2013 Results Call Conference Transcription March 25, 2014 Operator:

Transcription

1 2013 Results Call Conference Transcription March 25, 2014 Operator: Good morning and thank you for waiting. Welcome to CESP s conference call where we will discuss the results achieved during the year of Currently attending are CESP s Chairman, the Board of Directors, and advisors. We would like to inform you this event will be recorded and all participants are connected exclusively as listeners. Later on, we will start a questions and answers section for analysts and investors and, soon after, we will address the press questions, when further instructions will be provided. If an operator s help is necessary during the conference call, please type asterisk zero. Questions will be made solely by phone. This event will also be simultaneously broadcast through the internet, via webcast, and may be accessed at where the respective presentation can be found. Slide selection will be performed by you, gentlemen. We would like to inform this conference call will be simultaneously translated to English, to accommodate the Company s foreign investors. We would also like to inform that the participants listening to the event in the English language can also make questions during the questions and answers section. This event s replay will be available a few hours after it is over. Before we proceed, we would like to make clear that eventual statements made during this conference call regarding CESP s business perspectives, projections and operational and financial goals, constitute the Company s Board of Directors beliefs and premises, as well as currently available information. Future considerations are not performance assurances. They involve risks, uncertainty and premises, given as they refer to future events, therefore, depend on circumstances that may or may not occur. Investors should have an understanding that general economic conditions, industry conditions and other operational factors may affect CESP s future performance and lead to different material results than those expressed on said future considerations. Now we would like to hand over the floor to CESP s Executive Board. Gentlemen, you may proceed. 1

2 Good morning, everyone. I am Almir Martins, Finances and Investor Relations Director. We would like to thank you all for attending the CESP conference call regarding the results of On this board are CESP President Mauro Arce, Demand Generation Director Mituo Hirota, and a few CESP advisors. Before we start the slides presentation, I would like to make a few considerations and clarifications. The first one is that, from January 1 st, 2013, came into effect Review 1 of the Accounting Pronouncement CPC 33 regarding Employee Benefits. According to this new version of CPC 33, actuary earnings and losses assessed by the end of each period, from now on will be registered directly at Net Equity. Previously, those earnings and losses were registered by CESP at the Results account. This procedure change demanded journal entries from previous years be reviewed and recalculated, providing earnings which were accounted in favor of shareholders. Another relevant aspect is the Três Irmãos Power Plant. As CESP understands it, after allocation of the Três Irmãos Power Plant s energy to the quota regimen, concession of said Power Plant is over, in practical and legal terms, since April 18, During the year, we had already produced the Power Plant s reclassifying from Fixed Asset to Noncurrent Asset, as an asset in reversal process. On the fourth quarter of 2013, the Company s Administration and technicians discussed with the Ministry of Mines and Energy and the Brazil Energy Research Company EPE, the composition and comparison of the indemnification values of UHE Três Irmãos. The Conceding Power assesses the indemnification value at about R$ 1.7 billion. The Company understands that, according to both legal and Concession Agreement terms, it has the right to be indemnified for non-depreciated assets, registered at around R$ 3.5 billion, and will continue to discuss its rights, judicially if necessary. Therefore and in accordance to Accounting Pronouncement CPC 25, which addresses Provisions, Liabilities and Assets, a 1.8 billion provision was constituted, by adjusting the value of indemnification for the uncontroversial value, until this process was over. The adjustment of this receivable promoted the increase in the Other (Liabilities) and Net Revenue accounts journal entries of the Results Demonstration (and is available in detail in our Financial Demonstrations in the Explanatory Notes No. 26 and 32), and is responsible for the Loss pointed out at the last line of our Results Demonstration. Another adjustment, regarding the Três Irmãos Power Plant was performed directly in the Net Equity account, benefitting Accumulated Profit. We will be explaining such adjustment at a specific slide, to be shown later on. 2

3 It is important to register that, in the future, if the Company is successful on its claim, any recognized earnings will be reverted in favor of the Company and its shareholders. Considering the Company s performance, its financial situation, the reserves realizations and the equity valuation, CESP is offering its shareholders quite a positive result in the form of dividends proposed to the Shareholders General Assembly forecast for upcoming April 25. That said, we may start the slides presentation, beginning at slide number 2. At slide number two we show that Energy Revenues increased 15.7% during 2013, in comparison to 2012, reaching 4.4 billion. Sales at ACR - Regulated Hiring Environment the chart s gray left part show reduction around R$ 494 million, 23.3% less than the 12 months of 2012, due to the ending, in December 2012, of contracts signed with energy distributors for 8 years, at the December 2004 auction. Part of the energy unhired under ACR was rehired under ACL Free Hiring Environment, with better prices, allowing revenues in this environment red part of the chart to register an increase close to R$ 509 million, 37.8% above the previous year s. Revenues earned at CCEE Electric Power Commercialization Chamber the charts black share increased 152.6%, something around a R$ 525 million increase in regards to 2012, as a result of the liquidation, at Settlement Prices - PLD, of part of the energy unhired in the regulated market. Additionally, this chart brings the Energy Generation Revenue of the Três Irmãos Power Plant, on the top of the yellow column, an amount of R$ 60.5 million in The Tax Reductions, of RS million, comprehend majorly contributions to the Taxes and Reversions Global Reserve (RGR), and achieved 10.9% more than 2012, due to an increase in energy sales. As such, Net Revenue reached R$ 3.9 billion, including the Other Revenues value, reaching a revenue 16.4% superior to 2012 s. In the next slide, slide number 3, we see the percent distribution of CESP s revenue on the three energy commercialization segments. The ending of contracts in the regulated market, with part of such energy migrating to the free market and part of it migrating to the short-term market at CCEE, caused significant change in the revenue distribution profile. During 2013, the largest participation was in the Free Hiring Environment, with 42.7 of sales, followed by the Regulated Hiring Environment, with 37.4%, and a noticeable increase in the Short Term Energy, liquidated in the Electric Power Commercialization Chamber, with 19.9%. Slide 4 shows, on the left, the amount of energy sold in GigaWatt per Hour in 2013 and 2013, per segment. The 21.9% decrease in the total amounts in 2013 reflects the allocation of the Três Irmãos Power Plant to the quota regimen, but mostly the 3

