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Just Energy Group’s (JE) CEO James Lewis on Q4 2016 Results – Earnings Call Transcript

Just Energy Group, Inc. (NYSE: JE ) Q4 2016 Earnings Conference Call May 19, 2016 10:00 AM ET Executives Rebecca MacDonald – Executive Chair James Lewis – President and Co-Chief Executive Officer Just Energy Pat McCullough – Chief Financial Officer Analysts Nelson Ng – RBC Capital Market Carter Driscoll – FBR Damir Gunja – TD Securities Sameer Joshi – Rodman & Renshaw Operator Good morning, ladies and gentlemen. Welcome to the Just Energy Group Inc. Conference Call to discuss the Fourth Quarter 2016 Results for the period ended March 31, 2016. At the end of today’s presentation, there will be a formal Q&A session. [Operator Instructions] I would now like to turn the meeting over to Ms. Rebecca MacDonald. Go ahead Ms. MacDonald. Rebecca MacDonald Good morning. Thank you for joining us thing morning for our fiscal 2016 fourth quarter earnings conference. I’m Rebecca MacDonald, Executive Chair, Just Energy. And are here with me this morning, Co-CEO James Lewis and CFO Pat McCullough. Unfortunately, we will not be joined by Co-CEO, Deb Merril, as she is attending funeral services for a family member. Before we begin, let me preface the call by telling you that our earnings release and potentially our answers to questions will contain forward-looking financial information. This information may eventually prove to be inaccurate, so please read the disclaimer regarding such information at the bottom of our press release. Fiscal 2016 was tremendous year or Just Energy from a financial, operational and strategic positioning perspective. Our business continues to perform very well, delivering strong top and bottom line results, while generating meaningful cash flow. In parallel, with delivering strong results we were able to take strategic measures to position the company for continued long-term success in this exciting changing industry. On behalf of the board, I want to extend our appreciation to Deb, Jay, Pat and the entire team for their focus and commitment to driving meaningful change throughout the organization. As I look back over the past three years, essentially the time strains can put this new leadership team together, this is clearly a developing track record of delivering on our promises to our shareholders, customers and all of our stakeholders. In fiscal 2016, we exceeded our own guidance and overcame a very tough comparison to the strong fourth quarter of 2015. Given our world class risk management and our hedging strategy, we were able to drive strong performance in recently completed winter quarter, despite a relatively warm weather. As you’d recall, the winter weather of last year provided a windfall across much of the industry. The recent winter was about 15% milder than normal across Just Energy customer base in North America. Delivering such a strong result is testament to our hedging philosophy and commitment to establishing a stable and predictable earning profile. We feel strongly that our demonstrated ability to consistently deliver performance driven results in our any environment is now the new norm at Just Energy, as a result of our strengthened financial position and improved profitability profile. As you’ve heard us talk about all year long, we’ve taken action to change the business foundation and reposition the company to capture more accretive, profit and cash flow by not allowing our team to chase market share at the expense of margin due to our refusal to engage in risky pricing tactics that would ultimately damage our improved profitability profile. While this strategy will result in a decline in next customer additions from time to time, we feel strongly that our margin for customer improvement initiative is working. The progress is evident in improved scale and leverage in our model that is allowing us to take 5% topline sales growth for the year and deliver 17% gross margin and 15% Base EBITDA growth, while driving a 62% increase in cash flow. Let me be very clear, we are managing this business for the long-term, if that yield shorter negative additions for the sake of long-term accretive profit and cash flow, we will do it every single quarter. Let me also be clear, that we are planning for and we are well positioned for significant growth. We see tremendous opportunities to achieve our goals through the addition of product, markets and partnerships that will deliver value to our customers and growth for our business. Today, we are operating from greatly improved financial position. And our strategy is proving our ability to consistently deliver throughout any cycle. Our financial flexibility combined with the commitment to maintain a capital like model supports our ability to pursue a growth strategy centered on geographic expansion, structuring superior product value proposition and enhancing the portfolio of energy management offering. We feel confident, our strategy will continue to deliver in fiscal 2017 and beyond. With that I will pause, and ask Pat to provide some additional color on the quarter and years financial results. Pat. Pat McCullough Thank you, Rebecca. Overall, it was an outstanding year in terms of both profitability and cash. We’re very pleased with the financial results we’re generating as a results of the actions we’ve taken to reposition the company. The business is performing exceptionally well, and we’re seeing a consistency in our ability to take strong topline performance and deliver even more impressive bottom-line results. Let me cover some of the recent highlights for the fourth quarter and full year, then I’ll add more added color in specific focus areas and provide our outlook for fiscal 2017. In the fourth quarter, sales were $1,075.9 million, a decrease of 11% over the very strong quarter of fiscal 2015. The quarterly decline was a mix of lower commodity prices, lower volume due to warm weather and lower net additions from the year ago period in the consumer division, combined with lower sales prices for variable products in the commercial division. The effect of these items combined with the lower customer base more than offset the positive foreign exchange impact. For the full year, sales were up 5% to $4,105.9 million. The increase is primarily a result of the currency impact of converting US dollar denominated sales into Canadian dollars. Gross margin increased 5% to $204.3 million during the quarter, this is a continuation of the same positive foreign exchange impact and ongoing success of our margin improvement strategies that led to a full year gross margin increase of 17% to $702.3 million over last year. This quarter’s gross margin did not feel the impact of the warm weather that Rebecca mentioned due to our superior weather hedging program. Let me step back to add some color on how far we’ve come along this profitability for customer initiative. Today, we’re signing consumer customers at $207 of gross margin for our RCE, which compares to $191, just one year ago and $166 two years back. Additionally, commercial margins are being added now at $84 for RCE, up from $79 just one year ago, and $67 two years ago. So that’s a 25% improvement in both consumer and commercial over the two year period. We were able to drive these improvements in margin because our new innovative products are gaining more appeal and presenting more value for our customers. This is allowing us to price our energy management solutions competitively without sacrificing customer satisfaction. This satisfaction is evident in the attrition rate remaining flat year-over-year in what we consider a highly competitive market. The improvement in our operating results is also reflected in our cash flow performance. We ended the quarter with $127.6 million on cash and cash equivalents, up 62% from $78.8 million at the end of fiscal 2015. In addition, base funds from operations increased 37% from the same quarter last year and increased 49% year-over-year to $138.2 million. You’ve heard us talk a lot about the changes and repositioning this company has undergone, and this is another great example of delivering on promised change. Today, we’re happy to be able to say that the payout ratio on base funds is 54% for the full year, down from 94% in fiscal 2015 and down from 139% in fiscal 2014. Given the growth we’re projecting moving forward, I’m confident this achievement is sustainable. We’ve also remained committed to reducing debt. At year-end, long-term debt was $660.5 million, a decrease of 2% year-over-year. Despite the higher value of the US denominated debt due to foreign exchange, we successfully reduced debt during the year by $7 million through our normal course issuer bid program and an additional $25 million through repayment of our unsecured senior notes. As a result, book value net debt was 2.6 times the trailing 12 month Base EBITDA, significantly improved from 3.3 times just one year ago and approximately 6 times two years ago. We remain focused on further improvements to our debt position going forward. We were also successful in controlling overhead cost. Administrative expenses for the year increased by 10% to $170.3 million, however this was entirely driven by higher costs required to support customer growth in the UK, as well as the impact of the exchange rate on the US