Energy of Minas Gerais Co (CIG) 2012 Q1 法說會逐字稿

Good afternoon, everyone. My name is [Herso Lavez]. I am the Corporate Governance Manager of CEMIG. At this time, we will begin the video webcast and the teleconference to publicize CEMIG's results vis-a-vis first quarter 2012, with the presence of Dr. Djalma Bastos de Morais, our CEO, and Luiz Fernando Rolla, our CFO.

The webcast can be followed on the phone 55-11-4688-6341 and also on the Internet at our website, the Investor Relations, http.//ri.cemig.com.br. For those who have any trouble accessing the dynamic presentation, we inform you that our site has a PDF presentation available.

To begin the presentation we give the floor to our Financial -- Chief Financial Officer, Dr. Luiz Fernando Rolla.

Good afternoon, everyone. It is with great pleasure that we will begin this video webcast to present the results of the first quarter 2012. We're going to do it in a slightly different manner as traditionally we do. The first part will be partially a conversation between myself and Dr. Djalma, our CEO, about these results, approximately 15 minutes, in which we will be conversing about those results.

I cannot fail to mention our disclaimer, which, as usual, we will be talking about investments, and therefore, we need to have this page on display.

Our results, which is summarized in this slide, and naturally we've had always a positive result. Djalma, you see that the growth was quite strong. What do you attribute these results to?

Good afternoon, ladies and gentlemen. And today you have the nervous, very nervous results, shares and markets going down, and nothing better than positive facts that our Company has presented in recent years and especially of late. Very positive facts in order to give a boost of enthusiasm in this complex difficult time we're going through at the international level.

Our net income (sic -- see presentation) had 15% growth, our EBITDA 11% and our net income 20%. As you have seen in the recent years, with my presence here, there are very few expectations to a performance very close to this, if not the same as this. Our indicators grow -- aligned to our growth strategy. Our EBITDA from BRL1.4 billion sustained by balanced portfolio of all the businesses in our Company.

EBITDA growth and net income growth show the asset quality and operation efficiency of the Company. A low risk portfolio ensures good results, even with the slowing economic growth.

President, this less risk structure naturally reflects the results very often very quarter, as you mentioned in the last years, has been very positive and it adds a factor which is essential to our Company, which is the predictability of our cash flow.

Correct. First, we have always made ourselves feasible through assets that add value. We use transparent assets. And what's most important, Dr. Rolla, our strategy is that of a balance in investments, of a good balance in our assets. You have observed our growth. In transmission we have acquired more than a year ago the first part of Abengoa asset; recently, the second half -- the second part of these assets. We're just waiting for Aneel approval.

In the area of generation, about one-and-half year, two years ago, we began our interest in Belo Monte. All of these assets have in a well balanced way shown us that we are on the right path. We have recently acquired part of gas distribution in one of the three Sao Paulo segments.

Only in the distribution asset have we had -- we are still in the search. You have observed we have made a few [recursions], as you can see through the press -- of analysis of distribution assets. But this is probably the single point where there is a little imbalance in our actions. We will try to balance out our assets.

This model reinforces our efficiency position and the CEMIG strategy. The quality of credit and the financial solidity gives access to funding and new opportunities. Dr. Rolla?

Mr. President, we in recent years have made our growth through a strategic plan, which was approved by our stockholders, and this master plan has led us to the situation which we enjoy today, one of leadership in the process of consolidation in this industry. And this process is still going to unfold in the next years, in the future years. How do you see this growth process through acquisitions?

It has proven to be very correct. We -- you may have followed that, we have reached a few years ago a market value of approximately BRL31 billion. This is a very enviable position here in Latin America, a very outstanding one. I cannot fail to forget our companions are present here, our superintendents, our managerial Staff, which always aims -- has its main objective this consolidation.

We are indeed leaders in the sector, in this industry. We are in a privileged situation in the market. However, the most important thing, Dr. Rolla, for our managers and our board of directors is to keep this position, to keep as a leader in consolidation and to keep a situation of exceptional efficiency in first line situation in our market; that is our investor has the trust that we have reached a certain standard and we are going to work to keep ourselves on that same level.

