Companhia Paranaense de Energia (ELPC) 2011 Q3 法說會逐字稿

Good afternoon, and thank you for waiting. Welcome to the Companhia Paranaense de Energia - Copel's conference call to present earnings of the third quarter 2011. We would like to inform you that all participants will be in a listen-only mode, and then we will start our Q&A session and further instructions will be given. (Operator Instructions)

Before we proceed, I would like say that possible statements which might be made during this conference call regarding Copel's business prospects and operating and financial targets are based on beliefs and assumptions of the Company and also currently available information.

Future-looking statements are no guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events and rely on circumstances that might have or might not occur. Investors must understand that the general economic conditions, industry conditions and other operating factors can affect the future performance of Copel and can lead to results which differ materially than those expressed in forward-looking statements.

We have with us Engineer Lindolfo Zimmer, CEO and Mr. Ricardo Portugal Alves, CFO and IRO. The presentation which will be delivered by Copel's management can be followed on the site of the Company, www.copel.com/ri.

Now, we would to like to ask Dr. Ricardo Portugal Alves to take the floor.

Good afternoon, and thank you very much for participating in our web call, our conference call, which will present the results obtained up to September 2011. I would like to show you first of all the highlights of the third quarter.

In July of 2011, we won at the transmission auction promoted by Aneel, the right to build and operate the transmission line of Cascavel Oeste-Umuarama of 143 kilometers extension, and the Umuarama substation, both located in Parana. For this, an SPE (sic - see slide 3) was constituted and Copel participates with 51% and Eletrosul with 49%.

The annual revenue from this project totaled BRL9 million and investment of BRL75 million. We must say that these projects make up the accelerated growth program, and therefore, can be funded by the BNDES.

In August we announced a distribution of 35% of the claimed net earnings for the first half of the year in interest over own capital, a total of BRL226 million paid as from the 15th of September. With this, management signals the possibility of a gradual increase of the profit distribution to shareholders.

At the end of August, the Fitch Ratings agency disclosed the maintenance of the corporate rating of Copel, AA+ with stable prospects. The agency highlighted the financial -- solid financial profile of Copel based on its robust cash generation and liquidity.

In September we raised BRL600 million with the Bank of Brazil to settle debentures which came due on the first of that month. The term of this of this loan is of five years, with an equivalent rate of 109% over CDI.

The Copel grid market registered in the first nine months of the year, a growth of 4.9%, 30% ahead -- higher than the average of the country, especially for commercial classes 7.1% increase and residential with a growth of 5.5%. The performance of our market has consistently been higher than the growth of the market registered in the south of the country and Brazil. We would like to mention the growth of the captive market, which in the same period showed a rise of 5.5%.

Now we will talk about the results accrued till September. The net operating revenue grew more than 13% vis-a-vis the same period of 2010, totaling BRL5.7 billion. The main drivers of this increase -- well, the sales to end customers and use of transmission grid accounts were impacted by an increase of sales, by tariff adjustments and by the termination of the discount policy.

The revenue from the sales to distributors increased 12%, due particularly because of the adjustment of the contract of sales of energy in the regulated environment and the greater revenue in the Electric Energy Chamber of Commerce, 140 -- BRL104 million in 2011 compared to BRL84 million in 2010.

We must also mention the increase of 22% in the telecommunications revenue due to a greater client base. Today Copel Telecomunicacoes has 1,230 clients and is active in 278 cities of Parana and two in Santa Catarina. And finally, an increase of 11% in the revenues from piped gas supplied by Compagas due to an adjustment of prices and greater sales volume.

The operating cost and expenditures, as you could see on the slides, on the sixth slide, booked in the first nine months of 2011 showed an increase of 11% vis-a-vis the same period in the pervious year because of the following factors. Increase of the electric energy account portfolio resale due to greater expenditure with the acquisition of energy from auctions; an increase of 77% in the purchase of natural gas from Compagas, which occurred because of the growth observed and because the increase of the cost related to this gas acquisition; and a significant increase of other expenses due to the accounting of losses in the deactivation of assets because of the transfer of transmission lines from Elejor to Copel Distribution, according to orders from Aneel, as has already been said, and also because of financial settlements using water resources to serve the MRE.

And finally, we must mention the increase of 23% in the personnel items due to three factors. First, indemnities of the voluntary redundancy program, PSDV, of BRL51 million. Second, the accrual of profit sharing in 2011, a total of BRL70 million, and finally, the wage adjustment of 6.5% applied as from October of last year and the affect on the payable from January to September was BRL33 million.

