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Operator
Good afternoon. Thank you for standing by. Welcome to Companhia Paranaense de Energia - COPEL Conference Call to present the earnings for 2014. We would like to inform you that all participants will be in a listen-only mode during the Company's presentation. Afterwards, there will be a question-and-answer session when further instructions will be given. (Operator Instructions).
Before proceeding, let us mention that any statements that may be made during this presentation relate to COPEL's business outlook, projections and operating and financial goals. They are based on the beliefs and assumptions of the Company's management and on information currently available. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors might also impact the future results of COPEL and lead to results that differ materially from those expressed in such forward-looking statements.
Today with us, we have Mr. Luiz Fernando Leone Vianna, CEO of the Company; Mr. Luiz Eduardo da Veiga Sebastiani, CFO and IRO; Mr. Marcos Domakoski, Chief Corporate Management Officer; Mr. Vlademir Santo Daleffe, CEO of COPEL Distribuicao; Mr. Sergio Luiz Lamy, CEO of COPEL GeT; Mr. Reinhold Stephanes, CEO of COPEL Participacoes and Mr. Ricardo Goldani Dosso, Director of COPEL Renovaveis. This presentation will be delivered by COPEL's management and maybe followed at the Company's website at www.copel.com/ir. Now I will give the floor to Mr. Luiz Fernando Vianna, CEO of the Company.
Luiz Fernando Leone Vianna - CEO
Good afternoon everyone. Welcome to our 2014 earnings conference call. Thank you all for joining us today. I highlight that I'm really happy to talk to you today. Let me start by saying how proud I am for being the CEO of this company where I had a chance to start my career back in 1973 as an intern. I spent most of my life at this company. I have a degree in business administration, electroengineering and had several different positions in a rewarding career and here I became the first CEO of COPEL Geracao, an activity between 1999 and 2002 when our generation company ranked among the best 100 companies to work at according to Exame Magazine and also the first paid-on company in Brazil to be included in this important national ranking system. I accepted invitation by Governor [Beto Richa] and came back to COPEL taking the challenge to make an even better job. COPEL has made long strides over the past four years. Our footprint is spread over 10 states with generation and transmission projects. Our distributor is currently the best in Brazil and also in Latin America in terms of customer service. Our telecom has its optical fiber network to every town in Parana State. And thanks to COPEL Renovaveis, we are just beginning to write a new promising chapter in the history of the Company. Our mission is to keep on searching for higher efficiency and also profitablity to maximize the value of the Company. We also keep on searching for better efficiency without losing sight of our renowned quality. However, our challenges are not restricted to renew the Company to meet these goals. The electrical sector is going through a complex phase due to several factors, particularly lowering for volume which reduced the levels of reservoirs and required continued operations in thermal power plants, which in turn brought huge impact to companies and consumers. Despite this challenging context, COPEL has achieved excellent results, as we seen on slide number 3, which shows the highlights of the period.
In the fourth quarter of 2014, the Company's income totaled BRL271 million, an amount 52% higher than in the last quarter of 2013. In our consolidated results for 2014, our income totaled BRL1.3 billion, growing 21% vis-a-vis 2013. The result in Q4 stands from two basic drivers, revenues greater than BRL1 billion, due to the recognition of the net balance of sectoral assets and losses related to the impairment of over BRL800 million impairment of generation assets, primarily from Colider plant. Another important fact was the income from Araucaria TPP, which reached BRL155 million in Q4 2014. I would also like to highlight that the Board of Directors proposed a payout of BRL623 million as dividends and interest on capital, which accounts for 50% of the income achieved in 2014. Out of the total amount, BRL381 million were prepaid in 2014. BRL242 million is the outstanding dividend payout required to meet the amount proposed and it will be submitted for approval at the Annual Shareholders' Meeting possibly on April 23.
