Tractebel Energia S.A. Corporate Conference Call - Concessions Renewal
Sep 14, 2012 AM CEST
EGIE3.SA - Engie Brasil Energia SA
Tractebel Energia S.A. Corporate Conference Call - Concessions Renewal
Sep 14, 2012 / 05:00PM GMT
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Corporate Participants
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* Manoel Arlindo Zaroni Torres
Tractebel Energia S.A. - CEO
* Edson Luiz da Silva
Tractebel Energia S.A. - Planning and Control Officer
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Conference Call Participants
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* Felipe Leal
Merrill Lynch - Analyst
* Lilyanna Yang
UBS - Analyst
* Vinicius Canheu
Credit Suisse - Analyst
* Antonio Junqueira
BTG Pactual - Analyst
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Presentation
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Operator [1]
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Good afternoon. This is Tractebel Energia's conference call to announce the measures recently announced by the federal government of Brazil to reduce the electric power tariffs and to allow the renewal of the concessions in the sector. (Operator Instructions). You should be reminded that this conference call is being recorded.
Today with us we have Mr. Manoel Arlindo Zaroni Torres, Chief Executive Officer; Mr. Eduardo Sattamini, Chief Financial Officer and Investor Relations Officer; Mr. Edson Luiz da Silva, Planning and Control Officer; and Mr. Antonio Previtali, Jr., Investor Relations Manager.
Now I will turn it over to Mr. Zaroni. Please, Mr. Zaroni, you may go ahead.
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [2]
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Good afternoon. Thank you very much for the opportunity of providing clarification.
First of all, I am going to draw a short summary of the provisional measure 579. It's immediately effective, but it is subject to changes while it is reviewed by the national congress. This provisional measure addresses two main points, the renewal of the concessions previously granted before the law or the Act 8987 in 1995 and the change in the (inaudible) charges.
As to the concessions, they can be renewed for up to 30 years. They represent approximately 20% of the generation, 67% of transmission, and 30% of distribution concessions.
The basic conditions for the renewal are the following. Generation tariffs and transmission revenues will be calculated for each concession by ANEEL, and they will contemplate [OEM] recovery of investment and new investments because the non-depreciated amount that remains will be refunded based on the new refund cost. As to investments in concessions to be renewed, they should be approved by the regulation authority.
The concessions included in this provisional measure and those that will mature in up to 70 months should apply for the renewal within 30 days after the enactment of the provisional measure. That means October 12. After the approval of the government, they will have 30 days to sign a new concession contract to be in effect after 2013. If the concession company does not accept the conditions, the government will take possession of the assets after the termination of the contract.
So they will calculate the tariff based on OEM. Extra charges -- the charges related to CCC fuel consumption account and the global reversal reserve will be terminated, and the national treasury will provide the funds for those purposes. [MCD], manager development account -- it will be charged from consumers, and the share will be approximately 25%, considering the current amount in effect. An additional fund to meet the needs of [CDE] will come from [RGE]. There is a balance from a credit from Electrobras and Itaipu. And CDE will continue to pay the funds required for universalization, CCC reversal, competitiveness of national coal, and competitiveness of wind farms, biomass, and natural gas.
I hope you could understand the summary and our interpretation of the provisional measure.
Now I am open for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Felipe Leal, Merrill Lynch.
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Felipe Leal, Merrill Lynch - Analyst [2]
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I have two questions. First, I would like to know what is your assessment of the impact of the measures on the industrial consumers in the captive market and also in the free market -- if there is any difference or if they are equivalent. They are going to have a higher decline of the tariffs for the industrial, or it would be the same for both environments?
The second question is if you have assessed and if you think that there will be any situation where old plants that were sold out in the free market and would be reversed to the captive market -- if this will open any opportunity for additional contracts of energy in the free market.
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [3]
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Well, the impacts are different as regards the transmission and also the charges. So this complex is the same for the industry, irrespective if it's captive or free. As regards the captive market, we have the renewal of the concessions for generation, whose impact or the price difference will only take place in the captive market. That is, the reduction in costs in the captive market will be higher than in the free market.