4 action of the Electric System National Operator ONS that, from October 2012 on, activated thermal power plants to save from the hydroelectric power reservoirs. Even so, CESP s production was around 5% over the physical guarantee attributed to its power plants. On the right side, you can see the average price of the sold MWh increased 46.2% during the year, reaching R$ in The slide highlights the differences in price practices. The contracts average prices were around R$ , reflecting contract prices updates and the ending of older contracts, with lower prices. The energy commercialized at CCEE, though, reached the average price of R$ , reflecting the PLD increase. In the lower right area, below the chart, there are information regarding CCEE s prices divided into PLD Settlement Prices (SPOT) and optimization fees used in the MRE Energy Reallocation Mechanism. The Settlement Prices reflect the reservoirs situation, as we may notice in the following slide. At slide 5, on the left, we show the average levels of reservoirs on the Southeast/Central-West subsystem and, on the right, PLD Average Prices. Though reservoir levels on the three last months of 2013 (green line) stayed above the same months of 2012, the first months of 2014, the orange line, show a decrease due to a lack of rains in this year s rainy season. On the chart on the right, though, the green line show how volatile the PLD behavior was in 2013 and the peak R$ reached in February In the slide s lower part we can see last year s average PLD, rising from R$ in 2012 to R$ in At slide 6, we can see Operational Expenses show a decrease of 9.2% in relation to 2012, reaching R$ 1,694 million. Of these expenses, 78.6% may be classified as Non Manageable and 21.4% as Manageable. We highlight the main variations: Reduction in the transmission system costs for lower fees Reduction in the financial compensation for hydric resources use due to the decrease in hydraulic production, base for the calculation of this tax Inexistence of expenses with energy purchase from CCEE, that had charged the last quarter in 2012 Reduction of the depreciation expense due to the end of economical exploration of the Três Irmãos Power Plant under the price regimen Reduction on the Material and Third Party Services accounts, due to internal management Personnel expenses had an effective reduction, but we registered an additional provision at 3T13 due to implementation of the Retiring Incentive Program, a provision that most likely will be recovered in the coming months 4

5 Slide 7 shows the adjusted EBITDA, that is, excluding the Três Irmãos Power Plant 1.8 billion provision, reached R$ 2,663 million, 27.7% over 2012 s. The adjusted EBITDA margin was 68.2% in the year of On the right side of the slide, we show the adjusted EBITDA s composition for better detail. Next slide, slide 8, we see the Financial Result of 2013 was R$ 422 million negative, 27% less than the R$ 576 million of The Financial Revenues of R$ million were 182.8% superior to the R$ 46.4 million of The Debts and Other Financial Expenses Charges, at R$ million, registered a 28.2% reduction. The Net Monetary Variations resulted in R$ million negative in 2013, and reflect indicators related to inflation. The Net Exchange Variations reached R$ million negative during the year of 2013, reflecting the loss of value of Real compared to the American Dollar. For better understanding, on the slide s right side you will find the dollar behavior during As you can see in slide 9 s frame, the period results were impacted by the provision related to the Três Irmãos Power Plant, from a positive result to a R$ million loss. This provision was performed considering the accounting value according to the FIRS criteria, of R$ 3.5 billion and the indemnification announced by the Ministry of Mines and Energy of R$ 1.7 billion. Therefore, the constituted provision reached R$ 1.8 billion, accounted under Other (Expenses) Net Revenues. As an effect of this provision, R$ million were reverted, referring to Income Tax and Deferred Social Contribution. Therefore, the Três Irmãos provision net effect in the results account was R$ 1,381 million. Additionally, regarding this journal entry, there is still the Equity Evaluation Adjustment Realization relative to Três Irmãos, directly to accumulated profits, reverting in favor of shareholders. Slide 10 shows the Financial Debt of 12/31/2013 was R$ 3 billion, 19.9% lower than 12/31/2012 s. The debt in foreign currency was US$ million, representing 25.4% of the Company s total debt. This foreign currency debt was equivalent to R$ 763 million. Availabilities by the end of 2013 summed up to R$ million, resulting in a Net Debt, at that moment, of R$ 2,161 million, 31.7% lower than 12/31/2012 s. Next slide, slide 11, you may see that from 2012 s position R$ 1,941 million, we have a R$ 254 million in inflation accounting and interests; net constitution of provisions of R$ 165 million; and payments of R$ 44 million with legal actions. In 12/31/2013 the balance was of R$ 2,317 million, a 19.4% variation in relation to the end of Next slide, slide 12, we shot the Results Destination Proposal. 5

