Transcript – EDP Brasil Investor Day 2012 – Q&A
Carolina Carneiro (Santander)
My first question is in relation to the development pipeline. The projects that you have
disclosed on slide 15, you show up to 617 MW of potential wind projects that you are
already studying. I would like to know how the development of these projects is going
to be, if you guys are going to continue with the development in partnership with EDP
Renováveis with 45% stake on these projects and from this total capacity that you have
under analysis, how much of this do you consider that could be effectively sold in next
year auctions considering all the difficulties in environmental licenses and also the
oversupply that the government has identified in some cases in Brazil. So how much of
this potential do you really consider that could be commercialized in the near term?
If you allow me a second question, in relation to the contracted energy, that you show
in slide 14, we can see that you already have some contracts that are going to end in
the next three years, so if you could put some colour here in relation to how are the
negotiations to put this energy back in the market and in regards to price levels to sell
this energy right now in Brazil. Thank you.
Miguel Amaro
Regarding the development pipeline of much of wind, shall we use the pipeline that
we have, our projects that we have together with EDP Renováveis or EDP Renewables,
spotted, not only spots, places and the potential for developing the wind parks. Having
said that if we have an auction until the end of the year, because this is a big if, I don’t
know exactly if we have demand, we have 26 MW to put there.
Regarding the contracted energy, yes Energest will have a small amount that will end
at the end of next year and then you’ll have Enerpeixe in 2016 that will decrease or
that will be uncontracted.
Regarding prices, I’m sorry but that’s the name of the game. I cannot disclose that to
you or else I would be disclosing that to my competitors. If they want to bid for a
higher price, fine, I’m happy. But you know that long term prices for the next five years
on the free market they are being pressed out namely due to weather conditions, if it
rains, if it does not rain. Spot prices and the PLD today are at 190 reias, they come
from 40 reais in January. So having said that, you see long term prices maybe with a
pressure maybe of 120, 110, but those are big figures for now. You don’t know when
you have in 2015 to recontract that energy what would be the values.
António Mexia
In what concerns the structural development of wind I will answer this to avoid the
conflict of interests of Ana, between her past and her future, it’s going to be on the
same structure of 45-55% that was until today. I think it makes sense where the
knowledge is, where the skills are, so I think it is a good joint-venture. We have a
commitment where the only geography where you have basically intervention of two
listed companies you have to deal and we understand this rule of the game, eventually
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Transcript – EDP Brasil Investor Day 2012 – Q&A
now Ana would like to swap the majority but now it’s too late, so it will keep 45-55%
for the moment. That’s what makes sense.
Bruno Silva (BPI)
I have two questions, the first one is a detail in your guidance. If you can give us the
assumptions behind EBITDA CAGR for distribution alone and what are the expectations
in terms of tariff revision for the distribution company.
Second, departing from your comments regarding the risk/return trade off in
distribution I would like to know your opinion on what would make more sense at this
stage, also considering the strategic importance of the distribution business for the
supply and the generation business, but considering that risk return trade off, would
you say that it would make more sense today to sell a minority stake in that business
as long as obviously you keep majority and control? And if you have been seeing
appetite for a minority stake, would that be local or, for instance, Chinese investor for
instance. Thank you.
António Mexia
Before the guidance, I would start with philosophy and pass the guidance to Miguel.
What I have been mentioning, and we have been consistent, is that when we saw, for
example, with Enersul that we wanted to and we did the asset swap, I think we did it
right, I think we made the right choice.
In what concerns having a focus on generation it is basically because we see more
value there going from now on. The rest about who wants to buy asset, minorities,
consolidation. We have been eventually losing too much time in terms of considering
theories, different theories. Everybody is talking about consolidation in the sector for
at the least the last four years and we have seen a very small amount of consolidation
with the exception of the relation between Cemig and the construction group that
entered into Cemig. So we have to wait and see, and sometimes we have seen some
other companies that wanted to buy and if they cannot buy, they sell. So let’s wait.
Until now there is a lot of appetite but I’d prefer not to say exactly what part of the
animal they prefer to eat, so… We have just stated to the market what is our
preference and of course there are no taboos about assets, I know value about assets,
there are no taboos; there are only values, so clearly we have to see what is going on.
For now, and it is our vision, we keep as usual, developing, of course more in
generation, but having this balance of almost ¾ of generation and ¼ of distribution in
terms of EBITDA in 2015, but we don’t anticipate any major move; it’s not the time to
talk about this.
Bruno Silva
Putting it differently, would you say that regarding the distribution business, you’d at
least strategically rule out selling that business? I think it is a different question.
