Companhia Paranaense de Energia (ELPC) 2014 Q1 法說會逐字稿

Good afternoon, and thank you for standing by. Welcome to the first quarter 2014 earnings conference call of Companhia Paranaense de Energia Copel for investors and analysts. We inform that all participants will be in a listen-only mode during the Company's presentation. And then there will be a question-and-answer session when further instructions will be given. (Operator Instructions).

Before proceeding, let me mention that forward-looking statements that might be made during this conference call regarding Copel's business perspectives, projections, and operating and financial goals are based on the beliefs and assumptions of Copel's management as well as on information currently available to the Company.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions as 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 can also affect the future results of Copel and could cause results to differ materially from those expressed in such forward-looking statements.

This conference call is attended by Mr. Antonio Sergio Guetter, CFO and Investor Relations Officer. The presentation to be made by Copel management can be followed at the Company's Website at www.copel.com.br/ri. Now, I would like to turn the conference over to Mr. Antonio Sergio Guetter, CFO and IRO.

Good afternoon, everyone, and welcome to Copel's conference call to discuss the first quarter of 2014 results. I would like to start thanking you for participating in this conference call and stress that it is always a pleasure to speak with you.

The Brazilian power sector had a somewhat restless beginning in 2014. The unusual drought for this time of year caused the reservoirs, the water reservoirs, to fall to concerning levels. And the above-average heat that we are experiencing in Brazil and particularly in the south, a record heat, led to a record electricity consumption as well. Despite these concerns, particularly related to the costs of energy in the short term, the first quarter of Copel was very positive.

Please go to slide three. As you can see, our net income was BRL583 million, up 46% compared to the same period of 2013. Our revenue grew 28% and surpassed the mark of BRL3 billion. It is the first time ever that we hit the mark, while the EBITDA grew 29% and ended the first quarter of 2014, as you can see, totaling BRL859 million.

This good result is explained by the performance of our generation company, especially by the sale of energy in the short-term market, influenced by the high prices in the spot market in the period and by the sale of energy produced specifically by our thermal power plant Araucaria, which as you know went back to being operated by the Araucaria gas plant. It used to be leased at the PETROBRAS. Now, Araucaria gas plant is a subsidiary of Copel.

On the distribution side, however, the result was negative, stemming again from higher energy costs, primarily those related to thermal contracts and contracts entered into in January as a result of the A-minus one auction held at the very end of last year 2013.

Still talking about the [fiscal], we received around BRL884 million in disbursement of CDE funds and of the regulated market account, ACR, to offset costs incurred mainly due to the involuntary exposure to the spot market in the first quarter 2014 January, February, and March.

Actually, talking about involuntary exposure, we acquired in the A-zero auction a few days ago 388 average megawatts, which zeroed our exposure in 2014. I would like to remind you that this agreement entered into [first] in the beginning of May.

To end the highlights of Copel's distribution or Copel Distribuicao, we have to point out a significant 8.3% growth of the grid market compared with the first quarter of 2013 stemming from high temperatures and the good performance of the economy in the state of Parana in the period, which includes consumption.

As for cutting down costs, more necessary at the distribution company, we reduced by 6% our personnel expenses, a fact which is in keeping with our target set for 2014 and 2015, which we will firmly pursue.

Last but not least, we won just last week another three transmission line projects in an auction, which will add around BRL50 million in [WRAP], annual allowable revenue to Copel generation and transmission.

Now, these were the main highlights for the first quarter. However, I would like to give you more detail specifically about the Araucaria thermal power plant and about the compensation for energy purchase cost.

If we go to slide four, we can see a significant part of our results coming from the operation of the Araucaria thermal power plant. As you can see on slide four, the lease agreement for the Araucaria TPP entered into between Araucaria gas plant, UEGA, and PETROBRAS expired on January 31st, 2014, and the contract was not renewed.

So, in February 1st, 2014, the operation of the plant has been under the responsibility of Araucaria TPP, a company controlled by Copel, which has an 80% stake in the business, the remaining 20% belonging to PETROBRAS.