6 Starting from the Loss of the period, of R$ million, we add the realization of part of the unrealized profit reserve (referring to the 2008 exchange variation), plus the balance valuation adjustment realization (referring to additional depreciation due to IFRS adoption), plus the realization of the balance adjustment of Três Irmãos (since we have already adjusted the value to be received), plus the re-accounting of the previous periods due to the accounting pronouncement of CPC 33 regarding the pension fund, reaching a balance of destination to Results of de R$ 1,155 million. There was a Statutory Reserve Constitution of R$ 111 million, resulting in a balance to distribute of R$ 1,044 million. An amount of R$ 196 million was already distributed as Interest on Equity and the Board of Directors proposal to the Shareholders Assembly forecasts a payment of R$ million up to 06/30/2014 and a balance of R$ million up to 11/30/2014 The following slide, slide 13, sums up the highlights of this presentation, comprehending operational and financial data from the fourth quarter and the year of 2013, compared to the same period of 2012: Increase in the Operational Net Revenue of 18.1% in the quarter and 16.4% in the year; decrease of 23.5% in the Operational Expenses in the quarter and 9.2% in the year s sum; increase of 117.5% in the Service Result in the quarter and 48.6% during the twelve months; decrease of negative Financial Result of 13.0% in the quarter and 26.8% in the year; increase in the Adjusted EBITDA of 56.3% in the quarter and 27.7% in the year; Loss of R$ million in the year and proposed dividends of R$ 1,044 million. That said, we conclude our presentation. We thank you all for attending and open up this meeting for our questions and answers section. Thank you. ==================================================================== Operator: Ladies and gentlemen, we now start our questions and answers section. To ask a question, please, dial asterisk 1 (*1). To take your question out of the list, dial the hash (#) key. When the analysts questions are over, we will open up for questions from the press. Mister Sérgio Tamashiro, from Safra, would like to ask a question. ==================================================================== Sérgio Tamashiro Safra Bank: Thank you, good morning everyone. I have two questions, the first one regarding the Três Irmãos indemnification payment, about the receiving. Yesterday, during the broadcast, at least, the energy secretary stated this receiving should happen by the end of the month. You did not throw in any fact. How truthful is such statement? The second question regards the spot price methodology change? Do you you have any expectation regarding a price change and any expectation regarding a reduction in the prices-cut, are you thinking of changing this energy hiring or will you keep on liquidating this settlement in the spot market? Almir Martins, Finances and Investor Relations Director: Tamashiro, good morning. Sérgio Tamashiro Safra Bank: Good morning. 6

7 Almir Martins, Finances and Investor Relations Director: All talks the energy secretary had with the Ministry of Mines indicate the Ministry will broadcast an Ordinance establishing how the indemnifications will be paid to those who did not adhere to the Provisional Measure. So, whomever had adhered there was something defined and to whomever had not there was not. Secretary José Aníbal s expectation is that this Ordinance is published soon. And now we have to wait and see when payment will be made. Mauro Arce s expectation is that the Ordinance indeed is published, establishing the criteria, but most likely there will be no associate schedule saying when payment will be made and I believe each case is different. Sérgio Tamashiro Safra Bank: Also, does this Ordinance have to be broadcast, published, before Três Irmãos auction? Almir Martins, Finances and Investor Relations Director: Not necessarily. I believe it would be better if we had access to it before the auction, of course, but not necessarily. Sérgio Tamashiro Safra Bank: Ok. Almir Martins, Finances and Investor Relations Director: In regards to your second question, on the spot price composition, from the perspective of a methodology change, we have no new in this sense, Sérgio, our expectation is that underway measures have already been published, and that they will be maintained. January s accounting happened normally, and liquidation was performed with a high payment level. We registered very little failure to pay, under 2%, and now the next accounting, February s, will be made using the R$ price. Accounting is forecast to be broadcast April 9, so, until then we wait.. Sérgio Tamashiro Safra Bank: That means that without this methodology change you might continue liquidating in the spot market, and will not be changing your strategy, signing any kind of few months contract? Almir Martins, Finances and Investor Relations Director: Sérgio, in regards to PLD, I mean, there may be changes like: we will change the calculation rules, but I don t think that will happen. There may happen a change in the hydrologic situation, and then it is possible. We follow up the PLD as a definition that comes after the operation s marginal costs. We see the operation s marginal cost is calculated in another manner, it has a trend of going down, maybe it does not stick to the R$ limit, but I do not believe it will act in such a way, that is a belief and a desire, but I don t believe there will be a change in criteria and calculation will be changed by a change in criteria. Sérgio Tamashiro Safra Bank: Yes. Thank you. Operator: Mister Vinícius Canheu, from the Credit Suisse Bank, would like to ask a question. Vinícius Canheu Credit Suisse Bank: Hello, good morning. My question is in regards to an update on the free energy you have available for this year and the next one. If you could also comment, next year, from what I recall, you had a lot of free energy for the first semester, but after the end of concessions you would be at a loss, and you 7