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Transcript – EDP Brasil Investor Day 2012 – Q&A
António Mexia
The question is when you talk about strategy, there are no taboos, so I only recognize
value for the company, for the shareholders and basically as you know today the
business according to what is the value terms we keep the business plan that we have
in front of us, then we will see. So it’s a question of what makes sense at each
moment, at this stage what we share with you is this vision up to 2015.
Strategic taboos is something that it is long vanished, they were all killed in the last
three years. All that.
Miguel Amaro
Regarding the CAGR for distribution, of course if you look at what was the EBITDA of
this distribution Bandeirante plus Escelsa in 2011 it was on the peak of the last year of
the previous tariff review for Bandeirante and in the middle for Escelsa, so when you
look further ahead, you will see a drop in CAGR. Growth fall going ahead, namely
because you have a 9.95% decrease from walk from 2012 onwards plus the devolution
of the frozen tariff this year for Bandeirante and in 2013 you will have the decrease of
9.95% august to 7.5% in Escelsa further ahead, so in that period, 2012-2015, you’ll see
a reduction. That’s it.
Bruno Silva (BPI)
You cannot comment the EBITDA CAGR for distribution alone?
Miguel Amaro
It’s decreasing.
Gabriel Salas (JP Morgan)
To round a bit on the disco side, and not just focusing on tariff, I also want to look at
the volume growth. I understand that both Escelsa and Bandeirante are not necessarily
in construction in Brazil right now so demand is not tagging along as we’ve seen in the
past so that compared with tariff, should help on the dilution of this generation, if you
could talk a little bit extra on the volume patterns there and then.
Moving on to better things, are you contemplating transmission and what are your
conditions.
I know you have Santo António de Jari and the other smaller projects on generation,
but what are the conditions you would go forward with new generation projects in
terms of hurdle rates or conditions in general. Also, are you planning to go into
transmission or other areas?
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Transcript – EDP Brasil Investor Day 2012 – Q&A
Are you using your trading platform to allocate this renewable energy and take
advantage of the tax, sorry, the transmission cost subsidy, for smaller industrial and if
so, what kind of upside do you see in tariffs for that renewable side.
Antonio Mexia
I’ll start with the easy question: transmission. No! We’ll not be investing in
transmission, it’s not our business.
Miguel Amaro
Volume growth. Growth in fact. Distribution growth is related mainly with GDP growth
or vice-versa; sometimes it’s a leading sometimes a light indicator. Bandeirante is in an
area, a customer mix where industrial in facts weigh, in spite, Escelsa, on the other
side, has a mix where free customers namely in volume even if they don’t earn a lot of
money with free customers by the energy sold, it’s an indicator of what is going on
regarding the exporters. This first quarter was in fact poorer than what would be
expected regarding GDP growth and industrial production is still lagging in what would
be expected for Brazil this year. Everyone was a little bit bullish that the second half
would be better. Maybe with these macro initiatives, namely with the package, i heard
today that there was a huge package for the industry in order to have incentives with
cut of importing taxes and everything, this maybe have a little bit of effect within the
industrial and internal consumption but it is still a little bit below of what would be a
growth rate of GDP above 3%. So it’s 2.5%, 3% GDP. You may see a similar growth rate
like last year. Remember last year? The second half was particularly poor. You had a
very good first half and a very bad second half. This first quarter was not a brilliant one
and it seems that on the industrial side things still seem to have a little bit to gain track
for the rest of the year. The residential customer, you know, mainly in Espírito Santo is
hot, people connect the air conditioning and they feel good; if not consumption for the
residential customers suffer with that, so it’s mainly upon weather and it hasn’t been a
great summer. So like volume, that’s it, a little bit, I would say, on a steady stage.
Regarding hurdle rates, it’s 1.2 times the IRR of the project over WACC so that’s it.
That’s for the whole group. No commitments on that front. From that onwards. The
point is trying to find projects where we can have this condition. This could be based
upon the better location the better engineering solution for a particular hydro or the
conditions that you have in a specific project that is ready to build. Like the thermal 1
that we have. Everything is ready, we just don’t have the gas. Which is an important
part of the piece.
But just over the volumes you were talking, I was just looking at the booklet that I have
from 2010 and you had not even 21TW for the two distribution companies and here
with all these problems, this year we still sold 25TW, 25,000 GW. So, with all the
problematic that we faced, we still grew.
