AES Tietê SA ADR (OTCPK:AESYY) Q2 2014 Earnings Conference Call August 7, 2014 10:00 AM ET
Britaldo Pedrosa Soares – Chief Executive Officer & Vice Chairman of the Board
Gustavo Duarte Pimenta – Chief Financial Officer & Director of Investor Relations
Ricardo de Abreu Sampaio Cyrino – Board of Directors-Substitute
Marco Stefanini – JPMorgan
Vinicius Canheu – Credit Suisse
Good morning, ladies and gentlemen. Welcome to the conference call of AES Tiete SA, operated by Chorus Call Brazil. In this conference call, we are going to disclose the earnings of the Second Quarter of 2014. AES Tiete IR area also informs you that the earnings release is available on the Company website at ri.aestiete.com.br. Right now, all participants are connected in listen-only mode. Later on, we are going to start the Q&A session when further instructions will be provided. (Operator Instructions). We would like to remind you that this conference call is being recorded and is also being webcast on the website, ri.aestiete.com.br.
On behalf of AES Tiete, we would like to let you know that any forward-looking statements made during this conference call relative to the Company's business outlook, projections and operating and financial goals are based on assumptions based on current expectations. Forward-looking statements can change because of variables such as market conditions, the country's performance and the performance of international market. The presentation together with slides will be made by our CEO Mr. Britaldo Soares and our Vice President Director and Investor Relation Officer Mr. Gustavo Pimenta.
In the end, the executive officers are going to be available to answer your questions. I will now turn the call to MR. Soares. Please Mr. Soares, you may go on.
We are going to start the conference call of Aes Tiete SA for the Second Quarter 2014. In addition to Gustavo Pimenta, we have Sheilly Contente our Vice President for Regulatory Affairs, Francisco Morandi, market and development officer, Energy Generation Officer, Italo Freitas; Pedro Bueno for regulatory affairs and commercialization Ricardo Cyrino as well as our industrial relations team.
Going to slide number 2, I would like to talk about our operational area and the highlight is the lowering of 6.2% of the physical guarantee in the quarter, 2.3% points above the first quarter of 2014. This is very much with the indication of lowering that we already signalized in the first quarter this year. We commercialize in this quarter plus a 100 megawatts average (inaudible) with average period of 4.5 years and average prices around R$153 per megawatt hours with this new contract closed we contracted 943 megawatts average for 2016 which accounts for approximately 74% of the energy available for the year. For 2017, we contracted equivalent to 64% of the energy available and for 2018, 37%.
We believe is that long term prices are going to be at 140 megawatts or 150 megawatts hour for contract with the delivery of energy as of 2017 we continue to follow the market evolution and based on the development we can optimize average prices and with the new contract for our portfolio.
As for the financial performance I would like to highlight an increase in net revenue of 19% compared to the second quarter 13% this is basically because of a higher volume of energy sold in the spot market which is partially offset by the lowering in the MRE that we had in the period, a lower volume of energy sold to AES Eletropaulo due to the Company's seasonalization strategy.
Operating costs and expenses did have a decrease of 9.3% compared to 2Q ’13 given to the reduction of manageable PSMSO lower tax burdens and sectorial rates. The company’s EBITDA totaled R$431 million with the growth of 2% compared to the second quarter 2013 net income of 251 million with gross of 4% basically because of our selling position in the spot market.
The management proposed and the board of directors approved to the payout of dividend of shareholders of 390 million, those amount refers to the net income calculated and adjusted in the second quarter of 2014 in the amount of R$268.5 million added by the profit accumulated in the first quarter of 2014 of R$12.2 million, not paid out because of our restriction that was provided in our corporate loss as discussed in the first quarter.
Now, I am going to turn it over to Mr. Pimenta to continue talking about our results and give us further details. Thank you very much and I will be back in the end of the call.
Thank you Britaldo and good morning everyone. I am going to start my presentation with slide three with macro view of our reservoir levels and spot price evolution and you are all following the subject from close, what we can see in the first quarter, talking about our integrated systems was that an improvement in the stream flow compared to the first quarter of ’14.
We had something close to the historical averages because of the positive stream flow that we had in the south region in the first quarter of ’14, we had like 63% against the historical levels. So it was a rainy period in the first quarter, so would this have a benefit in the second quarter. Anyhow, the evolution of prices as of June July went down, although it was positive in the whole of the year, we can see in April/May we are very close to regulatory level and then we went back to 400-500 and then the number went up again.