On the next slide, we will focus again on the results and also the economic performance of the Company. However, before we get into that, let me comment another important event that recently occurred. Let's start with new assets. As we can see on slide number 4, we've concluded the construction of another transmission project. In December 2014, we had a start-up of transmission line Acailandia - Miranda II. It's a project led by Integracao Maranhense, an SPE in which we hold 49% stake, partnering with Elecnor, which holds the remaining 51%. With this start-up, we added BRL31 million in annual allowed revenue and reached BRL240 million in our RAP, considering all assets in the segment. The start-up of other important projects like Matrincha and Guaraciaba is scheduled for the coming months and will increased our RAP to BRL375 million in 2015. As to wind generation in December 2014, we had a successful participation in A-5 Auction and traded 55 average megawatts from six farms which all-together account for an installed capacity of 136 megawatts. It's always important to highlight that the energy was sold for the best price in the auction, with a minimum negative premium of BRL0.03 only, strengthening our commitment to pursue projects that bring good returns to COPEL. Thanks to this achievement, our current portfolio of wind power totaled 663 megawatts and starts generating revenues in 2015. The start-up of our first complex, Sao Bento Energia, with 94 megawatts of installed capacity has a value occurred and the construction phase of Brisa Potiguar complex with 184 megawatts of installed capacity is just about to be concluded. The same holds true for Sao Miguel do Gostoso in which we hold a 49% stake. Lastly, it's important to comment on the extraordinary tariff revision of COPEL Distribuicao.
As shown on slide number 5, ANEEL issued a decision regarding the extraordinary tariff adjustment of several distributors. In COPEL's case, the agency approved 36.79% adjustment, which has been fully in effect since March 2, 2015. As you all know, the extraordinary adjustment was necessary to restructure the revenues of distributors regarding; number one, the significant increase in cost with charges and energy purchased. And number two, the end of the policy to transfer funds from CDE and ACR account as had been happening for the past two years. Just as a reminder, in 2014, more than BRL1.2 billion were transfered to the distribution companies in order to offset cost of energy purchased. Turning back to the adjustment of the nearly 37% yield, more than 22% pertained to the increase in the CDE portion, whereas the remaining 15% relate to a review of energy purchase cost, particularly an adjustment of over 46% in Itaipu's tariff at a high price used in the adjustment auction which took place early this year in January when the distributor purchased 302 average megawatts for approximately BRL386 per megawatt per hour in a six month contract.
These were the main events of the period. Now I have the pleasure to turn the floor over to our CFO and IR Officer, my friend, Luiz Eduardo Sebastiani, who will comment now on the highlights of the period. Most of you already met him. Sebastiani was COPEL's CFO and IR Officer that was between February 2013 and March 2014, when the Company strengthened its efforts to improve the operating efficiency by expanding the policy to cut down costs. At that time, the Company also began to search for a better capital structure, more suitable to our industry's profile. He comes back after being the Secretary of the State Treasury in 2014. Sebastiani, welcome back.
Luiz Eduardo da Veiga Sebastiani - CFO & IR Officer
Thank you very much, Luiz Fernando Vianna. We also want to mention the presence of our business officers and also all the CEOs in our wholly-owned subsidiaries. They built COPEL with all our employees, our staff. We have a little bit more than 8,000 employees and staff at COPEL. Once again, I wish to thank everyone who's following this conference call. I'm very honored and excited to come back to our COPEL. Thanks to the high quality and reliability of services and the great commitment to its personnel, the Company set the example to Brazil and the people of Parana is really proud of you. Please rest assure that our commitments remain the same. We are paying keen attention to cost management in order to continuously improve our efficiency. We also pursue good opportunities for growth without losing sight of the Company's financial discipline. COPEL has made large cries in recent years, but we are confident that we can go the extra mile.
With regard to our results, as our CEO said, the fourth quarter was strongly affected by non-recurring effects which are listed on slide number 6. The strongest impact was BRL1 billion posted in COPEL Distribuicao revenues related to the net balance of sectoral assets and liabilities. These asset had not been recognized in the balance sheet since the adoption of IFRS but now they are being posted again after the execution of an amendment to the concession contract. This amendment assured us that the residual amount of [GVA] and other financial items not [recovered through tariff] will be included in the indemnification calculation, should the concession be terminated. After this amendment to the concession contract by means of CVM Resolution 372 (sic - see slide 6, "732") of 2014, the recognition of sectoral assets and liabilities has become mandatory.
