Energy of Minas Gerais Co (CIG) 2015 Q1 法說會逐字稿

Good afternoon to all of you. My name is Antonio Carlos Velez Braga, Investor Relations Officer for Cemig. We now start the transmission of our webcast and results of Cemig related to the first quarter of 2015 with the presences of Dr. Mauro Borges Lemos, Chief Executive Officer, Dr. Fabiano Pereira Chief Officer for Finance and Investor Relations and Dr. Fernando Rolla, Institutional Relations and Communication Officer. This transmission, this broadcast may be followed up by means of telephones 55 (11) 2188-0155 or 55 (11) 2188-0188 and also through our website.

To start up this presentation, we hand it over to our Institutional Relations and Communication Officer, Dr. Luiz Fernando Rolla.

Good afternoon to all. It's always a renewed pleasure to conduct this video conference with you gentlemen and ladies for disclosing our quarterly results. Some one and a half months ago, we disclosed our last year's results and this is the first quarter of this current office and administration and I invite to read the disclaimer, because we'll touch on various strategic points here. All indicators were rather positive and they do reflect the strategy that has been adopted by current administration. Mauro, our CEO, what would you say about this first quarter of our management?

Good afternoon to all of you. The assessment we make is that in fact, our results have been pretty positive. As made very clear from the point of view of net income, EBITDA and net profits, our position is very solid and that's what we have to present to you investors. We are highly pleased with these results and my personal commitment and of the entire executive Board of Cemig is in the sense that we should pursue the consolidated results for this year that will be true to these, first, good results in 2015.

We will discuss the results in detail during our presentation, but to some up of what happened during this first quarter, we had maximization of our results as a function of our trade policy that has been implemented for some time already and have brought up major results, in addition to some very relevant factors happening in the first quarter. And that not only impacted the quarter's results, but they will always bring benefits into the future. One of them, the consortium made up by Cemig and Light, which won the Itaocara auction, which had been dragging for over 10 years and we granted the concession for the next 30 years using these assets. Also, the tariff adjustments occurred in April with a general impact of 7% on our distribution business. This means transfer of costs that have been incurred over the past 12 months.

In addition, Alianca, or [Reliance] is bringing the first results with substantial accounting profit that we'll discuss to you in detail in a few moments. That reflects the capacity of the Company to restrict itself, to reorganize itself, having reviewed this rather complicated project and we could make a very attractive design of this effort to our shareholders. Yes, indeed, you're all right. This project we have been pursuing for a long time and now -- versus actually winning the auction and the competitor that would really go into this project brings a very positive result.

We have a build-up of resources for this project. We are very optimistic about these results. I do believe also that it is a signal very importantly that Cemig, this is a consortium made up of Cemig and Light, which is an associated company to us, that's a signal that we are back to auction. That's important, because as long as these auctions are attractive and made feasible to gain returns to our associates, so the participation in greenfield projects for generational Cemig is part of our DNA and if it's part of our DNA and if we do that so competitively, we consider that this is a very important route to be pursued by the Group. We are convinced of that.

We are strongly working on the formatting of these auctions, attracting interested investors, and the Federal government and the Union of Brazil, is interested in attracting such investors. We much work to make these auctions to be solid in bringing undisputable returns to investors and Cemig's associates and shareholders. So, this is our commitment and we are strongly pursuing this target, this goal. And this auction includes public consultation and audits. On the one hand, we are representing our competence and will on the part of the Group to participate and on the other side, the participation on the designing of the format of these auctions, they can become a long-term investments. This is our characteristic. We don't work on short-term speculative power market. What we know and what we do is to enter partnerships for long-term project and this auction perfectly reflects this idea, the auction good in itself, also is a sign that our Board is mobilizing to make our Group ever more competitive into future auctions.

We reduced and mitigated substantially the risks involved in the hydroelectric investment project. With investments made in recent years, we've got to the point that we are familiar with virtually all aspects of the project. And then we managed to reduce the risk in such a way that we will be able to ensure attractive returns to our shareholders. So this balance of risk and return in the Itaocara case was very important for the Company.

Yes, fast forward, there was an intense debate in-house, we have been discussing this project for over 10 years, if I am not mistaking and we've finally arrived at a design under which the return of this project to Cemig reaches two decimal case figures, and with the participation of the other managers and managing entities.