dollar denominated administrative cost. Selling and marketing expenses for the year increased 14% to $257.3 million, due to the impact of foreign exchange on the US base commission and overhead expenses. The start-up cost associated with the residential solar division, as well as the expenses becoming more directly co-related to the growing portion of the customer base for which selling cost are recorded over the life of a contract. In fact, the majority of the year-over-year increase was driven by prepaid commercial commissions. I’d also like to point out that during the recent quarter, we made four strategic sales in energy management solutions hires, whom we’re very excited to have on-board. These new members of the team provide us increased confidence in our ability to execute our growth strategy around solar and broader energy management solutions that will drive future customer growth within existing and new channels. To wrap up the year, the sum of all these activities and results led to strong bottom line results that exceeded even our aggressive expectations. Base EBITDA increased by 10% to $74.7 million this quarter, excluding the additional prepaid commission expense item. It’s important to remember that our reported Base EBITDA in the fourth quarter of this year included $7.4 million of prepaid commission expense, reflecting the change in classification of prepaid commissions to a current asset effective April 1, 2016. Base EBITDA was $67.3 million in the quarter, a 1% decrease from last year when we fully reflect this change in the current period. For the full year, Base EBITDA increased by 25% to $225.5 million in comparison to the fiscal 2015 excluding the additional prepaid commission expense. In fiscal 2016, we incurred $17.9 million of prepaid commission expense. When you include the prepaid commission expense item, reported Base EBITDA was $207.6 million, an increase of 15% over the prior year. While we did benefit nearly $21 million from foreign currency impact on the translation of our US operations, it was still a very impressive year as we posted performance based improvements of $24.5 million for the year. Now let me turn to the outlook for 2017. The improvements we’ve made to the business are here to stay. To reflect the progress in repositioning the business and to build off of our strong 2016, we believe we will achieve fiscal 2017 Base EBITDA in the range of $223 million to $233 million, reflecting continued double-digit percentage year-over-year growth. Fiscal 2017 guidance includes deductions to Base EBITDA of approximately $40 million for prepaid commercial commissions, which were previously have been included in amortization within selling and marketing expenses. This represents a $22 million year-over-year increase in this expense versus 2016, and represents a go forward run rate for this incremental deduction in future years. As you saw this year, we expect to offset this headwind with continued strong gross margin performance and foreign exchange benefit. If you consider the 20% EBITDA growth that we recorded this year, prepaid commission adjusted and on top of that another 25% for next year, this is a very compelling fees. In addition, Just Energy’s solar program continues to show promise, based on the success of the pilot launch in Southern California, operations will continue to grow with further expansion in California and in Northeast United States. In fiscal 2017, our solar and renewables business is expected to contribute $10 million towards the double digit percentage Base EBITDA targets. With that, I’ll turn it over to Rebecca for some concluding remarks. Rebecca MacDonald Thanks Pat. We enter fiscal 2017 well positioned to participate in the significant growth opportunity that exists in our changing industry. The energy management solution industry is in the midst of significant transformation as customers demand value added product that address the changing manner in which energy will be consumed. We embrace this change and feel we are uniquely capable of transforming our vision and insights into action, by delivering effective strategies and compelling product that capitalize on change and deliver real value. Our growth plan is centered on continued geographic expansion, structuring superior product value proposition and enhancing the portfolio of energy management offerings. Geographically, our expansion plan are focused in Europe, where we are actively evaluating new markets. Our UK business is striving and we are successfully adding consumer and commercial customers in a profitable manner. We believe this early success validates our ability to compete outside of North America and we plan to take this experience and expand into two new European nations this year. A large part of our ongoing success is also being driven by our ability to provide innovative product that take advantage of technological advantage and offer a superior value proposition to our customers. New products like our unlimited plan, our bundled product offering, our JustGreen offering, smart stat, thermostat and JustSolar to name just a few exciting opportunities. During the year, we also started [indiscernible] energy efficient LED lightbulbs without commodity product, and we added air filters to our suite of options. Each of those initiative –innovative product gaining more appeal and delivering more values to customer, which in turn is allowing us to price our solutions at premium, while retaining customers for long duration. In summary, this has been an incredible year for our company, and one we feel places us [indiscernible] on the best path of becoming the premium world-class provider of energy management solution. Our business is healthy and growing even stronger. We are committed to delivering another year of double-digits earnings growth, maintain our stable dividend, pursuing prudent geographic expansion and further strengthening the company’s financial and strategic position in the coming year. We would like to thank the employees of Just Energy, for making these results possible. As leadership team, we are very fortunate to have a group of employees who deliver results and believe in the future of Just Energy. Thank you for all you do for the business we operate, the customers we service, and the communities which we live in. With that I would like to open it up for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] We have a question from Nelson Ng from RBC Capital Market. Nelson Ng Great, thanks. Congratulations on a good quarter. Rebecca MacDonald Thank you very much. Pat McCullough Thank you, Nelson. Nelson Ng My first question relates to the customer margins, in terms of additions and the attrition, so I’m not sure if my math is right, but are the margins for the consumer customers lost higher than the margins for the consumer customers added in Q4? Pat McCullough The margin for… Nelson Ng For the customers lost, for Q4 specifically and not for the year, was it higher than the margins for the customers added? James Lewis No, the margin for the customer for Q4 and full year had [indiscernible]. Now, if we continue to look at those customers the mass markets are – has been added, as Rebecca talked about the bundles there, so that would be the case. Nelson Ng Okay. Pat McCullough So Nelson, we can help you with this offline. I know we put this full year fiscals in our MD&A, but we can pull apart the fourth quarter for you. Nelson Ng Okay, that’s great. And then, just in terms of the fiscal 2017 guidance, like once you back out solar and you kind of back out the – or adjust for the commercial commission prepayments, it implies like a growth rate of above 15% EBITDA for the base energy retail business. I guess, like what’s your expectations in terms of the customer level going forward for the year, compared to I guess the growth in margins? James Lewis Nelson, when you – if you look at it, I think – we’re looking at this from an overall cost perspective, we’re getting more value add, the customers were singing up, or cost selling, up selling investing customers with the filters, with the deck, with the LED lights, so we expect more value under the existing customers. As we bring on new customers, our expectation is that from next year, we’re mostly in the range of 300,000 customers to add. As you go – brings the guidance, typically, and now we didn’t have the other original value in gross margins a little bit. Nelson Ng So you expect modest customer growth than most of the EBITDA growth will come from higher margins per customer? James Lewis Yes. But we are expecting, as Rebecca said to add more customers this year. Rebecca MacDonald I think in the last couple of years, Nelson, what you’ve seen is a, cleaning up our customer base that grew over time with number of unprofitable customers and this theme of change is focused on financial metrics, way more than on actual absolute number of customers. And one thing that we have proven to ourselves is that the margin for customer with the bundled product that is growing, and we don’t expect any change there. Now, would we like to add more customers? Absolutely. But, we have created enormous amounts of discipline around the margin that we will accept for each customer. And if we are not able to get it, we are happy to walk away from it. So what Jay is saying, look at the bundle and look