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Companhia Paranaense de Energia (COPEL) (NYSE: ELP ) Q1 2015 Earnings Conference Call May 15, 2015 02:00 PM ET Executives Luiz Fernando Leone Vianna – CEO Luiz Eduardo da Veiga Sebastiani – CFO and IRO Sergio Luiz Lamy – CEO of Copel G&T Vlademir Santo Daleffe – CEO of Copel Distribuição Analysts Vinicius Canheu – UBS Operator Good afternoon, thank you for standing-by. Welcome to Companhia Paranaense de Energia Copel’s Conference Call to Present the Earnings of the First Quarter 2015. We’d 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’s 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, beliefs and assumptions of the company’s management and the 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 occur or not. General economic conditions, industry conditions and other operating factors may also affect the future results of Copel and these 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 Renováveis; and Mr. Reinhold Stephanes, CEO of Copel Participações. The presentation will be delivered by the Company’s management, may be followed at the Company’s website at www.Copel.com/ir. Now I’ll give the floor to Mr. Luiz Fernando Vianna, CEO of the Company. Luiz Fernando Leone Vianna Good afternoon. I have my management 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. [Technical Difficulty] that we’re drilling [Technical Difficulty]. On the one hand unfavorable hydrological scenarios including discussions are always progressing. On the other hand we have the implementation of [clients] and the so called tariff [indiscernible] was brought significant adjustment to energy carriers expecting inflation rate and causing even more turmoil in an economy that is already stagnating. In mid-May the scenario is markedly more optimistic compared to past month. Rainfall in March and also in April mitigated the risk of rationing and [indiscernible] and adjustment have allowed distribution companies to stand on their own. However, even though energy rationing is no longer an imminent risk in 2015, our reservoir remain low which takes the operation of TPP 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 COP or different settlement price which should remain at maximum levels all year round. In addition it’s important to remember the economic conjunction combined with increase in energy tariffs and awareness campaigns mainly through stagnation or even a drop in energy use. This 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 Distribuição increased 1.7% in the first quarter and latest information show that this continues growing until mid-May. In terms of results our income totaled R$470 million in the first quarter 19% lower than the income in the same period of the previous year. EBITDA posted a drop of 3% totaling R$835 million this quarter. Energy cost significantly increased by 82% which is a result of higher prices in auction and the end of the transfer policy of CTE and ATR account fund which offset a significant portion of this expense last year. On the other hand we have a 44% growth in our revenue in an acquisitive sale to final consumers this stems from adjustment applied in Copel Distribution tariffs required to offset the increase in the 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 sector of discussions involving the company, associations, regulatory agencies and the government. We are now more proactive now in the bank, topics like reversion of energy cost, indemnification of assets and renewal of distribution positions but we also have important discussions involving the current performance of construction works in terms of intake of the majority of companies with construction projects in Brazil we do have this it’s important to make some comments on construction works on Colíder Plant. As you can see on slide number four, we are requesting with them now a waiver of liability a term of over 644 days related to the delay in the startup of Colíder Plant. Initially it was scheduled for December 30, 2014. But after the waiver start-up will be scheduled for October 2016, this request is justified because over construction works we have acts of vandalism in the 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 this vegetation suppression of the reservoir area. We’re still awaiting for the waiver of liability to be accrued by now but we are in compliance with the contract of Colíder Plant which total 135 average megawatts using part of our non-contracted energies from other plants. Still about Colíder it’s important to say that our current forecast is to have construction works completed by April 2016. Another highlight is indemnification of pre-existing assets in May 31 year 2000 in late March we submitted to an evaluation report showing indemnification amount of R$882 million on December 31, 2012. The book value of these assets was 160 million on the same date. This difference is due to the methodology of the newest latest management value which was used according to [indiscernible]. Please bear in mind that the final indemnification amount will only be set once amount evaluates the provisions submitted which is expected to happen by year end. On slide number five I would like to underscore the start-up of [indiscernible] lines. By year end we expect to have an increase of 135 million in the revenue or position assets with a start-up of other important assets that are now in the final construction phase. In addition we also have a commercial startup of wind farms [Santa Maria] with a joint installed capacity of 59 megawatts. With that Copel [indiscernible] 