As you have mentioned, Mr. President, the value of CEMIG, its market value reaching BRL31 billion, represents a recognition of the stockholders that this strategy is one that really has led CEMIG to an outstanding position, a position of -- an enviable position even at the international level. Do you think that the pillars of such a growth have been fully recognized by investors; that is our discipline of investors investing in our financial solidity which guarantees this growth?

The market is actually the owner of this decision. We are in a privileged position. But I have every day and always together with the board of directors and our superintendents said that it's necessary for us to keep this situation. It is necessary for us to make every effort, joint effort, to keep ourselves in this position.

The investor expects this from us, and I'm sure that you can bet on it. And so, I would like to continue being favored by your confidence. Our position is been an important one for us. It is a position that -- we had expected to reach this position of respect in the market up to 2020 and we have anticipated that to 2012, but not only to reach there but to keep ourselves there. And this is our great objective at present.

Now I would ask I -- I have some other commitments. I would like now to leave; Dr. Rolla taking care of our objective, our conservation here.

Thank you very much. I take a leave. Thank you for your participation here. I will see you in a while.

We are going to continue our presentation here. Already -- with our strategic vision already talked about by our CEO, we found it important to have him participate so as to give the right strategic tone that our Company has been giving to its growth in latest years.

Our CEO has emphasized that very adequately that the acquisitions that are being sought after are the ones that have to do with our assets, that have to do with productivity gains corresponding to the scale, the joint scale of the acquisition of the assets. And that is reflected very clearly.

And the acquisition that Taesa has made -- Taesa has evolved its financial results in the recent years; has been very positive this quarter. You saw last Friday the conference call of Taesa that it had a profit that was 33% larger than the first quarter 2011. That is it represents today 16% -- transmission is 16% of the consolidated results. You know that our strategic plan talks of a ratio of about 20%, which guarantees us a business portfolio that is well-balanced and produces that which our CEO has emphasized as being vital for the Company, which is predictable long-terms cash flow, a cash flow that suffers -- undergoes very few oscillations from quarter-to-quarter, as you are going to see in the next slides.

One other pillar of our strategy is trading of energy, electricity. This activity has brought very good results for CEMIG; the strategy that we have adopted since the opening of the free market, where we have a market share around 25%. That is again a position of leadership, which represents exactly the success of this -- our strategy, the one that we implemented.

We are today holding partnerships with such customers so as to give them enough generation capacity so they can expand their own businesses. We have an average growth over 6%, showing again the correctness of our strategy. CEMIG has been one of the three largest winners of this market of sales of energy.

The distribution of electricity, we have given a focus looking for operational efficiency. We have been investing large amounts of money, not only in CEMIG D, but also in Light, so that the operational efficiency of these two companies increase substantially. Today the adequate scale where our network has reached of surpassing 500,000 kilometers, which represents the longest and the largest network in Latin America in a single company. We provide electricity to millions of -- something around 13,668 gigawatt hours that we actually distribute to our customers.

We have a few challenges in the distribution area, especially because of the mega events that are going to take place in the next two to four years, and these events naturally represent challenges that the Company understands is necessary to prove its qualification as an efficient operator of distribution networks of electricity.

We -- our programs, all of them are under way. Our investment programs and our distributor are proceeding consistently and adequately so as to reach an operational level that is quite high when we have those events occurring. Naturally, we have the challenge of 2013 of the tariff cycle. During these late years -- latest years we have had a very transparent and open discussion with our regulating agency.

The regulator, which established very modern standards and rules that are going to bring about a few consequences for the operation of the distribution assets, CEMIG together with Light, have become very active in the proposition of alternatives to the regulators, understanding the essence of such regulation and try to obtain the best possible gains when the tariff revision comes up.

Now, the evaluation of the companies has been very efficient. We have a risk ranking of A in almost every company; of A, AA by the best regulation agencies, whether Moody's or Standard & Poor or other. All of these companies have brought their evaluation, very positive evaluation about CEMIG and about its credit quality.

