Companhia Paranaense de Energia (ELPC) 2015 Q2 法說會逐字稿

Good afternoon, and thank you for waiting. Welcome to Companhia Paranaense de Energia, COPEL's, second quarter of 2015 earnings conference call. (Operator Instructions).

Before proceeding, let me mention that any statements that may be made during this conference call related to COPEL's business outlook as well as operating and financial projections and goals are beliefs and assumptions of the Company's management and on information currently available to the Company.

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 may also affect the future results of COPEL and cause results to 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 IR Officer; Mr. Sergio Luiz Lamy, CEO of COPEL Generation and Transmission; Mr. Ricardo Goldani Dosso, CEO of COPEL Renovaveis; Mr. Reinhold Stephanes, CEO of COPEL Participacoes; and Mr. Vlademir Daleffe, CEO of COPEL Distribuicao.

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

Good afternoon, everyone. Good afternoon. Our management colleagues welcome to our conference call to present the earnings of the second quarter of 2015.

We started the year with a challenging adverse scenario in the electric sector, and this especially due to a possible new energy rationing in Brazil, which may bring back to some extent and even more severely the sad experience lived in 2001.

But, to make things worse, the extremely high cost of energy stemming from the continuous dispatch of thermal power plants will no longer be paid by industry loans or by the government, therefore adding even more pressure to the sector. The government solution was to implement flags and match tariffs to energy costs by using the so-called tariff realism.

On the one hand, this brought us some relief, particularly to distribution companies. However, on the other hand, it also had a dramatic impact on consumers. The remedy was bitter, but necessary to bring stability back to the sector.

In June, we had a second dose of this bitter treatment, with the application of COPEL's distribution and real tariff adjustment. At that time, we used all the amount authorized by ANEEL. And we brought to an end the deferrals of the last two years.

And in August, we can already see that the tariff increase combined with the weak economic scenario in Brazil has affected energy consumption in our country. Until June, consumption was 1.1% lower year on year, according to the EPE, or the Energy Research Company. However, despite the adverse scenario, energy consumption in COPEL Distribuicao's captive market remains positive, growing by 1.3% in the first half of the year vis-a-vis 2014.

The reduction in energy consumption does not affect the distributors' market alone. It also affects the results of generation companies, particularly hydropower plants, which were already delivering below their capacity, due to the low level of reservoirs.

Due to the lower demand and maintenance of existing thermal power plants, hydro generation remains at lower levels. Consequently, GSF is approximately 20% below the 100% at a time in which we expected to see a rebound.

But, if on the one hand the decline in demand had a negative impact, it also helped to increase PLD, or spot price, which was reduced to levels close to BRL100 per megawatt per hour. This fact was also affected by hydrology, which was above average in July.

These two factors, lower demand and more favorable hydrology, encouraged our government through the Electric Sector Monitoring Committee, or CNSE, to shut down the most expensive thermal power plants in early August, therefore decreasing the cost of energy through the system, which may bring some tariff relief in upcoming months to distribution companies.

At this point, it is important to say that our thermal power plant, Araucaria plant, was not affected by the measure and continues to run on working days, in compliance with the national operator of the system.

Please note that the current unit variable cost of the plant, approved by ANEEL, is BRL595.11 per megawatt per hour. This amount will be in effect until January 2016. Our expectation is that, in the second half of the year, this thermal power plant will be up and running.

Moving now to slide 4, I'd like to highlight another point, the fact that, recently, more specifically on July 7, the concessions of plants Parigot de Souza and Maurao 1 expired. As a result, the energy generated by these plants was allocated to distribution companies in the quota system, whereas the operation remains under COPEL G&T's control, awaiting for the bidding process that will assign the new operator.

COPEL Distribuicao's concession also expired on July 7. The process to set the new rules and conditions to extend the contracts is being analyzed at the Brazilian Federal Accounting Court. We'll keep on delivering our services until all conditions are set. We are fully convinced that COPEL Distribuicao's concession will be renewed since we meet all the quality and financial sustainability requirements required by the government.

Before we comment on the earnings of the quarter, let me make a brief overview of the first months of our management. Since the beginning of this year, we have been focusing our efforts on the completion of construction works and the startup of the projects recently acquired.