So the combination of the improvement of stream flows in the second quarter and a continuous thermal dispatch to 16 gigawatts average against 12 compared in the second quarter of ’14 met our integrated levels to bet above the 41% which is what we observed most recently. And in our expectations as for cost prices is that they are going to continue at high levels, I am going to talk that when I talk about financial impact. We are thinking about R$600 per megawatts hours in the years to go.
Going to the next slide and specifically talking about TSA reservoirs, you can see the history for TSA is very much in line with the history of stream flows in the south east, we had the reduction of reservoir levels in our plant is to compare to 2013 and 2014 although in the southeast specifically talking about in the southeast we did have better stream flow in the second quarter thus when we look at the first quarter, we were below. As a consequence of the reduction of this retraction in reservoir levels in 2014, we had a lower physical dispatch as a strategy of the company to be constitute those reservoirs, we had the retraction of 44% compared to the same period of 2013 and when you think of assured energy, we had 58% to meet the physical guarantee, so a recomposition strategy for the reservoir.
Going to slide 5, and before talking about financial impact, it’s very important for us to talk about the issue of seasonlization that is very important for us to understand our financial results both of that have already been completed and to be completed along the year. We adopted this seasonlization strategy in the first quarter that is to have a high allocation in the spot market in the first quarter, we also had higher allocation in the spot market and had a positive exposure in the second quarter as well and this is the reason why even considered thus as a lowering of 6.2% we had a positive EBITDA effect of 27 million in this quarter and this is even positive compared to the previous year and despite the lowering of 6.2.
We had the guidance in the market of an impact of 350 million to 500 million in the year we have reviewed our numbers and we think that we still have this negative impact, the lowering is going on months by month much very much line with the projection that we have had which gives us a comfort that we are going to have this lowering of 6% to 8% which is the best estimate that the company has which means that in the years to go, we are talking about an average lowering of 10%. And therefore if we think of the prices of about R$600 per megawatt hours we are going to have the impact as indicated before but we are going to be following this information and if necessary we are going to update the guidance for the next quarter.
On the next slide and we think about the billed energy amount and net revenue, we had a lower invoiced energy for Eletropaulo again for a net exposure in the second quarter a higher invoiced energy in the spot market. So an increase of 19% because of the GSF but when we look at the financial impact the effect of this spot price more than offset the loss of a lower sale to Eletropaulo, so if you think of the revenues quarter against quarter which just has an increase a lower revenues in the sales to Eletropaulo but in the spot market much higher than what we saw in the previous year.
So the same rational can be seen the year-to-date, that is worth mentioning that we can realize and in fact in the quarter concerning the billed energy into MRE because of a lower dispatch from Tiete and our hydroelectric plants as a whole which leads us a better MRE fact than before.
On the next slide, speaking of spot prices and cost evolution and operating expenses, an evolution in cost account for the purchase of energy and the EBITDA the growth is associated with the growth and revenue considering variations in the spot market, so we have an increase but also an offset in terms of revenue and the main driver is the spot variation year on year, we had average spot of 682 and the same period of last year the average spot was at 250. So the financial impact was considerable both for expenses and for revenues. The main message from this slide concerns manageable cost, we had given a guidance in the market at the beginning of the year and we realize that there was a drop of 2% when we compared quarter on quarter and we would like to reaffirm the guidance for the year which is for a growth equals to zero, so there is a series measures being adopted by the company and we can already see some of the effect of those measures.
Moving onto the next slide and talking of EBITDA net income. We had an evolution of 2% in EBITDA, so that seasonality effect that I mentioned generated a gain for the company 431 as compared to 421 last year and the year-to-date we have an EBITDA at 1B 0.25 (ph) driven mainly by the first quarter where we had a very favorable effect arising from our strategy, 36% above the same period last year.
And what concerns income, it was 251 in the quarter as compared to 241, 4% up once again arising from the strategy we adopted and when we look at year-to-date that profit is 609 as compared to 462 as we Britaldo said the Board approved, yesterday that dividend payout at 308.7 million both the dividend equivalent to the second quarter but also the remaining balance that we didn’t pay out in the first quarter due to legislative restriction. That would generate a dividend yield of approximately 10% in the quarter.
Moving onto the next slide, our investment plan, we have invested in the quarter 48 million which is in line with the guidance we announced for the market, that's also investment of 186 in the year, this is equivalent to 87 above, 87% above what it was last year. Most investments are being focused maintenance and revamping of our plant, more notably Barra Vermelha, Promissao, Ibitinga, Barra Bonita. We are right now conducting the main maintenance work at Tiete and we believe that once we move into 2017 will resume previous levels of CapEx which is expected to become with non-recurrent than now.