Another important aspect of the first quarter, early in April, we could see the annual adjustments, the common ordinary adjustment of tariffs, that's just a transfer of costs incurred over the previous 12 months. This has mitigated a lot the risks of our operations. The regulatory body took on costs that were before shouldered by distributors and also future costs and had reached a very high threshold, and this ensures subsidies to low income consumers and also the purchase of additional power and energy by the distributors. The cost of distribution, therefore, was stable, remained stable without any transfer of costs to consumers, not even of inflation. This we'll give to the benefit of our consumers. Yes, indeed this is a concern of ours, a commitment and we believe that in fact we should go for these tariffs that are affordable that can expand the capacity of our consumers to use the energy. That's a very strong stance we are taking. Traffic adjustment included flags and included extraordinary adjustments, because we had had non-ordinary aspects that would justify that, but in real fact, in the long run, we see affordable tariffs as a means to expand our consumer base and to make [physical] economic growth of Brazil.

In contrast with most distributors in Brazil, Cemig has corporate and industrial consumers with a heavy weight, which we negotiate with both in the free market and the regulated market and the captive market. So, this brings a very differentiated portfolio, residential consumers, farmers and industry consumers. This varied portfolio is one of the most important assets of Cemig and this is important for all consumers and this is the way we work anyway.

I believe that we are in fact pretty much concerned with this huge effort we're making to reduce costs and increase productivity in the Cemig distribution sector. This is something that we should pursue further into the longer run. Unfortunately, this is not reflected yet in the first quarter. The increases are not 100% reflected in the first quarter, but in the upcoming quarters, we should see even a higher impact on our revenues, positive impact that will also reflect on the results of Cemig distribution. Most of the costs that made up our CVA are being transferred through the flags.

Another important impact on our results was the recognition in the first quarter of the fair value, as our President already mentioned, as we had an alliance with Vale, a major, mostly relevant project for Cemig and this stock-holding organization is bringing BRL735 million in accounting impact, but it goes far beyond that. Yes, indeed, Alianca Energia is our main drive to growth in generation. We have high levels of competency in engineering and if you add to that, a private vehicle for growth, this brings us extreme robust structure to increase our capacity for generation in Brazil. We have seen already huge increases in developments and now with this new vehicle, we have all the ingredients for an ever wider participation in the power sector in Brazil for cash generation, that's generation of electricity. This brings us predictability to our cash flow, which is much to the satisfaction of our Financial Director, isn't it? Yes, positively. In the short term we believe that it will already bring satisfactory results and payment of dividends to Cemig. I should remind you that our leverage is almost zero. So, our capacity to grow is enormous.

Another aspect that should be stressed here is that our partner is not just companion on our voyage, but it's a long-term strategic partner, namely Vale, it will be our partner in the growth of our alliance and it's a major consumer of our power. So PBAs that are very much consolidated and brings a lot of insurance or guarantee for performance. These are two partners; one look for the other, they get along very well with a long tradition of cooperation, mutual cooperation. I and my colleagues here have had many opportunities to talk to them and we are mutually satisfied to see this alliance taking shape, both on Vale's and Cemig's side. This is a partnership that came to stay. This is a perfect scenario. Vale wins, Cemig wins and all those who invest with us in this new resource will win as well.

We have a major concern with the sustainability of the Company's results, not only from the point of view of finance and economy, but also the communities we serve, so operating team performance, tariff, standards, these are major concerns and constant concerns of Cemig. It's a corporate principle for us to watch for the three aspects of sustainability, financial results, respect for community, use of resources into the future for the new generations and protection of environment. This is a corporate principle for us and we have been recognized for that among the communities we work with and we are at par with the companies that have the highest standards of concern in these aspects. So in this first part, we talked a little bit about our vision, our views on the results and what we should expect, having viewed the events of the first quarter. And now we will provide more figures to you,

The figures so far have been very positive. Net income have grown 24%, reflecting all that environment, reflecting the strategy that has been adopted and this allowed for these results. We had seasonal effects and we are going along the same actions as the other companies in the sector, having viewed the reduction of seasonal risks. And we had this natural hedge by buying energy. This brings stability to our revenues in our future results. This is a guideline we are following up very closely, despite the fact that the context was not too favorable. GSF was pretty low in this first period. Yes, we believe that efficiency in managing the trade, the commercialization, having viewed the hydro crisis, the adverse hydrology. And we adopted this hedge that was built accordingly and it was extremely relevant, so that we could cross this desert, so to say, 2015 which is extremely hard periods for the electrical sector, as all investors know from the point of view of hydrology. And we could build up some of these hedges. And the commercialization is a major highlight in these results and this will happen also in the coming quarters. The strategy was pretty well developed and the results are there, so we participate very significantly in the Brazil market.

