Companhia Energtica de Minas Gerais CEMIG (NYSE:CIG) Q2 2016 Earnings Conference Call August 17, 2016 2:00 PM ET
Antonio Carlos Velez Braga - IR
Fabiano Maia Pereira - CFO
Good afternoon to all. My name is Antonio Carlos Velez Braga, Investor Relations Officer of CEMIG. We'll now start our webcast with Cemig’s results relative to the second quarter 2016 with the presences of Dr. Fabiano Maia Pereira, Chief Officer for Finance and Investor Relations; and Dr. Leonardo Magalhaes, Controller. The transmission can also be followed through phone numbers 5511-2188-0155 or 5511-2188-0188, and also on our website ri.cemig.com.br.
Let’s start our presentation. We will show you first slide with the summary results, you can see 11.8% of negative results, reduction in EBITDA of minus 45% and net profit dropping 62.2% as compared to second quarter last year. If we recall some of the factors, some have already been disclosed but I should recall them in the second quarter results, we had the recognition of R$ 561 million in transmission indemnity revenue that impacted EBITDA and this showed a net impact from this accounting. You should remember as we already said and have commented quite often that in 2016 the strategy for allocation of energy was the opposite of 2015. In 2016 we showed much more energy in the first semester, the first half and this proved to be the correct strategy and this reflected in comparison 2016 and 2015, the [Indiscernible] is the lower results because of the lower volume of energy sold.
Also, in the second quarter we had average – we were increasing the provision for the put option of Parati due to the new pricing criteria.
The slide, we decided to include it in our presentation, in view of some of the questions raised by investors, as an opportunity to restate that the group follows a defined guideline among which reduce leverage of the company, increase productivity and efficiency, higher efficiency and review of the portfolio of equity interests as we have been discussing. We’re focused on the company’s core business mainly, generation, transmission, distribution and trading. In addition, we have internally discussed some solutions for the companies in which we have full control.
This is all I have about the slide really. Here I should make a comment on the indemnity revenues. As I have said in the beginning of our presentation, an event that affected our results in the second quarter in a relevant way was the recognition of indemnity revenue, we have been updating the value according to IGP–M but by then we didn’t know what the criterion would be to adjust the values.
Starting from the second quarter, given the new instructions from the mines and energy ministry, we have to re-calculate and we saw a large effect, one related to IGP–M that we were using, and that resulted positively. And the other one representing the remuneration that we hadn’t received ever since 2012 related to depreciation of our asset bases, and also already kept our costs, this value as determined by the ministry of energy. This will be adjusted by the IPCA by 2017. Using this system, having the inflation, we saw a positive effect in the results. From now on we will update by the regulatory instructions with IPCA and that’s what we have been doing right now.
Going deeper in the figures for net revenues, we have a drop of 11.8% from 2015, many factors impacting positively as well, I mentioned R$ 561 million in revenue, and in the negative side as compared with last year, lower volume of electricity sold on the spot market, and the São Simão output is now – has now been transferred to the quota regime and the lower spot price in the second quarter at around R$ 62.4 per megawatt hour as against R$ 356.8 in 2015.
As for the selling of energy, this is associated to the dropping of São Simão from our portfolio and the lower volume of sales in the spot market. If the growth in the distribution department or sector of the company was very strong, a 5% increase in the amount of energy sold. This already indicates an upturn or pleasant upturn from now on.
As for consolidated operational expenses, a very slight increase of 0.02%, one point, we had this voluntary retirement plan, 621 employees accepted the plan, and 27 October is the period with the deadline for [Indiscernible]. This is more than – our expense associated to this will be more than compensated in the coming years. Also impact on results from provisioning for Parati and [SAAG] [ph], leading to worsening of expenses, but in positive terms what we can see is despite increases in provisions operational expenses were pretty leveled as compared to last year.
With regard to your last comment, it is important to emphasize that even if we don’t take into consideration inflationary effects, the costs have been kept in very suitable levels with greater efficiency achieved by the company and there is increase in changing methodology of Parati, [R$ 355] [ph] million are expected and the impact of this new methodology is associated to a change in price [we realize] [ph] in the market, share prices are growing, and obviously in the next half or the next quarter all the issues involved with Parati, we will pay more dividend than reducing values of the put option, we expect lower results because of these issues. So this is a one-off effect in that given all the other considerations we expect better results in the next quarter.
As for EBITDA, as it’s been said, we had this 45% drop and as a result of this, there was a 93.1% down of spot prices, and average spot price significantly lower also.
