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Operator
Good afternoon and thank you for waiting. Welcome to Companhia Paranaense de Energia Copel conference call to discuss the first quarter of 2016 results. We would like to inform you that all participants will be in a listen-only mode during the Company's presentation. Afterwards we will have a session for questions and answers when further instructions would be given. (Operator Instructions) Before proceeding, we wish to clarify that forward-looking statements that might be made during the call related to Copel's business perspectives, operating and financial targets, and projections are beliefs and assumptions of the Company's management as well as information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions as they refer to future events and therefore will depend on circumstances that may or may not occur.
General economic conditions, industry conditions, and other operating factors may affect the future performance of Copel leading to results that differ materially from those expressed in such forward-looking statements. Participating in this call we have Mr. Luiz Fernando Leone Vianna, CEO of the Company; Mr. Luiz Eduardo da Veiga Sebastiani, CFO and Investor Relations Officer; Mr. Gilberto Mendes Fernandes, Business Management Officer; Mr. Jonel Nazareno Iurk, Business Development Officer; Mr. Antonio Sergio de Souza Guetter, President of Copel Distribution; Mr. Sergio Luiz Lamy, President of Copel GeT; Mr. Ricardo Goldani Dosso, President of Copel Renovaveis; Mr. Franklin Kelly Miguel, President of Copel Comercializacao; and Mr. Francisco Cesar Farah, CFO of Copel Telecom. The presentation will be made by Copel's management and it can be followed on the Company's website www.copel.com/invesor relations.
Now, we would like to give the floor to Mr. Luiz Fernando Vianna, CEO of the Company. Mr. Vianna, you have the floor.
Luiz Fernando Leone Vianna - CEO
Good afternoon, everyone; my colleagues in the Executive Committee, all participants. Welcome to our call to talk about the results of the first quarter of 2016. I would like to start by talking about reported regulatory issues that could bring relevant impact on Copel. The first point and it couldn't be different with the 4th Tariff Revision Cycle of Copel Distribuicao. We certainly are a company to develop the process. As you have already had access to the documents available at the Aneel website in the number 020 Public Hearing that shows a net remuneration base of BRL4.8 billion with the new cycle. This increase means that our distribution company has doubled in size in the last four years. However, it's important to highlight the investment was not made only with extensions. We also invested quite a lot with improvement in the quality of service that we deliver and this led us to be recognized as one of the best distribution companies in the country.
Now with the beginning of the 4th cycle, all these investments will be remunerated and for this reason, we are certain that we have adopted the adequate strategies for the business. The 4th cycle still brings about other important points such as the remuneration of special obligations and the trajectory of costs that will allow us to have a more adequate coverage for the (inaudible) within the cycle that starts in 2016. Nevertheless, the most interesting part is that the practices that (inaudible) should suffer a reduction of approximately 10% with the beginning of the new cycle, which is targeted for consumers because they will be spending less with energy and for the Company as well because it brings a [perceptible] delinquency reduction and growth in consumption factors that have been impacting our results in the last few quarters.
However, it's important to stress that the process hasn't been concluded yet. The hearing is still open until May 19 and after this period, the process will be validated and gratified by the Aneel administration and conclusion is estimated for the end of June. According -- continuing with the regulatory theme, as more Resolution 706 coming from public hearing [04], so I'll talk about an important advance into the issue of involuntary overcontracting of [business] that it will allow us to consider part of the energy that we receive through the quota system as involuntary overcontracting which was enough to mitigate Copel distribution risk regarding [ethane]. In transmission, the Ministry of Mines and Energy got the news about the RBSE [Implementing] which are the transmission assets already existing in May 2000 by means of ordinance 120 of 2016 and Aneel established the integration of RBSE to the Regulatory Asset Base. The restatement of the value of the assets since 2012 and payments of indemnity by means of [RAC] since the tariff process of 2017. This is interesting to say that the cost of own capital to be considered in the repayment of the asset value is 10.4% [near term] which allows us to have the adequate restatement of the amount to be indemnified in the place of Copel. This amount has not been ratified by Aneel yet and I would like to mention that any effect on our results or conditions to the ratification of the final result of the evaluation report by the regulators [Aneel]. Just to remind you, in March 2015, we submitted to Aneel the evaluation report to the amount of BRL882 million with (inaudible) to RBSE and the database was December 31, 2012. On slide number 4, I would like to highlight that we have important achievements related to the projects that we are building. Starting with Colider, the Supreme Court of Justice in a decision supported by technical studies canceled the injunction that mandated Copel GMT to suppress 100% of the vegetation of the area is to be flooded by the reservoir and confirmed that the suppression of 70% of the area was environmentally adequate. With that, the work has been concentrated in the construction of the transmission line that will be linking the (inaudible) to the interconnected systems. And the electromechanic assembly of the equipment, commercial operations should start in the first half of 2017. We also had an important achievement related to the [biosugar food] project in which we hold a 30% stake and we are building in partnership with (inaudible). In a recent decision, now approved an additional 130 days for waver of responsibility for the plant and the total number of days now is 756, which means at the beginning of the other utility was concerned to the end of 2018. And this is enough time for us to build the plant and start commercial operations.