at additions. And, we want to add as many profitable customers as we possibly can. But the key is profitable. Nelson Ng I see. But I guess in terms of your revenue guidance, you’re assuming like a modest customer growth, plus stronger margins per customer to drive growth, right? Pat McCullough Yeah, this is Pat, Nelson. If you go back to our growth strategy, we’re expecting both customer top line and bottom line growth through three main initiatives, geographic expansion, product enhancements to both bundling, but also bringing superior product structures like flat bill products to markets, when volatility returns, we think those are going to exciting products, and then the enhancement of more things sold through the customer at higher value. Nelson Ng I see, okay. And then just kind of moving on to the balance sheet, so you have a $128 million of cash at the end of the quarter, like I presume you’ll allocate some of that to reduce debt, as you’ve done in the last quarter. Can you talk about your – I guess your uses of cash in the next year in terms of what you intend to do with that and also, are there any updates in terms of I guess refinancing or addressing the 2017 maturity? Pat McCullough That was more than one question. Sure, let me start at the top. So, we’re very proud of this quarter based on the cash generated. Not only did we report, as we mentioned a $128 million of cash, we actually paid down $25 million of principal on the high yields senior note. And yes, that remains the priority. As we generate cash and [indiscernible] the dry powder on our balance sheet, we support the restructuring efforts of the business, which we’re very pleased, are right on track and we’re very confident that we’re going to be able to restructure the long-term converts and debt on our balance sheet in a shareholder efficient manner. Nelson Ng And do you have any, I guess updated timing on the solution? Pat McCullough We’re consistent with what we’ve said in the past, we see this getting done this year, this calendar year. We won’t be spilling into the fiscal 2017 calendar year, or the calendar year 2017. Nelson Ng Okay. Thanks Pat. I will get back in the queue. Pat McCullough Thanks, Nelson. Operator Our next question comes from Carter Driscoll from FBR. Carter Driscoll Good morning. So, can you talk maybe just about the competitive situation and maybe in conjunction with some of the changing regulatory in particular, obviously your state had a bit of a hick-up in terms of its curves to the energy retailing market most recently. How do you kind of deal with that from a high level? And then I’ve a couple of follow-up. James Lewis Yes, Carter. We believe the [indiscernible] that’s what they were looking at, whatever the drivers is. And if you look at, historically, when we have those competition, it will drive long-term value. So what we’re doing is we’re working with industry groups, and all the other markets to make sure they have the right market structure in place, that can deliver those types of value. What you’ve seen in place, where you have open access to the bill and you have policy going, you can offer customer innovative products, such as bundle that depends on what you do when you have markets when we only have aligned among the customer bill. Rebecca MacDonald I’m so sorry, I’d like to add to this, management of Just Energy is confident that we would be able to maneuver to any regulatory changes that might show through the year. Being in this for 25 years, I have seen so many different regulatory changes over time, pendulum goes left to the right and back, and our approach by large is conversation with the local environment about moderation, everything has to be balanced. Governments do want to protect the customers, but responsible players want to protect the customers as well. And we see the best protection customer guest is a strong consumer protection act and a very good value proposition to that customer. If you don’t try to drive value then in our opinion you are not going to survive in the business. Pat McCullough And Carter, this is Pat. One of the other enticing things about our strategy is as we move to more off grid or let’s say grid unconnected products, we’ve come a lot less attendant on regulation versus deregulation trends, where some of our competitors are pretty concentrated selling commodity only in deregulated markets. We’re really moving away from that to a broader or more diverse portfolio of products. And if you think about some of the new companies that are selling solar energy storage, they are not constrained by deregulation versus regulated space. Carter Driscoll And to that point Pat, can you talk maybe about your tax rate for some of the new bundled product, maybe quantify a little bit, so we get a sense of how that translate from just commodity offerings? Pat McCullough Sorry, I didn’t understand the beginning of your question Carter. Carter Driscoll I was just saying, can you talk about the attach rates for some of the bundled services, relative to your existing RCE base and how that’s trended over the past few quarters, so we get a sense, or try to quantify going forward as we try to apply some level run rate to, you’re kind of decoupling from the largely dependents on the commodity markets. Pat McCullough Yeah, that’s right. And as we were talking about earlier, and as Jay alluded to. Number of customers versus RCEs, which are commodity equivalent and the products per customer are going to be major drivers of improvement for us in the future. And as we create more of these bundled attach solutions, we’re really piloting first and then scaling into solutions that provide better conversion upfront and then less attrition and longer lifecycles with customers. So if you can get a – obviously stickier, more profitable customer you’re really going to be working both the front end and the back end of those income and cash cycles. And we see evidence of that as we bring differentiated value propositions to our customers. And we’re excited because we’re really starting to get to the point where we can take some of these high levels like LEDs, smart thermostats and solar from tens of thousands of customers to more. Carter Driscoll But quantifying it, is that possible at this point, can you just talk about your tax rate, as from some period, or over a longer period of time, is it 5%, is it 10%? James Lewis I think earlier on, Carter, I think we see in the market where we’re able to deal with and attrition rate, we see attrition, say about 5 percentage points and some like is 10%. What you’ll see in those markets, where you have a control of the bill and you choose the right customer, we’re getting a much this year value composition in those markets. As we look and figure out the ways to deliver this and constrain markets where we don’t have that sort of bill, the stickiness isn’t that strong because the utility determined to win the dropped customers in those markets. So [indiscernible] strong, but in other markets it’s extremely strong. Pat McCullough And Carter, the direct answer to your question is no, we’re not presenting a tax rate at this point in time, but obviously as we move to a broader portfolio RCEs don’t really represent, the strategy what the business will be doing. So you will see us begin to report in a different way in the future where we’re really talking about number of customers and products per customer, so that we can directly to the answer to your question. Carter Driscoll Alright. And then, just maybe a couple of quick ones. On the national side, you talked about kind of the margin expectations as you penetrate and the time to reach maybe kind of, what you’ve earned domestically, and then is there any incremental spend for those two target markets, you’re looking to expand internationally, is that already baked into your EBITDA guidance for the year? Pat McCullough Yes, it is. We’re really looking to address two markets as Deb mentioned on the last call. We’ve put some investor materials out on our investor website, which showed the P&L and the cash over the last four years for our UK organic business development. We’re assuming a similar business case as we enter markets in Continental Europe. Now the difference in Continental Europe and the UK is, UK and Germany are the largest markets by far. So other markets that Deb spoke about, Netherlands, Austria, Ireland are smaller markets. But we do expect to see similar sized customers as the UK, those customers end up being much smaller than North American users of energy, but they end up being much more profitable on a common energy unit basis, meaning gross margin for RCE for example on commodity. So we’re believing, as we’ve said in the past that single-digit millions of dollars to penetrate two new markets, we don’t want to take more than that on in the year, but we expect to have breakeven just after about a year’s time and get a cash on cash return in less than two years, that’s what we experienced in the UK, that’s what we think we can do in the other Continental European markets. Carter Driscoll It’s very helpful. Then just lastly, I’ll sneak one in, on the Resi Solar side, what do you see in terms of pricing, obviously there has been some comments about slowdown in market, I think it’s more unrealistic expectations entering the year, but any kind of feedback