This comes exactly from one of the pillars that our CEO has highlighted, a predictable cash flow, the solid cash flow which renews itself every year and adds considerable sums of money so that the Company continues growing in a sustainable way and in a perfectly healthy way.

Today, our indicators of performance -- of financial performance, are the best possible ones. We are within the standards established by our bylaws and affirm maybe we can go beyond one of them or some of them. But we have negotiated -- we always negotiate that with our stockholders, but in general, the performance has been such as to maintain this credit quality at the level that we have obtained thus far.

Naturally, the extension has not led to excessive debt. This debt also has been contained in the indicators within our strategic plan; has resulted in a very speedy growth. Once aligned with the ability of our balance to finance this growth, we have used very intelligent smart structures that have given us growth beyond that speed which we naturally would do with our own financial capacity, we would be able to do.

So today, with our structures in place and our growth vehicles, we have an insured growth for our next -- for the near future. We have a dashboard of our debts in the next slide. Today, we are positioned in order to enjoy the policy of reduction of the interest rates by the federal government, because 52% of our debt is indexed to CDI.

Therefore, with a declining intensity of this rate, we will be capturing considerable gains, as you can see already happening in the first quarter. We obtained a mean cost of debt around 6%, a real -- the mean cost of debt. And the average real cost of debt shows the adequateness of the strategy of the indexation by CDI.

We are trying to elongate this time, as you can see. According to our schedule we have a short-term concentration 3.5 years average. But we have already taken a few measures at the end of last year so as to find instruments that may elongate this profile and extend this profile through the debentures market. We have been able to get a significant parcel of resources over 7 years time and sometimes even 10 years.

So our indicators naturally are well within what I mentioned before, the credit quality that really can rank us AA in any of the companies that we have under our direct management. Just to mention, the interest coverage by EBITDA is more than 4 times our consolidated, but also the great -- the operational companies that we operate.

The net debt over EBITDA today has a performance of 2.4 times, showing that CEMIG is still under-leveraged company. And you see the operational, you see they are even in better conditions at 2.3 times, CEMIG GT or D, or even below 2 times that, showing that even though the debt has grown up a little in this quarter because of the acquisition of debt by Taesa to finance one more acquisition. In brief, we are going to be well below the threshold established by our Board.

Now the matter of the debt is extremely strategic for us as a function of the fact that it guarantees our growth. I couldn't also fail to mention our commitment to sustainability. We reassert this commitment to generate our economic financial results, respecting also the limits of environmental and social impacts of our projects and the companies that we operate.

The concern with the community, which might be exemplified by the management, a light in the search for needy communities, to deliver quality service to these communities, showing the commitment that we have to -- with the sustainability of our Group.

From now on let us focus then the results proper, now the first quarter. The first quarter results, as we have seen, has been extremely positive. We have reached a net income of BRL631 million, representing 20% growth relative to the same period last year, considering that the year 2011 was not exactly a year of good growth in Brazil. But even then as a function of our growth strategy with the addition of more assets to our management, we've been able to reach such a good performance, as you can see.

The EBITDA also had BRL1.4 billion performance in terms of reals, which is again a performance which very few companies can boast, with 11% growth and also with the growth of our operational revenues over BRL4 billion, close to 15%, as you can see. So it has been a very good performance and we are going to show that in the next slides.

This is the consolidated results. So in order to understand any variation in these figures, we'll have to go deep into the operational companies, and because of that we -- because of that then to understand those results and the variations.

Let us begin with the sales volume, the consolidated sales volume of our companies in the Group. They have very good performance, as you can see, that we grew by 4% in all, reaching 18,619 gigawatt hour, which is an extremely positive performance for the Group, which is a very good growth of 4%, in a year when we had a weak economic performance as a whole. But in the commercial sector and residential sector, we had a growth this first quarter, as you well know. We should not have a great growth of our GDP, but the sales volume has shown to be a pretty good performance as well.