Moving now to the next slide, cash generation in the second quarter 2014 it reflects our seasonality strategy in the year-to-date the same rational as I mentioned before and this obviously lead to operating cash generation of 605 million as oppose to 363 last year. We have a positive variation coming from more investments, more cash outflow once again due to our investment plan which has been presented to you financial expenses a little above because of the CDI and the remaining items have unchanged significantly so we have a free cash generation of 333 and half of approximately 500 million we paid something close to 500 million in terms of dividends and interest on loan capital which leads to a final cash for the second quarter 2014 at 451 million.
Moving onto the next slide concerning our leverage strategy and company’s capital structure. We remain with the capital structure which is very comfortable net debt at 0.4, net debt over EBIDTA, the net debt at 0.7 quite below the convenience. When we look at average cost, it is around 108% of CDI, similar to what we had last year and we have an extension of the average term because of the issue that we made of something close to 300 million with the term of six years that contributed to increase our terms and the effective rate went up because of the CDI and that's one of the main effect when we look at the variation in net financial expenses of the company.
In closing I would like to update you concerning our commercial strategy Ricardo has anticipated some of the main points. We remain focused on selling energy from Tiete and especially for longer terms so we can see from the release that we have been successful in that strategy in fact we have managed to sell average 100 megawatts with the time term of 4.5 years, we can see if you analyze the columns and increase year-on-year of the same size which is an indication that we have managed to adopt and execute the strategy as we plan.
Our price vision today for 2016 is between 180 and 201 and start in 2017 our price vision for contract still to be and entered into at 150 – 140 and what we see our some changes which have been taking place throughout the years in terms of structure, in terms of dynamics of the factor and that we hope or actually believe that we contribute to what we set in pricing in the longer term and that's basically what we have to take into consideration when we review that guidance going from 140 to 150. As Ricardo said this all take us to 217 with 74% of contracted energy at an average price of 125, 64% of that energy will be contracted in 2017 at a similar price considering today’s prices corrected for inflation and a price of, a level of contraction of 37% to have 2018 at an average price of 28. That's basically what I had and I give the floor back to Ricardo for his final remarks.
Ricardo de Abreu Sampaio Cyrino
Thank you, Gustavo. I will be brief. I think the fundamental aspect has been addressed throughout the presentation. I would like just to emphasize that given our seasonality strategy, given for the second quarter we have benefited net at 27 million because of our energy allocation strategy even after the 6.2% lowering which was more severe in the first quarter 2014.
Also our contracting strategy as Gustavo has emphasized, price levels and contracting levels has been reached and match our price vision for the future, something between R$140 and R$150 per megawatts hour for contract to be delivered after 2017 and as I said before our strategy is to monitor the evolution of the market and trying to optimize our contracting conditions for our portfolio, always looking to maximize returns.
And lastly the idea is to resume dividend payout at 389.7 million which reflect $0.98 per common share and R$1.07 per preferred shares.
We will now start the Q&A session and we are available for your comments and questions please.
Ladies and gentlemen, we will now start the Q&A session. (Operator Instructions) Our first question comes from Mr. Marco Stefanini from JPMorgan
Marco Stefanini – JPMorgan
Good morning, Ricardo. I have two questions. The first has to do with GSF. I'd like to know a little more about your expectations, your estimates for GSF for the second half. Given the Company's energy reallocation mechanism, you are very likely aware of what kind of exposure you'll have for the spot market. The second question has to do with contracts you've signed in the second quarter in the free market, the prices at a level above R$150 per megawatt hour. If you could give us a more recent estimate of how that price has been moving and the expectations you have going forward and if you will maintain that strategy of trying to anticipate those contracts or if you plan on slowing down in terms of contracts or of new contracts or if you would expect prices to go up in the free market please. Thank you, Britaldo.
Britaldo Pedrosa Soares
Okay, thank you Marco. Of course in terms of GSF, because we are talking about an average between 6 and 8, we expect to have more considerable lowering in the second half of the year so that we can arrive at the bracket we have indicated. If we look at what happened in the first quarter and also in the second quarter, we will see lowering levels of 9 to 11, 10 to 11 so depending on the months, different levels of lowering and what we see today within that average bracket that we have indicated is that in all likelihood we remain at the upper side of the bracket that’s how we see it today because of the levels of spot prices and lowering of MRE that we have.
In that concerns new contracts, I will make a broader comment on the strategy and then I will give the floor over to Ricardo Cyrino so that he can address the issue in more detail and also to update you on that. The strategy we are now adopting is to maximize conditions to for new contracts and clearly we would like to have flexibility for that.