you can give, what you’ve learned, whether you can hold EBITDA margins that you thought you would get from those markets and kind of the uptake, I know you reiterated the same contribution you did last quarter, but any incremental color would be helpful? Pat McCullough Yeah, I think we all know with SolarCity and SunEdison that the solar industry is taking some loss. It is impacting the cost of capital of our counterparties, and it’s impacting the cost of capital of financing solar across the industry. So yes, is the answer to your question that there is going to be pressure on our origination income and other parts of the value chain like installation and panels, which we do not participate in. But we really do believe we can hold higher origination income to the industry, but we’re obviously going to feel the same pressure that the industry feels. Rebecca MacDonald And just to add, we have already looked at solar and part of our bundle, because of diversified offerings we have to our customer base, we don’t want to hang our hat on any – not totally on solar and not totally on commodity, and that’s what does give us a real competitive edge. I would definitely, I don’t think this management team would want to be in 100% solar business today, and that’s not the space we would enjoy very much. Carter Driscoll Okay. I appreciate all your responses. I’ll go back in the queue. Thank you. Rebecca MacDonald You’re welcome. Operator We have a question from Damir Gunja from TD Securities. Damir Gunja Thanks good morning. Rebecca MacDonald Good morning. Damir Gunja Maybe can you just confirm the exact level of FX that you’re assuming in your forward guidance? Pat McCullough Yeah, Damir, we’re assuming 1.25 US deal saving. Damir Gunja Okay, that’s great. Thanks. And, I guess just a second one since everything was asked, I just want to confirm you quoted 300,000 customer adds for the coming year, that’s on a net basis? Pat McCullough Yes, Damir. And I think, the way we’re thinking about this, is it comes from geographic expansion, continued improvement in the UK, but also those non-RCE type customers. And I think solar being our energy storage pilot that we talked about in our outlook as well. Damir Gunja Okay. Got it. Okay, thank you. Operator We have a question from Sameer Joshi from Rodman & Renshaw. Sameer Joshi Hey, Pat, good morning. Pat McCullough Good morning. Sameer Joshi Just a quick question on – follow-up on Carter, line of questioning about the solar, is the outlook phase $10 million contribution to Base EBITDA from the solar business, should we expect the top line to be sort of in the same proportion as the $223 million to $223 million would reflect on the top line? Pat McCullough Relative to solar sales? Sameer Joshi Yeah. Pat McCullough Yeah, so I will refresh everyone’s memory on accounting for solar sales given we’re in origination business model. We’ll be experiencing the normal size installation that the industry sees, so I think 5, 6 kilowatts, we’ll be reporting revenue on the basis of the origination income that were paid. There is no cost of goods sold on our transactions, so gross margin will be equal to revenue. And then we’ll be recognizing our direct sales cost, our marketing efforts, our overheads between the gross margin and EBITDA lines. So that’s where you’ll see the fallout. We’ve talked publicly that we know third-parties are paying as much as $1 per watt, excuse me in Southern California, lower amounts closer to $0.50 in the Northeast, but we know that third-parties can hold as much as $1,500 US per transaction. We’re hoping to hold something in that range, but as I mentioned with Carter, there is quite a bit of pressure on those margins and with the heavy margins on the origination side of the business, we don’t think those will be sustainable for the long-term, but in the short-term we hope to experience those type of industry norms. Sameer Joshi Okay. That is helpful. And just two part question. Where there any installations in the – this quarter, in the last quarter, and going forward, are you giving any outlook in terms of solar installations, should we expect total installed base to be in the 5,000 to 7,000 range, and that 5 to 6 kilowatt per residence? Pat McCullough Yeah, if you use the industry norms, that’s the math that you would get to based on our guidance for fiscal 2017. And to answer your question that were limited installations done in fiscal 2016, they’ll become material to us in the coming year, so we’ll start to segment and show the details as to what we’re signing, what we’re recognizing as revenue gross margin needed up. Sameer Joshi Great. Thanks a lot, and good luck. Pat McCullough Thank you. Rebecca MacDonald Thank you. Well, if there are no more questions, I would like to thank you very much for joining us on this call. As management team, we really really appreciate your support, and if there are any other additional questions, all of us are available, you can call us directly. And look forward to talking to you in August when we report our first quarter. Pat McCullough Thank you. Rebecca MacDonald Thanks. James Lewis Thanks. Operator Thank you. Ladies and gentlemen, this concludes today’s conference. 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‘Go For Growth’ Still A Sound Strategy In Today’s Market

Stocks perceived as mitigating the effects of market volatility were popular among investors in the first quarter. Big swings in equity markets drove a flight to quality that benefitted dividend-paying sectors such as Utilities and Telecommunication Services (which were the two best-performing sectors in both ACWI and the Russell 3000). We largely have avoided those sectors due to their elevated valuations and the fact that we don’t believe they offer the growth possibilities that are necessary to generate long-term returns. While some high-profile growth stocks trade at triple-digit P/E valuations today, the reality is that the vast majority of growth stocks do not, and we do not believe it is worthwhile to examine what is happening with the growth story. The case for growth stocks in a low-growth world is relatively straightforward. All else being equal, companies that are capable of delivering above-average growth in a low-growth world should be rewarded by investors over time. However, in investing, all else is rarely equal. A high-growth stock at an unsustainably high valuation can be just as risky as – or even more risky than – a company that is in secular decline. 2015 was the best year since 2009 for major U.S. growth indices (e.g., Russell 1000 Growth, S&P 500 Growth) versus their value counterparts (e.g., Russell 1000 Value, S&P 500 Value), so it makes sense to take a deeper dive. The median growth stock trades at a similar valuation (on both an absolute and relative basis versus non-growth stocks) to where it started 2015. For example, the median P/E of Russell 1000 Growth stocks that have no weight assigned to the Russell 1000 Value traded at a next 12-month P/E of 19.4 at the start of 2015. This group of stocks entered 2016 with a very similar next 12-month P/E of 19.5, and ended the first quarter at 19.7. Absolute valuations for this group as a whole are not cheap, and therefore, risks associated with coming up short of investor expectations can be high. However, the premium for these high-growth businesses versus the rest of the Russell 1000 is well within historical norms (see chart below). Against this backdrop, we continue to seek opportunities to own well-positioned, growth-oriented businesses with valuations that offer attractive compensation for the risks taken. The number of such opportunities might be fewer than earlier in the current market cycle, but we believe a selective and active approach to investing can maximize the likelihood of finding such companies today. Click to enlarge Investing in companies that can grow their earnings at rates above the trend in broad economic growth is particularly important in today’s slow-growth economy. As an illustration, we’ve taken returns in the U.S. equity market on a rolling 10-year basis and broken them down into how much came from earnings growth and how much came from changes in the P/E multiple (i.e., multiple expansion or contraction). Beginning in 1970, it has been earnings growth that has been more consistent and stable most of the time (see chart below). Historically, earnings growth has been a more reliable contributor to the returns we get as investors than multiple expansion. Click to enlarge While there certainly are periods in which multiple expansion drove or provided a boost to returns, changes in multiples have been quite volatile. In the 1980s and 1990s – when multiple growth helped returns – the market was coming off some attractive starting valuations and had a backdrop that was favorable for rising valuations. As a result, there was solid multiple expansion. But before that – and, more importantly, recently – not only could investors not rely on multiple expansion, they also had to deal with multiple contraction. This is one illustration of why we believe it is particularly important right now to focus on companies that are capable of growing their earnings on an individual basis, which, in our view, puts investors in a much better position to generate positive returns. Past performance does not guarantee future results.

