Companhia Paranaense de Energia (ELPC) 2015 Q1 法說會逐字稿

Good afternoon. Thank you for standing by. Welcome to Companhia Paranaense de Energia, COPEL, conference call to present the earnings of the first quarter 2015. 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 conference call related to COPEL's business prospects, operating and financial projections and goals are beliefs and assumptions of the Company management and based on information currently available.

Forward-looking statements are no guarantee of performance. They involve risks, uncertainties, and assumptions since they relate to future events and, therefore, depend on circumstances that may occur or not.

General economic conditions, industry conditions, and other operating factors may affect the future performance 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; and Mr. Luiz Eduardo da Veiga Sebastiani, CFO and IR Officer; Mr. Marcos Domakoski, Chief Corporate Management Officer; Mr. Cristiano Hotz, Institutional Relations Officer; Sergio Luiz Lamy, CEO of COPEL G&T; Mr. Ricardo Goldani Dosso, CEO of COPEL Renovaveis; and Mr. Reinhold Stephanes, CEO of COPEL Participacoes.

The presentation to be delivered by the Company's management and may be followed at the Company's Website at www.copel.com/ri. Now, I will give the floor to Mr. Luiz Fernando Vianna, CEO of the Company.

Good afternoon. I have my manage friends here with me. Welcome to the conference call to discuss the earnings of the first quarter of 2015.

I would like to begin by giving you a backdrop of the first months of the year, which was quite challenging, particularly for the Brazilian (inaudible). On the one hand, unfavorable hydrological scenarios increasing discretions on the risk of rationing.

On the other hand, we had the implementation of flags and the so-called tariff (inaudible), which brought significant adjustment to energy tariffs, affecting inflation rates, and causing even more turmoil in an economy that is already stagnated.

In the mid-May, the scenario is remarkably more optimistic compared to past months. Rainfall in March and also in April mitigated the risk of rationing. And tariff flags and adjustments have allowed distribution companies to stand on their own.

However, even though energy rationing is no longer an imminent risk in 2015, our reservoir levels remain low, which takes the operation of PPPs and the deficit of hydraulic generation, or the so-called GSF, will remain high, negatively affecting generation companies that produce hydropower which are exposed to PLG, or preference settlement price, which should remain at maximum levels all year round.

In addition, it's important to remember the economic [conjuncture] combined with increase in average tariffs and awareness campaigns may lead to stagnation or even a drop in energy use. This is shown by EPE data, which points to a drop of 0.6% already in the first quarter of 2015.

However, despite this adverse scenario, consumption of energy in the captive market of COPEL Distribuicao increased 1.7% in the first quarter. And later information show that we continue growing until mid-May.

In terms of results, our income totaled BRL470 million in the first quarter, 19% lower than income in the same period of the previous year. EBITDA posted a drop of 3%, totaling BRL835 million this quarter.

Energy costs significantly increased by 82%, which is a result of higher prices in auctions and the end of the transfer policy of CDE and ATR account funds, which offset a significant portion of this expense of last year.

On the other hand, we have a 44% growth in our revenue in electricity sale to final consumers. This stems from adjustment applied in COPEL Distribuicao tariffs required to offset the increase in energy costs.

Next, we'll be breaking down the numbers. But, before that, it's important to say that the beginning of 2015 was marked by important sectoral discussions, involving the Company, associations, regulatory agencies, and the government.

We are now more proactive now in debate (inaudible) topics, like reimbursement of energy cost, indemnification of assets, and renewal of distribution concessions. We also held important discussions involving the current performance of construction works. This has an impact on the majority of companies with construction projects in Brazil. In this aspect, it's important to make some comments on construction works of Colider plant.

As you can see on slide number 4, we are requesting within Aneel a waiver of liability, a total of 644 days related to the delay in the startup of Colider plant. Initially, it was scheduled for December 30th, 2014. But, after the waiver, startup will be scheduled for October 2016.

This request is justified because over construction works, we had acts of vandalism against facilities and strikes that interfered in our schedule, which was also affected by changes to the original design and a delay in the issue of the environmental license required to begin the vegetation suppression of the reservoir area.

We're still awaiting for the waiver of liability to be approved by Aneel. But, we are in compliance with the contract of Colider plant, which totaled 125 average megawatts using part of our noncontracted energy from other plants. Still about Colider, it's important to say that our current forecast is to have construction works concluded by April 2016.