As we can see on the slide, the revenue from sectoral assets was posted in two different lines, as operating revenue and as interest income, according to the accounting guidelines approved by CVM. The fourth quarter also had a significant impact on expenses which were impairment past losses at COPEL GeT, showing a reduction of BRL807 million in the recoverable amount of generation assets. BRL680 million relate to the total amount of Colider plant. The reasons to lower the recoverable amount of generation assets arise from the critical hydrological scenario with recurring lowering of GSF in HPPs and maintenance of different settlement price at high levels. In Colider's case, more specifically, these losses were even higher due to a delay in the start-up of the plant which is now scheduled for April 2016. It is important to say that COPEL GeT has already filed for an exclusion of liability with ANEEL and we are monitoring the process very closely.
With regards to our consolidated results, on slide number 7, we can see that our operating revenue increased 52% in 2014, virtually reaching BRL14 billion. The main drivers for the revenue growth were; first, a 31% increase in revenue of sales to final customers, basically due to 24.86% adjustment to tariffs of COPEL Distribuicao as of June 2014 and to the markets growth over the period in 2014. Second point, 126% growth in the electricity sales to distributors account stemming from; number one, higher revenues in CCEE due to energy sales from Araucaria Thermal Power Plant, and number two, the energy sold in the spot market by COPEL GeT, which eventually benefited from the high different segment price of the period. As to power grid availability which is made up of TUSD and TUST revenues, there was a 10% rise due to a 4.9% growth in the grid market of COPEL Distribuicao and the annual adjustment of the RAP and the start up of new assets in transmission segment. Other revenues, which consist of construction, telecom, gas and other revenues amounted to approximately BRL3 billion, growing 57%. And this is explained, number one, the recognition of the balance of sectoral assets as we mentioned before, number two, by a higher construction revenue, which is an accounting record of the highest investments in distribution and transmission, and number three, a 17% growth in our telecom revenue, which totaled BRL165 million in 2014.
So next slide, number 8, shows a breakdown of our operating costs and expenses in 2014, which totaled BRL12.4 billion, an amount 53% higher than the number posted in 2013. The main reason for the rising costs is the 53% growth in expenses with energy purchased for resale, which has already exceeded BRL5 billion. This amount includes the compensation of BRL1.3 billion of CDE and ACR account which were booked along 2014. Costs with charges of the use of the grid went down 5%, mainly due to the accounting reclassification of BRL233 million regarding the refund of surplus financial announced of the Reserve Energy Account according to ANEEL's decision number 4786/14. By September, surplus amount of the Reserve Energy Account have been posted into CONER line. Therefore reducing expenses with energy purchased for resale. However, after new instructions by ANEEL, the refund of the surplus amount eventually decreased costs for charges, leading to the reversal seen in Q4 2014 and also in the full year. As the gas purchase costs have significantly increased due to operations in Araucaria plant, since Compagas provides the fuel to supply the plant. Personnel costs, including benefits went down 1% and reflects our efforts to control management cost, particularly when compared with the inflation rate of the TUSD, therefore showing an actual drop of 7%. Costs were also strongly affected by the increase in provisions due to the 800 [new posted] as impairment losses in COPEL GeT as I said before and also higher provisions for legal claims totaling BRL324 million in 2014.
Slide number 9 shows that our consolidated EBITDA increased 28% in 2014, totaling BRL2.3 billion with a margin of 20% over the operating revenue. COPEL GeT's cash generation accounted for 37% of the consolidated EBITDA. COPEL Distribuicao accounts for 35% and COPEL Telecom 4%. The other companies of the group accounted for 24% and the main contribution comes from Araucaria TPP. As to the EBITDA margin, COPEL GeT closed 2014 at 29%, distribution 29% and telecom 49%.