Thus, we can see that the net increase of personnel costs was about 5.5%, explained by the increase of the number of employees and the review of the structure of careers and compensation as from the 1st of June of 2011, leveling employees salaries to those practiced in the market with the objective of reducing turnover costs.

Now regarding an increase of personnel, which totaled in this quarter a total of 9,396 employees, we would like to clarify that to meet the Aneel resolution number 414 of 2010, which establishes the mandatory nature of being present in all the municipalities of the concessionary area, 257 new employees were hired for the job of commercial assistant to work for four hours and the compensation was BRL550 plus food vouchers in the value of BRL285.

And also, according to the voluntary redundancy program, 99 new vacancies were created until September so as to train people to replace those employees that joined the redundancy program. And regarding the salary of the new vacancy compared to that who was resigning is at 30%; in other words, the new employee will receive approximately one-third of the compensation of the employee who is retiring.

By -- until the end of September, approximately 280 employees joined the program and 225 will resign by the end of the month.

The consolidated EBITDA in the first nine months of the year registered a positive variation of 16% vis-a-vis the same period of 2010, totaling BRL1.6 billion with a margin of 27% on the operating revenue. Copel Geracao e Transmissao accounted for 53% of cash generation in the period, while Copel Distribuicao with 34%. Thus Copel's net income from January to September 2011 was BRL988 million, that is 13.4% higher than that percent of the year before.

Only in the third quarter the net income was BRL346 million, 20% higher than that in the third quarter of 2010. The ROE was 8.7% in the first nine months of the year, and if this is annualized, it will be about 12%.

Now I would like to ask Dr. Lindolfo Zimmer, CEO of Copel, to take the floor, and he will talk about relative points of our new projects and other subjects which have to do with the Company's strategy.

Good afternoon, everyone, and thank you for taking part in our conference call. I would like talk first about the projects which Copel is currently carrying out.

As you see on slide number 11, Copel is involved in the building of four energy generation projects and five for transmission, and these projects are located in the states of Parana, Sao Paulo, Mato Grosso and Rio Grande do Norte. These projects total investments of approximately BRL3.5 billion, and if they are included in the rapid acceleration program, they will be funded by the BNDES.

The Maua Hydroelectric Plant is in the final construction phase and 95% of works have been finished. Now the building of Colider is progressing according to schedule, about 20% has been finished. It important to say Colider has been through the critical period and has advanced during the dry period according to schedule and even ahead of time. So in the rainy period, we will come in with concrete and rock and it will be on time without any greater difficulties.

Other generation projects which are getting on according to the program are the SHP Cavernoso, 25% according to schedule and wind power plants have already been acquired and completed up to 15%. Regarding energy transmission, we may say that the [Foz-Cascavel Oeste] transmission line will be energized this month within pre-established terms in the concession contract.

The Araraquara-Taubate II transmission line is in the environmental licensing phase. We are now holding public hearings in -- as this line goes through 28 municipalities and more than 800 properties. Recently, a license for [Ecterutris] was obtained and works have now come to focus on obtaining the installation license. Hopefully it will come into operation on October of 2012.

And the Umuarama-Cascavel line, won in the Costa Oeste Consortium at the last transmission auction, the concession contract should be signed by January of 2012 and operation started in January 2014.

Slide 13 has to do with the Company's expansion plans. And we may tell you that we will take part in the next auctions of generation and transmission, which should occur at the end of this year. We have studied the several projects for generation; Sao Manoel with 700 megawatts and Sinop with 400 megawatts, Sao Roque, Canoas in Santa Catarina with 147 megawatts, Rio Cachoeira, Ammapa 209 megawatts.

These projects represent 1,500 megawatts of installed capacity, calling for an investment of BRL8 billion. And besides that, we are studying the possibility of participating in other projects, in wind projects, that can be coming to operation. Our participation will be through strategic partnership. We will be minority shareholders depending on each project.

As far as transmission, we are studying four possibilities in substations to be built in the south of country with an investment of BRL900 million approximately. Besides that, and as we have already said before, Copel has received few public hearings or calls more than 200 possibilities of investment in generation, transmission, distribution and telecommunication.

These projects are being analyzed and studied and some are already under negotiation and some other already becoming reality, both greenfield and others already installed. But we must always say that Copel will only enter projects which will bring returns above the cost of our own capital.

What I would also like to mention and reiterate to you is that we are seeing many opportunities of strong growth in the near future always with adequate profitability.

The market growth, as already mentioned by our CFO, has been above the national average and will be fostered by the great attraction of industry that are coming to the state of Parana. The government has created a program for attracting investments called Parana Competitivo, with a modern fiscal policy, legal security and an opening for dialogue with entrepreneurs who wish to invest in our state.