8 would need a strong position on the matter. If you could update us in regards to this situation, that would be really helpful. Thank you. Almir Martins, Finances and Investor Relations Director: Vinícius, our hiring situation for 2014, with round numbers is, we have around 2,000 MW average, is hired in the free market. On 2014 s average we have about 1,000 MW average hired on the regulated market. We have left to ourselves something on the base of 600 MW. Maybe a little less, maybe a little more, that depends on the flexibility and the exercise of such flexibility by free consumers. But, on average, that is it, this has been the energy liquidated at CCEE, and we made seasonality of such energy during 2014, concentrating a little extra on the first months of the year, a little less on the following months, but no period of such seasonality leaves us at a risk of being negative, so we make quite a conservative play. For 2015, we already have around 1,300 MW in contracts on the free market. And hiring in the regulated market will be cut short in half, maybe a little more than that, maybe a little over the half of this will be hired in the regular market, due to contracts ending in December Ok? Vinícius Canheu Credit Suisse Bank: Ok. However, just to be clear, since for 2015 this year average changes a lot, because concessions end. The number I had in mind was around 1,000 MW free in the first semester and something shorter on the second, but you are trying to reallocate that. I think an update on that would be good. Almir Martins, Finances and Investor Relations Director: That is true. In 2015, we have two pretty distinct periods. In the first semester we have plenty of energy since we have Ilha Solteira and Jupiá s energy, and on the second he do not have so much since concessions end in July Nevertheless, the numbers of the first semester show lots of unhired energy, and we are quite fair on the second semester. If there is something short, we will be making adjustments this year. Vinícius Canheu Credit Suisse Bank: So, expectations are there will be nothing short on the second semester of next year? Almir Martins, Finances and Investor Relations Director: Right, that is our plan. Vinícius Canheu Credit Suisse Bank: All right. Thank you. Operator: Attention analysts, to ask a question just dial asterisk 1 (*1). Mister Vinícius Canheu, from Credit Suisse, would like to ask a question. Vinícius Canheu Credit Suisse Bank: Taking advantage of this opportunity I would like to ask a question on another subject. When I look at the provision of Três Irmãos, you activated a relevant fiscal credit. I would like to understand it, if it is already the full asset, I mean, if it is all already deferred, or if there is yet something to be added, and which is the expectation of use of such fiscal credit? Since there was already plenty of fiscal credit accumulated before. How will this credit movement be? Almir Martins, Finances and Investor Relations Director: Your question will be answered by Mauro Marques, the company s accountant. Mauro Marques, Accountant: The provision of Três Irmãos in the installment of R$ 429 million related to deferred taxes, this installment is the one that was against 8

9 liabilities reduction. Then, let s say at the initial moment of IFRS adoption, which increase the value of the fixed asset against the PL and against the deferred taxes liability. Then, in regards to Três Irmãos provision, this reduction is a liability reduction. There is an installment, the installment relative to the difference of the Três Irmãos installment, the regulatory installment of the provision highlighted, and it promotes a fiscal credits installment, composing the unregistered fiscal credits installment in our assets deferred taxes. Almir Martins, Finances and Investor Relations Director: Ok. Vinícius Canheu Credit Suisse Bank: Let me just understand, this unregistered part, when will you be able to use this fiscal asset? Almir Martins, Finances and Investor Relations Director: Credit does not prescribe, right? CVM only allows us to bring into our balance the credit we plan on using in the next 10 years. Then, as Mauro Marques mentioned, there is a new expectation that shows a perspective of use of these fiscal credits in the next 10 years. Therefore, in our projections, we have 2 billion Reais of fiscal credit, which are not forecast, to be used in the next 10 years. However, since they do not prescribe, they will be used slowly, in a way that we may receive future taxable profit. Vinícius Canheu Credit Suisse Bank: That is right, it is clear. Operator: Attention analysts, to ask a question just dial asterisk 1 (*1). Mister Sérgio Tamashiro, from Safra, would like to ask a question. Sérgio Tamashiro Safra Bank: Almir, going back to the 2015 hiring, some quick calculations show you have 3,600 of secured energy in the first semester and on the second, with Porto Primavera it falls to 1,100, Porto Primavera plus PCHs. An average of 2,350. You said the free hiring has 1,300 and the regulated has 450. An average/year of 1,750. So you have about 600 MW unhired? Almir Martins, Finances and Investor Relations Director: No Tamashiro, your calculations are certainly incorrect. You need to make these calculations with a lot more detail, month to month, and unfortunately, I do not have this composition dividing semester per semester. What will actually happen is, from the loss of the Ilha Solteira and Jupiá concession, adding with Três Irmãos, we will have around 1,051 MW at around half of This 1,051 MW of assured energy is the number you may hire. Not the number you calculated so quickly. Sérgio Tamashiro Safra Bank: Or it could be that instead of 600 average, meaning, 0 in the second semester plus 1,200 in the first one? Almir Martins, Finances and Investor Relations Director: I would need to make the calculations, Sérgio. Sérgio Tamashiro Safra Bank: All right. Mauro Arce, President: Sérgio, whatever the number regarded, though I can say it is small, Almir already said it, on the second semester we are working on an energy negotiation usually called Swap, but it is actually an exchange: look, you need energy in the first semester and we are trying to provide it. Obviously, we can only do it through 9

