Q1 2016 Companhia Energetica de Minas Gerais CEMIG Earnings Call
May 17, 2016 AM EDT
CMIG4.SA - Companhia Energetica de Minas Gerais CEMIG
Q1 2016 Companhia Energetica de Minas Gerais CEMIG Earnings Call
May 17, 2016 / 02:00PM GMT
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Corporate Participants
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* Antonio Carlos Velez Braga
Companhia Energetica de Minas Gerais CEMIG - IRO
* Fabiano Maia Pereira
Companhia Energetica de Minas Gerais CEMIG - CFO and Chief Officer of IR
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Conference Call Participants
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* Carolina Yamaguchi
JP Morgan - Analyst
* Marcelo Farin
UBS - Analyst
* Pedro Manfredini
Itau BBA - Analyst
* Carolina Carneiro
Santander - Analyst
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Presentation
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Antonio Carlos Velez Braga, Companhia Energetica de Minas Gerais CEMIG - IRO [1]
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Good morning everyone. My name is Antonio Carlos Velez Braga, CEMIG's Investor Relations Officer. We will 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 George de Magalhaes, Controller.
This broadcast can be received by phone numbers, 55 (11) 2188-0155 or 55 (11) 2188-0188, and also through our website ri.cemig.com.br.
Let's then begin our presentation. The 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 profits have 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 thermal plants and industry. The home market for us, our resident market, is growing but still not to match those two first ones.
Also, negative equity contribution from Renova had significant effect. And because of this acknowledgment of Renova, it showed a negative result which Cemig consolidates directly or indirectly via Light Company. That amounts to BRL152 million.
Also along these comparisons, you can see that we recognized in the first quarter of 2015 a fair value gain of Alianca business with Vale, which implied a fair value gain of BRL735 million. And I will now hand over to Dr. Fabiano Pereira, our Finance Officer.
The quarter's 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. Also we summoned an EGM for later this month related to our negotiations with the banks with regard to FIP Redentor. Also our meeting, our annual Cemig-Apimec meeting is set for May 24 at this same venue.
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Fabiano Maia Pereira, Companhia Energetica de Minas Gerais CEMIG - CFO and Chief Officer of IR [2]
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Good morning everyone. A little bit about indemnity of transmission. It's known by the market that the ministry of energy defined the criteria for updating and payment of transmission that was remaining from the sector. We had been discussing with Aneel ever since 2013 with the law, the actual 73. These criteria go through the indemnization. The amounts in our balance by 31st March, 2016 is around BRL1.090 billion that's updated by IGP-M.
Up to this point, in 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%. This is just an estimate, initial estimate and it should be -- it might be affected by other calculations. But it had a relevant effect to the Company showing revenues, financial revenues amounting to BRL500 million this quarter, and I believe it was -- 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. Consolidated 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 the previous year. Another point that also impacts net revenue is the drop in supply. The situation has come all the way from last year. Sao Simao 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 aims at reducing PMSO and we keep on bringing it lower than inflation. Also, lower cost of purchasing supply due to a price drop; and two provisions that were kept as in the report; the Parati and SAAG, Santo Antonio.
Our main point is with regard to provisions that I would like to add anything. Well, I think as we see the evolution of operational expenses of Cemig consolidated, we see our great effort to reduce costs and provisional amounts related to outsourced services, also highlighting real increase in personnel. That's a one-off effect because it had to do with this collective agreement with 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 impact due to that. This will be diluted throughout the year as we expect 2016 agreement retroactive to 2015.
We have seen increments in -- we've seen that part of this effect is associated to tariff impacts, 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 default 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 tends to fall down.
We will see already in the next quarter, efforts -- the results 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 BRL643 million or BRL735 million rather and if you compare EBITDA to last years, the drop is 75%.
This other diagram by Company that's more like an EBITDA, a managerial EBITDA, it's not an accounting figure but to show the flow -- the cash flow of each Company of Cemig; Cemig GT, Cemig D, Taesa, Light, the same consolidation as Renova, Alianca and Gasmig also contributing to generation of cash of the Company.
With regard to consolidated net profit, we saw a drop, a 99% drop to BRL1.4 billion to nearly BRL5 million, that's BRL500 million that has to do with Renova negative equity method contribution if you compare 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 rolled over -- rolling over of the Company debt with maturities still to come in 2016. You can say from those BRL3.9 billion, BRL600 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 little above what we saw last year, also due to this EBITDA figure that should be recovered along the year.
As for Cemig GT, the debt maturing in 2016 is BRL2.9 billion, most of it in December. We have to assume that debt to pay the granting and banks that we are dealing with are already negotiating, 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, extend the tenures to settle that debt.
In terms of investments, what has been planned for the year is BRL4.7 billion. Of that, we have already done in the first quarter and has mostly to do with the auction bid we won last year by acquiring the grant of hydro plants.
As for our cash, closer to the end of the quarter, that was almost BRL2 billion. I think that's more than BRL2 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 got more from the tariff than from CVA this quarter.
The tariff flags also helped and also Cemig's 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 grant, our concession granting that adds up to almost -- or a little more than BRL2 billion investments that protect us from any effects from last year. Our main concern is with 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 then. Thank you. Now let's move on to questions-and-answers.