The Araucaria TPP does not have a bill of -- excuse me, the Araucaria TPP does not have availability agreements and operates under a merchant model in which revenue depends on the operation of the plant. And energy when produced is sold in the short-term market.

In the first quarter 2014, consolidated net revenues of Araucaria TPP totaled BRL474 million. It is the first line of the table. In the same period, net income stood at BRL134 million. And EBITDA was BRL167 million.

It is worth highlighting that this plant continues to operate in the second quarter, which allows us to conclude that Copel's results will continue to be positively impacted by the thermal power plant's good performance.

As to the recovery of costs related to the purchase of energy, it also influenced our results. We're on slide five now, where we give you more detail on the amounts received.

As you know, Copel distribution had to purchase energy in the spot market since the involuntary exposure caused by the lack of auctions to offset insufficient amounts, the energy contracts ended in the end of 2013.

This problem, and it is important to highlight that it did not impact only Copel. It impacted the electric system and the electric sector as a whole. This problem was aggravated by the hydrological conditions, which drove the energy spot market price up to its maximum level of BRL832 per megawatt hour.

To offset the January costs, the Brazilian government enacted decree number 8203 amending decree 7945 of 2013 and allowed the transfer of CDE funds (inaudible) energy development account to cover only for the costs incurred due to the involuntary exposure of [discos] in the month of January 2014.

With the higher electricity price and the lack of funds in the CDE, the government created the regulated market account, the so-called ACR account, which ended up being ratified in April of 2014 by decree number 8221.

The ACR account will cover expenses resulting from the involuntary exposure to the spot market and from the thermal plant dispatch between February and December 2013. We have used this account in the months of February and March.

Regarding value that we posted BRL832 million in compensation for electricity costs. However, BRL884 million was transferred relative to the first quarter. We had estimated BRL832 million, but BRL884 million were transferred, of which BRL115 million referred to January, BRL447 million to February -- they came on later, but they're relative to February -- and BRL322 million relative to March.

The BRL52 million, which is the amount estimated by the Company and the amount transferred, will be adjusted in the next quarter.

Please go to slide six. As for Copel's consolidated results, you can see on slide six that the net operating revenue grew 28% in the first quarter 2014, surpassing the mark of BRL3 billion. The main reasons (inaudible) for this revenue increase were going to talk about revenues from electricity sales to final customers and to distributors.

Well, there was a 20% increase in revenues from electricity sales to final customers due mainly to the 9.55 tariff increase of Copel distribution as of June 21st, 2013, and secondly, the 6.6% upturn in sales volume in the period.

Also regarding electricity sales to distributors, there was a 53% growth, mainly stemming from higher revenue in CCEE from energy sales due to the Araucaria thermal power plant sales in the short-term market as of February of this year and higher prices PLD, as I said, in the period.

The use of the main distribution and transmission grid, which is made up of (inaudible) revenues, posted an 8.8% upturn due to the 8.3% expansion of the grid market of Copel distribution, resulting from the good performance of the Parana economy.

Other revenues, which encompass construction, telecom, gas, and other revenues, had a 25% upturn and reached BRL463 million, driven greatly by two factors, one, increase of the construction revenues, which reached around BRL300 million, and the booking of investments in distribution and transmission infrastructure and, number two, by the 20% growth in telecom revenues in the quarter, which totaled BRL40 million in the period.

Please go to slide seven, where we detail our operating expenses in the first quarter 2014, which increased 28% compared to the same period of last year. This can be explained mainly by the 17% increase in the cost of electricity purchased for resale, which totaled BRL982 million.

I would like to remind you that this amount already considers the BRL832 million offset by the transfer from CDE and from the ACR account that were accounted for in the period. Charges for the use of the main distribution and transmission grid were down 14% in the period due to a cost reduction in systems service charges following the (inaudible) dispatch of thermal power plant [to offsite] (inaudible) order in the period.

The first quarter was also marked by higher expenses with gas purchases, resulting from the end of the lease agreement of the Araucaria TPP, which since February has been buying gas from [Copel Gas], which on its turn is buying more gas from PETROBRAS to meet this additional demand.