Pampa Energia’s (PAM) Management on Q1 2016 Results – Earnings Call Transcript

Pampa Energia S.A. (NYSE: PAM ) Q1 2016 Results Earnings Conference Call May 17, 2016, 10:00 AM ET Executives Lida Wang – Head of IR Leandro Montero – CFO Analysts Frank McGinnis – Bank of America Merrill Lynch Walter Chiarvesio – Santander Bank Santiago Wesenack – Raymond James Operator Good morning, ladies and gentlemen and thank you waiting. At this time, we would like to welcome everyone to Pampa Energia and Edenor’s joint first quarter ’16 results conference call. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during both company’s presentation. After the company’s remarks are completed, there will be a question-and-answer session. At that time, further instructions will be given. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Pampa Energia and Edenor’s management and on information currently available to both companies. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Pampa Energia and Edenor and could cause results to differ materially from those expressed in such forward-looking statements. Now I would like to turn the conference call over to Mr. Leandro Montero, CFO of Edenor. Mr. Montero, you may begin your conference. Leandro Montero Thank you very much. Good morning, everyone and thanks for joining us on this joint conference call of Pampa Energia and Edenor. As we usually do, I first Leandro Montero, will be presenting for Edenor first and then for this quarter, Lida Wang will be sent for Pampa Energia. First, we will focus on the main events that lately took place and then briefly review the results of the first quarter of 2016. As you know, you can always call any member of our team for more details on the results of the period or any doubts you might have. On April 16, this year, the Regulator issued a note number 12151 establishing that all final penalties imposed by the ENRE after this date must be valued according to the kilowatt hour values in effect off of the last date of the semester or period during which the even given rise to the penalty accrued including any increases or assessment applicable to our remuneration of such date. In addition fines and penalties set forth within the preview of the note will have interest from the last day of the semester and with the even giving rise to the penalty accrued until the date they are paid by us. Because of this note, the company accounted for an assessment of approximately AR$250 million regarding the penalties of the last semester, which is the September 2015, February 2016 period, and in addition registered the amount of AR$129 million to reflect a good interest according to the note terms. Then by means of Resolution number 31 of the ENRE issued on March 28, we started to compensate this small residential customer who had been affected by the power outage occurred during the period between February 12 and February 18 this year. The amount of such compensation depends on the duration of each relevant power outage. The total compensation to be prepared to our residential customers amounts to AR$73 million. Moving to the normalization of the sector has started with a new tariff of schemes issuing generally on April 1 this year the ENRE Resolution number 55 which approves that 2016 Tariff Revision Program and establish fixed tariff for mid out to be applied in the tailored tariff revision process as well as the compensation and penalties regulation together with a tentative schedule including the tariff of the working plan to be submitted. In our opinion, the EITR process we have to factor in our right analysis of our distribution cost, modifications to our quality of services standards and penalty scheme and finally a revision of our asset base of return and the balances and other issues resulting from the measures presently adopted by the Argentine government to provide us with temporary and partial release. Finally the Ordinary and Extraordinary Shareholders Meeting held on last April 28 appointed a permanent and alternate members of the Board of Directors and Commission. In connection with the Board of Directors New 10 Class B and C members were appointed five as permanent directors and another five as alternate directors. Now taken into consideration the results of Edenor in the first quarter of 2016, net sales increased 209% reaching about AR$2.9 billion compared to AR$969 million for the same period of 2015. This variation was mainly tariff increase obtained since February 1 this year, which means not only higher distributer added value with impact in the company’s margin, but also an increase in the cost of energy included in the tariff. At the same time, the volume of energy sold in terawatt hour increased about 2% regarding to the volume of and regarding to the volume of sales reached to 5,671 terawatt hour in the first quarter this year from 5,567 kilowatt hour in the first quarter of last year basically due to an increase of 6% in medium commercial customers and a 3% growth in industrial and [system] customers. The electricity power purchases increased 152% to AR$1.3 billion in the first quarter of 2016, compared to AR$523 million in the same period of the year before, mainly due to the purchase price increase effective as from February 2016. Operating expenses increased approximately AR$829 million as a start of the right in salaries and Social Security taxes and ENRE penalties as a consequence of the accounting effect of the note 121-151 issued by the ENRE as described before. The sum of these two effects amounted to a loss of AR$734 million and represent about 89% of the total increase. As I mentioned in the previous conference call, the rise in salaries is basically explained by an increase in salaries agreed with the Unions last year of which 27.8% become effective as from September 2015. Now there is still an 11.9% remain on grace that will be since this March. Regarding Pampa Energía, the increase can be basically explained by the application of the new method of calculation which establishes our penalty should be based on the distribution added value that corresponds to the date on which event occurs. Edenor’s net operating income decreased AR$678 million amounting a gain of AR$238 million in the first quarter of 2016 compared to a gain of AR$916 million in the same period last year. This negative result was due to an increase in operating expenses as explained above and to a reduction in the amount of time as subsidies under Resolution 32 issued by the fixed rate of energy in March 2015 and cost maintain in maintenance increases with what continues since February 1 this year. Finally the net income of the period shows a decrease of AR$595 million, amounting in a loss of AR$125 million in 2016 first quarter, compared to a gain of AR$470 million in the same period last year, mainly due to the operating results explained above and to a decline in financial results caused basically by the effect of our debt of the devaluation in the first quarter this year of the Argentine Pesos related to U.S. dollar. In connection to Edenor’s adjusted EBITDA, it resulted in a gain of AR$338 million in the first quarter of 2016, compared to a gain of AR$366 million for the same quarter of 2015. This amount includes in 2016, AR$513 million of additional income of the Resolution 32 and its assessment for generally the last month effective. To end up, regarding Edenor’s capital expenditure, during the first quarter this year, our investment increased about 88% reaching about AR$629 million compared to AR$334 million in the same period of 2015, mainly focused on increased enhancement, new connections and maintenance and improvements. So this concludes my review on Edenor. I will now leave you with Lida Wang, Chief of Investor Relations at Pampa Energía, who will review other relevant events of the Group, as well as the consolidated results. After that, we will be open for questions. Lida Wang Thank you, Leandro and good morning, everyone. Lots of developments have happened since our last call on March. As you may now consequently after the approvals obtained from Pampa and Petrobras Brazil, Board of Directors, last week we signed the SBA contract acquiring to controlling 67.2% stake of Petrobras Argentina for a base price of $892 million. The base price is subject to agreed adjustments, likely no material until the closing. As we signed the SBA contract, we deposit 20% of the base price in Escrow account being the remaining to be paid at the closing. Let me