Companhia Paranaense de Energia (ELPC) 2011 Q4 法說會逐字稿

(translated) Good morning, and thank you for waiting. Welcome to the earnings conference call of Companhia Paranaense de Energia COPEL to present the results referring to 2011. We inform that all participants will be on a listen-only mode during the Company's presentation. Afterwards, we will start our Q&A session when more instructions will be provided.

(Operator Instructions)

Before proceeding, we would like to mention that forward-looking statements involving projections, operating and financial goals of COPEL are based on the beliefs and assumptions of COPEL's management and on information currently available to the Company. They are not guarantees of performance, and involve risks, uncertainties and assumptions, because they relate to future events, and therefore depends on circumstances which may or may not occur.

Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of COPEL and could cause results to differ materially, from those expressed in such forward-looking statements.

Participating in this earnings conference call are Mr. Lindolfo Zimmer, CEO and Mr. Ricardo Portugal Alves, CFO and Investor Relations Officer.

This presentation will be made by COPEL's management can be followed in the Company's website, www.copel.com/ri. We now give the floor to Mr. Ricardo Portugal Alves.

Good morning, thank you very much for joining us to our earnings conference call. And we will now present the 2011 results. And after that, our CEO Lindolfo, will talk about the highlights of 2011 and the outlook for 2012.

Before anything, I would like to say that COPEL is going through one of its best moments. Our staff is motivated, profits are growing, the payout is increasing, cost control is continuing. We have profitable projects, and a huge indebtedness capability. And the market is not being unfair with the product of our shares, we need to look ahead and trust the effect of the measures that have been taken.

Now, we will start giving out the data about our energy market. COPEL's captive market had a 5.4% increase, 50% above the national average, and the highlights were the industrial class 5.3%, residential 6.8%, and commercial 5%.

Our market performance has been consistently higher than the market growth seen in the southern region of the country and in Brazil. We expect that this market expansion trend will continue based on the optimism regarding the Parana Estate economy for coming years, thanks to initiatives taken by the state government of Parana that is implementing programs to recover the local economy. And also due to the expected recovery of the slow -- of the global economy which will ensure the continuity of an upward cycle in the commodity prices, as you know Parana is very strong in that area. So if that continues, the market should look very promising for 2012.

We will now give you an analysis of the results seen in 2011. The operating revenue grew about 13% compared to the same period of 2010 totaling almost BRL8 billion. The main drivers of this increment were the accounts, delivery to end customers, and great availability which were impacted by a sales increase, by a tariffs review and by the extinction of a tariffs discount policy. As we all know, we had the discount until June of 2010 for consumers, and -- for consumers that were paying on time. And in June of 2011, we had a 2% tariffs discount policy.

Another factor is the revenues from the delivery to other utilities which are the 12% increase due mainly to an adjustment in power purchase agreement in the regulated market into a greater revenue in the electric power commercialization chamber. BRL143 million in 2011 vis-a-vis BRL113 million in 2010.

Certainly, that is worth mentioning the 20% increase seen in the telecommunications revenues because of the client base expansion and the diversification of products and solutions offered. COPEL Telecomunicacoes, currently has 1,442 clients, 47% up compared to 2010 and operates in 302 cities in Parana state and two cities in Santa Catarina state.

In addition, the fourth factor is a 15% increase in the revenues of piped gas supplied by Compagas due to tariff adjustment, 8.5% as of August into a greater sales volume.

Operating cost and expenses reported in 2011 showed an 8.5% increase compared to the same period of the previous years because of the following factors. We will mention the four main factors, first, increasing the account electricity purchased for resale due to a high expenditure with the purchase of energy in auctions of the regulated market.

Secondly, 29% increase in the purchase of natural gas of the Compagas caused by sales increase and an increase in costs related to gas acquisition. Thirdly, an additional provision amounting to BRL118 million due to a civil lawsuit of a contractor that claims compensation for an alleged economic and financial imbalance in the construction of the Jordao River Bypass. That lawsuit started in 2004 and Jordao River Bypass was completed in October of 1996.

The fourth factor refers to a 21% increase in the personnel item due firstly -- due in -- to salary adjustments of 6.5% and 7.4% applied as of October 2010, and October 2011, respectively, referring to collective bargaining agreement.

