Companhia Energtica de Minas Gerais CEMIG (NYSE:CIG)
Q1 2016 Earnings Conference Call
May 17, 2016 10:00 AM ET
Antonio Carlos Velez Braga - IR
Fabiano Maia Pereira - CFO
Carolina Yamaguchi - JPMorgan
Pedro Manfredini - Itaú BBA
Carolina Carneiro - Santander
Antonio Carlos Velez Braga
Good morning everyone. My name is Antonio Carlos Velez Braga, Cemig’s Investor Relations Officer. We'll now initiate our video webcast of Cemig’s results relative to the first quarter 2016 with the presences of Dr. Fabiano Maia Pereira, Chief Officer for Finance and Investor Relations; and Dr. Leonardo Magalhaes, Controller. This broadcast can be received by phone numbers 5511-2188-0155 or 5511-2188-0188, and also through our website ri.cemig.com.br.
Let’s then begin our presentation. This first slide shows in a summarized way the results of first quarter 2016 as compared to the same quarter last year. Both revenues and EBITDA and net profit has seen reductions and the main factors affecting results in the quarter include a very important one, change in the allocation of supply in 2016. In 2015, we had as a seasonality factor, we allocated much more for the first semester and in this year, it’s exactly the opposite, less energy in the first half and more energy in the second half of 2016. And if you also add a reduction in average spot price, well, also the sales of gas, natural gas, Gasmig also saw a strong reduction in sales both to thermo plants and industry, the home market for us or resident market is growing, but still not to match two those first one.
Also negative equity contribution from Renova had significant effect and because of this acknowledgement of Renova, it showed a negative result which Cemig consolidates directly or indirectly via Light companies that amounts to BRL152 million. Also along the comparison, we can say that we recognized in the first quarter ‘15 a fair value gain of Aliança business with Vale which implied a fair value gain of BRL735 million.
And now I hand over to Dr. Fabiano Pereira, our Finance Officer.
Fabiano Maia Pereira
The quarter highlights. First, the Energy Ministry has set the criteria for indemnity of transmission assets. Leonardo will talk more about that later on. Also Taesa won the auction bid in one of the lots occurred recently. We capitalized Cemig D along the lines of lowering the leverage of the company, also capital increase in Renova through Cemig GT and also we summoned an EGM for later this month related to our negotiation with the banks with regard to FIP Redentor. Also our meeting, our annual Cemig-Apimec meeting is set for May 24 at the same venue.
Good morning everyone. A little bit about indemnity of transmission. It’s known by the market that the Ministry of Energy defined criteria for updating and payment of transmission that was remain from the sector. We had been discussing with Aneel ever since 2013 with [indiscernible] These criteria go through the indemnification. The amounts in our balance by 31st March, 2016 is around BRL.1.90 billion as updated by GPM up to this point and according to this order of the Ministry, it was defined and updated by the IPCA.
It was going to be remunerated based on the cost of capital which is around 10.44%. But this is just an estimate, initial estimate and it should be - it might be affected other calculations but it had relevant effect to the company showing revenues, financial revenues amounting to BRL500 million this quarter and I believe - we believe that it was really a gain for the sector, although it’s a long period for receiving eight years at least our cash is well defined and I think this was good news that came out in April.
A little bit about the disclosed data as Velez had mentioned before. Consolidate net revenue saw a drop of almost 24%, lower volume electricity sold in the first quarter, also associated to the spot price, a little lower than in the previous year. Another point that also impact net revenue is the drop in supply. This situation has come all the way from last year. São Simão is now transferred to the quota regime and these are the main points I believe for revenues.
As for operational expenses, we should stress again as we have been doing ever since last year the intention and the planning of the company things as reducing PMS and we keep on bringing it lower than inflation, also lower cost of purchasing supply due to a price drop and supervision that were kept us in the report [indiscernible]. Our main point is with regard to provision, I would like to add anything, well I think as we see the evolution of operation expenses of CEMIG, consolidated is we see our great effort to reduce costs and provisional amounts related to outsource services also highlighting a little increase in personnel. That’s one off effect because it had to do with this collective agreement with the employees and even if we had provisions to cover the effects of that agreement in November as it was signed, it had retroactive effects and it had some effects due to that.