Then, basically, this is the difference. But it doesn't mean that the free market will not continue to be competitive. In our preliminary evaluation, we are going to have this aspect; that is, the decreasing costs in the captive market but not enough to compete with the free market. But, on the other hand, this will encourage consumption where we do have higher demand, and, therefore, we are going to have a larger market, which is an upside.
Also, within the same scope in answering your second question, if it remains as it is, as the provisional measure was published, some contracts that were sold in the free market will have to need a new energy because all energy was directed to the captive and regulated market. And this may open up for new opportunities for Tractebel that's not being affected.
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Felipe Leal, Merrill Lynch - Analyst [4]
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So, if I could ask an additional question -- have you also evaluated the type of impact it may have in your transmission costs? Do you expect any significant reduction in your transmission costs?
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [5]
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Well, we don't know yet because we don't know what will be the new amount of the annual revenue for each concession that is renewed. But it must be something in the order of -- I can't tell you exactly. Sorry.
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Felipe Leal, Merrill Lynch - Analyst [6]
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Thank you.
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Operator [7]
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(Inaudible).
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Unidentified Participant [8]
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I would like to ask you in relation to the schedule that was published yesterday in terms of the enforcement and publication of the measures. So, how do you feel in terms of this schedule proposed by the agency? Is it enough for all discussions, or do you think they will adjust this timeframe?
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [9]
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I'm going to ask Edson to answer your question. In fact, I did not [follow up] on that.
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Edson Luiz da Silva, Tractebel Energia S.A. - Planning and Control Officer [10]
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On Monday, the decree will be published, as promised. And we believe that some adjustments will have to be made, perhaps, driven by the state companies. Based on the statements we have heard, there are investments to be amortized. And, perhaps, for them today they will anticipate a revenue. And I think that this will not be an easy decision to be made. Perhaps in our evaluation there will be some kind of extension of time, but we understand that, except for minor adjustments, the government will achieve what it is proposing. But we need some adjustments to allow for some negotiations with the state companies. With the federal companies, I don't think they will not need any negotiation.
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Unidentified Participant [11]
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Specifically, as regards October 15, which is the deadline for the companies to send their interest in their renewal, do you think that this one-month time is feasible? Is that what you expected? Or the discussions will extend -- go beyond this deadline?
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Edson Luiz da Silva, Tractebel Energia S.A. - Planning and Control Officer [12]
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I don't think this is going to apply. Everybody knows for a long time that they have to ask for the concession. The conditions obviously were changed, and we had some surprises. But I don't believe that they will change the deadline. Strictly speaking, the state companies have asked for the extension but in different phases, obviously. So the requests have already been made. However, considering the magnitude of the alterations, the deadline is too short. So it's very hard to answer this question.
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Unidentified Participant [13]
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Okay. Thank you.
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Operator [14]
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Lilyanna Yang, UBS.
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Lilyanna Yang, UBS - Analyst [15]
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My question is about how you see the change in the behavior of the regulating authority that would have 30 plus 20 years to have their investments compensated to have amortization, and now it's 30 years. Do you see their grounds for a legal appeal because it's not reasonable. And, along those lines, what do you think is the way to try to eliminate this part from the provisional measure? Or do you think it will stay there?
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [16]
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Well, if we take that article, the provisional measure will lose its essence. I think that we are talking about concessions that were granted directly to the state-held companies, whether they are federal, state, or city, without the competition, without the bidding process before 1995.
So, we have a situation different in the case of the power plants, whose process was then through a competition, an auction, or privatizations that were granted and, then, our concession contracts that have been signed in compliance with a different regulation. These power plants as the government has been fulfilling the contracts, and they do so. And we believe in that. These power plants have in the concession contracts the possibility of extending the concession 30 plus 20 years after maturity.
My personal opinion -- it looks like there is a distortion because, until then, no power plant had [never] failed to extend after the first maturity of the contract. But they didn't have this intrinsic right and just because of finality or purpose or because of economy or equal conditions.
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Lilyanna Yang, UBS - Analyst [17]
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Well, I don't think I asked the right question. Do you think you'll have the right, for example, of extending the contract due to zero cost because of equal condition? Is this what you think?