In the transmission segment, SPE Matrincha concluded its construction work and over 1,000 kilometers of lines have already been planted and commissioned successfully. And now, we need a confirmation by the regulators in order to officially start operation of the projects. Besides Matrincha, other transmission projects are about to be concluded and start commercial operation. SPE Guaraciaba should start-up by the end of June, whereas SPE Paranaiba has already concluded construction of 346 kilometers of lines and should come on stream by the end of next month. Jointly, these three projects will bring about to Copel (inaudible).
Lastly, I would like to highlight that we have recently held two auctions for the sale of energy in the free market in which we have sold over 6 million megawatt hour in products. They delivery in two to five years and started delivery as of June 3, 2016 then January 1, 2017, and then January 1, 2018. Our strategy is to hold additional auctions. In order to reduce the amount of energy, whose contracts have been terminated and allows a better predictability for the generation business. It's important to highlight that the results already obtained allows us to make or give a significant step in order to reach this objective.
Now, I give the floor to my colleague, Sebastiani, our CFO, who will talk in detail about the results for the period.
Luiz Eduardo da Veiga Sebastiani - CFO
Thank you, Mr. Luiz Leone Vianna, our CEO. As he said, we have a participation of all the executives due to the important moment for the Company and thank you very much for participating in this call. As you see on slide number 5, some events again impacted our results for the first quarter of 2016. We posted over BRL120 million in provisions, of which BRL84 million are related to labor litigation and BRL32 million to civil. We posted BRL38 million in allowance for doubtful accounts because of the economic crisis that we are going through in Brazil and that has (inaudible) impact on first quarter results. The economic crisis has been impacting energy consumption leading to a drop of 4.3% in the capital market of Copel Distribuicao, in line with the drop in consumption that we see in the country.
The decrease in Copel's results is also explained by the lower results of Araucaria TPP, which represented only (inaudible) in the first quarter of 2016 accruing BRL14 million loss in the period vis-a-vis earnings of over BRL150 million in the first quarter of 2015. Besides the drop in results was also impacted by the lower allocation of energy of Copel GeT to the short-term market aligned to the lower value of the spot price in the period. Slide number 6 now, details of our operating revenue. We had a reduction of 27% in the first quarter of 2016 being close to BRL3 billion. The main reason for this decrease is the recognition of the result of sectorial assets and liabilities that was negative by BRL527 million in the first quarter of 2016.
There was a positive result of BRL561 million in the first quarter of 2015 due to the amortization of BRL402 million in the period coming mainly from the recovery via tariff of the deferrals realized in 2013 and 2014 and the negative constitution of BRL144 million coming from the reduction in the value of the CDE, the economic development account, and the lower cost with the purchase of energy vis-a-vis the current coverage. Revenue from delivery to end customers grew by 19% due to the adjustments of the tariffs to the Copel Distribuicao tariff over last year. Nevertheless, these adjustments were affected negatively by the charges and by the slowdown in the captive market of Copel Distribuicao and the free markets of Copel GeT. Revenue from [use of the] utility that means the many of the sales of Copel GeT and all the sales of Araucaria TPP had a 47% reduction in the first quarter of 2016 due slightly to the lower dispatch of TPP, the lower volume of energy allocated by Copel GeT, and lower spot price of energy.