On slide 5, we can see that, in the transmission segment, if we consider our stake in SPEs, we have already started 491 kilometers of lines and one substation since the beginning of 2015, adding therefore the approximately BRL36 million to our APR.

By year end, we expect to start another 1,600 kilometers of lines and another four substations, adding therefore another BRL129 million to our Company's APR, which will exceed BRL400 million.

Regarding the renewable energy segment, we recently started up another two windfarms that comprised the portfolio of the Brisa Potiguar complex, windfarms Ventos de Santo Uriel with 16 megawatts and Asa Branca I with 27 megawatts of installed capacity. As a result, our commercial operation totals 197 megawatts.

Another three farms, Asa Branca II, Asa Branca III, and Nova Eurus IV, are already in the commissioning phase. And commercial production is expected to startup in upcoming weeks, increasing our wind power to an installed capacity of 278 megawatts.

Now, please note that the four windfarms of Sao Miguel do Gostoso complex, with 108 megawatts of installed capacity in total, which is a partnership between COPEL and Voltalia, already scheduled to start their commercial operation, only awaiting for the completion of the transmission lines and activity under control of other stakeholders.

Now, I'll turn the call over to my colleague Luiz Eduardo Sebastiani, our CFO and IRO, who'll give more detail on the earnings of the quarter.

Thank you, CEO Fernando Vianna. Good afternoon, everyone. Once again, thank you for joining our conference call.

So, now, let's highlight our earnings. As you, ladies and gentlemen, can see on slide number 6, COPEL's operating revenue increased 32% in the first half of 2015, reaching BRL8.1 billion. The main driver of this growth is the 49% increase in the revenue of electricity sales to final customers, reflecting adjustments to the tariffs used by COPEL Distribuicao, 24.86% in June last year, and 36.79% in March this year, due to the extraordinary tariff review.

Please bear in mind that these adjustments were necessary to offset the increase in energy costs, as we all know. In addition, BRL1 billion were recognized in the revenue of sectorial financial assets and liabilities during this period. This amount comprises mainly of tariff deferrals, which are now being recovered via tariff after the adjustment on July 24 of the current year, which was very important to the Company.

These sectorial assets have not been recognized in the balance sheet since the adoption of IFRS and started being posted again at the end of 2014 after the amendment to the concession contract was signed, ensuring that the residual amount of Parcel A and other financial components not recovered via tariff would be included in the indemnification calculation, should the concession be terminated.

On the next slide, number 7, we give you a breakdown of operating costs and expenses in the first half of 2015, which totaled BRL7.2 billion, or 38% higher year on year. This is mostly due to the increase of 64% in the cost of electric energy purchase for resale.

The significant increase stems from several factors, which include new contracts. Please note that COPEL Distribuicao purchased 302 average megawatts for BRL385 per megawatt per hour in the adjustment auction held in January this year.

Other factors include monetary restatement by inflation and higher dispatch of thermal power plants over this quarter. This increase all stemmed from the end of the transfer of funds from CGE and ACR accounts, which offset costs of over BRL1 billion in the first half of last year, and the increase in Itaipu's tariff, which was also affected by the depreciation of the US dollar.

In addition to energy costs, there was a 58% increase in cost of charges of the grid use, particularly reflecting higher system service charges, or ESS, related to the [non-cost-married] base dispatch of thermal power plants.

Manageable costs increased by 12% in the first half of this year compared to the same period of the previous year, due to higher expenses with personnel and third-party services and the collective bargaining agreement, in addition to inflation and higher cost required to offset the Company's growth in the period within the same quality standards.

Slide number 8 shows that the consolidated EBITDA remained stable vis-a-vis the same period of last year, totaling BRL1.3 billion, a margin of 16% over the operating revenue.

COPEL G&T's cash generation accounted for 57% of the consolidated EBITDA. COPEL Distribuicao accounted for 80%, and COPEL Telecom 5%. The other companies of the Group accounted for 20%. The main contribution came from Araucaria thermal power plant.

As to the EBITDA margin of COPEL G&T, COPEL G&T closed the first half of the year with a margin of 49%. Distribution accounted for 5% and telecom 44%.

On slide 9, we show COPEL's consolidated net income, which totaled BRL772 million in the first half of 2015, or 7% below the same period of 2014.