Now CEMIG GT has a growth even greater than 4%. Its performance was very strong in 2012 in the first quarter, reaching then 8%, with special mission of the free customer growth. We not only maintain our share in the market, but we are also enlarging it. And so, we have reduced the service to the regulated market and then we have increased free customer service. This keeps us in a leading position. And the participation in the free market is about two-thirds of the total electricity sold to final consumers and intermediaries.

And this reflects our strategy, as I said, our policy, our trading policy, our sales policy, which have brought extremely positive results even in a period when we had the price of electricity reduced because of the excess power on the market. But even then, we've been able to -- through our sales policy, to keep very reasonable growth.

And what has to do with the CEMIG D, we had a decline of sales and this decline results basically from our reduction of sales to industrial consumers, which was quite significant because of the migration of part of those consumers to the free market. You saw that the free market has grown reasonably well in the quarter and we had this reduction in the regulated market.

If we abstain from this growth, you can see that we would have a growth around 2%, total 2%. Taking out the CCEE growth, we have a one growth -- a growth of 1%. But considering the position that we enjoy today of growth of our GDP, we can say that this performance is again extremely positive to CEMIG as a whole.

Consolidated net revenue growth, very strongly, as you can see, as a result of the growth, especially of the sale to the final consumers. The sales to the final consumers grew by BRL516 million in 2012 this first quarter as compared to the first quarter 2011, helped by the supplement that -- the supply that has a very good growth because of the growth of our PLD. PLD in the last two months presents growth intensity that is quite strong and which resulted in this revenue growth in terms of our net revenue.

You see that we had very strong performance in the quarter. And what has to do with the operational expenses, we consolidated. In order to -- we have to understand this, we have to investigate company by company, and you have access to all that information, not only on our website, but on the site of our allied companies, Light and Taesa.

You can see that there was no -- not the very expressive cost increase in any of the items, the most relevant cost items. But this represents that we had to absorb maybe a growth of inflation in the period. We had some changes that we have made to the recognition of some expenses, which resulted in a few increases, as you can see, as was the growth of purchased energy expenses, which comes naturally from a higher activity of sales of CEMIG GT.

In CEMIG D, we had an increase of load, so -- and a higher PLD. And this reflected in our expenses. Consolidated EBITDA shows again the same balance that we are looking for. We have shown this growth -- this strong growth today. The generation has surpassed 50%. The 50% mark on this comparative to transmission, which has reached 14%, as we have mentioned. And the other businesses, distribution and others, reaching 27% today. Generation are actually locomotive, as it were, has justified its name and added great portions of generation of resources for CEMIG.

The performance, as you can see, in CEMIG GT of our EBITDA was very strong. And this chart here, you can see that in the first quarter 2012 we have reached BRL682 million to -- in a total of BRL1.440 billion, representing 40% of the total [interest].

All of the assets responded positively, with special mention to Taesa, which had a very strong performance. TBE following this growth. The two together reached 12% of the total of CEMIG, which represents very positive performance.

As usual, this is the best slide to end the presentation. It shows the cash flow statements; very robust and comfortable cash flow. We are now reflecting exactly that which IFRS prescribes, and that's considering stock as value. If we added that value, we would already going beyond BRL3 billion cash at the end of the quarter, which shows that CEMIG in a single quarter could add approximately BRL1 billion of cash coming from its activities, especially operational activities, as you can see, reaching BRL938 million.

And all those growing, all those solid, and all those predictable coming from the contracts, the long-term contracts that we have -- that we display, not only in the generation segment, but also in the segment of transmission. These factors are extremely positive for CEMIG, which guarantee to us this long-term growth. And for that -- and for that reason, we can invest large amounts of money in the expansion of our assets and our network.

And our ability to -- capacity -- generation capacity has been enlarged continuously following our growth strategy, which has naturally added more performance, future performance, not only in what has to do with the net income growth, but also in our cash generation.

Today CEMIG, we can say, very assuredly, that CEMIG is a global investment choice given the magnitude of its assets and the sheer size of its revenue, and especially because of its market value, as our CEO has stressed at the beginning of the presentation, reaching BRL31 billion in terms of market value. Very few companies have this level, have reached this level.