Revenue from the use of the power grid grew by 44% due to the tariff adjustment applied by Copel Distribuicao in June 2015 and also the increase in the revenue of the transmission segment coming from the tariff adjustments and the startup of new Copel assets. Other operating revenues item now called as revenue classification and others grew by 6% and reflects mainly the 31% increase in the telco revenue which comes from the increase in the client base. On the next slide, slide number 7, we show the operating costs and expenses that were below BRL2.8 billion in 1Q 2016, 23% less than the one that we had in the same period 2015. This can be attributed mostly to the 33% decrease in the cost for the purchase of energy because of the end of existing energy contracts that were replaced by energy contracts coming from the quota system much cheaper and the reduction of the Itaipu tariffs.
Regarding the other costs, it's important to see that we had higher expenditures and charges for the use of the grid due to the dispatch of TPP's results by the order of merit. Manageable costs went up 12% in the first quarter this year due to higher personnel cost and third-party services due to inflation that reached 10% in the period. The provisions and reserves line, as I said before on slide 5, represented BRL121 million that was impacted by labor and doubtful accounts provisions. But when compared to the same period in 2015, we see a 45% decrease in the period. But it's important to highlight that in the first quarter of 2015 we posted BRL73 million gain allowance for doubtful accounts related to the difference between the contract of Colider and the spot price, which means a higher amount of provisions at the beginning of last year.
On slide 8 we show the EBITDA that was 37% lower year-on-year totaling BRL528 million in the first quarter this year with a 17% margin over the operating revenues. The Copel GeT cash generation accounted for 86% of the consolidated EBITDA and Copel Telecom 5%. The other companies in the Group accounted for 9% and the main contribution came from (inaudible).
Copel Distribuicao closed the first quarter of 2016 with a negative EBITDA of BRL29 million, vis-a-vis a positive result of BRL49 million at the beginning of 2015. As we had the effect that we consider non-recurrent, because of that we show on slide 9, the comparison between the adjusted EBITDA of Copel Distribuicao.
As we know, the tariff for Copel Distribuicao contemplate a coverage for delinquency that for the current tariff cycle is [up about BRL13 million] per quarter. However, the tariff increases and the economic stagnation have been contributing to an increase in the level of delinquency that is higher than the tariff coverage and ended up having a negative impact of BRL22 million. The results of the distribution company in the sector decide in a non-recurrent fashion, we posted BRL38 million in legal claims -- provision for legal claims and in February, we had some organizational adjustments that caused the transfer of part of our [fuel costs] from the holding company to subsidiaries with higher impact on Copel Distribuicao.
Considering the adjustments [with respect to the EBITDA] for the first quarter of 2016, it has been positive in BRL38 million, 58% lower than the adjusted EBITDA of the first quarter of 2015, reflected very clearly the impact of the market downturn, therefore the economic scenario that we have in the country now.
On slide 10, we show the consolidated net income of Copel, which reached BRL136 million in the first quarter of 2016, 71% lower than year-on-year. Analyzing results of the subsidiaries, you can see that Copel Distribuicao posted BRL39 million of losses in the first quarter of 2016, vis-a-vis a positive result of BRL29 million in the first quarter of 2015. Copel G&T ended the period with BRL165 million net income, 60% lower on a year-on-year basis, whereas Copel Telecom reached BRL11 million net income, dropping 23% year-on-year.
Specifically about telecom, it's important to say that (inaudible) quarterly income is directly related to the increase in the financial expense that come from the increase in the debt that's necessary to support the subsidiary's expansion of services.
Before opening for questions, I would like to talk about the leverage of the Company. As you can see on slide number 11, the indebtedness of Copel measured by the net debt-EBITDA ratio grew in the last few years and closed March at 3.3 times. It's important to highlight that this ratio is as planned, it's below the limit imposed by the covenants that also lower than what we see in similar companies. This increase in the leverage was expected, as it has to do with the significant expansion plan the Company has been going through and will be reduced with the beginning of the cash flows from the different projects that we are building, many of them starting up in the next few months.