Slide number 10 shows COPEL's consolidated net income, which exceeded BRL1.3 billion in 2014. Therefore 21% higher than 2013. On analyzing the results achieved by our subsidiaries, we can see that COPEL Distribuicao reversed the loss of the previous year, closing 2014 with an income of BRL428 million (sic - see slide 10, "BRL437.9 million") reflecting the recognition of sectoral assets. COPEL GeT in turn closed the period with an income of BRL682 million, an amount 32% lower than in the previous year. This drop is explained by the recognition of impairment losses. And COPEL Telecom's income amounted to BRL59 million, growing 23% vis-a-vis 2013. As we can see, our results were strongly affected by non-recurring effect. To give an idea of what the Company's earnings would have been if such events have never happened was adjusted to the numbers as you can see on slide 11.
In order to adjust the results for COPEL Distribuicao, we've excluded the net balance of sector assets and considered CVA mutations which was the adjustment required to show what the distribution company's results would have been if all (inaudible) have been factored in. As the COPEL GeT was adjusted the result by excluding impairment losses of generation assets. If we took all these adjustments into account, the consolidating net income would be around BRL1.6 billion and EBITDA would amount to BRL2.7 billion. These were our highlights and we'll be happy to take your questions now. Thank you very much.
Operator
We are opening the Q&A session now. (Operator Instructions). Please hold while we take your questions. Lilyanna Yang, UBS.
Lilyanna Yang - Analyst
My question is about the projects that are in progress. You've just had an impairment task. Could you explain about Colider for instance? And what about other period Baixo Iguacu in terms of the return expected?
Luiz Fernando Leone Vianna - CEO
Good afternoon. I'll let Sergio Lamy, CEO of COPEL generation and transmission to answer your question. But before that, I think it would be interesting to make our -- can we go one-by-one first?
Lilyanna Yang - Analyst
Perfect.
Luiz Fernando Leone Vianna - CEO
About Colider first.
Sergio Luiz Lamy - CEO
Okay. Good afternoon. This is Sergio Luiz Lamy speaking from COPEL GeT. Lilyanna, the assumption we used for the Colider impairment was very conservative. In reality, that's a vision we had by the end of last year when we worked on our assumptions. Like I said, it's a very conservative approach with only five months of the liability exclusion. As you know, the delay of Colider is over one year. And we understand all of them have COPEL's exclusion for liability. Today, we are more bullish. After we submitted our reason for exclusion of liability at ANEEL and after debating exhaustively all the justifications and reasons and, by the way, the first conclusions about ANEEL's statement, now our expectation is to have a much longer term compared to what we first thought when it comes to exclusion of the liability but our expectation is to have ANEEL statement in April based on our last meetings with ANEEL. So, we are just awaiting for ANEEL statement and now we are more optimistic compared to when we worked on our proposal for exclusion of the liability.
Lilyanna Yang - Analyst
What is the return expected for Colider, if you take into account only five months of exclusion of liability?
Sergio Luiz Lamy - CEO
The internal rate of return will be around 2%, which is slightly positive. By the way, that's a very conservative assumption, like we said before.
Lilyanna Yang - Analyst
Could you give us some color about other large projects like Baixo Iguacu and others please?
Sergio Luiz Lamy - CEO
About Baixo Iguacu, our current expectation is that there won't be a strong impact on the return originally assumed by the project. Only factors considered responsible for the construction of the first factor was the severe hydrological event that we had back in June 2012. It led to a problem in the stock marks in the works. And secondly, we had the injunction for the installation license, which is the effects of the injunctions will be put aside. We already have a favorable opinion of the end deal and therefore we believe that all the reasons and drivers that met to this project will be considered exclusion of liability. So we'll be based on the assumption that the early internal rate of return around 7.4% will be maintained. Is that okay, Lilyanna?
Lilyanna Yang - Analyst
Okay, that's good for Baixo Iguacu. Thank you.