Well, talking about personnel costs, including pension benefits, they dropped 6% on the top right-hand corner of the slide and are -- the personnel costs are detailed on the next slide, where we also inform our manageable costs.

As you can observe on the [chart], personnel costs and third-party services costs dropped 4%, effect which compared to IGP-M ratio of 7.3% represents a drop of more than 11% in manageable costs [inverting a and ascending a line] that we have for these costs, which comes to show how we're putting a lot of effort in reducing costs in the Company.

The greatest contribution to this reduction comes from lower expenses with compensation and charges, resulting mainly from a reduction in our headcount in 2013.

In the last quarter, we also reduced our headcount even further. We currently have 8,600 employees currently, which represents a 9% reduction vis-a-vis the previous year.

I would like to highlight that analyzing just the numbers of Copel distribution, reduction in manageable costs was BRL29 million, which is in keeping with the expected in accordance with the target of saving BRL100 million in 2014 to have the Company comply with the regulatory framework, which we expect to achieve in 2016.

On the next slide, slide nine, we break down expenses related to electricity purchased for resale, which as previously mentioned grew 17% and totaled around BRL982 million in the first quarter 2014.

Electricity purchased in the regulated market grew mainly because of new thermal and hydropower contracts and the contracting of 511 megawatts in auction A-minus one in the end of 2013.

Electricity sales to distributors started in January of this year. Also investing was the higher cost of the thermal plant taking into account these plants dispatch and the monetary restatement of the contract.

In addition to this cost with regulated market contracts, the cost for the prices of energy in the CCEE grew because of a high PLD, where the cost at ITAIPU grew motivated mainly by depreciation of the dollar in relation to the first quarter of the previous year.

Again, talking about the Company's results, we are now on slide 10. Here, it is possible to observe that the EBITDA, consolidated EBITDA, grew by 29% in the first quarter of 2014, totaling BRL859 million and a 28% margin over the operating revenue, in keeping with what we saw in the same period of last year.

Cash generation of Copel generation and transmission accounted for 75% of the consolidated EBITDA, while Copel Telecom accounted for 3%, and the other companies of the Group accounted for 22%, influenced by the results of Araucaria TPP.

Copel distribution showed a negative EBITDA of BRL21 million, again due to higher costs with energy purchases, as shown. EBITDA margin of Copel generation and transmission reached meaningful 76%. And this is on the bottom left-hand corner of slide 10. And Copel Telecom posted 56% EBITDA margin.

Please go to slide 11. Here, we have Copel's consolidated net income, which was BRL583 million in the first quarter of 2014, 46% up compared to the same period of 2013. Net margin reached 19% and was higher than what we achieved in the same period of last year.

Analyzing the results of the subsidiaries, we see that Copel generation and transmission ended the period with a profit of BRL432 million, 6% up vis-a-vis the first quarter of 2014, and with a net margin of 51%. Copel Telecom had a profit of BRL14 million, which corresponds to a 23% growth year on year. Copel distribution on its turn posted a loss of BRL15 million, a little bit less than BRL15 million.

Well, these were the main highlights of Copel's results. However, before we close, I would like again to talk about our success in the last transmission auction, which happened about a week ago.

As we can observe on slide 12, we won three new lots, which for an operational will add around BRL60 million to our WRAP of Copel generation and transmission. We are very happy with the results obtained, which is one more example of our commitment to financial discipline and to the sustainable growth of the Company.

In two out of the three lots that we won, (inaudible) with these three new projects, altogether we have 17 projects that we are building, we total about 2,800 kilometers of transmission lines and an additional revenue of BRL355 million in a segment where the risks are very small.

In a nutshell, these were the highlights of Copel's results for the first quarter 2014.

I would now like to begin the question-and-answer session. And I would like to thank all of you for your participation.

(Operator instructions). Pedro Masagini, Credit Suisse.