Despite the drop in the first half of the year, there was 22% growth in the second quarter year on year. If we analyze the earnings of subsidiaries, we can see that COPEL Distribuicao's net income amounted to BRL171 million in the first half of the year, recovering, very importantly, the loss posted in the same period of the previous year.

COPEL G&T's net income totaled BRL532 million at the end of the period, of 35% lower than the previous period, affected by the higher GSF and the reduction of PLD, or spot price cap.

COPEL Telecom's net income, in turn, reached BRL29 million, a 5% increase vis-a-vis the first quarter of 2014, reflecting the market's growth in the period.

Lastly, I'd like to highlight that Araucaria thermal power plant contributed to the result of the first half of this year, as we can see on slide 10. Net income amounted to BRL255 million, and EBITDA totaled BRL386 million. This is mostly due to the fact that the thermal power plant operated nearly nonstop in the first half of 2015, delivering a total of 1,827 gigawatts.

The first half of 2015, thermal power -- Araucaria thermal power plant delivered a total of 1,827 gigawatts per hour. Please bear in mind that the plant operated with a unit variable cost of 765 megawatts per hour between February 1st and May 30, when it recovered all administrative and operating costs expected for the full year in addition to the amount required to pay the asset according to ANEEL's resolution to plants such as Araucaria under the merchant modality.

Since June 1st, the plant's unit variable cost was reduced to BRL595 per megawatt per hour. This price reflects gas costs only and will remain effective until January 31st, 2016.

These were our highlights. And now, we'll be happy to take your questions, ladies and gentlemen. Our CEO Luiz Fernando Vianna and all the officers of the Company, COPEL Distribuicao, G&T, all subsidiaries, all officers are here to take your questions. Thank you very much.

(Operator Instructions). Eduardo Cancian, Votorantim Bank.

Good afternoon, everyone. Thank you for taking my question. I have two questions. My first question has to do with the energy value that is not contracted for 2016 and 2017. What is the Company's plan vis-a-vis alternative sale of this energy? And what about the approximate price you envisage for energy in the free market?

My second question regards the negotiation and GSF. We have almost daily data. So, could you give us an update of the assumptions that are prevailing today? Thank you. These are my two questions.

Eduardo, I'll answer your first question. And then I'll kindly ask you to repeat your second question because we had a problem in our sound system, and we could not fully understand your second question. Just to highlight that who's speaking now is Engineer Sergio Lamy, CEO of COPEL G&T.

Eduardo, regarding the volume of noncontracted energy and with regards to our sales policy and the expected price for the future, to some extent, we believe that there are very significant facts happen as of next week, once we have the first step by the government to introduce a proposal in an attempt to solve a problem of the low GSF generation plant.

So, we understand that this fact will be so important that it will have a significant impact on all projections. So, we would rather state more reliable forecasts once we have more information as of next week, once we have the publication of the rules to be set by the government to solve the GSF problem.

Can I just add something? Luiz Fernando is speaking now. We expect to see key provisional measures next week, which will support what Lamy said. And they go as follows.

First, it is a provisional measure that introduces a solution that has been drafted in the sector for GSF. That provisional measure is expected to be published by Monday or Tuesday.

The other provisional measure, which also had a strong impact, not only on COPEL, but (inaudible), are new rules to concessions. And they also include concessions that already expired, which expired in June or July, which is the Parigot de Souza and Mourao plants.

So, we cannot make any forecast about our strategy and not only forecast about price because there'll be a heavy impact on energy prices as of next year.

Could you ask your second question again, Eduardo?

My second question was along the same lines of what you said before about a topic that is being negotiated for the GSF. Based on conversations with stakeholders and agencies, the overall lines of the process are changing constantly.

So, we would like to hear more from you about the overview or the general lines of this agreement that is being drafted. Do you expect to see a different solution for the captive market and another one for the free market? Do you expect to see a reduction on price in the captive market? So, these topics were already brought to negotiation. So, I would only like to clarify if they will prevail or if there has been any change.

What we expect to see is a very general overview. Regulation by decree law will only be an addition. So, regulations will be in effect as of January.

