Aes Tietê's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: AES Tiete (AESYY)
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Aes Tietê Sa (OTCPK:AESYY) Q3 2013 Earnings Call November 7, 2013 8:00 AM ET


Britaldo Soares – CEO

Clarissa Sadock – IR

João Batista Reche Severini


Leondo Capa – Deutsche Bank

Ahke Perace – JPMorgan

Louisa House – Banco Safra


(Interpreted). Welcome to the Conference Call of AES Tiete operated by Chorus Call Brazil. In this conference call we are going to announce the Results of the Third Quarter of 2013.

The IR area of the Aes Tietê also informs that the release is also available at the company’s website at At this time, all participants are connected in listen-only mode. And later on we are going to open the question-and-answer session when further instructions for your participation will be provided. (Operator Instructions). You should be reminded that this conference call is being recorded and it is also being simultaneously transmitted through webcast at the site

On behalf of Aes Tietê we would like to clarify that any statements made during this conference call regarding the business prospects, operational and financial targets and projections of the company are based on the current information and on current expectations which may change due to variables, such as market conditions, economic performance of the country and also the performance of international markets.

The presentation along with the slides that can be seen on the internet is going to be made by the CEO Mr. Britaldo Soares and also by the Treasurer and Investor Relations Officer Ms. Clarissa Sadock. At the end the executive officers will be available to.

Now, I would like to turn the conference over to Mr. Britaldo Soares. Please Mr. Britaldo Soares.

Britaldo Soares

(Interpreted). Good morning to everyone. We are starting the conference call to announce the results of the third quarter of Tietê today. We do not have the presence of Gustavo Pimenta, our CFO and IR for very good reason. And his wife is having their second child. And for this reason he could not be here with us even though he tried his best.

So now we are going to continue. I would like you to go to slide number 2. And I am going to start the presentation with the highlights of the third quarter. In terms of operation, the company’s energy generation was 19% above the physical guarantee in spite of smaller generation as compared to the third quarter of 2012.

As we said last quarter the improvement in outage rate are part of our strategy of fixed assets which led to a 39% reduction in forced outages of Aes Tietê Power plant in the first nine months of the year as compared to the first nine months of 2012.

Following our strategy of re-contracting energy to deliver, starting on the beginning of 2015, the company closed 200 average megawatts of new contracts in the free market in this contract closing the third quarter 2013 with a total of 413 average megawatts of own energy contracted to be delivered as of January 2016. During the presentation, we are going to have a slide dedicated to that with more details.

As to our financial performance, I would like to highlight an increase of 7% in our net revenues as compared to the third quarter of 2012, influenced mainly by the growth of sales through bilateral contracts as part of our strategy of re-contracting energy. In this quarter, our manageable cost remained stable and our EBITDA reached R$393 million with a 64% margin and net income of R$225 million.

Here we should highlight the impact of privatization of the energy sold to Eletropaulo as compared to the same period last year following our practice of payout of interim dividend payout we submitted to the Board of Directors, the proposal of dividends payout was R$242 million to be paid on the next November 25 this year.

Lastly, we should highlight that Aes Tietê received from Ana Facco, the 2013 Transparency Award for the quality and transparency of its financial statements.

Now I am going to turn it over to Clarissa to continue the presentation. And then I will come back further ahead.

Clarissa Sadock

(Interpreted). Thank you very much, Britaldo. Good morning to everyone. On slide number 3, we will be talking a little bit about some factors related to the current scenario in the country.

On the left you can see the normal flows in the period and the normal flows in the period and the higher thermal dispatch has been a path of recovery of the reservoirs in this system. In October reservoirs reached 44% of their current capacity as compared to 37% in October last year. At the end of this year, we are expecting the level of reservoir to reach 47% as compared to 32% that we had in December last year.

On the right, you can see the evolution of spot prices. In September the spot price was 266 megawatts hour when the new methodology of pricing started. The trend from now on is to have greater stability in spot prices and also a higher level than what we’ve recently. Spot prices at the end of September, was 280 and in the second week of November it has reached 316 per megawatts hour.