And we have some other values that shall be recognized by our investors in the future, which is going to take us to even higher levels of confidence in the market. And we are sure that the strategy that the Company has adopted is a successful one and aims at adding value to our stockholders, and with that we deliver every quarter the results that naturally are desired by our stockholders.

These were the slides that we would like to show preliminarily to you, and naturally we are, as usual, open to questions in the next minutes -- few minutes, as I try to cover those topics which were not adequately approached by our presentation. Therefore, let us begin the Q-and-A session.

(Operator Instructions).

Marcio Prado, Santander.

I would like to ask you two questions -- three questions. Looking prospectively -- two questions about the future and one about the presentation. About the future, CEMIG in the last interactions with the market has talked much about its natural gas business; Gasmig was mentioned during the presentation. Now I would like to listen -- to hear you about the exploratory gas campaign in Minas Gerais and if you have set some specific date to talk specifically about this prospection campaign and the integration of Gasmig to Brasiliana? Is that part of our plan -- your plans?

Second question, real quickly about CapEx. On page 21, in 2014 you have a CapEx distribution BRL88 for 2014 and one for 2012 of BRL2 billion. Do you see a risk in this CapEx for 2012 sliding away and be left for later -- after the tariff revision?

Well, thank you for your question, Marcio. Naturally, we seek growth alternatives within our business portfolio and the natural gas seems, to us, in the next five years, the segment that we understand is the one that has the highest potential. We are going to grow due to the fact that there is already a significant demand for natural gas in the state of Minas Gerais, and we need only to -- today we supply 3 million cubic meters of gas to our distributor through contracts with Petrobras, and we can reach -- we can serve in the next five years of reprised demands somewhere around 18 to 20 million cubic meters per day.

These values are pretty significant. They are going to naturally to demand a growth, a very strong investment in the upcoming years, not only in the development of the network of distribution of natural gas, but also in the prospection of gas in those blocks where we are partners.

As you know, a few years ago we, in partnership with investors, we were able to obtain the concession of prospection of gas in the Sao Francisco River Basin and to other points in Brazil, in Bahia and the Potiguar Basin, but especially in the state of Minas Gerais and the Sao Francisco region.

We have very good prospects because the drilling that has already been made by other -- that have already been made by other investors were very positive and are quite promising in what has to do with the production of natural gas. If there is availability of such natural gas, of course we are going to trigger the necessary investments in order to utilize this gas and take it to our final customers.

We have many other opportunities to use this gas for thermal generation, and thermal generation is going to have a relevant role in the supply of electricity in the future in this country, because of the hydroelectric plants are being built without reservoirs and this is going to demand the stabilization of this supply by means of thermal generation. So this is a very good perspective. We are going to do geological studies, which are probably going to take up the year 2012, and the next drill operations will begin 2013. This is the outlook for this investment.

Apologize; any perspective -- any possibility of publicizing some information about geological studies? Now drilling would begin in '13, but can the market know something about the geological surveys in 2012?

We still do not have any information that can be publicized because they are all preliminary. But as soon as we have some figure in which the accuracy of such information can guarantee to us that we are not going to publicize something that will be a new speculation, we would do that.

We have every interest in showing the community of investors all the outlooks for this gas industry. But for the time being, unfortunately, we cannot really talk about any information, because we don't have such information. As for the CapEx, the CapEx of the distribution of course we have a good, great challenge of delivering in 2012 a value over BRL12 billion, because of the commitments that we made to the regulator in the last cycle.

We intend to deliver a value very close to that. Very likely, the execution of investment programs is subjected to many factors, which may result in a delay maybe in the delivery of those projects. But I can assure you that by the end of the year we will be very close to this value that you see. What you saw in the first quarter is seasonal and does not represent the pace of growth that we are going to give to this investment program in the upcoming quarters. But all of us -- certainly, we are going to be delivering something around those -- these BRL2 billion. Thank you.

Vladimir Pinto, Bradesco.