Also, the impact coming from the consolidation of Gasmig acquisition, almost a 100% of Gasmig is ours now, does reflect revenues with an additional BRL426 million as a result of incorporation of Gasmig. Operating expenses also grew, somewhat 50%, but our slide shows the reason for that. That has to do with the amount of energy purchased. This has been very high in recent years, due to the dispatch of the thermal plants, the GSF is lower. And this purchased electricity compounded to our hedge, which is not necessarily a negatively value, although it was substantially increased the expenses in percentage terms as well, but it brought a positive effect. The other aspects are pretty under control, isn't it Dr. Fabiano? And nothing that would be a reason for concern. Gas bought for reselling reflects the impact of the acquisition of [4%] of Eletrobras.

EBITDA showed an increase of some 22% and if our President is willing to explain to us, please what happened to our EBITDA. We had major performance, BRL2.5 billion, and that was an important indicator for the remainder of the year. Yes, an increase of 22.3% as compared to the quarter in 2014. This was partially a result of our alliance and the other part comes from the management and commercialization and internal efficiency gains of the Company. We still remain with the commitment to improve this result and this will be our pursuit during the rest of the year. [1.8b] is our performance, still very positive in comparison with the remainder of the market. If we add that to the measures we're about to discuss, this performance will be even better into the upcoming quarters as a consequence of revenues and (inaudible) or EBITDA 18% was consolidated revenue or net income. It's a little lower, but it's understandable that last year [PLD] or spot market had a very expensive price, which is now [BRL388] per megawatt hour in this first quarter, so we have to adjust that in considering the gains from Alianca. Still a very positive result, Yes, one of the best results of the sector in this quarter, again demonstrating our constant pursuit for positive results. And it's a good sign for the rest of the year. I have no doubt about it. This result in the first quarter was a very strong focus that our Board having viewed and we wanted to achieve and we did achieve this very positive result. We will keep on working strongly to achieve consolidated result comparable with this first quarter.

This is the favorite slide for Dr. Fabiano; that's our debt profile, consolidated value of [BRL11.9 billion]. Some indicators here will be commented on by Dr. Fabiano. As we look the profile, consolidated debt profile of Cemig, we list it as an observation that a good deal of this 2015 debt was rolled over, but it's not reflected here because that was started in March. Capital cost of the Company of the debt has increased a little bit over recent months, because the long-term interest rates has been increasing. But as we see the leverage of the Company in itself, then we have all indicators under control and that allows us to look ahead with confidence to improve this profile. This will be a pursuit of ours this year and into the next years.

It's important to highlight also that the debt, although it's indexed to [PC] and IPCA, we have -- CDI and IPCA, we have a hedge for it and our index is IPCA. And our debt is determined by the SELIC, which is the future interest rates, Federal. And if we consider these two factors, we see an advantage for a company of a scale such as Cemig. Cemig (inaudible) also in a very positive position, some BRL6 billion in debt, but the relationship between this and EBITDA is very favorable.

We are very much concerned Dr. Fabiano, isn't it to elongate that debt profile into the next years, it's a restructuring of this debt and we are doing that beginning in the 2015. Yes, we are looking at the possibility of reducing the debt volume at Cemig, Cemig GT, this is already in our pipeline. And also working on potentially debt indexed to inflation. This brings more flexibility to the Company and to help us drove even further. Distributor, as well as Cemig D, despite all the tight conditions in 2014, it's still at a very reasonable position in terms of debt profile. Of course, not all the hedging mechanism and protection mechanism is reflected here. The tariff flags adopted by the regulatory bodies. So, we're still to absorb a little bit of this impact in the second quarter, but in any event, this performance is rather positive and predictable and with our strategy to [restruct] the debt, we will elongate, we stretch this debt for our distributor division. Tariff revision and flags have reduced substantially our perception of risk.