10 auctions, not through bilateral negotiation, for a series of reasons. Including because we are a state company, then I have to call an auction. We are looking exactly into it. Moreover, obviously, something else we have to look is the hydrologic point of view of I watched a meteorologist s interview where he said things would not get better, you see I do not know what is going on, El Niño s effect have been pretty dull. That is something else to consider. I have energy in the first semester, and imagine that the PLD of the first semester of 2015 is very high and the second semester is very low. This is the great obstacle, both to us and to whoever wants to purchase energy to make this Swap thing. Sérgio Tamashiro Safra Bank: That is all right. Thank you. Operator: Ladies and gentlemen, we will now open the questions and answers section to the press. To ask a question, please, dial asterisk 1 (*1). To take your question out of the list, dial the hash (#) key. Mister Wellington Bahnemann, from Agência Estado, would like to ask a question. Wellington Bahnemann Agência Estado: Good morning everyone. I have a few questions. The first one regards Três Irmãos. You say in the balance that, throughout the fourth quarter of 2013 there was a series of meeting, that is, discussions with the Ministry of Energy and EPE. I would like to understand the conclusion of such talks, if you grasped where is the difference between the government proposed values and the one you are registering at the balance. In addition, regarding the Ordinance doctor Almir commented on, at the start of the questions section, I would like to understand a little better what it will address, specifically. Will it open, for instance, the possibility of a payment in installments or will it be paid integrally, will there be any monetary update fee, what will this Ordinance discipline. And then I have a third question, a more general one, regarding how the company sees Brazil s downgrading, in its credit grade, because in a way, it affects the electric sector. I would like a more conjectural assessment on this matter. Thank you. Mauro Arce, President: Wellington, this is Mauro Arce, good morning, how are you? Wellington Bahnemann Agência Estado: Good morning, I am fine. Mauro Arce, President: The Três Irmãos question, after a long time we chose to open numbers, to find why the difference, why we use the same methodology and achieve such distinct numbers? We had some difficulties early on, but it is important to stress there was some opening for us to talk and find out the differences. And the difference is not in the methodology, but on what has been considered. There are two pretty clear items, that were in our concession contract, since we build and operated the sluice gate and the Pereira Barreto Canal the whole time. And this value should be around R$ 800 million, R$ 900 million, that is quite the difference, ok? Wellington Bahnemann Agência Estado: Ok. Mauro Arce, President: The biggest change is in the part they call environment, the social part, expropriations, something like that: but try to build an 800 MW power plant, it has such a big reservoir. It seem like we have a reservoir when, in reality, all this terrain was bought, first, it has not depreciation, or market value correction. From 10

11 information we received from the personnel in the region, if we were allowed to sell the terrain at the prices they are selling it, we would get around R$ 10 billion, but that is obviously not possible. Then, what I understood of the big difference between a power plant that will be build, that the methodology is the same as one already built. Then it is built not on the Amazon, but here, in São Paulo. What we presented there, we have, for instance, regarding the environmental part that involved the terrains, we have the land registry value, we have real values. That was the big difference, this R$ 1 billion something came out of it. And they obviously closed the question, given one of the arguments they used was that this was one of the same criteria used in one of the power plants, including, who accepted it. Whether it was the Eletrobrás Group or whoever accepted it. That was the big difference. And we obviously asked for payment of the non controversial. Then things started working out, went to the Ministry of Treasury, there was a conversation between our Income Tax secretary and the Treasury secretary. And the last new I got from secretary José Aníbal is that the Ministry of Mines and Energy is forwarding an Ordinance to release, placing that the payments... because up to now, no indemnification of those who did no adhere, was paid. Then, I am not aware of the content of this Ordinance, but looking at it, the values should obviously be there. I cannot tell how will be the payment schedule, how it will be performed, we are anxiously awaiting this Ordinance. Wellington Bahnemann Agência Estado: Perfect. Almir Martins, Finances and Investor Relations Director: And S&P downgraded Brazil. Mauro Arce, President: Look, I have heard someone talking about this today, how important these agencies are, and I do not want to go into this merit, because it is quite a technical problem, involving the federal government, in particular Eletrobrás and Petrobrás. And I would rather stay out of it... Almir Martins, Finances and Investor Relations Director: Warington, this is Almir. Regarding the impacts this may have, in the past, CESP s need of international capital was quite significant. It was way more practical to raise cash in Dollar or Eurodollar, it was way more practical, we did it in the past, and there was no need for guarantees and the like. However, our current situation is very different, we do not issue debts since 2007, save for a small R$ 150 million promissory note we made, and have already liquidated. Our foreign currency debt nowadays is U$ 325 million, with the federal government. We are not dependent, so, if Brazil s classification changed and it may burden companies fund raising, CESP will not be affected by it. Mauro Arce, President: I would just like to, today, actually, I would like to remember we recently received an upgrade by Moody s, we reached Investment Grade. Therefore, I do not know what this means for a country, but for a company it means, if we have to go to the market and hire a loan, it will have higher interest. This seems to be a peaceful point. From the instant you have a situation... CESP, from what I remember, before 2006 it was Selective Default, close to one... Then people will think twice before loaning money to whoever is in this kind of situation and, obviously, people believe these agencies because they are, they are part of the whole economic/financial model, not from Brazil, but the whole world. Now, from the 11