So, these were our highlights. We are available to you now to answer any questions that you might have.
Operator
(Operator Instructions) (inaudible), Citibank.
Unidentified Participant
Now talking about provisions, BRL84 million related labor claims, could you go more in-depth, what was exactly that and do you expect this to continue for the remainder of this year?
Luiz Fernando Leone Vianna - CEO
I will give the floor to the accounting person of Copel.
Adriano Fedalto - Accounting Superintendent
Referring our provisions for contingencies in the first quarter of 2016, in fact, we've had a very (inaudible) labor unions. So very prudently we applied a conservative approach and this event represents about BRL45 million in our provision. Our allowance for doubtful accounts is coming up because of delinquency represented BRL30 million of this BRL112 million and the others are the ones that you are familiar with. BRL45 million should be non-recurrent for the next few quarters and we are monitoring very closely the issue of delinquency in order to maintain or to move down as much as we can this amount of provision for that specific end. Thank you.
Operator
[Jimmy Suskenia], Credit Suisse.
Jimmy Suskenia - Analyst
The first one about provisions, you explained about the provisions regarding expenses but there was a big reversal as well. Maybe you could mention what it was all about? Could you point to any commitment? And the second question has to do with what Sebastiani shared about the covenants. When we look at slide number 11, I understand that there are many projects that will be coming onstream in the next few quarters. But when we look at the average for the last 12 months, we see a deterioration in generation and the situation has a negative impact maybe from the third quarter of last year. As we look ahead, you have new projects coming on stream; but as we look at the average of the 12 months, generations and distribution worsened because of Araucaria maybe. So, do you believe there will be any break of covenant? Are you negotiating any of the covenants that you still have?
Adriano Fedalto - Accounting Superintendent
Once again this is Adriano from accounting making brief remarks about contingencies. Regarding this reduction, if I understood correctly vis-a-vis last year in 2015 the provision of BRL75 million referring to the difference of price for the Colider plant. We had complied to the contract fully, but there was still a doubt about the price. We only took the full amount and we provisioned the difference of BRL75 million prudently. As soon as this is judged, we will be able to reverse this provision in the future quarter as soon as we have a legal decision about that.
Jimmy Suskenia - Analyst
Just to clarify, the reversal of BRL15 million, you're saying that we had provision BRL75 million for Colider and you reverted BRL50.8 million of this amount?
Adriano Fedalto - Accounting Superintendent
No. I'm sorry, there is some misunderstanding. The comparison that I am making is between 2015 to 2016. This is what represents the variation of minus BRL40 million some in our results.
Jimmy Suskenia - Analyst
My question was about slide number 5. When you talk about the breakdown of provisions et cetera, there are reversals. On slide number 5, was it something specific that was reverted?
Adriano Fedalto - Accounting Superintendent
I understand. So in 2016, we had two events that represent BRL50 million, BRL34 million in benefits to employees regarding the Copel Foundation and we were able to revert BRL24 million. And another one which is trivial as well was in the context of almost BRL29 million also is something non-recurrent and that's what reverted during this period. So if you add up these two events, we have this difference of BRL15 million.
Jimmy Suskenia - Analyst
Okay. And the other point is about the covenants.
Sergio Luiz Lamy - President of Copel GeT
The President of Copel GeT. Before we make some remarks about covenants, I would like to make one remark about the result of Copel generation and provision in the first quarter and the expectation for the second quarter and of course it is linked to the issue of covenants. As we have said before, I would say that three factors came into play that was very relevant in this regard impacting the result of the first quarter. The first one was that last year we have made an allocation of free energy, which was much stronger in the first quarter and then this year we made a more linear allocation over the year and this tends to show better results as we evolve over the year. The second answer was very much impacted also and this has to do with the spot price with a sensitive recovery and a trend. We believe that the trend would continue to be there for the next few quarters and we believe there will be more positive impact on our results coming from the increase in the stock price, and then (inaudible) also was a driver as we believe that, at least the second quarter or part of the third quarter. By the end of the second quarter and part of the third quarter, it will come back online due to the Olympics, so we have a positive outlook for better (inaudible).