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Questions and Answers
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Operator [1]
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Ladies and gentlemen, we will now start this Q&A session. (Operator Instructions). Carolina Yamaguchi, JP Morgan.
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Carolina Yamaguchi, JP Morgan - Analyst [2]
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What about the negotiation, the Jaguara, Miranda renewal and negotiations with the government, any new dates because it's been canceled.
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Unidentified Company Representative [3]
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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 some time because of this recent change in power and the ministries, we should resume the talks within a short time.
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Operator [4]
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[Marcelo Farin], UBS.
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Marcelo Farin, UBS - Analyst [5]
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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. And what about the next stockholders meeting, it should be reduced to 4.14%. Is this really falling down over the year? The EBITDA is still to be strong and if you compare it with the new basis for EBITDA this year 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?
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Unidentified Company Representative [6]
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Yes, to the agreement, we understand that we have good conditions to reach an agreement. And as for the leverage, we have already mentioned -- well in our last presentation we mentioned that Cemig is re-assessing its portfolio, which allows us to reduce our debt within the mid-term.
In addition, we should remember that specifically with regard to covenant, is a statutory covenant. It's read in December and as we submit the budget to our general meeting, we have already brought to them a request to keep that covenant little above the statutory level.
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Marcelo Farin, UBS - Analyst [7]
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Yes, in your remark you said that you are considering selling assets, participation or stockholding in Taesa could be considered. What's exactly on your mind, selling some assets or what?
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Unidentified Company Representative [8]
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Yes, we are looking at other assets as well. Fundamentally, assets we have no control over that. The Company's planning includes focusing on these cases, and put them on sale of course to good profit to the Company.
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Marcelo Farin, UBS - Analyst [9]
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As for the hydro plants auctions, what's the next step for solution to pay some bonuses or --?
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Unidentified Company Representative [10]
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Well, precisely that point is still being negotiated.
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Operator [11]
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Pedro Manfredini, Itau BBA.
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Pedro Manfredini, Itau BBA - Analyst [12]
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I have a question on the line of disinvestment. We've seen Cemig talk about that since 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 to inject more capital into Renova. 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 between Light and Renova and perhaps Cemig should follow suit and terminate its participation in Renova?
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Unidentified Company Representative [13]
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Well Pedro, first of all, we must be aware of the fact that Cemig is a large Company with a very complex governance. So in recent months, we had this very strong work, try to convincing people internally to the correctness of our strategy. Some projects have already been approved by our Board and we are still negotiating.
As for Renova negotiation specifically, that's contrary to what I've just said. In Renova, we are co-controllers or co-owners. We have an interest to see that they keep strong and get stronger; that is not to be mixed with what I had said before.
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Pedro Manfredini, Itau BBA - Analyst [14]
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So any discussions going on about the portfolio, you have Alianca Energia, you have pretty well -- highly leveraged balance. It was said some time ago that there was this possible arrangement with Light, but you have Belo Monte, Santo Antonio which is -- I am not sure if it's under Alianca, but any other possibilities and perhaps Alianca could absorb some of these assets and reduce leverage of Cemig?
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Unidentified Company Representative [15]
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Well, the strategic planning with Alianca, we are discussing that with our partners there. We are convinced that they are an excellent business with a great potential for growth in brownfield rather than greenfield. We look at Belo Monte and Santo Antonio, that's still a greenfield that will take a while to start generating cash. That's not the way to follow by Alianca in principle.
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Operator [16]
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Carolina Carneiro, Santander.
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Carolina Carneiro, Santander - Analyst [17]
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I would like to hear your comments on cost performance, especially in the distribution, despite the fact that you have reduced part of the agreements you had for profit sharing, we saw that there was this pressure on supplies. I would like to understand better this cost profile and if you are working on any better way to improve cash generation?
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Unidentified Company Representative [18]
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At Cemig D, we are looking strongly. We have attracted resources to reduce the leverage of the Company. We are focusing now on productivity and operational efficiency. We have just completed an internal effort and we are proceeding 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 we have been dealing with. We have additional budgets approved by the Board seeking reduction in that provision. We are seeking also strong reduction in this specific point.
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Carolina Carneiro, Santander - Analyst [19]
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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 of volume for this year?
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Unidentified Company Representative [20]
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If I am not mistaken, next week in our general assembly meeting we will produce that to you. Can you wait until then?
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Carolina Carneiro, Santander - Analyst [21]
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Yes
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Operator [22]
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(Operator Instructions). We now close the Q&A session. I would like to hand over the floor to our Chief Officer for Finance, Investor Relations Dr. Fabiano Maia Pereira for his final remarks. Please Dr. Fabiano, you may proceed.
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Fabiano Maia Pereira, Companhia Energetica de Minas Gerais CEMIG - CFO and Chief Officer of IR [23]
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My final message is here. I would like to reinforce our willingness of our top management, our Board, our employees to reduce the leverage and to improve operational efficiency. This is the focus, our focus for the upcoming years. And as we said last year, well, 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.
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Operator [24]
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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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Editor [25]
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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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