12 countries point of view, I do not know, Brazil is not getting loans, etc. Obviously, when it is on the news, if Brazil was upgraded everybody would be like: hey, look, Brazil is better, and the like. But in Petrobrás and Eletrobrás specific cases, obviously, if the go just for the external market... I do not know their situation. With the grading reduction you have this kind of consequence. Wellington Bahnemann Agência Estado: Perfect. Thank you. Operator: Ms. Ana Flávia Roja, from Reuters, would like to ask a question. Ana Flávia Roja Reuters: Hello, god afternoon everyone. I would like to ask to questions, as well. I would like to know, now that the Três Irmãos auction is close, on Friday, how will the Pereira Barreto and the sluice gates case work. Do you have any legal action to delay this auction so that this situation is defined, what is your expectation regarding this. And if you also could give us an assessment, as energy generators and sellers regarding the directive already published about the auction at zero which will cover the unhiring of distributors. Is it possible yet to have a notion if we will be able to have offers, if there are generations in condition to and interested in offering energy for this auction, including you. Thank you. Mauro Arce, President: Look, in regards to the auction execution itself, because obviously, if everything were, if our indemnification had been correctly calculated, there would not be much to discuss. We need to discuss the sluice canal operation, since it is not stated if the new, I am not talking about concession, if a new power plant Operator starts operating it, how it will be made. There is, in the auction s invitation to bid, a period for assisted operation, as they call it, but we first questioned the Court of Auditors, who analyzed the case and made a questionnaire, which we already answered, and have awaited the Court of Auditors decision to be taken before the auction, before last Wednesday. But this matter was not discussed. The new meeting of the Court of Auditors, it seems, will happen this Wednesday, but it looks like the auction is tomorrow, right? Ana Flávia Roja Reuters: Tomorrow. Almir Martins, Finances and Investor Relations Director: And this matter is not a subject of the meeting. Mauro Arce, President: And that is why we started legal action so that the auction was cancelled, a writ of mandamus, currently being judged by a federal judge, from Brasilia. We await this result, this manifestation. Ana Flávia Roja Reuters: Then there is a writ of mandamus, you entered a pledge that is currently being judged, and a decision could come out this week to stop the auction, is that right? Mauro Arce, President: I hope so. But that, if the Court of Auditors has decided and said: look, the auction has to be postponed because there is... But since that did not happen, so that we do not lose the deadline, last Friday we entered with this Writ of Mandamus. 12

13 Almir Martins, Finances and Investor Relations Director: Ana, this is Almir. About the auction, the next energy auction, we do not have all details. We know the Ordinance that was published, it talks about long-term contracts CESP is not able to enter because we only have energy until July Unless in the detailing they break it up in shorter terms. Then CESP could participate. What we notice is that a long-term contract at high prices could, actually, attract those interested, and now there is a strong possibility that thermal power plants could participate. A R$ 300 price for fixed costs was settled, and the variable part is covered by the average of thermal dispatch. Therefore, it is quite likely there will be success on the auction. But, in the current settings, CESP could not participate. Ana Flávia Roja Reuters: Thank you. Operator: Ms. Cláudia Fachini, from Valor Econômico, would like to ask a question. Cláudia Fachini Valor Econômico: My question is as follows, about this writ of mandamus, if an injunction will be approved until Friday, if you expect an injunction that postpones the auction, if it is possible for it to be approved before the auction. I believe that is the idea, right? My other question is, what will you do with the payment of that indemnification, do you have a destination for it yet, I mean, will you distribute it as dividends when you receive it, or the like. The other question regards EMAE. If I am not mistaken, EMAE was one of the companies looking at, evaluating the Três Irmãos power plant, they spent some money to take a look at it. I would like to know if you will advise EMAE on this offer, it the auction happens. That is it. Mauro Arce, President: Cláudia, Mauro Arce. Good morning. Cláudia Fachini Valor Econômico: Hello Mauro, how are you? Mauro Arce, President: I am fine. We entered with a Writ of Mandamus, as I explained in my former answer, last Friday, because the Union Court of Auditors had not yet reached a definition, so, to prepare ourselves... we are not against the auction, but doing it without paying us and with no definition, especially regarding who should operate the Canal, the sluice gate, I mean, in our point of view there is an indefinition regarding these matters. Therefore, the auction could make, ok, it is legal to make the auction, but not in the way it is currently being proposed. So, that is our position. Regarding EMAE s participation, they are a company under the state government, I do not know if they will effectively participate. They made a few visits at the power plant, as other have, there was a reasonable relation. Seven companies debited, and I do not know each of their decisions. We will know next Friday, if there is an auction. Cláudia Fachini Valor Econômico: proposal? Mauro Arce, President: Not even discussed it. This Friday. You did not help EMAE in this Cláudia Fachini Valor Econômico: Since you know the Power Plant well, and have the same controller... Mauro Arce, President: Not really, we had to keep a neutral position. We are operating the power plant during this whole time, it was our duty, as a participant as 13