I think that the most important thing today in the distribution business of course is the
tariff review but also the fact that you have a lot of excess power in the market, there
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is overcontraction from all over supply, if you want to say, that distribution had made
estimates for a better GDP growth and now there’s a little bit of oversupply. It is
curious because it is happening pressuring margins for the distribution companies in a
time where you have spot prices going up, so more thermal dispatch and everything.
You had a last question regarding subsidies of termination fees or transmission fees
regarding the free market, right? So if you have the opportunity to have, instead of
having one project of 100 MW, four projects of 25 you have the assumption profit and
you have the opportunity to have the discount in the transmission cost, of course you
will go for that. Because those are the different ways, even though there is no
distinctive advantage, those are the opportunities that you have in order to create
value in the project.
Pablo Cuadrado (Merril Lynch)
I have two follow up questions. The first one is more strategic. I think you have
described earlier a bit tough business environment in Brazil, even to distribution. You
have also explained that it is difficult to se consolidation there. Just looking from the
outside, what I’m trying to get here is what in your point of view needs to happen in
order to promote that consolidation in the country is a question of being even more in
terms of return local regulator, just to have your view there and on the distribution
side, looking into the guidance coming to that point, I would like to know versus the
base of 2011, if you can tell us more or less, in roughly terms, which is the absolute
drop that you will expect for the distribution, because clearly the rate return is going
down, I guess that the rate base of the assets is going to be moving up with the
inflation, with the capex, so just to have an idea on absolute terms which is the level of
decrease of the level of BITDA.
António Mexia
Consolidation: Business is tough. One of the reasons that we have on the side of
demand – at the same time everybody wants to consolidate but everybody wants to
be the consolidator, and nobody wants to be the consolidated. So clearly, and you
have several local groups, and some also from outside, especially when one is trying to
do some consolidation, I think that it has been clearly a political game in the question
of consolidation, and until now nobody has found neither the will or the means into
financial plus the framework to establish consolidation, so we have been much more
talking about much more than what reality is. You can be surprised but I don’t think
that it’s a question of regulation. Sometimes I see over evaluation of what would be
synergies of consolidation or cost reduction. If you put these companies together so I
think it’s more than the regulation issue, it’s a political/national/putting the money on
the table issue and really want… will and both the political but the private sectors to
do it. In any case I don’t think it’s fundamental for the sector. I don’t see in certain
cases where the value will come from, so I don’t think it should be the driving force.
For us clearly is to find the opportunity, as we have been proving with Pecm, clearly a
very attractive return doing a technology that we were no more doing elsewhere, coal.
At the same the last auctions in renewables show that we have been… Jari… so clearly
tackling. For us that’s the name of the game, it’s finding with a slight higher hurdle
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third party services from now onwards. But the aim, the goal is to continue to be
productive, because ANEEL obliges you so, you have to beat not only a reference
company now but the universe of a peer group where you stand, so you have to be
more productive, so cost on the distribution side and in the company as a whole must
be a target. Trying to beat inflation is something you know… Inflation in the index is
5.2% and service inflation in Brazil is a little bit higher than that.
António Mexia
In what concerns CTG… about page 11 and it says that the partnership reinforces
strategy in Brazil and the idea was strengthening financial capability in the shared
vision as a key market. I think that’s valid more for Energias do Brasil but also
especially in Brazil. Why? Because what we say is that we will be facing opportunities
some of which we are able to anticipate today, and some of those we are not able to
anticipate today, namely it is very difficult to know exactly how many projects in
hydro, average hydros of 400 MW or 500 MW or 600 MW you will have auction in
Brazil, how many projects of wind will be auctioned in Brazil. For that period, what
China Three Gorges brings with the same vision and its financial strength is we will be
able to cope with more opportunities than if we were alone. Why? Because not only
what CTG brings as direct investment in the group, namely through renewables but
also what is the idea of co-investment. Basically, sharing investment, facing new
projects that could have a scale or could be, if added up on a scale that we would not
be considering. Why? Because globally, not only Energias do Brasil but also EDP, we
have a clear commitment in terms of financing for 2015. the deleveraging. So in a
country that can be surprised by new opportunities, like it was the case of Jari, if we
have several Jari that you do not anticipate today, you can tackle them better together
with CTG than alone. That’s obvious. So compared to other geographies where it’s
easier to square what you are going to see in front of you, in a package of around
almost 60 GW even if you consider larger hydros, than you have an amount of average
projects, average size projects in hydro but also in wind that you don’t know exactly
how much you’re going to face in the next three years in terms of opportunity. So it’s
basically tackling more opportunities if they are there. If not, we’ll be constrained by
our financial constraints.
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