On the next slide, you can see the information that we started talking about last quarter and which is quite important is the evolution of our unscheduled outage rates. As we said before, we have maintenance program also for the management of the assets that is very recognized and they have then direct impact in our outage rate. As a consequence there is a direct impact in our financial results.

This quarter, you can see on the chart to your left-hand side, a 39% reduction in forced outage rates, thereby showing a clear trend of improvement as compared to previous years. Another important aspect, as we said in the highlights was the energy generation which was 19% above the physical guarantee even though it was lower than the third quarter last year. The smaller generation of this quarter as compared to last year is caused by the smaller generation especially due to Agua Vermelha which was dispatched 12% less than in the same quarter last year.

Now, on slide number 5, you can see that the company closed the third quarter with a total investment of R$60 million which was a 48% increase as compared to the same period last year. In terms of investments, they were allocated especially to the power plants of our Agua Vermelha, Ibitinga, Ika Caconde, Agua Vermelha, R$23 million and the other power plants approximately R$6.8 million.

It is also important to mention the new guidance of investment that we announced yesterday at the end of the day. We changed to R$202 million as compared to the R$213 million that we had before. And this is because of the postponement of investments in thermal projects. The reason to reduce the guidance is the probability of us participating in 2013 in auction.

Also our investment in modernization of our power plants remains unchanged and the modernization of the power plant gets a direct impact in outage rate.

On slide number 6, we’ll be talking a little bit about build energy and revenue. In the quarter, the build energy of the company increased 5% as compared to the third quarter of 2012, the growth is explained especially because of a higher volume of energy sold in the spot market which grew 40% and also bilateral contract that grew 300%.

The net revenue reached R$580 million in the quarter, also as a consequence of bilateral contracts and spot market. The growth in revenue however was partially reduced by the seasonality of the contract with Eletropaulo in the quarter which was 4% lower than in the same period last year.

In the first nine months, the revenue from Eletropaulo in terms of volume is practically stable. And a total volume for the Aes is 1,000 gigawatt hour.

Now, cost and operational expenses of the company that had total increase of 56%. In terms of cost, we then brought down the non-manageable effect such as sales of assets so that we can clearly see the manageable cost. Therefore the cost and operational expenses were exactly at the same level as that of the quarter of last year even though the 4.4% inflation rate.

This shows the efforts that we have been making to reduce the costs. The increase of purchased energy was R$62 million. And this is caused by the back-to-back contracts that represent 59% of the purchases of energy and it’s softness on the revenue. The contract was part of the strategy of our own energy sales which will be available as of 2016.

In addition to the increase of the cost of energy, this also reflected in the purchase in the spot market, due to the outage rate of the generating units.

On slide 8, we can see the EBITDA and the income of the company. The EBITDA reduced by 7% from R$423 million to R$393 million. And since reduction it’s caused basically due to seasonality of the agreements with Eletropaulo with contributions of R$9 million and R$10 million due to the sale of this multi-department so that happened the first quarter 2012.

The net income of the period was R$220 million R$225 million and this is caused by the items that were reflected on the EBITDA. And the board approved the payments of the dividends of R$242 million to be paid on November 25, 2019. And it represents R$7.9 million of the net income of the period.

On the next slide, we see the cash flow of the company. And the minor generation of operational cash is the result of the cash effect because there is always a delay to be effected on the results. And we had a secondary market this year and the cash is back. So the liquidation of CDE was R$27 million in the third quarter of 2012 against R$3 million in the third quarter 2013. And the cost price also impressive.

Now on, slide about net debt. Once again we showed low level of leverage for the company with the EBITDA and the net debt of 0.5 times.

Now I’m going to turn the call over to Mr. Britaldo Soares. He can continue the presentation.

Britaldo Soares

(Interpreted). Thank you very much Clarissa. Now, on slide 11, we can see the operation of the energy contract sold by Aes Tietê as I said in the beginning, by selling with the 200 megawatt average for the half of the year. We reached one third energy of Aes Tietê sold for 2016. And as you can observe based on the table the 413 megawatt average was negotiated at an average price of R$105 per megawatt hour. And this price is based on applicable for September 30.