Good afternoon, Guetter, and thank you for the call. I have a couple of questions. I'm trying to do the calculation for Araucaria, particularly the cost modeling. We believe that the results were quite strong. I would like to have an idea of the cost of operating Araucaria in terms of megawatt hour (inaudible) calculation. It seems like the number's closer to 400. Could you elaborate about your cash cost, and is my calculation right for Araucaria? This is the first question.

My second question is, can you give us a sense of how much was allocated in this quarter of energy of Copel GeT?

And my last question is about [CVA]. I have some questions regarding the reconsideration of the account for compensation of (inaudible) more than BRL200 million for more than one quarter. There are other components that caught my attention here. Could you (inaudible) part of the tariff bubble the fact that tariffs did not increase last year? But, it seems to be high. So, is there anything that you could mention about that that is worth highlighting? Thank you.

Hello, Pedro. It's a pleasure to have you onboard again. [Felipe] is going to provide some additional information.

Hello, this is Felipe. Pedro, about the tariffs of Araucaria TPP, in terms of cost is a relatively simple matter. We use whatever the (inaudible) dispatch for four months. And when we look at the cost, the cost is very diluted over the 12 months of the year. And this is why we have a difference between what was verified and what we estimated is in the tariff for the thermal plant.

As for Copel GeT, we disclosed this. The amount of energy sold by Copel GeT in the first quarter was about 500 megawatt hour. And we have to see what would be the average allocation vis-a-vis availability.

The next was CVA. This has given rise to some questions. But, it's important to highlight that, when we do an estimate of CVA, again, this is a calculation done by estimates. And in this quarter specifically, when we're going through a moment where the PLD values are very high, so any estimate here, even if the gap is very small, it ends up accounting for a lot in monetary terms.

We have verified this difference. It is a little bit higher than what we should have. But, the fact is, when we talk about CVA, the value considers the estimated thermal dispatch and the estimated cost for dispatch in February and March, which ended up being offset by the ACR account.

The deferring of the tariff represents BRL68 million. And in the next quarter, it will be another BRL68 million. And there's still a BRL50 million balance in the CVA from last year. So, we have these adjustments that happen quite frequently, not only in Copel. And they should continue to happen basically because it is very difficult to estimate based on resolutions and estimations, which end up being released a lot later.

So, and there are a number of factors that influence the accounting, which is always done by estimate in this case. So, these are the comments about CVA.

Thank you. As for Araucaria, the cost of the four months, you said there are four months and that like you would have to dilute it by 12 months. Did you do the math about what exactly is the cost?

Well, I haven't got the calculation here. But, when you establish a cost of [BRL695], we got the whole cost along 2014, operating cost minus the moments when the plant is not operational. And the cost recovery was concentrated in the four months which was estimated for the plant to be operating. So, to tell you the cost now is kind of difficult in monetary terms. But, the difference is explained by that.

The tariff considers that you're going to recover all of your operating cost, including personnel, maintenance, monthly maintenance, etc., that all of the cost would be recovered in the first four months when the thermal plant is operational. Even if not operating, it still [entails] cost throughout 12 months. So, the cash cost is lower.

If I imagine that (inaudible) is going to be constant over the year, can I work with this kind of level (inaudible) per megawatt hour would be more or less the same for the coming quarters in your expectations? Is this a fair statement?

Yes, this is our expectation. But, it really depends on PLD spot price.

Okay. Thank you very much.

(Operator Instructions). If there are no more questions from participants, we will turn the conference over to Mr. Guetter.

Well, before closing, I would like to thank all of you for participating. I am very happy with the results we achieved. And I reaffirm our commitment with controlling our cost, which as I mentioned should be even lower in the coming quarters. I stress that we will maintain our focus on creating value to our shareholders, seeking greater operating efficiency and maintaining our financial discipline when evaluating new business opportunities.

Again, I would like to thank you for your participation. And I would like to say that our Investor Relations department is at your disposal. Thank you very much, and have a good day.

Ladies and gentlemen, this does conclude Copel's 2014 first quarter earnings conference call. We would like thank all of you for participating. And enjoy the day.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.