Another highlight is indemnification of preexisting assets in May 31st, year 2000. In late March, we submitted to Aneel an evaluation report showing indemnification amount of BRL882 million on December 31st, 2012.

The book value of these assets was BRL160 million on the same date. This difference is due to the methodology of the new replacement value, which was used according to Aneel's rules. Please bear in mind that the final indemnification amount will only be set once Aneel evaluates the information submitted, which is expected to happen by year end.

On slide number 5, I would like to underscore the startup of Foz do Chopim/Salto Osorio line. By year end, we expect to have an increase of 135 million in the revenue of position assets with a startup of other important assets that are now in the final conclusion phase -- construction phase.

In addition, we also have the commercial startup of windfarms Santa Maria and Santa Helena with a joint installed capacity of 59 megawatts. With that, COPEL Renovaveis already has 153 megawatts of wind power in commercial operations. In the coming months, another 177 megawatts will be added to our generation farm.

Commercial startup of another five windfarms in Brisa Potiguar complex and four farms of Sao Miguel do Gostoso complex in which we own a 49% stake.

In addition, we have 13 windfarms under construction in Cutia complex totaling 332 megawatts of capacity to be added by 2019. COPEL Renovaveis is already among the largest companies in the sector in Brazil.

Now, I give the floor to Luiz Eduardo Sebastiani, our CFO and IRO Officer. He'll be giving more detail on the results of the period.

Thank you, Senor Luiz Fernando Vianna. I also thank the President of the CEO of COPEL subsidiaries with us, professionals from the finance area, and other staff at COPEL, and particularly those who are joining us during the conference call, analysts, investors. It's a very important moment to COPEL. It's important to be close to investors.

I would like to begin by making comments on the good results of Araucaria TPP with income totaling BRL155 million in the first quarter of 2015, 16% above the number year on year. Just reminding you all of the history of this [plant], as you can see on slide 6, the PPP is once again operated by UEG Araucaria, a COPEL subsidiary.

This operation came back in February 2014. It is a plant under the merchant modality with no availability contract and sells all the energy produced in the spot market. And the sale price is between PLD and CVU, whichever is higher, according to the rules of this operation modality.

Last year, the TPP traded energy according to PLD, since it was higher than CVU during most of the year. However, in 2015, with the drop of PLD cap to 388 megawatts per hour, the energy sales price will always be CVU, which was defined by Aneel as follows: BRL765 per megawatt per hour between February 1st and May 30th and BRL595 per megawatt per hour between June 1st and January 31st, 2061 (sic - see Press Release - 2016).

CVU is higher because, in addition to (inaudible) recovery, it also includes recovery of administrative and operating costs in addition to asset compensation.

Despite the drop in the sales price vis-a-vis 2014, the plant provided very interesting results in the first quarter, reaching an EBITDA of BRL239 million, which accounts for an increase of 43% year on year.

This result is mostly due to the fact that the TPP operates continuously in the first three months of the year with a total of 963 gigawatts per hour, whereas last year, the plant only came to our responsibility in February.

Now, COPEL's consolidated results on slide number 7. Operating result -- operating revenue went up 39% in the first quarter of 2015, exceeding BRL4.2 billion. The main drivers for growth in revenue were increase of 44% in the revenue of electricity sales to final consumers, mainly due to adjustment of [light] to tariff by COPEL Distribuicao, 24.86% in June 2014, our annual tariff adjustment, and 36.79% in March this year, due to the extraordinary tariff review in addition to growth in the captive market; 17% growth in the account electric energy supply, spanning from higher revenue in CCEE due to the sale of energy from Araucaria, as previously mentioned, and the strategy of energy allocation in the spot market by COPEL G&T.

We allocated 1,522 gigawatts per hour this quarter vis-a-vis 501 gigawatts per hour in the first quarter of last year, very significant growth.

As to availability of the power grid, which is made up of TUSD and TUST, we had an increase of 7% due to the annual APR adjustment and new startup in the transmission segment.