So, we have the challenge of selling two thirds of Aes Tietê which will be available in January 2016, when we finish the agreement AES Eletropaulo and as you can see if the price is close to R$198 per megawatt hour with current expectations as regards price for energy in the free market to be delivered as of January 2016 is around R$110 and R$120 per megawatt hour. And the agreements are just according to the IGCM grade.

And in comparison to expectations or any energy auction for 2016, we can assume there the range of $R97 and R$108 with an average discount of 10% for the energy auction that we have observed so far.

Lastly, I would like to wrap up the call. Before moving on to the question-and-answer session, I would like to highlight the improvement that we have made continuously in our operations. As Clarissa mentioned, with the evolution of the operational indicators as well as the 39% reduction in the outage rate is a factor as compared to first nine months of 2012.

And such increase of the portfolio bilateral contracts as our commercialization strategy and also the control of the manageable cost. And also the net income of R$220 reached in this semester. And the full distribution is going to be considered as R$242 million into interim dividends which are going to be paid on November 25 this year.

Now we are going to open the Q&A session. We are available to take your questions. Thank you very much.

Question-and-Answer Session


(Interpreted) (Operator Instructions). Our first question is Mr. Leondo Capa from Deutsche Bank.

Leondo Capa – Deutsche Bank

(Interpreted). Hello, good morning everybody. Thank you very much for the call. First of all I would like to know out of those contracts after 2015, how long do they last? And the price you’re mentioning in slide 11 are they met? And what is the magnitude of the free market potentially if you consider the country as a whole does it reach 30% to 40% of the demand and how much can the free market develop? Thank you.

Britaldo Soares

(Interpreted). Thank you, Leondo. Well, first of all the price that you can see is the gross price. The R$105 is the gross price, the range of price from R$110 and R$120 are also gross prices. And this is what you’re going to be seeing – to see in the market. And the free market today has an estimated size of 10 average gigawatts.

And if you compared to the firm energy is around the 63 to 65 average gigawatts. So we are talking about 25% out of the total energy from energy in Brazil. So the free market would account for 25% of the energy sold in Brazil which is equivalent to those 15 average gigawatts.

Considering the current situations or free consumer to date, in terms of average validity period of the contract, we have contracts for two or three years. And this has to be the typical practice at present in the free market.

If you can see the graph, you can see that in the yellow bars. Slide number 11, you will be able to see that there are contracts go on up to 2019, 2020. But on average we have considered two or three years.

Leondo Capa – Deutsche Bank

(Interpreted). You were just complimenting that if you use your special customers to the free market, how big could it be in addition to what you have mentioned or does it not include other special customers?

Britaldo Soares

(Interpreted). The 5 average gigawatts that I mentioned to you in current numbers, here you may consider going half rate in my grade sheet. But potential, we can’t really give you an estimate right now but it depends very much on economic incentives for migration of special customers.

Leondo Capa – Deutsche Bank

(Interpreted). Thank you very much.


(Interpreted). Excuse me. Our next question comes from Mr. Ahke Perace from JPMorgan.

Ahke Perace – JPMorgan

(Interpreted). Hi, good morning everyone. Considering the price reality that you presented to us today, wouldn’t it be more interesting or more prudent to delay the decision to contract maybe to the second half of next year, when the scenario might be slightly different with regards that you commented?

João Batista Reche Severini

(Interpreted). Now, we’ll just make it clear, this is Severini speaking.

Ahke Perace – JPMorgan

(Interpreted). I couldn’t recognize your voice.

João Batista Reche Severini

(Interpreted). Okay, well, first I agree what you said that as the market has evolved and agreeing with the comments that I have made in many other calls, I think that one of the advantages that we have and to the favor of Aes Tietê is time. So to do cautious contracting, our strategy is focused on the three markets but obviously we need to manage time and the evolution of the market.

If you go back to the fourth quarter of 2012, right after the provisional measures 579, you should remember that many of the market expectations then was that the energy prices it should be around R$90 to R$100. And then the market migrated to R$100 and R$110 and then now there is a different range. Obviously the negotiations in which we’ve been involved in the agreements we have closed.