As for consolidated net profit, 62.2% dropped given the sharp fall in energy prices in the quarter, and allocation of the energy for the second half of 2016. Equity method gain contributed R$ 72 million in the second quarter as against R$ 6 million in the second quarter 2015.
With regard to debt, in the consolidated of CEMIG we have onward for the second half which is the rolling over of part of our debt, most of it by the end of the year. The positive aspect here is that despite the increase in nominal terms, in actual terms, the debt is now stabilizing, the actual cost of the debt is a positive point.
And with regard – and if we look on to GT, that the bulk of the debt to be rolled over in the next half we see 3.092 billion, we have been working with the bank towards rolling that over and our guideline is to prevent it to be happening long term, perhaps three years ahead in order to prevent [Indiscernible] maturities. In CEMIG D we have conducted almost all the rollover of the year by now and we should be looking at extending the debt in 2017 and trying to pay instalments of the debt at lowering the leverage levels.
As for investments, that’s the planning we have shown in the first quarter of this year, we should only [Indiscernible] that the large amount of investments in a very relevant amount in concessions given the option we won last year, this has been fully paid for and our distribution of Cemig D program, investment program is a robust one, almost 40% of the total volume expected for the year and we are convinced that we should do that. In the first quarter we had this repayment of cash with reduced investments, but after the adjustment and the [Indiscernible] that we are collecting we will proceed to this investment program without any problems.
And for the cash flow, we talked about that on the previous slides; we had a very conservative flow – cash flow program, R$ 1.6 billion for the year for another $3 billion for cash generation, 2.5 billion still available and this has been financed but we haven’t deepened our investments. We haven’t seen much capital injections already in finance and so on, that [number come to June] [ph] 1.5 billion. We are talking about almost 2.5 billion as total available, we are talking about cash we are in R$ 2 billion which is a profitable position for our investments and to ensure that leverage to previous periods.
That was the presentation, and the slides we prepared, talking about the second quarter of 2016. And we will move on to the questions and answers session. Ladies and gentlemen, we will now start the Q&A.
[Operator Instructions] Our first question comes from [indiscernible].
Good morning. I’d like to make a question, the idea would be to finalize it like now are we going to other areas of CEMIG, or perhaps resume the program for the second half?
Fabiano Maia Pereira
With regard to this voluntary retirement program, we don’t need to do any more about in the second semester, we will leave it for next year – healthy plan.
That’s perfect. Thank you.
[Operator Instructions] Our next question comes from Young from HSBC.
I would like to hear from your about the negotiations of São Simão, Jaguara hydro generation sites, what are you expecting for the next years?
Fabiano Maia Pereira
With regard to the talks related to the hydro plant Jaguara, already at the supreme court, we have been talking to the government but so far we haven’t arrived at any final decision to bring to the supreme court. It’s the same situation as the last time we have talked about it.
With regard to the trading, would you like to say anything?
Antonio Carlos Velez Braga
Well as far as trading this year, next year, first we have been entering a few contracts. We have prepared toward the second half of 2016, have done some time ago but for 2017 energy prices given the potential upturn of the Brazilian economy and the reports never arrived at a very comfortable level, we are still expecting pricing pressures in the spot prices this year but sometimes our – already for the second half and already some for next year, 2018, 2019 our position, well, we should be more careful about this because we are a short position given the uncertainty with regard to whether we achieve the plans or not, we have been trying to pressure energy to cover the short position, but they are relevant into the next years.
Our next question comes from [indiscernible].
Good afternoon. My question refers to light. We have seen on the media that they are negotiating the sale of light, when will that start this purchase of or this sale?
Antonio Carlos Velez Braga
On the parts of CEMIG, we have no information regarding the selling of light. Our CEO has affirmed it repetitively that light is our way to grow in distributions. What happens and that’s known by everyone is that our partner FIP is willing to leave. What may happen is restructuring of its holdings integration but there is no way of talk of selling it.
End of Q&A
[Operator Instructions] We now close this Q&A session. We’ll now hand over the floor to Dr. Fabiano Maia Pereira, our chief officer for finance and IR for his final comments.
Fabiano Maia Pereira
I would like to thank you all for participating and again Carlos Velez, our staff at your disposal for clarification of any issues that you may still have it, we should stress our purpose with CEMIG are being transparent before all our investors. Thank you.
The video webcast with CEMIG second quarter results is now closed. We thank you all for attending and have a good afternoon.
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