We have been talking about different possibilities to explore but that will depend on the evolutions of factor conditions as a whole depend on the hydrological effect, so of course what happened when the rainfall season start in November what kind of consequence that will have in 2015 and 2016 and so on. We still have 26% of 2016 energy not contracted so that gives us a flexibility buffer if you will that could be used both to maximize longer contract and also to manage situation in which it would be more exposed should we have a more severe scenario in 2016. So this is a more dynamic analysis we are conducting. We have been doing this on a constant basis and the idea is that as I said to minimize impact after 2016. For 2015 as you know we are fully contracted and we will try to observe and try to again minimize impacts if we have a more challenging environment in which we will have a further lowering of the energy reallocation mechanism.
So when November comes and the rainfall starts and throughout April 2015. So I will now give the floor Ricardo Cyrino he can comment on the latest news on the market, how we see it so that he can be more specific about it, please Ricardo?
Well, thank you, Britaldo. Well Marco just to add to the answer but very much in line with Britaldo mention what we want to still have a balance between the mitigation of the risk that is keep some energy for the future and so the energy that we have and the pace of the sale is very much in line to what the market is responding and this meant more recently we see the prices are a bit more pressured to the highest point, from 180 to 210 very much in line with the recovery of the system, of course the rain period is going to be determinant for us to have more clarity of what 2015 and 2016 are going to be like, so 2016 is affected by the spot price because in pricing we have a higher presence of the spot prices because the generators in the end that they can leave energy to be settled in the spot market. So we are going to be a more pressured in the first two years and then things are going to be a bit better and we see is that both buyers and sellers want to extent contract to minimize a much higher price in 2015, 2016. So again we are very much in line with supply and with market demand, so longer contracts with a more controlled price in terms of behavior and I think that in the scenario we can even think about delay of Belo Monte which can also press 2016 onwards. So this perhaps a factor that may keep prices a bit more pressured because of the Belo Monte delay.
Marco Stefanini – JPMorgan
Thank you very much. The answer was very-very clear.
Thank you for the questions.
Our next question comes from Pedro Manfredini from Credit Suisse.
Vinicius Canheu - Credit Suisse
Hello, again. This is Vinicius once more. I have two quick questions. First I would like to know from here on when you're thinking of selling energy, if you have an idea if it's still reasonable to continue operating over contracted. This was good because the prices were high, the spot price was low. Is this a good measure to be taken now or do you going to establish a threshold, what are you going to do? As far the contracts that you announced in the free market sales, I would like you to elaborate a bit on the customer profile. What are they, are they industries, are they generators, if you could give us an idea on the customer profile for the buyers of this contract, it would be very interesting. Thank you very much.
As for the targeted level in terms of amount of contracts, of course that you have to have some considerations. The contract that we have with Eletropaulo was the contract that was signed in 2000 when the whole scenario was different in terms of volatility of prices, quite different reality that we are experiencing today and we had this idea of hydrological stability that we no longer believe we have. And also it was a contract that was close to at a period before energy rationing and et cetera. So this is a contract of 2000 before the first energy crises hit the country. So the scenario has changed and we do think of a targeted amount of contract but we have to work in a way that it is going to be possible to manage the limits according to what we have on a specific point in time. So it’s not something that is going to be frozen, so we do have a target now 2016 and we are going to follow up how things develop and to see if we are going to keep it in terms of hydrology water levels, energy metrics because of the volatility that we are having now, how things are going to be settled, spot prices, house brought prices are constituted so there are a several points that have be to analyzed and monitored for us to have almost a fine tuning in our strategy and threshold. So I think that today to the best of my knowledge I would say that we will probably not be contracted at 100%, this issue is what percentage should we keep in terms of margins and at what point and time and this is something that I believe that still have to be very flexible about. But we have it in mind.
As for the customer profile, we do have a certain variability in terms of profile. We do have industry, we have other players in the electric sector. So it’s a quite diversified profile that makes up the portfolio and most recent contract if you think of the order, they you are talking about industries mostly but if you think of the average portfolio then you will have a huge variety of power players and customers.
Vinicius Canheu - Credit Suisse
Okay. Thank you very much.
(Operator Instructions). Since there are no further questions, I am going to turn the call to Mr. Soares for his final considerations.
Britaldo Pedrosa Soares
Well, I would just like to thank you very much for attending the call. And we are available for any questions or any further clarifications you may need. Our IR team is here for you and myself and Gustavo. Thank you very much and have a good day.
AES Tietê conference call is now closed. We thank very much for joining us and wish you a good day.