I have actually two questions. One, just an update about the situation of CRC. What are the negotiations in the state of Minas Gerais? To understand, we had two years of extraordinary dividends. Do you have any -- is there any forecast or any -- about that?

Well, thank you, Vladimir. You have asked an interesting question. Naturally, CRC will have a schedule that we are trying to meet. This schedule aims at obtaining the approval by the senate of the execution of the pre-payment of the CRC contract with the state by the end of July. This is the date that we have agreed upon with the state, and very likely we are going to be concluding all the bureaucratic process to obtain such an approval and then the liquidation of this contract.

As you know, this contract is going to be paid up with resources being captured by the government of the state on the international market, and this needs the approval by the federal agencies and federal organs. And after this approval process is concluded, then we will proceed until we do the final liquidation.

Now, most of the resources are going to be used for our own expansion. In some of the cases, we have even part of the reduction of our debt. But as we should have some financial gain from the operation, this will reflect upon the net income and within the dividend policy to pay 50% of the net income. We should have an addition there and what has to do with the 2012. So already answering your question, we are going to try and utilize those resources in our own expansion. We want these resources to continue generating cash.

For CEMIG, we have been receiving somewhere around a BRL100 million per year from the state and naturally we are going to try and apply those resources to give us higher values, so that we can continue paying dividends to our stockholders.

Now, as far as extraordinary dividends, it is circumstantial if there is any availability of resources we can pay extraordinary dividends. But that shall depend upon the success of our expansion policy through acquisitions. And if are not successful -- and if we have -- with the existence of a very robust cash, you see it's over BRL3 billion by the end of the year, we should have a pressure in order to pay extraordinary dividends. But this is circumstantial and we are going to make this decision at the end of the year jointly with the shareholders. Thank you.

(Operator Instructions).

Vinicius Canheu, Credit Suisse.

And the cost cutting that you informed of BRL600 million per year, I like to know how the Company intends to reach this potential cost reduction and how long can we expect so that the program is concluded? And I like to know if you can talk about it, if this is part of the adjustments that are going to take place this year?

Thank you, Vinicius, for your question. This matter of -- yes, this matter is very important to us, because in search of -- our search for the operational efficiency is part of our growth strategy, as you saw. We have as a goal that of reaching a performance over -- better than the other companies in the industry. So we are going to look for these results in the next years. We have already designed all the initiatives that are going to result in this extra gain that was publicized, BRL600 million in the next three years.

These gains have everything to do with the third tariff revision. This third tariff revision is going to impose a few challenges to other distributors in general, and we have anticipated ourselves to the pressure and we are already implementing initiatives that are going to bring us effective results by 2012 already and throughout 2013 and '14. We intend in 2014 to capture that volume that was publicized.

We have several areas in which we've been striving to get improvements as a function of the cost pressure. We -- on the one hand, we have cost being inflated, and on the other, we are trying to review and revise processes in order to make up for the growth because of inflation, both of the minimum wages and the non-availability of labor, which results in higher wages. All of these initiatives are a great number of them, and practically all of the companies are engaged in such a process of looking for better efficiency resulting, therefore, in those gains that we mentioned.

Thank you very much.

Well, I'm going to thank you.

We have now closed the question-and answer-session, and we will now give the floor to the Dr. Luiz Fernando Rolla for his final remarks.

I would like to thank you for your attention in this day with the -- as the CEO has mentioned, which is not a very -- actually, a quiet day in the stock market, as you see a substantial fall in practically every spectrum, all the stock exchanges. The dollar going over BRL2 per dollar. Therefore, it's not an easy day, and therefore, I have to thank you twice for your presence.

I would like to remind you that at the end of the month we are going to have our event, the annual meeting with the analysts and investors. This meeting which annually we renew our communication with the market, whether through a new guidance as (inaudible) was concerned, or we are going to revise our guidance, and already reflecting all of our -- the growth that we had had in recent years and future outlooks.

This meeting is going to be very interesting, and I invite you all -- all who want to participate in this event, because of the novelties we should be imparting to the market. But once again, I like to express my thanks and wish you a good day. Thank you very much.

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.