This program created in the beginning of the year has already shown significant results, with an expectation of attracting investments of approximately BRL17 billion to implement new projects or to expand industrial plants in different industries.

In this way, Copel will be benefited with the coming of these industries to the state and increasing the energy market even more, so there might be a significant amount of increase of the energy market. And we see Copel as one the companies with the best outlooks for growth supported by its financial soundness, low leverage, motivated personnel and great expertise in the energy sector. This allows it to be one of the companies with the greatest growth potential in its areas of activities.

Another point to mention is the potential of cost reduction through the implementation of the voluntary redundancy program, and these effects will be felt over the next few years. The technological progresses which are being developed, particularly in the distribution segment like contract networks; shielded substations which will allow for reducing operating and maintenance costs; and implementing the ERP SAP management system, which will come into operation at the beginning of next year.

Thus I would like to conclude with a conviction that Copel has a huge, huge potential for growth and appreciation, which very often is not seen by the market. But I'm sure that we are doing our best with the objective of putting Copel in an outstanding position in the Brazilian electric sector.

We all seek a healthy growth and a return above our -- well above our costs. Thank you.

Thank you. And now we will onto our Q&A session. (Operator Instructions)

Philip [Evia], Merrill Lynch.

I have a question regarding your investment program. What kind of CapEx are you considering? According to what you have invested in nine months, that BRL2.2 billion, that was talked about at the beginning of the year probably will not be achieved. And from now on what will be the CapEx level without excluding the growth projects but just maintenance levels and to keep the assets -- current assets going?

The investment -- the approved investment program was BRL2.6 billion, and in September it was reviewed to BRL2.15 billion and we hope that by the end of the year it will be BRL1.65 billion. We are exactly at this moment in this process of planning for 2012, planning our budget.

The numbers have not yet been closed. But I imagine that of these new projects that have been mentioned that we are executing like Colider, the Araraquara-Taubate transmission line, the (inaudible) and other lines here in Parana, this investment for 2012 will be BRL500 million, and the investment program which we call normal should be BRL1.6 billion. So we haven't closed, but it should be about BRL2 billion, BRL2.1 billion, without considering possible acquisitions or participation in another undertakings. Thank you.

Thank you so much.

[Vinisu Scanel], Credit Sussie.

I had two questions. First, the booking of the PDR that you mentioned, your accounting of this, is it following the same metrics as last year or -- well, last year it just focused on the quarter and now it's distributed throughout the year. So have you focused things or not? And secondly, I would like you to give us the free energy that Copel has? How much can it be filled in the action of minus 8?

We do a monthly linear provision of this. When you have a projection of the profits updated for more or less you alter it. So our forecast is BRL70 million vis-a-vis the last projection. But it's linear. So this profit sharing will remain probably until the end of the year.

Regarding the free energy, which we will have available as from 2013, about 20% of the energy. Our idea -- I will pass this question on -- we feel we've already -- and up to the Operations Director of Copel, and he is more familiar with this area.

So what do you think the price will be for free energy or how we would be selling or how much are we already selling part of this energy for? We all know that the market is looking downwards regarding the value of this energy.

We have the very probable expectations regarding this energy, which we don't -- but the fact is we don't have too much energy available, and we have drawn up some contracts with amounts well above the amounts of the old contracts. So even with values slightly below the expectations, they are still above the contract enforced. So we think that things will be better with the new contract, better than the old ones.

Of course, we hope that the economy will continue at a good pace and we hope that this energy will be able to be placed at reasonable amounts. Obviously, if growth continues to -- at 4% or 5%, this will happen. So as the country continues to grow, the Company will suffer like all other companies in the industry. But we are optimistic and we think that we will have better results than we have had in the past.

Thank you.

Thank you, Vinisu.

Marcio Prado, Santander.

Vladimir Pinto, Bradesco.

My question was, this week we had an approval of the tariff adjustment, and I think two points I think in the case of Copel. How are you going to work with this new reality, and the operating costs? You indicated that there will be a stronger approach regarding the cost.

And the second, the question of leverage. Aneel is looking at the debts and the 45% equity in the tariff structures, and Copel has a less leverage structure than that. So what will we have -- what will Copel do to answer this challenge?

We have already made some simulations, and to our distribution the inputs of this new policy will be minimum. I would not say the amounts are negligible, because any amount is important. But the effects or the -- it will be minimum impact. And we also have -- we have readiness [contracts], which are being implemented -- automating services and --

Vladimir Pinto Another question, which is an adjustment to the inventories?

With our administration, inventories they have reached a good level and inventories is about BRL300 million. And thus, we have leeway and we are in a comfortable position. We understand that this is important. On the other hand, the tariff base is going to grow significantly due to the inclusion of some assets which are not yet being granted by Aneel, so we will be able to improve our return.