14 well, to elaborate the invitation to bid, the database, the information, open it up to everyone and help each of them on the same way. So, there could not be a special treatment. Because there was also the possibility we could choose to participate. Cláudia Fachini Valor Econômico: Understood. Mauro Arce, President: But that is EMAE s decision, and I have no idea, they visited the plant, and I did not ask them what they think of it. I do not know what their position will be. Cláudia Fachini Valor Econômico: Understood, ok. So you expect the injunction to be approved before the auction, right? Mauro Arce, President: Yes. We have an injunction to stop it, a Writ of Mandamus asking for an injunction. Cláudia Fachini Valor Econômico: Asking for an injunction? Mauro Arce, President: Yes. Now, obviously, the matter is under analysis, a magistrate was defined, and she is analyzing it. Cláudia Fachini Valor Econômico: Ok. That means it could be approved a little before the auction? Could be approved until Friday? Mauro Arce, President: Yes, it has to be approved a little before the process starts. Do you understand? From attending previous auctions, this is how things are, you await a last resort, you wait the Writ of Mandamus to be approved or not by... And you obviously have to warn who is promoting the auction: there is an injunction and the like. We are not responsible for notifying them, a judge will do it directly, the injunction goes directly to who is promoting the auction. Cláudia Fachini Valor Econômico: All right. Could you tell me who is promoting, the office you hired? Mauro Arce, President: No, it is internal, it is the company s lawyers. Cláudia Fachini Valor Econômico: Internal lawyers. That is ok then. Mauro Arce, President: From CESP. Cláudia Fachini Valor Econômico: How about the destination of the non controversial part of the indemnification, have you decided what to do with it, what will be the destiny of this...? Mauro Arce, President: We already... we already paid the dividends according to this... Cláudia Fachini Valor Econômico: It will go to the dividends? Mauro Arce, President: Yes, now yes. No, it already did. Cláudia Fachini Valor Econômico: Oh, it did? Is that so? Alright. Mauro Arce, President: What could go into the dividends later is the non controversial part we will win, or so I hope. 14

15 Cláudia Fachini Valor Econômico: Got it. Almir Martins, Finances and Investor Relations Director: Let me explain to you the effect of this on the cash account. What Mauro means is, we made a 1.8 billion provision, by doing that provision we affect results and dividends distribution. But, if in the future the company wins this dispute, or it is determined CESP has any further values to receive, this extra value will be registered as a revenue, provide profit and be distributed or be destined to whatever the Shareholders Assembly decides. On the first amount, a R$ 1.7 billion amount, that the federal government calculated, we recognize that, at least our assets should be indemnified, we have not yet received that value. If it is delivered to the company, it no longer affects results, because we already made the necessary journal entries. It will just be a part of the company cash. It is a company cash and, later on, the company may decide through planning what this elevated cash will be used for. Ok?? Mauro Arce, President: If you ask us: what are you going to do? We do not know. Cláudia Fachini Valor Econômico: That is not decided? Mauro Arce, President: This is a decision that has the involvement of the controller shareholder, etc, then we have to wait. Cláudia Fachini Valor Econômico: All right. That is ok, then. Thank you. Thank you for your answers. Mauro Arce, President: Just to reinforce it, it is not a question of receiving it, but acknowledging we are owed it. It is not yet defined when we will receive these R$ 1.7 billion to be paid by the federal government, the conceding power, to CESP. Cláudia Fachini Valor Econômico: And just to clarify your answer to Flávia about the mnius zero, you cannot participate of the minus zero, is that so? Mauro Arce, President: Yes, in principle. But since they are talking in up to 5 years, it could mean a month or 5 years. That is, we do not want to rush things, we want to know the invitation to bid s detailing, because this kind of detail will be there. Now, obviously, if they make a 5 year contract and say: a year long one is worth the same price. Then the price would have to change as well. The analysis is different. The last auction they did, they offered three possibilities, and we entered two. The first one was the 2014 one, and the other one of 18 months. They are going to number two, three. The other one was a three-year long one. Then came the decision: look, of the three years, on the first one there is no energy, on the second... I may have it, because I can buy it, but we have always been an energy seller, not a buyer. I wanted to buy cheap to sell better, which is always a good possibility, since a generator can also be a buyer. Ok? Cláudia Fachini Valor Econômico: That is ok, then. Thank you. Mauro Arce, President: We will wait a objective answer, we will wait for the invitation to bid to see if there is any conditions we can enter into. Operator: Attention press representatives, to ask a question just dial asterisk 1 (*1). Mister Wellington Bahnemann, from Agência Estado, would like to ask a question. 15

16 Wellington Bahnemann Agência Estado: I only have two more questions. One question regards Ilha Solteira and Jupiá, where you also contest the values proposed by the government in terms of indemnification. Jupiá no longer has any value to be received. You have also started to discuss these power plants question, there is already a something in the works to understand the government numbers, your numbers? Could the Ordinance question, somehow, discipline this matter? Regarding debt, I have seen that you reduced your debt this year, but in comparison to the fourth semester there was an increase in the net debt. I would like to understand if this is a trend for 2014 or, well, if it was something specific to last year, involving some exchange devaluation. Thanks. Mauro Arce, President: Wellington, first, in regards to Ilha Solteira. We obviously disagree with the numbers presented on this matter and we will first ask for an opening, as it happened with Três Irmãos, to start with. Anyway, let s cross that bridge when it comes to it, though we are preparing exactly for that. This Ordinance would solve this problem if it changed: I pay what you think you are owed for Ilha Solteira and Jupiá. Though I don t believe this will happen, we will probably have to undergo the same work we did for Três Irmãos, and find the difference between our calculations, by the same methodology, and why we find such different values. Remember in Jupiá s specific case there is also a sluice gate, so we have to see how that was composed. That sluice gate became operational, we equipped it recently, 10 years ago, it is younger. Then we will specify, we want to know why such difference between what we put as an asset in our balances and, why, with the same methodology we reached such different values. Probably, there are large differences on terrains, since there is no terrain depreciation or commercial valuation. I think it is important to have the same procedure to verify why Jupiá has nothing to be received and Ilha Solteira had R$ 20 million. Wellington Bahnemann Agência Estado: Perfect. Mauro Arce, President: Regarding the other question, Almir will... Almir Martins, Finances and Investor Relations Director: Wellington, this is Almir. Regarding the debt, let me explain it with numbers. Our debt in the third quarter was R$ billion. Our debt by the end of the year was R$ 3 billion, a feeble growth, a 1.5% growth. Wellington Bahnemann Agência Estado: Gross debt, right? Almir Martins, Finances and Investor Relations Director: Yes, gross debt, we have not assumed any new debt, have not issued any new debt, nothing of this kind. When you look at the net debts account, the difference is that in the third quarter we had in cash, billion available. And by the end of the fourth quarter we have R$ 840 million. That is almost R$ 300 million less. We paid dividends this year s end. So, our net debt rises, when you do the math, it goes from R$ billion to R$ billion, but the debt does not increase. You have the same consequence if you look the cash generation by EBITDA. Wellington Bahnemann Agência Estado: No leverage, right? 16