The perception of risk from our investors was looking at some risks to the cash flow of the companies. From the point of view of investors, last year [EBITDA] with our measures we managed to reduce these risks. And even so, we adopted further measures for protecting our cash flow, restricting execution of our investment program in the first quarter, and we've heard few of our investors -- investments rather is not -- to say that we are not going to make those investments. We will recover that over the rest of the year, but for the sake of protection of our cash flow we did that.

If you look at the figures for 2015, planned and executed, we restricted a little bit that in the beginning of the year for greater tranquility, but we did invest some 25% of planned. If you look at -- this is just the first quarter, it's well evenly distributed over the year. As compared to last year, it's a little lower indeed, but it has to do with differences between the two years.

Last year, our investment program was pretty robust and in comparison with this year, it looks like there has been a reduction, but actually what happened was that investment in last year was outstanding. But these next slides bring very positive indicators. Generation of cash is pretty positive, even having viewed the pretty complicated situation we went through during the first semester as for the context of the economy. That reflects the hard work of the Company over last month. We have kept track of that very closely and this you can see our capacity to generate cash, to meet our commitments. We rolled over some part of the debt. We liquidated matured debt and we still have good cash to go through the rest of the year without any much concern.

Also, if you compare, as far as capital markets are concerned, we see very positive evolution. By March, we showed a negative performance. But as the extraordinary tariff adjustment and flags, the perception of the investor improved pretty much and our shares valued pretty much above the average in the sector at Bovespa set, and for example is too being built. They didn't have also a very positive performance in the capital markets.

These were the points we wanted to bring to you. We'll now open for questions and answers. And we are ready to approach any other points that may have not been looked upon our presentation.

(Operator Instructions) Canheu, Credit Suisse.

I'd like to know if you have any update on the court disputes concerning the three main hydro plants? Apparently, there have been no news, but we just saw that this has been brought back to the Court's agenda. Could you anticipate any further developments on that?

What I could advance to you is that as planned, we have started off a process for negotiating the three plants. We defined together with the Union -- the Brazilian Union the parameters for such negotiation and I am personally involved in this negotiation with Federal government and Minister Eduardo Braga appointed by our President, Federal President, to conduct negotiations with Cemig. On the part of Cemig, I've been conducting dealings with the Minister personally myself and my perspective on that is very positive. I do believe that our interests, mutual interests, the Federal government and the state government and Cemig controlled, of course, by the State of Minas Gerais, there is common interest to get to a solution where everybody will win. Ever since we took on the direction of the Company, we have been saying to the market that we can transform this gain, which looked like it's all or nothing type of game to a win-win situation and that's the direction we are following in the negotiations with this Federal Union. As we know, negotiations of this scale require time, take time and you really need time to wrap up all the aspects, not to leave any room for further litigations, so that we can get to a position where we will be comfortable that the decision will be for the benefit of the Company. It's a complex negotiation and in that sense, we have defined from the incept of this negotiation that the time variable shouldn't be the most important variable, once again solution. This year, as everybody knows, is exceptionally restricted year as for water resources and this is an external factor that pervades a little bit the process of seeking a negotiated solution. We know that, we have knowledge that before the market, from the beginning we have mentioned it and we have no deadline or final date to define the end of negotiations. We believe that the more time -- if we have a little more time, we can arrive at beneficial solution by the second semester of this year; that will be good for Brazil and for all concerned.

Paulo Ferreira, Bradesco.

I'd like to ask if there is any concern on the part of the Company or the market in general as regards the leverage? What's the prospective for distributing dividends in 2015, will it be 50% as before or will it be anything below that? Thank you.

I'll request our Financial Officer to reply.

First I would like to make it very clear that the commitment on the part of the Company remains strong. The statutory dividends are 50% of the profits. What we have done at this moment was just a prudential move. In the last month assembly meeting, approved 25%, and we reserve 25% for future dividends. And these will be paid as soon as the scenario of uncertainties is overcome. To add a little bit to this, the issue of indebtedness, as we mentioned, our conviction is that our indebtedness level is pretty low. If you look at all the relevant indicators, it's a fact that the distributor went through a period of increased indebtedness, due to all that happened last year and early this year. But with this new policy of transfer of costs, especially non-controllable costs, in this we will, by the end of the year, improve substantially our performance.