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 start-up of another five wind farms in [indiscernible] complex and four farms up [indiscernible] complex in which we own a 49% stake. In addition we have 13 wind farms under construction in [indiscernible] complex totaling 332 megawatts of capacity to be added by 2019. Copel has is already among the largest companies in this sector in Brazil. Now I give the floor to Luiz Eduardo da Veiga Sebastiani our CEO and IR Officer. He will be giving you more detail of the results of the period. Luiz Eduardo da Veiga Sebastiani Thank you CEO, Luiz Fernando Vianna. I also thank the president of CEO of Copel subsidiaries with us progression on from the finance area and other staff at Copel and specifically those who are joining us through the conference call, analysts, investors a very important moment for Copel, it’s important to declare the investors. I would like to begin by making comments on the good result of [indiscernible] with income total R$155 in the first quarter of 2015 16% above the numbers year on year. Just reminding you of the [indiscernible] as you can see Slide 6, the TPP is once again operated by UEG Araucária a Copel subsidiary, this operation came back in February 2014, it is a trend under the merchant model with no availability contract and sold only energy produced in this spot market and the selling price is between POD and TBU whichever is higher according to the rules of this operation modality. Last year the TPP traded energy according to PLV since it was higher than CVU during most of the rest of year; however, in 2015 with a drop of PLV cap to 388 megawatts per hour, the energy sales price would always be CVU which was defined by Aneel as follows. R$765 per megawatt per hour between February 1st and May 30th and R$595 per megawatt per hour between June 1st and January 31, 2016, CVU is higher because in addition to gas cost recovery it also includes recovery of administrative and operating cost in addition to asset compensation despite the growth in the sales price vis-à-vis 2014 the plan provided very interesting results in the first quarter reaching an EBITDA R$239 which accounts for an increase of 43% year-over-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 well responsibly in February. Now Copel consolidated results on Slide number 7, operating results, operating revenue went up 39% in the first quarter of 2015 exceeding R$4.2 billion within drivers for growth in revenue were increase of 44% in the revenue of electricity sales to final consumers mainly due to adjustment applied to tariff by Copel Distribuição 24.86% in June 2014, our annual terrific 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 starting from higher revenue in CCEE due to the sale of energy from Araucária as per the dimension and the strategy of energy allocation in the spot market by Copel GeT, we allocated 1,522 gigawatts per hour this quarter vis-à-vis 501 gigawatts per hour in the first quarter of last year, very significant growth. As per the availability of the power grid which is made up GUSP we had an increase 7% due to the annual APL adjustment and new start up in the transmission segment. Please note that the adjustment in the GUSP was offset by charges this quarter as well the revenues which includes in addition for sectoral asset and liability results other revenues like construction, telecom and gas reached likely more than R$1 billion reflects of the recognition on R$561 million related to the result of sectoral financial asset and liability and the 17% growth in telecommunications revenue which totaled R$48 million marked basically about sectoral assets and liabilities result in Copel Distribuição we highlight that this revenue stands for the increase and the asset balance related to tariff deferral and higher cost of energy in charges which will be recovered in the next tariff review. These central 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 in the indemnification calculation, should concession be terminated. On the next slide we talk about operating cost and expenses in the first quarter reaching 3.6 billion or 50% higher than the first quarter of 2014. This is mostly due to the increase of 82% with electric energy particularly sale totaling R$1.8 billion this quarter. Costs with charges and the use of the grid increased 61% basically due to higher charges in the sales of service related to terminal dispatch in addition to an increase of cost related to the startup of new license in the system and adjustment in concession carried n Itapúa energy. Cost with the approaches 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, UEGA only as of February, 2014. Managerial cost increased 22% reflecting higher expenses with personnel and third-party services, inflation, adjustments and salaries, benefits and contract cost required to offset the growth of the company and also GeT and EFC. Costs were also affected by an increase in provision for several administrative and work, labor claims in addition to the closing of R$73 million in ADA and the price of energy traded in CCEAR in Colíder and PLD. On slide number nine we break down expenses with energy purchase for retail like we said before increased 82% totaling approximately R$1.8 billion in the first quarter of this year. Energy purchase in the regulated market CGAR increased basically due to the entry of new contracts and high prices. Copel Distribuição purchased 302 average megawatt at price of R$385 per megawatt per hour in the adjustment option in January this year in addition to repayment of contracts by inflation and high dispatch of thermal plant this quarter. [indiscernible] cost doubled vis-à-vis the first quarter of last year reflecting the tariff adjustment denominated in dollars but the main reason behind the increase in the quarters competitive cost is the end of the fund transfer policy from CDE and account ACR. The first quarter 2014 had 832 million with CDE and ACR account to offset high cost at that time. Slide 10 shows that our consolidated EBITDA had a growth of 3% vis-à-vis the first quarter of 2014 totaling R$835 million with the margin of 2% of operating revenues. Copel G&T cash generation accounted for 75% of consolidated EBITDA, Copel Distribuição 6% and Copel Telecom 3%. The remaining companies of the group jointly account for 16% and the major contribution came from other Colíder Plant and 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. 