Please know that the adjustment in the TUSD was offset by charges this quarter as to other revenues, which include in addition to sectoral asset and liability results are the revenues like construction, telecom, and gas. They reached slightly more than BRL1 billion, reflects of the recognition of BRL561 million related to the result of sectoral financial assets and liabilities and the 17% growth in telecommunications revenues, which totaled BRL48 million.

More specifically about sectoral assets and liabilities results in COPEL Distribuicao, we highlight that this revenue stems from an increase in asset balance related to tariff deferrals and higher cost with energy and charges, which will be recovered in the next tariff review. These sectoral assets were not recognized in the balance sheet since the adoption of IFRS and are now being posted again after an addendum to the concession contract we signed, with a guarantee that residual value of portion A and other financial components not recovered by a tariff will be included to the indemnification calculation should concessions be terminated.

On the next slide, we talk about operating costs and expenses in the first quarter, reaching BRL3.6 billion, or 50% higher than the first quarter of 2014. This is mostly due to the increase of 82% with electric energy purchased for resale totaling BRL1.8 billion this quarter.

Cost with charges and the use of the grid increased 61%, basically due to higher charges in the sales and service related to thermal dispatch in addition to an increase of cost related to the startup of new assets in the system and adjustments in concession tariffs in Itaipu energy.

Cost for gas purchase increased 11.4% vis-a-vis the first quarter of 2014. It's a natural consequence of Araucaria plant, which is now being operated by UEGA only after February 2014.

Manageable costs increased 22%, reflecting higher expenses with personnel and third-party services, inflation, adjustments in salaries, benefits, and contracts, cost required to offset the growth of the Company and also [DEC] and [EFC].

Costs were also affected by an increase in provisions for several administrative and work labor claims in addition to the posting of BRL73 million in ADA and the price of energy created in CCEAR and Colider [NPLG].

On slide number 9, we break down expenses with energy purchase for resale, like we said before, increased 82%, totaling approximately BRL1.8 billion in the first quarter of this year. Energy purchased in the regulated market, CCEAR, increased basically due to the entry of new contracts at high prices.

COPEL Distribuicao purchased 302 average megawatts at a price of BRL385 per megawatt per hour in the adjustment option in January this year in addition to restatement of contracts by inflation and higher dispatch of thermal plants this quarter.

Itaipu costs doubled vis-a-vis the first quarter of last year, reflecting the tariff adjustment denominated in dollars. But, the main reason behind the increase in the quarter comparative cost is the end of the funds transfer policy from CDE and account ACR.

The first quarter in 2014 had BRL832 million with CDE and ACR accounts to offset high costs at that time.

Slide 10 shows that our consolidated EBITDA had a drop of 3% vis-a-vis the first quarter of 2014, totaling BRL835 million, with a margin of 20% of operating revenue. COPEL G&T cash generation accounted for 75% of consolidated EBITDA, COPEL Distribuicao 6%, and COPEL Telecom 3%. The remaining companies of the Group jointly account for 16%, and the major contribution came from Araucaria plant. As to the EBITDA margin, COPEL G&T closed the first quarter with a margin of 69%, distribution 2%, and telecom 45%.

On slide 11, we show COPEL's consolidated net income, BRL470 million in the first quarter of 2015, or 19% lower than the same period of 2014. When we analyze subsidiary results, we can see COPEL Distribuicao closed the first quarter with a total income of BRL29 million, offsetting the loss in the same period of the previous year. COPEL G&T closed the quarter with an income of BRL409 million, or 5.3% lower year on year, affected by higher [GSF] and a reduction in PLD cap. COPEL Telecom in turn had an income of BRL15 million, in line with the numbers year on year.

These were our highlights. And we are happy now to take questions. We are all here for any questions you may have. Thank you very much.

(Operator Instructions). (inaudible), Citigroup.

Good afternoon, everyone. Thank you for the call. What about Colider startup? Do you have any forecast when the waiver will be evaluated by the regulatory agency?

We'll (inaudible) to Sergio Lamy, Engineer and CEO of COPEL G&T.

Good afternoon. Answering your question, we have a preliminary statement of a technical note, an internal technical note by Aneel, 214 days of waiver. These 214 days, which would account to slightly more than six months or seven months, actually, even above the number that we used last year.

This is when we first decided to have the impairment of Colider plant. At that time, we [bathed] ourselves in an internal Aneel document, given signs of a request of five months.

