-date, we invested BRL953 million including investments in those control or we have a stable number in relation to last year if CapEx [dropped 19% in relation to Q4 2015] and even this way, we were able to improve our operating results reinforcing our commitment with efficiency and good management. Now we can begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Marcelo Sa, UBS.

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Marcelo Sa, UBS - Analyst [2]

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Good afternoon, congratulations. The question has to do with the loss. I'd like to understand, did you have any non-recurring effects? You recovered -- were there losses that you recovered in other quarters that you recorded now, should we expect this indicator to improve from now on?

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Unidentified Company Representative [3]

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Thank you, Marcelo. In reality, I was talking about this earlier with Wilson and he said the following. Now we're on the right track. So in 2017, we can expect more reduction in losses. We are now with a performance above 70%. So we expect a recovery higher than previous months. We will continue our program strong -- we have program for loss recoveries.

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Operator [4]

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(Operator Instructions) (inaudible), BBA.

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Unidentified Participant [5]

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Good afternoon. Two quick questions. First in the distribution company, I'm looking at the Possible Areas as you said, when we look at losses in the other regions, don't know if I can compare these, we see lower losses. Can we imagine that the losses in Possible Areas could get to levels compared to Sao Paulo. Can we imagine higher recovery and in generation, how are you treating this, we have a year that where we have a lot of activity in the first quarter with second semester with [CFF] that is relatively low and thus what is the Company's strategy, I'd like to understand this.

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Unidentified Company Representative [6]

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Thank you, [Pedro]. Concerning the losses in Possible Areas, we have an area of concession that is extremely complex, but within this complex area, we have very good areas. So within the good area, we have to do the best possible work because we have areas of risk. We have some areas where it's very difficult for us to enter and do our work. So we have to deliver indicators for DEC, FEC, good indicators in the Possible Areas, so we're doing our best.

Now we can't give you guidance, but if you see with this last we dropped 2 percentage points in relation to the previous year in the Possible Areas. We will continue until we get to what we believe is a reasonable loss because we have a concession in area that is concentrated. There is also the culture that we should attack concerning the theft of energy. I have said in meetings, we find something that is different from what you find in other regions of the country with high-income consumers especially in the West, we've seen condominiums with 100% of the homes. So we are fighting these losses. Now concerning [CSS and PLD], I will pass the floor to Luis, our manager in the generation area and he will comment.

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Unidentified Company Representative [7]

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Good afternoon. Thank you for the question. We did this work in December. We did this update in December. Since we still did not know at the time how summer would behave, so in a prudent way, we made an accrual. We will protect as best we could without running too much risk. I believe that as of May, we will have a reasonable drop also because of other agents, PLD too and we have some expectations depending on the regulation agency's actions, we may improve the situation.

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Operator [8]

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[Dominic Magnolia].

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Unidentified Participant [9]

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Good afternoon, I have two questions. The first, could you comment the investments in Renova and Belo Monte. What are the expectations in terms of the need for capital? Could you comment on the amount opened, how much the state owes and how is the evolution collections, the debts of the state? What are receivables and what will be accrued, the amount to be accrued in receivables?

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Unidentified Company Representative [10]

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Thank you, Dominic. The state is the largest debtor, their monthly bill is BRL13 million, they represent 1% of gross revenue. Still we are negotiating with them, we know that the state's economic situation, financial situation is very serious. We have offset taxes and so it's a difficult situation. We're trying to see if we can find more alternatives offsetting with taxes and so forth.

Concerning Renova and Belo Monte, our desire is to sell these assets. Light, we're invested in these assets in different times, Renova now -- we have a BRL150 million there. We have projects, greenfield projects that require capital and an asset like this one is not our strong point. Belo Monte, we have 2.5% of the capital of Belo Monte, an hydroelectric power plant, they are almost ready. So they have received BRL2 billion from the National Development Bank. We should receive money from the National Development Bank as I said, to invest in Belo Monte.

We're not that concerned, because it's almost ready, the hydroelectric power plant Belo Monte. So we want to focus on the distribution company which has the greatest potential for upside, but we have to deal with this company and concerning these assets that we acquired between 2011 to 2014. We already invested BRL1.4 billion in them, and they haven't generated any result of the company.

As you said they demand more investments. So I believe for Light to focus on the distribution company is the best strategy and we're also looking for buyers for these two other projects.

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Operator [11]

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(Operator Instructions) Vinicius Canheu, Credit Suisse.

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Vinicius Canheu, Credit Suisse - Analyst [12]

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Good afternoon. You mentioned these investments in generation. I'd like to ask about Itaocara. You trying to sell, but it's closer and closer to the delivery and now it becomes more difficult for someone to buy. Do you have any adjustment which can be done concerning this project to attract private investors, the sale or the prospects? Thank you, [Luis].

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Unidentified Company Representative [13]

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Concerning Itaocara, it's a project. We have three options; one is, [alignation] of our participation, another would be to request a delay for the delivery of the (inaudible) and the third, to begin the projects. When the project has energy sold, what can happen is, that should delay the delivery. So today, we see these three options, let's see what happens. We have until July and if we do not sell we will begin the project. We know that if it's delivered on time, it will generate a return profit.

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Unidentified Participant [14]

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[Dominic Magnolia, Banco Capital].

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Unidentified Participant [15]

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Dominic again. Could you comment in general terms, your strategy for DEC and FEC? We have the first measurement that the end of 2018. You have a year-and-a-half to work. Please comment your internal plans to get to these levels for DEC and FEC.

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Unidentified Company Representative [16]

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Thank you. The Engineering Director can help.

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Unidentified Company Representative [17]

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In reality, we had already presented to the regulating agency now results plan something that is well built in terms of investments and operating expenses to get to 2019, with a DEC of 8.13. So in 2022, seven hours, maybe four. Our program reality it's one that involves measures, not only CapEx the changes, other change, we know that DEC is more related to management and FEC is related to investments.

Concerning investments, we have those classic investments that companies make. The installation of equipment on the network that are (technical difficulty) to recover energy that had been interrupted in a quick way with less impact on DEC. And DEC improvements in logistics to improve the cutting of trees, we have a lot of trees in our network, to improve the management of the maintenance on the trees and giving priority to investments and have a better return. This is the program, but these -- we have more details on the website. Yes, our quality plan is on the regulating agencies website and we have all these measures investments and also maintenance and other actions.

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Operator [18]

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(Operator Instructions) Thank you. Since there are no more questions, I'd like to pass the floor to Mrs. Ana Marta Veloso for her final comments.

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Ana Marta Veloso, Light SA - CEO, Chief Business Development & IR Officer [19]

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Thank you very much for participating in our call. We're available for more clarification and I'd like to say that we're very happy with the results in 2016. We are sure that in this Company, we have more results to achieve. We have a good team and we're working to deliver what we have promised to the market. Good afternoon. Thank you.

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Operator [20]

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Thank you. The earnings call for Q4 2016 for Light has ended.

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Editor [21]

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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.