And this asset may be used even by companies, if necessary. And the latest news addressed a different approach to the captive and to the free market. We don't know if this will be published in the provisional measure or in the subsequent. And we don't know what the amount of the discount would be like. So, this is still very open.

As to the past-due or expired concessions, our expectation is that the rules created in the past by Measure 579 would amend it. So, we have part of the value of the energy converted into quotas, but not the other part. And actually, it will involve a bidding process. There will be a tender. But, conditions will be greatly improved.

Eduardo, may I just add some comments? Sergio Luiz Lamy is speaking now. My comments are related to the topics mentioned by CEO Vianna. There is no doubt we expect to see different solutions for the regulated market and to the free contract market.

The expectation for the regulated market is that there'll be a risk premium charged by generation companies to the benefit of distribution companies. And for each one of ACR contracts, there would be a conversion from hydraulic generation to be available. So, the risk premium amount is still being speculated. And we haven't come to a more final amount in terms of what the government may do.

As to the free contract environment, we expect to see a different solution. In other words, mitigation of risks of ACR through the purchase of reserve energy to be settled in the spot market, and expense to generators might generate a regulatory asset, which in turn might be offset in the future, maybe by an extension of concessions.

For us generation companies and our associations in which we're members, particularly at APINE and ABRAGE, a very hot topic that appears quite often, and possibly the government is sensitive to, is the so-called purification or cleansing of GSF. We would eliminate GSF calculation and the reserve energy out of merit and maybe even imported energy for contract purposes.

Just adding to the previous comments, they are considering -- well, there is a concern about purification and the reserve energy, but for imports and generation out of merit, this is very -- this is running smoothly. But, as to the reserve energy, there is strong resistance by the government, but the request continues.

Okay. Thank you.

(Operator Instructions). Maria Carolina Carneiro, Banco Santander.

Good afternoon, everyone. I have two questions. My first question, is there any update about the Federal Audit Court vis-a-vis the concession renewal of distribution companies? And if you consider the proposal by the regulating authority, we believe COPEL would have to be adapted or to adapt itself to meet the leverage target vis-a-vis the Company's EBITDA, at least in the long-term metrics.

So, I would like to know if the Company has any plan, or how does it intend to fit into these rules to be compliant to the rules?

And the second question is about the estimate guidance. If we consider what you did year to date and considering our target or your target for the end of the year, we feel that maybe the Company's investment curve is not as fast as before. So, if we analyze your investments right now, we would not reach the target.

So, from the previous target that you mentioned in the beginning of the year for investment purposes, what will really happen? And what might be delayed for next year? These are my questions. Thank you.

Carolina, Vlademir Daleffe speaking from COPEL Distribuicao. Let me answer your first question about the TCO, Federal Accounting Court. We are optimistic. They wanted to affect the renewal process, but we have -- we are optimistic because we understand that this is very consistent with the defense of the ministry.

And you also wanted to know -- still about a concession, you wanted to know the concern about the indicators proposed by ANEEL and being discussed. We are still talking to ANEEL or the government about these metrics. One of them is related to quality, and others are related to financial performance.

As to financial -- your financial management concern, we're being more conservative because, in the first three years of the five-year cycle, we are nearly meeting all the targets and expectations by the government. Maybe we had a nonrecurring problem in the fifth year, but up to then, we can work a lot with efficiency gains and lowering costs.

As to quality, we are concerned with a stringent contract which sets a target but gives us no margin for 2015. And we assume it will be a too-high risk. If you have any serious problem that might interfere the performance, we might put the concession at risk. But, we are having close conversations with ANEEL, the government. And they're aware of the stringent nature. And we expect them to revisit this.

Answering your second question about transmission, we expect maybe investment will be lower than our initial plan. Our expectation is to be around 700 million by year end. But, one reason is that we had another assessment of investments considering the signs given by the government of the importance to lower quality improvement index, particularly by the end of the fifth year for ELC and EFC.

So, we want to improve results, particularly in rural areas in which quality levels are below the expectations. As a result, we're working on an investment plan, about BRL500 million for future years, more oriented to the rural segment, not only to improve quality, but to adapt to the efforts of the Mines and Energy Ministry and quality requirements to maintain the concession.

Thank you very much.

(Operator Instructions). Vinicius Canheu, UBS.