So this new policy will have -- it will not be painful for Copel. Now a little bit about our leverage.

Good afternoon, Vladimir. And you know that today Copel's long-term and short-term debt is BRL1.6 billion; the consolidated debt of Copel is BRL2.2 billion. As we have already said, Copel is asking the BNDES for about BRL1.5 billion, BRL1.6 to finance several undertakings; the Colider, Araraquara-Taubate transmission line, two transmission lines in Parana and a small hydroelectric plant.

So we will be able to get these resources directly from BNDES. All the data has been sent to them and these projects at this moment are under analysis. And one transmission line we are already signing for this funding from Foz do Iguacu to Cascavel transmission line.

So our debt might reach -- I think all these projects will be approved by the middle of next year or the end of next year, so our debt will leap from BRL2.2 billion to approximately BRL3.5 billion or BRL3.6 billion. Besides that, as we have already mentioned, in the market we have an open window for the issue of debentures in the domestic market.

And this will depend on acquisitions, which are being analyzed by Copel, and it will also depend on the results of the new auctions, which will start now in December. And if there any auctions next year, as they certainly will be, we will also be taking part. So this indebtedness, seeking what Aneel proposes, will not be next year, but in two, three years we will be able to achieve a debt of about 50%.

Thank you.

(Operator Instructions)

Marcio Prado, Santander Bank.

I have a question about Copel's generation capacity short term. We have seen some generation -- generators, not all, have suffered a bit from reserve in the free market. Plants have been returning this energy and the generators have this energy and they are selling it at low spot prices. So I'd like to ask what Copel's dynamics are. So you're still strong on generation, but will this continue short term or will the clients be returning energy -- so will Copel have more energy in hand?

Well, this does not worry us as much it's worrying other companies. We have availability 2012 on, so today we are okay. Of course, when energy becomes available as from the end of next year, it will depend on the political definition of the concessions and policies of the industry itself and also of terms for commercialization.

Today for -- up until 2015, this is a short term and we hope to have a better negotiation. We understand that this should be solved soon and it might be renewed. We do not know under what terms. But if this happens, it releases us so we can deal with the contracts in a much better way, and I would say the most. But we also think it's very positive. The consumers of the captive market could be united. And these consumers want to continue with us so we have a growth of the market and we can save this energy for the captive market. It's better than conditions in the contracts that we have today for captive market.

Thank you, Lindolfo.

[Liliana Yam], UBS.

Could you talk a little bit more about acquisitions? Do you think the market is more -- is going more for generation or other businesses? Could you elaborate on this, please? And second, are you thinking policies regarding dividend payment?

Yes, we feel that more than 200 business opportunities have been presented to Copel, and these projects -- they have been -- and they have different aspects of engineering and political aspects and we have noted with. And following, we already have -- the Company had the positive due diligence in the company.

The due diligence must be meeting all economic, financial and complete. Specifically today, we were told that two due diligences have been concluded and we have the intention of acquiring these companies. We will analyze the reports of the companies to see whether they are in keeping with our interests and in a short while we will communicate this to the market and explain the conditions of these acquisitions.

So, yes, we are analyzing acquisitions greatly. As the CEO Lindolfo says, it's very difficult to acquire assets in Brazil in the electric power sector. But we are doing this. And we have found several projects, some that have a great interest and will bring a very good profitability to us, but significantly among the cost of our own capital -- above.

Regarding dividends and our payout policy, perhaps Lindolfo could say a few words.

Our management throughout this first year has already made a significant increase of our distribution. We have increased it 10% vis-a-vis the level which we had. So this is already a good sign for the investors regarding their expectations. And of course, we would like these expectations to be fully met.

So the payout could be greater not only in terms of volume, but also the percentage of distribution. The idea is to reach a level, a comfortable level for the investor and that they will be comfortable that the Company will pay out the results that it can do so at least to a minimum. We will do that to increase the earnings and of course to increase supply and increase the payout. So this will be healthy both for the investor and for the Company.

Thank you.

(Operator Instructions) Thank you. Our Q&A session is finished. I would like to ask our speakers for their final remarks.

Well, thank you again. I would like to say how delighted I was to talk to you this afternoon and saying we are at your disposal should you have any questions or clarifications regarding our conference call and the earnings or any other issues which might come up.

It has been a pleasure and thank you all for your participation and your interest. And we would also like to say that please contact our Investor Relations department who are always ready to talk to you. Thank you so much.

Thank you. The third-quarter 2011 earnings conference call of Copel is closed. Thank you very much. Please disconnect your lines.

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.