Operator
(Operator Instructions). Maria Carolina Carneiro, Santander.
Maria Carolina Carneiro - Analyst
I have two questions. The first question is about the distribution concession renewal. We've heard some news in the media, Minister Braga mentioned negotiations and also possible metrics to be taken into account for (inaudible). And any burden related to the renewal in agreement or any CapEx to be negotiation as to amend the quality metric? The media also mentioned an expectation that the agency might make a statement soon. So, is there any actual news and could you give us an idea of the metrics to be considered for (inaudible) and distribution?
And I apologize here for the next question has already been answered. I'm having problems with my connections. I couldn't understand it very well, but what about the impairment that you have, just to have a better understanding? Is this related to the delay of the project and future sales and the GSF might have a negative impact in the project for 2015. So base calculation takes into account [horizon] in 2015. Did I understand you correctly?
Luiz Fernando Leone Vianna - CEO
Let me talk about distribution first, right. Maria Carolina, Luiz Fernando speaking again. About distribution and renewal, first of all, we would like to say that if we consider COPEL Distribuicao's performance, when it comes to order guided by ANEEL and sustainability, liability and also the awards that we've had about our performance and our consumer satisfaction, we understand, we have no doubt when it comes to the concession renewal with COPEL, I think there's no doubt about it. Now, the burden behind it, we still have very little information on it. It might be a possibility. However, if there is a burden behind this renewal or this expansion, the burden should be on consumers because there is no margin at COPEL Distribuicao or in distributors in general to absorb any kind of burden. I'll turn it over to the CEO of COPEL Distribuicao, Vlademir.
Vlademir Santo Daleffe - CEO
Maria Carolina, in reality we were also taken by surprise when we heard this information by the Minister. If we this consider burden, our CEO put it so well but the information we have -- based on the information we have, we are expecting clear information by the Ministry but please rest assured there is no risk at COPEL of not having a renewal based on the economic sustainability and also based on the quality of the services we deliver.
Maria Carolina Carneiro - Analyst
Thank you.
Vlademir Santo Daleffe - CEO
Now the next question is about impairment. Let me please -- (inaudible) speaking from COPEL G&T. Answering your question about the impairment of [collider] land, our assumption was the following. We consider the whole life cycle of the project, the whole concession period, work on the revenue and expense flow. We had the schedule GSF and the results we are delivering come from a vision throughout the life of the project.
Maria Carolina Carneiro - Analyst
Okay, thank you. Just adding, if I may. How much was the GSF for 2015 and after 2015 what was the GSF [figures]?
Vlademir Santo Daleffe - CEO
82.5%, [0.825%] in 2015, 0.95% in 2017 and as of 2018, 100%.
Maria Carolina Carneiro - Analyst
Thank you very much.
Luiz Fernando Leone Vianna - CEO
Carolina, may I just highlight something about the same topic about GSF. We met personally with the Minister and we know there are several proposals, several players and has also made a work group and they submitted their proposals to the Minister last week. This topic about GSF at the end of the day, like we said before, we are very conservative. We are considering based on the assumption that nothing will be done. And the last time that I talked to the Minister a week ago, we consider something within 60 days so we could have a solution to minimize and mitigate the GSF topic in the electrical sector.
Operator
(Operator Instructions) Sergio Conti, Goldman Sachs.
Sergio Conti - Analyst
My question is about natural gas. Basically, we can see the government giving signs of interest in the increased supply of natural gas. Possibly there will be a special auction for it. At the end of the year, we also had a private group getting in with an offer for natural gas. So what are COPEL's ideas about this energy potential? Could you assume COPEL would be involved in auctions for natural gas? And what about exploration and production assets in Parana like you said, the operational results but what about any reduction in gas prices in the domestic market? So strategically, do you think it still makes sense to invest in E&P in Brazil for a company such as COPEL or would it make more sense to invest in the TPPs or like the other group did?