470 million in the first quarter of 2015 19% lower than the same period of 2014 while we analyze subsidiary results we can see Copel distribution close the first quarter with a total income of R$29 million offsetting the launch in the same period of the previous year. Copel G&T closed the quarter with the income of R$409 million or 5.3% lower year-on-year attracted by higher GSF and a reduction in PLV cap. Copel Telecom in turn had an income of R$15 million in line with the numbers year-on-year. These were our highlights and we are happy now to take questions. We are here for any questions you may have. Thank you very much. Question-and-Answer Session Operator We begin now the question-and-answer session. [Operator Instructions] The first question is from [indiscernible] Citigroup. Unidentified Analyst Good afternoon everyone. Thank you for the call. What about Colíder’s product? Do you have any forecast when the waver will be evaluated by the regulatory agencies? Unidentified Company Representative Let`s turn to Sergio Lamy, Engineer and CEO of Copel G&T Sergio Luiz Lamy Good afternoon. To answer your question — we have a preliminary statement of a technical note an internal technical note by now 214 days of waivers. With 214 days which would account to slightly more than six months or seven months actually this is what the number that we used last year — this is when we first decided to have the impairment of Colíder plant. At that time we base ourselves in an internal document given signs of — request of five months. Although this new statement is not favorable compared to the original one we are not happy at Copel with such a statement. We’ve been working with a regulator in order to try and clarify the issue so we can be closer so the position we understand to be fair and certainly issued exceed one year. Today the delay of the plant is around one year and four months. And we are very confident that we do have arguments enough in order to have the waiver of liabilities very close to the real delay of our operations. Operator [Operator Instructions] The next question is from Vinicius Canheu from UBS. Please go ahead. Vinicius Canheu Good afternoon. Thank you for the call. The question is still about Colíder. I would like to have more detail on the negotiation of the purchase of equipment and turbines that you have with wind power Energia were there any energy or cost increase? Vlademir Santo Daleffe This is Vlademir speaking again from Copel GMP 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 project but this risk is very well under control today vis-a-vis new all the measures 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 product supply that is in Mendoza, Argentina. The idea is also to present problems and 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 scheduled but the risk is very much mitigated and we have no signs of an increase in CapEx caused by the problem with WPE. Vinicius Canheu Could you make some comments about the negotiation of the use of Petrobras infrastructure for gas supply to automatically what will the comps in wells be like? Unidentified Company Representative 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. Operator [Operator Instructions] The next question is from [Pedro] from Credit Suisse. Unidentified Analyst 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? Unidentified Company Representative Cash cost I don’t have it here with me but the forecast is at best a very stable scenario only around our expectation is to maintain this batch. So 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 a presentation he mentioned reduction of CVU so there will be a slight reduction due to CVU reduction in the coming months, but that 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. Unidentified Analyst We are saving ourselves on the total cost at Araucária this quarter; could you try to assume the cost of operating Araucária per megawatt per hour? 100 megawatt per hour per CVU assume May IRR 7.65 that’s why Araucária is so significant over the year, I understand there will be a drop into the use 595. But would like to understand give the confident of Araucária the bulk is gas operation should we consider for 100 megawatt per hour and then there will be a reduction in EBITDA at Araucária this year, but something very interesting still interesting to the Company. I will just like to understand if the math is okay or if I am missing something. Unidentified Company Representative Your math is correct but when it comes to cash price variation, that’s a market issue. We can make projections but this is uncertain. Right now I cannot make any more accurate forecast. Unidentified Analyst So if there is any significant variation that in the cost of Araucária, can you also knock on an outdoor