Good afternoon. I would like to know COPEL's strategy for the next transmission auctions. Is there any project you're interested in developing, or do you plan to be out of these auctions for a while? Thank you.

There'll be an auction on the 26th, and we're still considering the possibility of participating in the auction of the second circuit of (inaudible) the third circuit of (inaudible) line. But, we haven't come to any decision yet. We're still considering whether we'll be there and who we should do it with. We expect to come to a decision by next week.

As to the solar energy auction, we decided not to participate in this auction, and we will await for future auctions.

Okay. Thank you.

(Operator Instructions). [Juliano], [Real Investamentos].

Hello, everyone. I still have a question about the GSF package. My question goes as follows. We assume there might be a reimbursement about everything that was paid by the Company vis-a-vis the first half of the year.

This support package will affect the energy that expired. For instance, you have the three HPPs that expired by midyear. With brief maths, you paid GSF. And would you have this BRL30 million reimbursed? And to some extent, would the BRL30 million, well, would there be a calculation to lower the tariff from 2017 onwards? In other words, the energy that expired in midyear, will it have any impact on the price from 2017 going forward?

The package starts in January 2015. That's already an agreement, a consensus. Our concession expired on July 7th. Parigot and Mourao I's concessions are included in this package, in this MP.

Okay. But, the approximate BRL30 million, will this amount be used to lower the tariffs in the future or not? We've been hearing about that discussion in the sense that there would be an extension in the concession. And if this extension happens, I don't know if there might be a specific plan to be taken into account in this extension.

But, my question is, will the extension also factor in the BRL30 million. That's my first question. And second question, the lower tariff to transfer the risk of the generator onwards, so will this take into account the future or only what was there in January 2015?

Juliano, Sergio Luiz Lamy speaking now. Let's break down your question into parts. First about expenses, GSF in 2015, there are different negotiations and approaches to ACR contracts and ACL contracts.

More specifically about ACR contracts, this involves a lot of theory in almost all discussions that were held with the government. And we don't know yet. We still have to wait until the provisional measure is published. We don't know what the final version will be.

The process is quite dynamic and has been changing very dynamically, for the last draft considered payment by the generation party of a risk premium. So, this would happen, the distribution companies would bear this burden, so to speak, as of January 2016.

And the match or the amount taken by the generator in 2015 would be converted into a regular target asset and, so to speak, would be returned by a reduction of the risk premium in the future. That's the last draft we got. Like I said before, we haven't come to the final draft yet. We'll only know more about it next week, Monday more precisely, Monday.

Okay. Great. Great. Thank you. Thank you very much.

For GSF, there will be a solution to it. The government stated before that a hydrology risk was a problem to be handled by the generation company, and the government would not be involved. Even the series of pieces at court, we opened and we started dialogue with the government. We don't know precisely what the final decision will be. But, I think it's much better than the 20% expected by year end.

My question is the following. So, you already had GSF expense with the plants that expired. So, you already had the burden. And in the future, all hydrology risk will go through the captive market because it will become quota. So, the benefit you have if the cost coverage you have -- well, to some extent will come back to you in the future as burden or not. That's my question. So, you will have the BRL30 million back?

We expect to receive it, Juliano. But, that's not -- but, this topic has not been fully clarified by the government yet. But, we expect to have our right compliant in the first half of 2015.

Now, there's something else, the extension of concessions. But, they also mentioned having this through tariff flags. So, this is still being considered. We don't know what the final solution will be, though.

Great. Thank you.

(Operator Instructions). This concludes the question-and-answer session. Would like to give the floor back to the management for the closing remarks.

Well, there is a lot of expectation for the second half of the year. I anticipated some data. Despite the whole crisis in the electric industry, we do have good expectations because our thermal power plant, it is at lower levels, but we expect it to be up and running. And we also expect to come to a solution to GSF. And we'll do everything in our power to be successful in the bidding process for Parigot de Souza and Mourao plants, taking into account the possibility of having 30 or 40 as part of the energy so we can sell it in the future in the free market or in the regulated market.

I guess this is where we have high expectations for the second half of the year. So, we wish you all good afternoon. We thank CEO Luiz Fernando Vianna. We thank all the managers and officers. And we all would like to be close to you and the financial market. Thank you very much. Enjoy the weekend.

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.