give you a quick glimpse of Petrobras Argentina. Petrobras Argentina [indiscernible] Argentina with a daily production of 28,000 barrels of oil and seven million cubic meters of gas, 60% gas and 40% oil currently. They also participate in refining and distribution business with our refinery install capacity of 30,000 barrels per day, plus a retail network of 260 gas stations across the country. In Petrochemicals segment, Petrobras Argentina operates two plants being the only national integrity producer of styrene, synthetic rubber, polystyrene and BOPS. In gas and energy segment, Petrobras Argentina controlled almost 1200 megawatts of the power generation capacity through two thermal gas fired power plants and one hydro plant, increasing Pampa capacity by more than 50% with premium quality asset. Petrobras Argentina also holds the other 25.5% of TGS, the largest gas transportation company and one of the leading natural gas liquids producer of Argentina. Last first quarter 2016, Petrobras posted a AR$2.4 billion of EBITDA and a net income of AR$931 million. To test this ticket Pampa was formed with a combination of own cash of up to $220 million, up to $250 million from the sale of TGS is completed prior to the closing and I’ll explain later more details. Up to $700,000 of financing from a concert in a bank, prior financing of up to $225 million of which we have $140 million permitted from YPF and financing from the vehicle controlled by the controlling shareholders of the company for up to an amount of $115 million. As a part of the deal, and as of Petrobras Argentina taking over by Pampa, Petrobras Brazil will remain as a partner as they agree to acquire one third of their rights and obligations of Rio Neuquen block for an amount of $72 million. Likewise YPF we acquire the another one third of Rio Neuquen for the same amount. So the former Petrobras Argentina YPF and Petrobras Brazil will pin up with an ambitious investment plan of approximately AR$0.5 billion in Rio Neuquen one of the best and most respected gas fields in Argentina to be spend in the near future and period of which partners take in the block. Together with a one third of Rio Neuquen, YPF is also acquiring the 80% of Petrobras Argentina to state our Latina Block, another area with high gas potential in Neuquen Basin. After the completion of the aforementioned sales, Pampa Energía together with the former Petrobras Argentina will hold 8% of Argentina’s total gas production, an important market share placing us as one of the country’s leading oil and gas production company. Moreover after the closing, Petrobras Brazil to acquire 100% of the rights and obligations under the operating agreement Petrobras Argentina entered into by Petrobras Argentina branch and Yacimientos Petrolíferos Fiscales Bolivianos in relation to the Corporación Creada Block. We assign a negative value of AR$20 million in those assets. Furthermore, in compliance with the provisions of the Argentine Capital Markets Law, [Capitalist] relating to the mandatory tender offer to be made in the event of change of control and indirect acquisition, prior to the closing of this transaction, the company will launch a mandatory cash tender offer for the minority shareholders of Petrobras Argentina. As I mentioned before, when explaining how old this acquisition ticket, the company has the necessary terms to fulfill and the cash offer. In addition to that, the company thought to evaluating the net of simultaneously with the launching of the cash offer, offer of a loan tariff change of to Petrobras Argentina shares into Pampa shares. Both the cash and exchange offering as well as the call for Shareholders Meeting to deliberate on the corresponding capital increase will be probably submitted for approval of the Board of Pampa and duly reported to the market, in accordance with the requirement establishing the Argentine Capital Markets Law, the Argentine Security and Exchange Commission with CMB Regulation applicable U.S. laws and regulations. In the long term, after the closing and completion of the cash and exchange offering, the company felt assessing the possibility of managing Pampa with Petrobras Argentina, being Pampa the surviving entity. In the event of carrying out another and after total analysis, we will submit for its approval of full company’s board and shareholders. Acquiring Petrolera Argentine is a huge milestone for Pampa, which not only will significantly increase the size of the company, but also will play as one of the key players in Argentina’s energy sector and a few integrated energy private owned company in Latin America. Our strategy going forward is to significantly among other things, grow our focus in gas production a business that we believe is going to play a dominant role in the next few years in Argentina. Also as related to what I mentioned before on April 22, Pampa agreed with Harz Energy a subsidiary of Group Neuss a 45 days exclusivity period to complete the sale of the stake and rights held in TGS representing the 25.5% of its shared capital for an amount of $250 million, Harz Energy paying an amount of $3 million as a consideration for the exclusivity period, which will be deducted from the purchase price. Moving to the last news towards normalization in the utilities sectors set by the new government [indiscernible], the Secretary of Electric Energy issued Resolution 22 in which increases the prices of all generation as of February 2016. For Pampa generation unit, sales resolution represented an average increase of 42% in comparison with the previous pricing scheme under Resolution 428/15. Also TGS was granted 200.1% tariff increase in gas transportation as of April 2016. In line with the Resolution 21 issued by the Ministry of Energy and Mining and which also encourages an Internal Tariff Review, ITR by April 2017. That increase must be taking on account of the ITR and subject to compliance with the mandatory investment plan for the next 12 months to be overseen by Energas, the Gas Regulator Entity. In electricity distribution it was issued Resolution 55, which details was previously reviewed by Leandro. Going to more news and generation specially in Loma de la Lata Power Plant with the President of Argentina’s, Vice President, Gabriela Michetti the Gobernador de Neuquén province, Omar Gutiérrez National and Provisional Authorities and Executives from the company, on May 2,we inaugurated the new 105 megawatt gas turbine at Loma de la Lata, which increased its installed capacity to 645 megawatts. The total investment was AS$1.1 billion. The new LMS 100 gas turbine manufactured by GE, General Electric is the same model as suspension gas turbine build with the most advanced technology available which allows the high efficiency and flexibility. Currently the commission of this new gas turbine related by the last profit incurred are being covered by GE, the contractor because we engage with them in EPC contracts. Anyway we expect to start commercial operation soon. Moreover in our goal of supporting the development of renewable energy in the country, on April 18, Loma acquired 100% of share capital of Greenwind for $2 million. Greenwind is the developer of Corti Project, a 100 megawatt install capacity wind farm to be built in Bahía Blanca, south of Buenos Aires Province. Greenwind holds the right to usufruct a 1,500 hectares field in which the wind has been measured for the last four years. Regarding the Arbitration Award against Isolux, Loma has been able to collect a total compensatory agreed amount of $16 million, including interests and expenses leaving no remaining due amount from Isolux. In relation to debt transactions last month, our subsidiary Petrolera Pampa issued short term North BCP Series 14 for an amount of AR$296 million bullet in 12 months and at plus 590 basis. Also March, Petrolera Pampa was granted by ITVC new productive launch for AR$300 million aiming to repay along with the same bank granted back in July 2015, there along with a repay in 10 quarterly increased installments beginning on January, 2017 and at a combined 23% fixed rate for the first year and a variable rate of about core plus 575 basis for the remaining period. Finally, on the news recap, on April 29, Pampa Shareholder Meeting approved the appointment of Clarisa Lifsic, Santiago Alberdi, Javier Campos Malbran, Julio Suaya Demaria as Independent Directors replacing [indiscernible]. Moreover as other independent directors were appointed José María Tenaillon, Mariano González