(Operator Instructions) Vinicius, UBS.

Perhaps you could give us a more colorful description of what's happening with Alianca. Are you going to focus on more known assets, existing assets or what?

Our strategy, as we have commented during our presentation, is to make it into our vehicle for growth in the generation from [mean] to big, to (inaudible) and greenfield projects, some of them already defined, to turn our alliance into a company that will be much more -- have much more capacity than the initial 1,200 megawatts. This will enable accelerating this growth and our goal is to grow very strongly into the next five years. In five years, it will probably become one of the most important generating companies in the country.

(Operator Instructions) We now close our Q&A session. I'd like now to hand over the floor to Dr. Fernando Rolla for his final remarks.

Before I hand it over to our CEO, I should remind you that on the 25th, our 20th annual meeting with analysts in expressing the (inaudible) that's a traditional event in the market and for Cemig. I extend the invitation to all of you. If you can't be present, you can follow the event through the telecommunication media we will put at your disposal. We will discuss the strategy of Cemig for the next years. And now for the final remarks and to close the meeting, our Chief Executive Officer, Mauro Borges Lemos.

I'd like to close this session by saying, first, that we restate firmly our commitments taken when we took office into this new administration. Our shareholders, our investors are fundamental to us. We will seek consolidated results consistent with what we have already achieved in the first quarter and reaffirming this commitment is very important to me and to us. How do we plan to deliver this result, this is always a question that we should revisit. First, we believe that competence, Cemig's competence as a company involved generating, transmission and distribution of energy involves major gains in operational synergy. And then operating at low cost at these three specialized dimensions of Cemig is extremely important.

Secondly, we are working on a growth strategy of Cemig as a Group. We today are a group, a relevant group, we have private vehicles in dimensions that we consider the most significant for our growth, involving generation, creating this private vehicle, which is Alianca [Energia] with Vale and consolidation of [Renova] as a company generating renewable energy. Renova, it's important to say that this recent operation with [Phoenix Group] aims at expanding our capacity to invest. We are not selling any of our assets, we are rather establishing a long-term partnership with renewable -- with this leading U.S. company in renewables, so that we can have assets for generation in Renova. We have backlogs with PPAs already structured and auctions already done. We have already the guarantee on long-term contracts and we want to speed up investments for cash generation by operating these assets that are now in our backlog.

Our pipeline is of high quality and that's what we want to press ahead. Our strategy is to have this financial instrument for speeding up our renewables. We are already a leading company in renewables in Brazil. Along with this, with the participation of Cemig and Cemig's Group in transmission, our intention is that our capacity in engineering should be added to this private vehicle, which is Thaisa, which will expand our participation in the transmission market of Brazil.

And then operational maintenance in transmission, we can operate at very low costs, so we must use our competence in engineering to press on with the growth of this sector in Brazil. As far as distribution is concerned, we have a Cemig distributor, which holds the largest market of distribution in Brazil. This company is a major asset of ours and together with that we have Light as a private participant and by means of these actions, we would take important steps towards growing together, Cemig and Light. These are the instruments we have with a big capacity for synergy and this can be put as a service of further growth. This is the commitment of the Board and we should deliver by the end of the year, results to the shareholders that's comparable to the size and scale of the Company we lead.

And as a public utility company, we must also deliver affordable quality services. This is a commitment that we are restating at every opportunity and I do it again right now. These are not incompatible. Profits and returns are not incompatible with the public utility role of Cemig. On the contrary, the more we deliver services, affordable services, quality services, the more we will be able to grow. One size reinforces the other, quality affordable services, means greater returns to our investors. So this strategic review will be reflected in our economic financial projection to be disseminated on the 25th during our event. We will be transforming the strategic view into figures but also into results for the future.

To wrap up our conference, I would like to thank you all for your attention. I should mention that our Investor Relations department are here and [Mr. Pereira] is here. You'll probably reserve the tougher questions for him and he is available 24/7 to you and to share our strategy for relationships with investors. Thank you.

So the video webcast is now closed. We thank you for your participation. And have a nice afternoon.

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.