This will be diluted throughout the year as we expect 2016 agreement retroactive to 2015. We have seen increments - we’ve seen that part of this effect is associated to tariff impact, almost 50% last year and the other provision is associated to the age of these debts and the company is taking internal measures involving these four issues and how to deal with that, so that it won’t be perpetuated into the coming semesters. And it was more significant in this quarter but it trends to down. We will see already in the next quarter efforts - result of efforts made by the company to reduce default and also costs associated to labor claims. Now about EBITDA that reflects what we've been saying so far, reduction in liquidation of spot prices, allocations in the first quarter as compared to last year, the same period. Fair value also increased 643 million or 735 million rather. And if you compare EBITDA to last year, the drop is 75%.
These are the diagram by company that’s more like an EBITDA, a managerial EBITDA, it’s not accounting figure but to show the flow, the cash flow of each company of CEMIG, CEMIG GT, CEMIG D, Light and consolidation of Renova, Alianca also contributing to generation of cash of the company. With regard to consolidated net profit, we saw a drop - a 99% drop to 1.4 billion to nearly 500 million that has to do with Renova negative equity method contribution if you compared to last year also considering the stockholding transaction with Alianca that increased first quarter 2013.
These are the two main points to be commented upon as for debt profile. During this first quarter, we proceeded to most of the rolling over of the company debt with maturity still to come in 2016. We can say from those 3.9 billion, 600 million have already been rolled over in April. This is partially as a result of the higher interest rate, Selic rate and leverage is now a little above what we saw last year also due to this dip in the figure that should be recovered along the year.
As for the CEMIG GT, the debt maturing in 2016 is 2.9 billion, most of it in December. We had to assume that [indiscernible] granting and the banks that we are dealing are already negotiated the take out of that debt. A good deal of the debt is already rolled over to 2017, 2018 and 2019 and this remains our strategy to seek extended tenures to settle that debt. In terms of investments, what has been planned for the year is 4.7 billion, of what we have already done in the first quarter and has mostly to do with the auction that we won last year buying the grant of hydro plant.
As for our cash, closer to the end of a quarter that was almost 2 billion, I think that’s more than 2 billion. That’s an important highlight and that helps us to go through this delicate moment from the macroeconomic point of view. Also the net effect of CVA and other financial operations, we have got more from the tariff than from CVA this quarter. Tariff flags also helped and Cemig distribution had less pressure from demand as compared to 2015, the prices were too high that will result in an additional CVA and this reduction of this pressure in the first quarter, we saw it as a positive phenomenon.
We are concerned as said before with rolling over our debt and keeping it in tandem with our cash generation. It’s a stable profile, not very relevant variation from earlier this year. And BRL1.5 billion that we applied in our grants, concession granting that’s up to almost - more than BRL2 billion that protected us from many effects from last year. Our main concern is, we are protecting our cash flow and I think that in this year we will keep adequate levels and perhaps even reduce our leverage as we have today.
So these were the highlights. Thank you.
[Operator Instructions] Our first question comes from Ms. Carolina Yamaguchi from JPMorgan.
Good morning. Thank you. What about the negotiation of the Jaguara and Miranda renewal, and the negotiations with the government, any new date, because it’s being canceled?
Fabiano Maia Pereira
Thank you, Carolina for your question. Negotiations are still ongoing. We are talking to the government seeking a solution to Jaguara, it’s already at the Supreme Court and to represent the others. We are giving it sometime because of this recent change in power and ministry, which we would resume the talks within short time.
Our next question comes from Mr. Marcelo Farah [ph] from UBS.
Good morning. Along the lines of this question, and about leverage 4.4 EBITDA, I understand that you must be keeping it below that level from the December position. Then what about the next stockholders meeting, it should be reduced to 4.14 [ph]. Is this really falling down over the year? EBITDA, due to the strong and if you compare with a new basis, our EBITDA, this will make it hard for you - even harder for you to comply. Perhaps, you should renew that and pay some extra to do that. In view of your super high leverage, do you still expect to come to some agreement?
Fabiano Maia Pereira
Yes, to the agreement, we understand that we have a good conditions reach an agreement. And as for the leverage, we have already mentioned in our last presentation, we mentioned that Cemig D is reassessing its portfolio, which allows us to reduce our debt within the mid-term. In addition, we should remember that specifically with regard to covenant, covenant is a statutory covenant, it’s red in December and as we submit the budget to our general meeting, we have already brought to them a request to keep that covenant a little above the statutory level.