Álzaga and [Gomez]. Regarding the committee Santiago Alberdi and Clarisa Lifsic were appointed in replacement of [Marcelo and Hector]. On May 10, the Board of Pampa approved the designation of Marcello Mindlin as Chairman and Gustavo Mariani as Vice Chairman of the Company. So regarding Pampa’s consolidated results, first of all let me remind you that we are still not include in TGS figures in our figures and because we co-control Transener, we only consider 50% of its adjusted EBITDA. So moving on to the result, in the first quarter of 2016, we presented an EBITDA of AR$1,353 million compared to an EBITDA of AR$833 million in the same period of 2015, mainly due to increases of AR$56 million in generation and AR$517 million in oil and gas segment, partially offset by increases of AR$6 million in the transmission, AR$31 million in distribution and higher losses of AR$16 million in holding and other segment. The higher EBTIDA at our generation segment was many driven by prices for oil capacity remuneration, from the application of Resolution 22 compared to 2015’s first quarter prices that were under an older resolution than 482 as well as the peso devaluation, which impacts our U.S. dollar contract to which we sell the energy to CAMMESA and under Energía Plus. This effect partially offset by a lower electricity dispatch, which mostly due to technical problems a lower availability of gas in our thermal units and also due to increasing operating cost as you may know fuel oil capacity generation is all provided by CAMMESA. In Transmission segment, the EBITDA fell AR$6 million and during the first quarter of 2016 versus the same period of last year, mainly due to increasing operating cost outpaced the accrual of renewal revenues corresponding to the renewal agreement plus the fact that as of January 2015, Transener stopped recording requiring financial income on the export line [cannon] which is instead O&M remuneration at sales. The interest on the full line registered in the queue first 2015 corresponds to one time restrictive adjustments to the tenants. Moving on to the distribution segment, which was previously reviewed by Leandro, during the first quarter of 2016, the EBITDA decreased by AR$31 million on a consolidated basis compared to the same period of 2015, mainly because the resolution for reduced income and tariff increase to end users were not able to offset the operating and energy processing cost. In the oil and gas segment, in the first quarter of 2016 we posted an adjusted EBITDA of AR$645 million compared to AR$127 million in the same period of 2015. This EBITDA was mainly driven by higher natural gas sales from our joint venture between Petrolera Pampa and YPF in [indiscernible] as well as the effect of the peso evolution impacting our U.S. dollar sales price. In that sense, during the first quarter of 2016, we produced an average of 2.1 million cubic meters per day versus 906,000 cubic meters in the same period 2015, which represents an increase of 136% increase quarter-over-quarter. The agreement with YPF signed in 2013 and initial committed to invest $150 million was later extended in May 2015 an increase to a total investment from Petrolera of around $350 million to be done by 2017. As of March under this JV we have 97 productive wells we around 1.7 million cubic meters per day of natural gas production during the quarter. Overall, including the agreement with Petrolera and Apache as of March, we have 121 productive wells. Finally our holding segment represented a negative EBITDA of AR$30 million in the first quarter of 2016, compared to a loss of AR$414 million in the same period of 2015. Finally in terms of net income, Pampa presented a consolidated profit of AR$673 million in the first quarter of 2016 of which AR$608 million corresponds to the shareholders of the company, compared to AR$902 million in the same period of 2015. This was mainly due to higher losses from financial exchange rate difference and interest. As a result of Peso depreciation against U.S. dollars partially offset by higher profits from results and exchange rate difference from the holding of financial instruments. So this concludes our review of Pampa and Edenor. Now we open the floor for questions. Thank you. Question-and-Answer Session Operator Ladies and gentlemen the floor is now open for questions. [Operator Instructions] Our first question comes from Frank McGinnis from Bank of America Merrill Lynch. Please go ahead with your question. Frank McGinnis Hello, good day. Two questions if I could. One is just related to how you are managing the portfolio that you are acquiring with Petrobras Argentina? You are bringing in Petrobras into Rio Neuquen as well as YPF and then you’re also YPF is going to take one of the others Aguada de la Arena, I was wondering if the YPF this is as I understand an exchange to the financing, but it appears that you might by that back or pay back to financing and maintain those stakes. I was wondering if that is your intention. And secondly related to that, would — are you thinking of possibly adjusting a portfolio in other ways and selling other pieces to other participants in the market in Argentina? Leandro Montero Hey Frank, Leandro Montero here, begin by the end trying to remember all your questions, no, we are not planning at this moment to sell any additional part of the EMP portfolio. Regarding YPF, they will be operating Rio Neuquen. The idea is to keep one third Petrobras Brazil, one third YPF as an operator and one third will remain with ourselves. You mentioned to return the fund and keep the assets, I don’t know why you had a doubt, but that’s not the case. We plan to divest those assets to YPF as informed in the past few days. Frank McGinnis Okay. Okay. Great. That’s very clear now. I just didn’t read the Press Release that was the — left me with a question related to that. Then if I could just have one more just in terms of generation capacity and capacity utilization, with all the changes going on in the market with potential changes in pricing and regulatory rules, I was just wondering how you’re thinking about the generation business in terms of potential upside, in terms of both pricing as well as the ability to have a greater capacity utilization? Leandro Montero Okay. If you think, I’m sure as I mentioned, we will be increasing our capacity by more than 50% by adding [Canelma] which is state-of-the-art combined cycle and of 160 megawatts of capacity and we will be adding in also in Canelma of 860 megawatt of capacity where the project to add the steam turbine and closed cycle and convert that in a 240 megawatt combined cycle. It’s already there and it’s something that we will like to do as soon as possible. Although there is something that we need to negotiate with the Secretary of Energy, Petrobras has also made $80 million in grades, generally more than $80 million in grades that Petrobras has not utilized. We here in Pampa, we did use them and was part of the grades that we used to build the new 100 megawatt gas turbine that we had recently inaugurated in Loma. So that is where what concerns on the thermal plant in Petrobras, we’re also going to be adding this 285 megawatt hydro plant [indiscernible] and the other plant that we have for our — to increase our thermal capacity in Pampa, we will be participating in this billing process that will be taking place next week. We think we will be a placing something between 150 around 150 megawatts of thermal capacity and it has been announced we’re also planning to be to participate in the renewable bidding that does not have a date, but we expect that bidding to take place in the next two or three months and for that auction we have already secured two facilities to our wind farms. So, that’s what we’re expecting in terms of new generation of new project in generation capacity and regarding the regulatory environment we still have not much — we don’t have a clear view of what the government is going to do to accommodate what we call the old energy capacity. I’ve seen that something that this new government will focus after finishing in internal tariff region that they’re planning to do this year on distribution and transmission and so we expect that a new regulatory framework for the end of the year or early next year, but that’s — again that’s our guess, our assumption. Frank McGinnis Okay. Great. Thank you very much. Very helpful. Operator Our next question comes from Walter Chiarvesio from Santander Bank. Please go ahead with