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [18]
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First of all, our power plants -- our concessions were not obtained through this provisional measure. These are only the power plants that were granted before 8987 Act of February 1995. And so our concessions were not obtained through that instrument.
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Lilyanna Yang, UBS - Analyst [19]
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Well, can the same thing happen to your concessions -- with Tractebel concessions and others because there is a new regime?
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [20]
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They were granted in a different system. They have -- and the concession contracts determine -- that they can be extended.
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Operator [21]
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Vinicius Canheu, Credit Suisse.
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Vinicius Canheu, Credit Suisse - Analyst [22]
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Going back to the first comment that you may have opportunity in the free market, I want more clarification. What is the opportunity, considering that Tractebel is almost fully sold until 2015 and, until then, there is not so much room for these other companies?
And the second question is the dynamics of re-contracting. It's more in theory. And so some companies have already sold the power, and it goes back to the regulated market as quotas. And there may be companies that are short of energy. So there is a surplus or a deficiency or shortage on different sides. How is it going to work?
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [23]
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Vinicius, we have the same perception as you do. We do not yet know how the issues of quotas are going to be; for example, a power plant whose concession was only expiring in 2017.
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Vinicius Canheu, Credit Suisse - Analyst [24]
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Well, are they going to advance it, to advance the renewal, and it's going to be part of the quota? Maybe it would be impossible for the company to fulfill its contracts because it would need to start buying. Now, if there are forecasts, maybe we could terminate contracts earlier.
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [25]
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Well, the dynamics -- still too early for us to know.
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Vinicius Canheu, Credit Suisse - Analyst [26]
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Well, there is a regulated market, but, in theory, it's fully contracted as a large block of energy that is going --
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [27]
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Well, I can explain what I understand from that. There are 30-something distribution companies, so, December 31, the 9,000 megawatts are going to be contracted. But the amount each one bought in the past depended on their status back then. Some had more bilateral contracts. For example, there may be a distribution company that is 100% contracted and others that will be -- have a large amount that is not contracted.
So, if it is proportional to the market, such as, for example, Itaipu, one will be fully met, and the other will be a lot of excess. And then there is a swap mechanism between distribution companies. Those who have a surplus give to those that have shortage until we get to a point of balance. So, at the end of 2014, the same thing will be done. So, every time (inaudible) quotas to distribution companies, that can be done.
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Vinicius Canheu, Credit Suisse - Analyst [28]
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Okay. Thank you very much. That is very clear.
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [29]
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Well, this has not yet been defined or specified, but this is what I think will happen.
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Operator [30]
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Marcelo (Inaudible).
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Unidentified Participant [31]
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I have a question about the scope of the provisional measure. Right on the first article, it says that this provisional measure refers to the concessions of electric power encompassed by Act 9074 of July 7, 1995. I was wondering if your power plants are encompassed by this article of this Act 9074 of July 7, 1995.
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [32]
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Well, this article of Act 9074 only refers to article 42 of Act 8987 -- of concessions up to then. So we don't have any concessions going back as long as 1995. Our first concessions were in 1998 when Gerasul privatized.
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Unidentified Participant [33]
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And, on paragraph 8 of the first article, they say the provisional measure also refers to the concessions of electric power plants generated independently. So could this also encompass your power plants?
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [34]
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Edson is going to answer that.
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Edson Luiz da Silva, Tractebel Energia S.A. - Planning and Control Officer [35]
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What you have mentioned has caused some questioning. But, if you go in the explanation of reason that supports the Act, it is clear in the (inaudible) of the law, or the heading. And this all applies to the power plants, as Zaroni mentioned, with concessions dating back -- or before 1995. And the question somehow is understandable because of the wording of the Act, but this has been confirmed in the manual of the ministry -- the booklet of the ministry. The manual clearly addresses this issue, saying that all concessions that are included are those that were done before 1995.
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Unidentified Participant [36]
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The question is that, in your case, the newest concession was given after 1995. But there was a previous concession before that when the Company was still a state-held company.
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Edson Luiz da Silva, Tractebel Energia S.A. - Planning and Control Officer [37]
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But when it was privatized, there was not an extension of concession. There was a new concession. That's the concept. Privatization generated a new concession.
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Unidentified Participant [38]
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Thank you very much.