Yes, in your remark, you said that, you are considering selling assets for sufficient or stock holding in Taesa could be considered. What exactly on your mind, selling some assets or what?
Fabiano Maia Pereira
Yes, we are looking at other assets as well, fundamentally assets we have no control over that. Our company’s planning includes focusing on these cases and put them on sale. Of course, to grow the profit to the company. As for the hydro plants auction, what’s the next step for a solution to pay some bonuses or precisely that point is still being negotiated.
Thank you. Excellent.
Our next question comes from Mr. Pedro Manfredini from Itaú BBA.
I have a question on the line of this investment within Cemig, talk about that. It’s a long time, what has evolved in the recent months, we understand that this would be a unique opportunity perhaps to sell assets that you don’t control. What has really evolved over the last six months with that regard?
Also another question, related to that, why is it that you took a contrary position instead of disinvesting, you had injected more capital into an order, that’s going against the market trends, putting more money in a company that will not generate cash in the short run. Renova would be perhaps one of the assets to be disinvested given what we’ve heard in some of the media, relationships with Light and Renova and perhaps CEMIG should follow suit and terminate its participation?
Fabiano Maia Pereira
Well, Pedro, first of all, we must be aware of the fact that CEMIG is a large company with a very complex government. So in recent months, we had very strong work, tried to convincing people internally to the correctness of our strategy. Some projects have already been approved by our board and we’re still negotiating.
For Renova negotiations, specifically that contrary to what I’ve just said, in Renova, we’re co-controllers or co-owners. We have an interest to see that it keeps strong and gets stronger. That is not to be mixed with I had said before. So any discussions going on about the portfolio, you have Alianca, you have pretty highly leverage balanced. It was said some time ago that there was this possible arrangement with Light, but you have got to launch it in San Antonio, which is I’m not sure if it’s Alianca, but any other possibilities in perhaps Alianca could absorb some of these assets in the reduced leverage of CEMIG.
Well, the strategic planning with Alianca, we’re discussing that with our partners there. We are convinced that they’re an excellent business with a great potential for growth in brownfield rather than Greenfield. We look at Belo Monte, sometimes along that greenfield that will take a while to start generating cash. That’s not the way to follow by Alianca in principle.
Very clear. Thank you. Thank you for the answers.
Our next question comes from Ms. Carolina Carneiro, Santander.
Good afternoon. I’d like to hear your comments on cost performance, especially in the distribution, despite the fact that you have reduced part of the agreement you had for profit sharing, we saw that there was this pressure on supply. I would like to understand better, is cost profile working on any better way to improve cash generation? Thank you.
Fabiano Maia Pereira
At CEMIG, we’re looking strongly. We have structured resources to reduce the levers of the company. We are focusing now on productivity and operational efficiency. We’ve just completed an internal effort and we’re receiving with that into the next years. We expect that to increase substantially, some studies already demonstrate that this is possible and this is one of the points that we’ve been dealing with. We have additional budget approved by the board taking reduction in that provision. We are seeking also strong reduction in the specific point.
That’s all right. If you allow me one more question only, about the impact on the volume of the distributor, especially involving an important industrial client, we have seen that with other distributors, if you see any movement, any expectations from the market with regard to distribution volume for this year.
Fabiano Maia Pereira
If I’m not mistaking next week, in our general assembly meeting, we’ll produce that to you. Can you wait until there?
Yes. Thank you.
[Operator Instructions] We now close the Q&A session. I’d like to hand over the floor to our Chief Officer for Finance and Investor Relations, Dr. Fabiano Maia Pereira for his final remarks. Please, Dr. Fabiano, you may proceed.
Fabiano Maia Pereira
My final message is here, I’d like to reinforce our willingness of our top management, our board, our employees to reduce leverage and to improve operational efficiency. Our focus for the upcoming years and as we’ve said last year, some analysts predicted that we wouldn’t be able to deliver, but we did deliver and we will keep on delivering. That’s our main message. Thank you and see you next time.
The video webcast with first quarter 2016 results of CEMIG is now closed. We thank you all for participating. Good afternoon.
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