Luiz Eduardo da Veiga Sebastiani - CFO
One of the most important things that have already been mentioned by [Vianna], and the worst moment that we see which is the beginning of the first quarter and that was already mentioned because of the economic scenario and the specific reality of this (inaudible), and with regards to instance to the non-residential (inaudible), with GDP and the positive outlook that was mentioned by Vianna, so all that leads us to have a positive for the future.
The covenants are analyzed on daily basis, all of the -- track our covenants, and it was still below the average of factors, and below the average of covenants that we see, and that are only posted at the end of the period. So I understand we are concerned which is legitimate, also it is important also to clarify to you and to everybody that we have a permanent monitoring of the covenant, and observing a better scenario from now on for the next few quarters. We've driven high-degree with the risk indicator.
Jimmy Suskenia - Analyst
So you expect a improvement in the 12 month EBITDA, offsetting the deterioration of distribution and generation compared to last year, so you believe the situation will not worsen.
Luiz Eduardo da Veiga Sebastiani - CFO
Our outlook as far as that is not negative. We have already established our covenants below the limit and below the average of the sector, and because of all the factors that I mentioned, our outlook is positive as we said.
Jimmy Suskenia - Analyst
One last question. The issue of exceeding it, is it only for one quarter or two quarters? Did you have any type of debate?
Luiz Eduardo da Veiga Sebastiani - CFO
It's at the end of the year, the fiscal year. That will conclude the merger of the covenancy with the contracts that we have in place.
Jimmy Suskenia - Analyst
Thank you.
Operator
(inaudible), UBS.
Unidentified Participant
Regarding the volume of energy that you sold, 300 megawatts sold in each year and the comparison with the price cut. So the price cut over time. It becomes more and more difficult to predict the EBITDA for distribution. What will be the record level of EBITDA? Can you have the visibility? And do you expect an improvement because of the next tariff revision? So how much do you believe the EBITDA will be going up?
Luiz Eduardo da Veiga Sebastiani - CFO
In relation with the sale to commercialization company in 2016, well, the generation company should 2017, 2018, 2019 and 2020. And the amount that we showed, I don't have the exact figures here with me, but we were rather successful with a sense of selling all the energy that we are making available for this auction. So, besides having been able to create all our available energy, we were able to reach average prices that are very satisfactory around BRL128 per megawatt hour. I can send you the exact figures for each year later after this conference about the result of the auction, okay. I'll give them to you later.
Unidentified Participant
Just to the order of magnitude, is there anything it was reasonably significant -- always within a negotiation strategy?
Luiz Fernando Leone Vianna - CEO
We're [placing] the energy over several different auctions during the year. It's an amount that will exceed the annual value (inaudible) get evaluated [200 to 230] just to give you an order of magnitude.
Operator
(inaudible).
Unidentified Participant
Good afternoon. Thank you for the call. My questions were about the covenants (inaudible) volume of energy sold. It was also clear to me, I mean the volume of energy sold, it seems to me that at the beginning you're having more aggressive effort around the BRL125 to BRL130 per megawatt hour. And -- correctly what you said?
Luiz Fernando Leone Vianna - CEO
What's your name please? Could you repeat your name?
Unidentified Participant
(inaudible) Good afternoon.
Luiz Fernando Leone Vianna - CEO
The sound is very bad. So I would like to ask you to repeat the question.
Unidentified Participant
I had two questions. One about the covenant that you have already answered. And the other one, I need some more color about the order of magnitude of your energy sales of the (inaudible) company. Is it according to the prices that are acceptable between BRL130 and BRL145 per megawatt hour, could you clarify this please?
Luiz Eduardo da Veiga Sebastiani - CFO
We had a few auctions in place in which we sold energy from the generation company, in one modality and the (inaudible) modality. So, you are asking about the (inaudible) company and because of that, I am going to give the floor to the President of this company.