17 Almir Martins, Finances and Investor Relations Director: Just with the debt, our third quarter debt by a EBITDA of over R$ 2 billions represents a 1.5% debt. If you split the net debt by the EBITDA with the Três Irmãos effect, that throw our EBITDA to R$ 850 million, this relation goes to 2.5. But you need to take into account that the adjustment made is a provision, it has no cash effect. Therefore, our net debt divided by a reasonable EBITDA, which is an EBITDA we may raise, generate as money during the year, is a debt that is under 1, it is currently 0.8. If we consider our gross debts, the gross debt by the end of last year was R$ billion, and it is currently R$ 3 billion. We noticeably reduced debt. Wellington Bahnemann Agência Estado: Well, will this debt reduction work continue throughout this year, Dr. Almir? How is, which is your planning for this year? Almir Martins, Finances and Investor Relations Director: Since we do not have many opportunities, we have a bonus, the series 8 bonus. The series 8 bonus is a debt issued in the foreign market, but issued in Reais. This debt sells next year, in january, and there is not much we can do regarding it, we already bought part of it in the secondary market. We have a foreign currency debt with BNDES. This BNDES debt goes until It is not an expensive debt, we pay every other month, so there is not much to be done. But we will use, whenever possible, cash surplus to reduce debt. Wellington Bahnemann Agência Estado: Perfect. Always liquidating, no scrolling, right? Almir Martins, Finances and Investor Relations Director: No, we have not issued any new debt this year. Wellington Bahnemann Agência Estado: Perfect. That is alright. Thank you. Orador: Mister Carlos Herrera, from UBS, would like to ask a question. Carlos Herrera - UBS: Hello, good afternoon. I would like to make sure I understood correctly the question of the eventual payment of the Três Irmãos indemnification. You said you await, with no reasonable date, it could be after the auction, that an Ordinance of the Ministry of Mines and Energy is published regarding the sector indemnifications in general, even for companies that did not renew their concessions in Then that is it, in this Ordinance should be more details about how payment will be made, if it will be adjusted, why such deadlines, and all that. Correct? Mauro Arce, President: Carlos, we have insistently asked to receive our indemnification during all those talks and negotiations between São Paulo government and the federal government. Of course the Três Irmãos concession is over for us, therefore, we have the right to be indemnified. During the most recent conversations, that happened about 15, 20 days ago with the Treasury, Treasury stated it awaited the Ministry of Mines and Energy for a few instructions on how to proceed with payment to those who did not adhere to the Provisory Measure. What we know about all these conversations is that the Ministry of Mines and Energy will indeed divulge an Ordinance establishing a few criteria, of which we know nothing about. Therefore we have no knowledge about what will be defined, and we have no information on when this value will be received. We have two 17

18 values, we have not received a value, R$ 1.7 billion, which is a value, let s say, already acknowledged, and we have a value we believe is our right according to accounting criteria and the terms of the concession contract. And we await a position from the Ministry. We will fight for this difference. We have not reached an agreement, there was no acknowledgment on the Ministry of Mines part regarding the number we are asking for. So, we will most likely have to go to justice. Carlos Herrera - UBS: Then the Ordinance will be about the payment of indemnification to those who did not renew their concessions at that time? Almir Martins, Finances and Investor Relations Director: Yes, that is the information we have. Carlos Herrera - UBS: Cool. Thank you. Operator: Ms. Carolina Medeiros, from Canal Energia, would like to ask a question. Carolina Medeiros Canal Energia: Hello, good afternoon. I would actually just like to clarify a doubt about this Writ of Mandamus against the Três Irmãos auction. Where have you issued this suit, in the Justice of Brasilia, Federal District of Brasilia? Almir Martins, Finances and Investor Relations Director: Yes, correct, we started this lawsuit in Brasilia, last Friday, in the Federal Justice. Carolina Medeiros Canal Energia: Brasilia Federal Justice? Almir Martins, Finances and Investor Relations Director: Our solicitation was broadcast on Monday. And, normally judges on an urgent action manifest after 48 hours. That is our expectation, that they manifest yet by the middle of this week. Carolina Medeiros Canal Energia: That is ok. Thank you. ==================================================================== Operator: We close, at this moment, the questions and answers section. I would like to handle the floor to CESP for final considerations. Almir: We would like to thank everyone for attending. The financial demonstrations and our results release are available at our Investor Relations website (ri.cesp.com.br) and our IR team is at your service through the means you will find by the end of the presentation. Thank you very much. Operator: The CESP call conference is over. We would like to thank everyone for attending. Have a nice day. 18