your question. Walter Chiarvesio Hi, yes hi good morning everyone. Thank you for taking the call. I have a few questions more focused on the distribution segment in Edenor. So the first one is the volume of residual has been quite resistant or quite strong even despite that the rates to the consumer has been increased. What is your view about it? How do you think that will perform in the upcoming quarters given that we will have the full impact of the tariff increases and I guess in the second quarter? The second question I’d like to ask is regarding the penalties imposed by the ENRE, if you can explain a little bit more how is that or what do you expect in the future about it, if the level that we saw in the first quarter is also expected for the upcoming quarters? And third question would be regarding the Resolution 55 by the ENRE and if you can develop a little bit on how this resolution determines the calculations of the asset base to determine the tariff. I understand that you have some freedom to propose some methodology. And the last one I saw a capital work increase receivables in Edenor I guess that is related to the increase of tariff, but my question is, is that just business as usual or you show some increase in delinquency or something related to the rate increases that we saw in the first quarter. That’s all my questions at the moment. Thank you. Leandro Montero Okay. Good morning, Walter. Well just to start with the first question, as you mentioned we have not seen any change in the behavior of our customers relating to the energy consumption. In fact during March we had a decrease a deep decrease in the residential consumption of around 20%, but this was because of the weather conditions and because it was in comparison with very high consumption period, which was March 2015. In fact all our customers have been receiving the new builds with full impact of the new tariff since April 1 and we didn’t see a change in the behavior. In fact during April, the average demand for Edenor increased 5.5% in comparison to the same month last year. So we don’t see any change in the behavior may be because increasing the tariff is still not as high as we as think or since the average build for our residential customer is between AR$80 and AR$300 per month that if you compare this with any other service or like cable or gas maybe it’s even lower. So we didn’t see any change. And then in relation to the penalties, during the quarter the Regulator issued this note, the 120/151 which was an instruction for the Regulator in order to set how they were going to establish the amount of the penalties to be imposed since February or since April. In that note they establish that new kilowatt per hour price should be taken to account in order to both the penalty taking into account the price of the kilowatt hour in the last day of the semester that was being punished. You know that penalties and fines are imposed every semester. So what we did was to assess the amount of the penalties for the semester from September ’15 to February ’16 and that had an impact of approximately AR$250 million. In addition we were imposed a penalty of AR$73 million because of the outreach we had during the period of February 12 and February 18 and in addition we started to work with our penalties taking into account the new tariff scheme. Of course we’re discussing with the Regulator about the level of the quality of standard that should be taken into account in order to calculate the penalties. But these are discussions we think will be end with Integral Tariff Revision process. Then going to the Resolution 55 of ENRE as you mentioned the ENRE of the Regulator asked to present two different ways to determine the asset base. One they called the cash flow approach. In fact it’s not the cash flow. It’s a calculation taking into account the account in value of the assets and the other is the net realizable value or replacement value of the assets, which we think is most appropriate asset base calculation, but ENRE the Regulator is open to receive another methodology we consider. And then going to the working capital decrease — increase, we have as you mentioned, the receivables increase because of the increase in the tariff, but we haven’t seen yet an increase in the delinquency or the trough and even in bad debt. So by the moment it shuts the normal increase because of the higher amount in our bills. Walter Chiarvesio Okay. Thank you very much. Leandro Montero You’re welcome. Operator Our next question comes from Santiago Wesenack from Raymond James. Please go ahead with your question. Santiago Wesenack Hello everyone and thanks for taking the questions. Just three quick ones if I may. The first one on the Petrobras acquisition, if you can give any guideline if there is — if you can give any guideline on the future dates, when should we expect anything on the closing side maybe and what’s still missing to get the actual closing of the operation? Then the second question on the generation side well this quarter you had technical issues as Lida mentioned on the steam turbine both in [indiscernible], is there any news, any positive news for the second quarter? And also in terms of the gas supply from CAMMESA taken into consideration that we’re now into one month and half after the closing of the first quarter, how is the gas flow coming from CAMMESA? And the last one for Leandro Edenor at the Edenor side, if we reclassify revenues, last year revenues under Resolution 32, was to the revenue line we saw this quarter, a decline in terms of EBITDA margins, mainly driven by distribution and distribution and electricity purchases going higher or growing higher than your revenues. What should we expect for second quarter, third quarter and the rest of the year? Thank you. Leandro Montero Okay. Regarding the timeline for the closing of the transaction, we expect closing to happen within the next 90 days and we need to fulfill all the condition prices basically a preference right of partners in some areas in the — EMP areas in North Basin and in Endosa. Some lender consents, small issues and they refinance of Petrobras Argentina $300 million bond that we expect that to happen in the next six year or 90 days. Once those condition presences are fulfilled, we will go to the closing of the order transaction. The second question… Lida Wang The second question was about CP, first quarter not performing so well compared to last year. Well in terawatt we just finished a major overhaul that this quarter it didn’t responded as we expected to, but the second quarter actually a little bit just brightly acted as closing the first quarter we started to work on this to reconnect and we expect the second quarter to do better than Güémez the thing that is not available it’s not something discussions to us. Remember that gas is provided by CAMMESA but the old capacity generators and there wasn’t any gas available in the north part in Argentina. So, we always collected the cost because we’re available and we are not collecting the generator the variable cost from that. Third question is going to be addressed by Leandro. Leandro Montero Good morning, Santiago. Well, yes your precision is correct because in 2015 in the first quarter 2015, we recorded an additional revenue because of one of the Resolution 32 effect, which was the recognition in revenues of the salary long we had received in 2014. That’s why the first quarter 2015 is impacted by AR$464 million regarding this long. If you see our last year EBITDA, this quarter is similar to the quarter last year, just taking out this special effect that was recognized in 2015. So we think that for the upcoming quarters, the EBITDA will remain similar to the EBITDA this quarter, taken out the one-time effect of the increasing penalties and final penalties line. Santiago Wesenack Okay. Great. Thank you very much. Leandro Montero Welcome. Operator [Operator Instructions] And ladies and gentlemen at this time it’s showing no additional questions. This will conclude the question-and-answer session. I’d like to turn the floor back over to Mr. Montero and Ms. Wang for any closing remarks. Leandro Montero Okay. Thank you very much for attending this conference call. Have a nice day. Lida Wang Thank you. Operator Ladies and gentlemen thank you. This concludes today’s presentation. You may disconnect your lines at this time. Have a nice day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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