Although this new statement is more favorable compared to the original one, we are not happy at COPEL with such a statement. We've been working with a [repertoire] in order to try and clarify the issue so we can be closer to the position we understand to be fair. And certainly, it should exceed one year.

Today, the delay of the plant is around one year and four months. And we're very confident that we do have arguments enough in order to have the waiver of liability very close to the real delay of our operations.

(Operator Instructions). Vinicius Canheu, UBS.

Good afternoon. Thank you for the call. The question is, too, about Colider. I would like to have more detail on the negotiation of the purchase of equipment and turbines that you had with Wind Power Energia. Were there any energy or cost increase?

Sergio Luiz Lamy speaking again from COPEL G&T. The answer is no. When it comes to an increase in cost, we haven't had any cost increase yet. We haven't identified any problems.

Any signs of problem were related to a risk of acceptance vis-a-vis new projects. But, this risk is very well under control today vis-a-vis all the managers we took supported by the consortium in order to carry out a diagnosis of the whole supply, all the services that are being outsourced by WPE. So, we can start managing directly our supply with our suppliers.

In addition, we also had another approach in the part of supply that is in Mendoza, Argentina. The idea is also -- presents problems in the schedule in addition to what we already had caused by environmental factors. So, just to conclude, there used to be a risk that might affect the schedule. But, the risk is very much mitigated, and we have no signs of an increase in CapEx caused by the problem with WPE.

Got it. Thank you. Next question, could you make some comments about the negotiation of the news of Petrobras infrastructure for gas supply to Araucaria 2? What would the cost involved be like?

We don't have accurate information yet. We're still working on it with UEGA and Petrobras. We don't have any data yet. And gas supply for Araucaria TPP number 2 has not been defined yet. One possibility is supplied by Petrobras.

But, we can also work with imports, imported gas, and maybe have a plant, a gasification plant along the coast of Parana State. But, this has not been defined yet. We are still in the phase of very preliminary studies.

Thank you.

(Operator Instructions). [Pedro], Credit Suisse.

Good afternoon. My question is about Araucaria. Could you give us some color about Araucaria's current cash cost? And what is the forecast over the year of this cash cost? Any variation expected?

Cash cost, I don't have it here with me, but the forecast is -- that's a very stable scenario all year round. Our expectation is to maintain dispatch.

Let me just correct myself. There will be a slight impact in the coming months. Like we said before in our presentation, when Mr. Vianna delivered the presentation, he mentioned reduction of CVU. So, there will be a slight reduction due to CVU reduction in the coming months. But, that's in the second half of the year. I don't have the percentage with me, but reduction would not be significant. I would say 15% max.

We're (inaudible) ourselves on the total cost at Araucaria this quarter. Could you try to assume the cost of operating Araucaria per megawatt per hour, 100 megawatts per hour per CVU until May, [IOR] BRL765. That's why Araucaria's so significant. Over the year, I understand there will be a drop in CVU, BRL595.

But, we'd like to understand what the cost of then Araucaria. The bulk is gas operation. Should we consider [400] megawatts per hour, and then there would be a reduction in EBITDA at Araucaria midyear? But, something very interesting -- still very interesting to the company, I would just like to understand if the math is okay or if I'm missing something.

Your math is correct. But, when it comes to gas price variation, that's a market issue. We can make projections, but this is uncertain. Right now, I cannot make any more accurate forecast.

So, if there is any significant variation in the cost of Araucaria, can you also knock on Aneel's door to ask for a CVU review?

Absolutely. We're assuming that in the CVU of BRL775 and then BRL595, maybe we have some question of EBITDA per megawatt per hour for Araucaria this year. No, Aneel is very strict in this sense when it comes to CVU recognition. There is no question.

But, if there is any significant variation in cost that may become higher, there is no problem, no difficulty to try to file or request a CVU review.

Okay. Thank you.

(Operator Instructions). [Renato] (inaudible).

Good afternoon, everyone. I would like to know your viewpoint about concession renewals for distribution companies. How do you see that? And what is the impact on COPEL in terms of any possible obligations? Could you give us some color?

I'll ask [Acasio], our engineer from COPEL Distribuicao to answer your question.

Good afternoon, Renato. We are convinced, Renato, that the renewal of the concession agreement of distribution, when it comes to COPEL, this is well balanced.