And we are considering time and market conditions to contract our energies. So you can be sure that we are managing this obviously, considering price behaviors. If I note that of all the energy back we’ve seen or that we consider to, make proposals for, we ended closing about 25% to 30% which means that in theory we along these months, we have made considerations of practically 1,200 average megawatts of transactions. And we did not advance in most of them, of these negotiations because we didn’t find they had interesting pricing conditions.

So, without setting a date or a deadline, what I can assure to you is that our sales team is paying attention to time. And we are being attention to the timing so that we have the best contracts possible.

Ahke Perace – JPMorgan

(Interpreted). Another question, what is your expectation of a price ceiling for the A minus 1 auction. So if they is three year – as you’re going to have a three year project there until 2016, what are you going to do, what are your plans?

Britaldo Soares

(Interpreted). I think that the pricing issue, we will have been talking a lot about this auction considering its importance A minus 1 auction. With regards to 2016, today if we look, well you must remember that we only have energy available starting in 2016 and afterwards.

So today, there is a lot of market pressure for ‘14 and ‘15, and if you look at ‘14 the prices will be around R$160. So, this is our vision for 2014. Now, I think that this A minus 1 auction, it also involves a more strategic prospect in terms of the general contract level of distribution companies.

So it’s not just pricing but also product profile. If there are longer products, our challenge today is not to have energy available to make the bridge between ‘14 and ‘15. But after ‘16, it’s a different type of consideration.

Ahke Perace – JPMorgan

(Interpreted). If you allow me one last question. Should we expect along next quarter the announcement of any new contracts that you will have signed or not? Are you waiting, or will this be in the future.

Britaldo Soares

(Interpreted). Well, these announcements will depend on the pricing conditions that we see. If we see any good prices then we will be reporting every quarter and we’ve been doing quarterly to make all information transparent to you. But then again, what will determine us signing the contract is the attractiveness of the transaction in itself.

And this attractiveness is that it should, in my understanding should it be above the current levels? Well, then we are going to see the evolution of the market. Today, on the whole, we are seeing this price range. And here, I am using price quotes in which we took part and sometimes we didn’t win.

But we are seeing this evolution in prices. And I agree with you. Yes, there is a high bias in the market and that’s why I went back to the fourth quarter of 2012 and this is a trend we’ve been seeing. We will follow that app on an everyday basis so that we gradually adjust and manage all the exposure that we have for 2016 vis-à-vis the commercial terms that we are obviously going to seek and try to make them the best possible. So, any announcement that we make will depend on commercial firms.

Ahke Perace – JPMorgan

(Interpreted). Thank you, Britaldo.


(Interpreted). Excuse me. (Operator Instructions). Our next question is from Ms. Louisa House from Banco Safra.

Louisa House – Banco Safra

(Interpreted). Good morning. I would like to ask a question related to the sole capacity expansion as we saw in the invitation to bid for privatization. What have you been doing about this? What are the updates out of the legal dispute?

Britaldo Soares

(Interpreted). Louisa, as regards the losses is moving its course. Recently, there was a hearing involving representatives of the São Paulo government as well as Aes Tietê together with the judge. There to consider alternatives that would be considered in addition to the thermal projects that have this challenge of supplying energy as we have mentioned along the quarter.

The lawsuit is moving its course. We believe as legal decisions will be consistent. But we are willing to continue comply with this expansion determination. And if the thermal power plants are further delayed we are going to consider different alternatives together with São Paulo government.

At present we are discussing with the government as well as with the judge, who is presiding over the case to check whether or not there are other possibilities in this process so that we can imply and with this obligation, satisfactorily. If there are no other alternatives, we are going to see the lawsuit progressing. So there is no first intense decision already rendered, okay.

Louisa House – Banco Safra

(Interpreted). Okay. Thank you.


(Interpreted). Excuse me. (Operator Instructions). Excuse me, if there are no further questions, I would like to turn the conference over to Mr. Britaldo Soares for this final considerations.

Britaldo Soares

(Interpreted). I would like to thank you all once again. Our investor Relations team both myself and Gustavo as soon as he’s back and Clarissa, we are all available to discuss anything that you might find necessary. Thank you very much. And have a good day.


(Interpreted). The conference call of Aes Tietê has now ended. We thank you all for your participation. And have a good day. Thank you.

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