Luiz Fernando Leone Vianna - CEO
Good afternoon, Sergio. We tend to say at the Company that one year of challenge is also an year of possibilities, but you need the right financial conditions to do so. We understand that 2015 will bring a lot of opportunities. There will be auctions in the area of solar energy at least (inaudible) and also in TPPs. We will also have at least two auctions in the first and second half of the year and also a minus 5. When it comes to gas, the big question mark is that, despite all the news spread in the media, we still have some instability of a currency. And we are also considering during our financial expiration we do have plan to expand our TPP at Araucaria and we are also considering even larger projects too. Not only the expansion of TPP, these these are studies, up to now, but we consider the possibility and also the probability to have something in that area in the second half of the year. There are big chances, but I'll also ask our Director of New Business to talk about our plans.
Unidentified Company Representative
Good afternoon, Sergio. COPEL is working in two directions right now with the winner of A and B auction in 2015, but unfortunately it is [unfold] and we have an aspiration for shale gas and also conventional gas in the State of Parana. COPEL is very bullish with the possibility of finding structures for commercial purposes in the State of Parana. And the second driver is gas import and the installation of a regasification plant along the coast of Parana and also to expand our Araucaria plant and maybe have another plant in (inaudible) municipality another TPP. And this also was related to an expansion project of the market which is held today Compagas, the domestic market in the State of Parana with a very interesting potential. And the challenge we had was how to ensure 20 years supply contracts and we are having good negotiations in order to overcome this challenge.
Sergio Conti - Analyst
Great. What about the project for NGL that was mentioned in Parana Coast? Do you have any schedule when this project might be offered or submitted to an auction?
Luiz Fernando Leone Vianna - CEO
We have a project to expand the TPP and it's already submitted for and recorded for the next auction. Petrobras agreed to have a swap should it managed to have access to imported gas, maybe we can have a swap via Rio and gas from Petrobras as soon as the installation or the TPP at Araucaria expansion is concluded. And this would to some extent break down the regasification process and also for gas pipes from -- at Araucaria to Curitiba. And these would be independent processes. So we are ready for the next auctions in order to expand our Araucaria plant.
Sergio Conti - Analyst
And how much would the expansion be in megawatt?
Luiz Fernando Leone Vianna - CEO
About 200 megawatt.
Operator
(Operator Instructions) There are no further questions from participants. Now I'll give the floor back to the Company's management for the closing remarks.
Luiz Fernando Leone Vianna - CEO
First of all, I would like to highlight once again how happy I am to be talking to all of you. I think this first stock is just the beginning. I'd really like to highlight how willing we are. We'll be in contact with you whenever necessary so we can clarify your questions. We always want to be transparent with the market and this is critical. So this relationship is just at the beginning and we can go even deeper into it. So once again, I would like to thank you all for joining us today.
This was a great opportunity to share the results achieved, and not only that, but also to address our outlook for the Company and also to address the new challenges in the electric segment. Particularly in 2015 we have many, many challenges but we are willing to take this challenge. I repeat, like I said before, it is a year full of difficulties, but it is also a year full of opportunities and we are pursuing these opportunities naturally always searching for good projects and trying to maximize our Company's income.
In the generation segment, we have low exposure to GSF risk and that's something very positive. And like I said before, we have very strong expectations that even this low exposure may be mitigated due to actions by the Ministry of Mines and Energy and the federal government.
Another reminder is that even if we consider this reduction, we also have Araucaria TPP and it should also help us to balance the account.
In transmission, we have many important projects that will be concluded over the year and we intend to add as a result, another BRL130 million to our RAP. In distribution, like we said before, we are giving large strides to further improve our results and performance.
Consumer satisfaction and the sustainability index achieved will both allow us to have the concession renewals and that's something we expect to maintain trying to optimize our cost without losing sight of the quality of our services. With telecom, we also have large room for growth. Basically that's all we have to say. Thank you very much. Enjoy the rest of your day.
Operator
Ladies and gentlemen, this concludes COPEL's conference call on the results for 2014. Thank you.