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Operator [39]
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(Operator Instructions). Antonio Junqueira, BTG Pactual.
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Antonio Junqueira, BTG Pactual - Analyst [40]
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I would like to ask a question based on Vinicius' question, supplementing his question. If everything that's going to mature goes to the regulated market, we know that there are nine -- what's maturing at the end of 2012. In talking to people from energy trading, we have the information that these companies have hired before [four and five]. So the distribution system has a gap between four and five. And the average capacity that is in the package for the renewal of concessions is much higher than that. So, if all of this capacity as of 2003 rolls to the regulated market, even if one distribution company offset with another, we are going to have a case with the contracts signed in the free market will not be able to be respected. So the distribution companies will have more energy than they need.
And my question is if you share the same opinion we have in this scenario. And, if this is the case, what's going to happen? Are we going to have anything from the regulated market that will go to the free? Which contracts would go? Did the government tell you anything about that or give you more details about the contracts executed until 2015? So this is the major question mark of this package so far.
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [41]
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Your question is quite appropriate. And, truly, there is a point that will have to be resolved because, if this happens, perhaps we are going to have surplus in the regulated market and shortage in the free market. But what solution will be given we cannot anticipate so far.
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Unidentified Company Representative [42]
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Now, supplementing the answer, well, the tariff equality is a goal to be pursued. But we don't believe that this equalization will be pursued with [expansive] returns of CCRs. So this is an equalization that will be sought after as far as possible.
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Antonio Junqueira, BTG Pactual - Analyst [43]
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If the contracts can be respected -- for example, there are many contracts that have been executed. If they can be respected -- and the regulated will mature 2013 or 2014, allowing the contracts with the free, the concessions that will mature-- if they will come back to the regulated only when the contracts expire, the balance will not take place. But, if the whole energy is forced to the regulated market, there would be a huge proportion right there. And we receive questions involved by that, asking us what we can answer.
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Unidentified Company Representative [44]
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What do you mean by the energy to be forced to go from the free market to the regulated market?
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Antonio Junqueira, BTG Pactual - Analyst [45]
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For example, [CEMIG]. If you take into account that all CEMIG's plants, including the ones with automatic renewal, will expire in January 2013, and that energy will go to the regulated. So CEMIG will be free to negotiate 1.4 giga. So there is a gap, just to give you an example. And then it may be forced to go to the regulated market for a contract that has been executed until 2015.
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Unidentified Company Representative [46]
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Well, they can buy from another company that's in the free market. But, this being said, it can always go to the free market. It's not the distribution company itself. It's (inaudible) or the trader of CEMIG.
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Antonio Junqueira, BTG Pactual - Analyst [47]
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So it has to buy the energy. Is this, apparently, what has been designed? Will it have to rush and buy from another one?
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Unidentified Company Representative [48]
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It's not apparently. This is really the reality. If it doesn't have the balance to honor the contract, it has to look for the energy. Otherwise, it's going to have a dispute with the customer. Or it can leave its concession to go up to 2015 or 2016 and does not decide to renew. And it will serve the market. But it can give up the renewal of the concession.
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Antonio Junqueira, BTG Pactual - Analyst [49]
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Okay. I understood. Thank you.
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Operator [50]
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(Operator Instructions). We are now ending our Q&A session. I would like to turn it over to Mr. Zaroni for his final remarks. Please, Mr. Zaroni.
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Manoel Arlindo Zaroni Torres, Tractebel Energia S.A. - CEO [51]
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I would like to thank you for your questions. I think they were useful for us to clarify.
Making two points clear, there is a direct impact of the renewal of concessions, but we don't have any power plants whose concessions are about to mature. The first one will mature in 15 years. And our concessions are not included or encompassed by the provisional measure. In the case of the renewal of a transmission concession, there may be a positive impact on Tractebel's performance because transmission costs may go down.
As to the captive market in contrast with the free market, in our first impression or assessment, we can say that we will continue to be competitive in the free market.
So thank you, all, very much.
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Operator [52]
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Tractebel's conference call has now ended. We thank you very much for your participation. Have a good day, and thank you for using Chorus Call.
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Editor [53]
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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.
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