Unidentified Company Representative
The (inaudible) was very concentrated and incentivized and the expectation that we have is tending around BRL165 as of 2017. For 2016, the amount is slightly lower, but the purchase is more feasible. Within conventional, BRL30, BRL35 slightly below this amount.
Operator
(inaudible).
Unidentified Participant
I had a question about distribution and the recurring EBITDA. How much it will increase with the implementation of the tariff revision? And (inaudible) BRL200, BRL250 average megawatts that's already sold by the generation company is very high volume. So, it slightly better than between BRL115 and BRL200, that's all I have just checked.
Luiz Eduardo da Veiga Sebastiani - CFO
(inaudible) President of Copel Distribuicao will answer the question.
Unidentified Company Representative
About the reduction in our EBITDA as we have said before, it stems mainly from distributions and also by the problems that we have at the distribution company regarding the allowance for doubtful account. Because at the moment that the country has been [leaned] with recession and reduction in consumption, and at the same time here in Parana as another state, we have an increase in cost of energy and this results a reduction in the size of our market and the increased delinquency. As a consequence, our allowance for doubtful accounts, we have been working very strongly, and our allowance for doubtful account even increasing our cost to -- and also work with a client in order to revert this delinquency cost and we believe that this decision with clients that we have a trend of changing incentive in terms of (inaudible) that was negative this quarter.
I believe that the market will continue to be weak, and looking at the scenario that we have for this year, we believe we will not even have BRL100 million of EBITDA we agree or may be a little bit more than that.
As our CFO said, we have already reached the worst point of the year, and now we expect EBITDA -- we already see that in terms of delinquency because we see already (inaudible) because we put in place many actions in this regard and we believe that the level that we will have by the end of this year will depend
a lot on what the administration that the government does, but we believe there will be a positive trend in the market reduction in delinquency for the auction regarding allowance for doubtful accounts.
Unidentified Participant
How much EBITDA would increase because of the carrying provision, how much should we expect?
Luiz Fernando Leone Vianna - CEO
I think you are following that, we expect to build out our asset. As a consequence, we believe that we will approximately double our EBITDA.
Unidentified Participant
Thanks very much. Thank you for the answer.
Operator
Miguel Rodrigues, Morgan Stanley.
Miguel Rodrigues - Analyst
Two things. First, leverage. Net debt to EBITDA that you delivered, it is already addressed by the (inaudible) and what is the exact balance today? Going back to the energy portfolio, whether that contracts will now come back on, are you going to accelerate expecting prices to pick up or do you tend to have new auctions and what is your intention regarding this?
Luiz Fernando Leone Vianna - CEO
New covenants, net debt and EBITDA is not part of that calculation, okay?
Unidentified Company Representative
This is generation and transmission. Although we have an expectation regarding the trend and that's a trend in the prices of energy from now up until the end of the year. Our strategy, a strategy based on the average price. So we are going to hold many auctions starting next month. So we do have many different auctions during the year not just for us to have an average selling price for the year, okay?
Miguel Rodrigues - Analyst
Let's say the market conditions worsen, are you expecting [BRL125 to BRL130] and do you expect market prices different from that, are you going to hold back on your auctions?
Unidentified Company Representative
Our expectation is positive in the phase of having more favorable market prices. Of course, if this does not materialize, then we do have to address the amounts of energy to be sold due to the market prices with the decrease of [rate or increase of rate] regarding the market prices and how they develop.
Operator
(Operator Instructions) There are no more questions, I would like to give the floor back to the Company for the closing remarks.
Luiz Fernando Leone Vianna - CEO
This is the CEO of Copel speaking. As we have said before not only at Copel, but in the sector as a whole and in the country; we had a very unfavorable first quarter. We have shown that the [current sector] was even better than the average for the country and our outlook and we are very much convinced when we say we will be back in the second quarter we will have better results than the first and place our bets on this new moment that the Company's starting to look and expecting a recovery because of exchange and we are rather hopeful. We believe there would be improvements to the country and we will be able to close 2016 with a much better perspective than we have in the first quarter. Thank you.
Operator
Copel's conference call about the results of the first quarter of 2016 is closed. We thank you for participating and wish you all good afternoon.
Editor
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.