We have a schedule already set in the issue of decree laws or public hearings to validate at least conditions that were stated by [a media]. And as we see it at COPEL, when it comes to these conditions, there will be no problem to work on obligations that might be related to this concession agreement.

Okay. Thank you. If I may, I would just like to ask another question. I would like to better understand why manageable cost increased so much. I understand there was an increase in thermal dispatch in some cases. But, still, even personnel expenses increased more than 10%. What justifies you? And what should we expect going forward?

More specifically, at the distribution company, when it comes to personnel, we had 11%, close to 11%. If we consider that we really had an adjustment, a salary adjustment spanning from [IMPC] restatement, it totals 7.5%. So, variation was about 4% on top of what is our obligation according to labor agreements.

Naturally, if you notice that, over 2014, we had a lag in DEC indicator. We were concerned about recovering it. And one of the actions was to work again in our labor force in several points in which DEC really had an impact. And then we really had an increase in staff and also in places or regions where we had to recontract some maintenance services to be outsourced and specific clients because, as you know, distribution is statewide. And in order to shorten this layoff, we had to increase our personnel.

In the first quarter, in addition to this effort to try and shorten our connections and our layoffs, we also had a strong impact, a weathering impact that were atypical from January to March. Over these months, we really had to work on an extraordinary basis with our headcount. So, it also is related to operating costs.

If you look at it carefully, this effort -- when it comes to strategy, this effort met our expectations because duration index are within the goals set by the regulatory power. And now, we feel comfortable to meet the terms of the concession agreement without running any risks during expansion.

Okay. Thank you.

(inaudible), JPMorgan.

Good afternoon. I have two questions. The first question is about the tariff review in June. Do you have any idea about the adjustment index that you want to request with Aneel? And do you expect to include a tariff deferral of 12 months? We have about BRL1 billion deferred over 12 months. Is that the intention?

And the second question is about M&A. We could see that COPEL participated in a consortium with Energisa in 2012 (inaudible), and then it walked out of the process. We know there will be privatization by year end and then we have (inaudible) discounts. You were interested in this kind of concession in the past. So, are you having a look at these items? Are there any studies or any partner that you consider with another private player? Thank you.

Your first question, just repeating, okay, it's about tariff review. Okay. Engineer Acasio is going to answer your question.

The extraordinary tariff review recovered on global terms portion A. So, our expectation, which will be included in our calculation, which usually are submitted to Aneel on the eve of the base date of adjustments, is exactly factor you mentioned, which is [pent up], which are the deferrals that happened over 2013 and 2014.

This is our expectation. And once this is included again, we believe the distribution company will be well balanced, considering the current scenario that basically has an impact on tariffs. As to the scenario mentioned, about any possible interest or sale of distribution companies, right now by COPEL, there is no attention given to this aspect.

Attention is given to COPEL [Distribuicao]. We work on efficiency in this area at COPEL Distribuicao and at all the other assets that are under COPEL responsibility. This is where we focus our attention and dedication of COPEL's whole professional team. And in 2013, we considered the group [risk], but we walked away from it. And like we said before, now, we are paying full attention to our distribution assets from COPEL.

If I may add to the comment, we're paying keen attention now to the rules of the extension. And naturally, based on the rules or the extension rules to be set, there might be opportunities or not, but it's still too early to carry out any analysis. The main point today is the extension of the contracts from 2015/2017.

Do you already have a definition if renewal should be for 20 or 25 years? Do you know that already?

This will be defined through a decree law that possibly will be issued in the second half of the week -- or the month by the Ministry of Mines and Energy. And we believe the decree law will regulate these topics.

But, first, what really pervades -- prevailed in this law, so, they specified 30 years. So, we expect to see a decree law about distribution companies and also a public hearing to be set by Aneel.

Great. Thank you.

This concludes the question-and-answer session. I give the floor now to Mr. Luiz Eduardo da Veiga Sebastiani.

Once again, I would like to thank you all and wish you a great afternoon, a great weekend. I ask all COPEL's team of professionals and those of you who joined our conference. We are relentlessly trying to be more efficient so our Company COPEL can reach even higher levels. Thank you very much. See you in our next conference call.

This concludes COPEL's conference call. Thank you, all, for joining us. Have a good afternoon.

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.