to ask for a CVU review? Unidentified Company Representative Absolutely, we are assuming that in the CVU of 7 of 5 and then 595 maybe we have some question of EBITDA per megawatt per hour for Araucária this year. No [indiscernible] when it comes to CVU recognition. There is no question. Unidentified Analyst But is there is any significant variation in cost? Unidentified Company Representative Yes, maybe become higher. There is no problem, no difficulty to try to file or request a CVU review. Operator [Operator Instructions] The next question [indiscernible] Bank. Unidentified Analyst I would like 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 obligation, could you give us some color? Unidentified Company Representative I’ll ask [Akaishi] our engineer from Copel Distribuição to answer your question. Unidentified Company Representative We are convinced that the review 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 the creative hours of public hearings to validate at least conditions that were stated by media. And as we see it at Copel, when it comes to these conditions there will be no problem to work on obligations that must be related to this concession agreement. Unidentified Analyst Okay, thank you, if I may I would just like to ask another question, I would like to better understand why management cost increased so much? I understand was an increasing thermal dispatch in some cases but still even personnel expenses increased more than 10% just define you and what should I expect going forward? Unidentified Company Representative More specifically at the distribution company when it comes to personnel, we had 11% close to 11%. If we consider that we really have an adjustment at salary adjustment then in from IPCA restatement, it’s totaled 7.5%. The variation was about 4% on top of what is our obligation according to labor agreement. Naturally, if you noted that over 2014, we had a lag in GEC indicator, we were concerned about recovering it and one of the actions was to work again in our labor force in several point in which GEC really had an impact and then we really had an increase in fact and also in places or regions where we had to re-contract and maintenance services to be outsourced. And specific points because as you know, distribution is state wide 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 connection and our layoffs we also had a strong impact a weathering effect 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 cost. If you look at it carefully this effort when it comes to strategy, this effort met our expectations because duration index within the [indiscernible] by the regulatory power and now we feel comfortable to meet the terms of the concession agreements without running any risk due to extension. Operator The next question is from [indiscernible] from JPMorgan. Please go ahead, sir. Unidentified Analyst Good afternoon. I have two questions. The first question is about [indiscernible] in June. Do you have an idea about adjustment index that you want request it now and do you expect to include the tariff deferral for 12 months, you have about 1 billion deferred over 12 months, is that the intention? Then the second question is about [indiscernible]. You consider Copel participated in a consortium with energy in [2012] and that is walked out of the process. We know there will be a privatization by rent and then we have inner progress disclosed. We’re interesting in this kind of concession with the clients, so are you having to look at these items, are there any strategies or any partner that you consider with another private player. Thank you. Unidentified Company Representative Your first question just would be, okay, it’s about tariff reveals, okay, engineer [indiscernible] is going to answer your question. Unidentified Company Representative The extraordinary tariff review recovered on global terms portion A. So our expectation which will be included in our calculation usually are submitted to announce on the eve of the basis of adjustment in exactly the factor you mentioned which are the deferrals that happen over 2013 and 2014. This is our expectation and once this is included again we believe that distribution company will be well balanced considering the current scenario that basically has an impact on tariff. 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 Distribuição. We work on efficiency in this area at Copel Distribuição and in all the other aspects that are under Copel responsibility this is where we focused our attention and dedication of Copel’s whole professional team. So in 2013 we considered the growth rate but we also walk away for it and like we said before now we are paying attention to our distribution assets for Copel. If I move after the comments we obtained keen attention now to the rules of the extension and naturally based on the rules of the extensions rules to 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 to 2017. We 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 announced by the Ministry of Mines and Energies and we believe that decree law will these topics. And third what really prevailed in this loss, so they specified 30 years. So we expect to see a decree loss about distribution companies and also a public hearing to be set by Aneel. Operator This concludes the question-and-answer session. I give the floor now to Mr. Luiz Eduardo da Veiga Sebastiani. 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. Operator This concludes Copel’s conference call. Thank you all for joining us. Have a good afternoon. 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