The allocation of profit sharing, during the fiscal year of 2011 into indemnifications paid us -- by the permanent voluntary resignation program amounting to BRL64 million, of which BRL14 million were provisioned in the last quarter alone.

After these adjustments, and increasing the personnel account would be 11% and this was explained by an increase in the number of employees and by the revision in the career and compensation structure, beginning in June 1st, 2011 matching our employees' salaries to those of the market. The goal being to reduce turnover costs.

The effects of these -- of this measure were needed for employees turnover dropped from 11.6% in 2010, to 8.9% in 2011 and should return to historic level of 5% to 6%, which is what we had in the year 2000.

Specifically in terms of our staff increase, our staff at the end of 2011 totaled 9,400 employees. I would like to clarify, that the additional hiring took place primarily to meet [any out] resolution for --[1/4/2010] which requires companies to have (inaudible) physically located in non-municipalities of the concession area.

About the permanent voluntary Resignation program, until now, 333 employees have joined the program of which 144 resigned until the end of 2011. Of these, 99 only in the first quarter.

Consolidated debt in 2011 showed a positive 26% variation compared to 2010, totaling BRL1.9 billion with a 24% margin over the operating income. COPEL [GeT] in transmission accounted for 51% of cash generation in the period where COPEL Distribuicao contributed with 35%.

Net working provisions in fact have better -- would have hit the mark of BRL2 billion. Thus, in 2011, COPEL's net income was almost BRL1.2 billion, 17% up compared to that of 2010, a growth which was way above the average of peer companies in this sector.

In the fourth quarter alone, net income was BRL189 million, 26 % above that of the fourth quarter of 2010, just like we did with that EBITDA, net of nonrecurring effects, we would have reached BRL291 million of net income in the fourth quarter, totaling BRL1.3 billion in 2011. Return on equity was 10.5%.

Compared to the cash flow for 2012, some impacts should be considered. As you know, we are going through the third tariffs review cycle which currently is at its stage of public hearing, and it's pointing to a tariff review index of minus 85% -- minus 0.85%, the post equity nature of BNDES loans, I'd like to remind you, that our expansion strategy is partially based on BNDES debt.

And possible concessions of energy generation transmission and distribution projects which are being analyzed and that we learned about through public invitation for new business. And finally, the traditional company restraints in waiving CapEx at funds via the information system. We do not have restrictions in terms of the capital market.

Most of our funding should happen through debentures. Because of these possible constraints, COPEL's management chose to maintain the payout at 35% for FY2011. I will now give the floor to Dr. Lindolfo Zimmer our CEO, who will talk about some points relative to the first year of the new management. Dr. Lindolfo?

Good morning to all, and thank you for joining us in this earnings conference call. Before anything else, I would like to make some comments about the results that we communicated here.

The COPEL management is very happy with these results taking into account the significant growth of 13% in our revenues, and the 26% increase in EBITDA, already mentioned by Ricardo. These figures are the result of the performance of the Parana economy which is growing a lot more than the Brazilian economy in the recent past while the Brazilian GDP grew 2.7% in 2011, the GDP of Parana state grew 4.1%.

To accelerate this differential, Governor Beto Richa implemented a program called, Parana Competitivo, Competitive Parana that happened in the beginning of his term in office. That triggered the interest of hundreds of companies to negotiate with the state government, the installation of new factories and or the expansion of existing plants.

New investments translate into a growth in the energy market so much so that in 2011, COPEL's captive market grew 5.4% compared to 3.6% versus the captive market of Brazil as a whole. So the trend is that the Company's market should continue to perform above the national average.

The prospect of good results, will allow us to propose a 35% payout to the general shareholders meeting to be held on April 26. It is worth mentioning that the volume of interest on equity proposed is 50% higher than that distributed in the previous year, increasing from BRL281 million, to BRL421 million as you can see on the chart, on the slide.

Along 2011, we have worked hard to lay the grounds for the expansion cycle to come. For example, we acquired the right to build and operate six transmission lots promoted by ANEEL in December of last year and in March of this year.

With that, we are participating in projects at which total more than 3,000 kilometers cutting the states of Rio Grande do Sul, Santa Catarina, Parana, Sao Paulo, Minas Gerais, Goias, Mato Grosso and Maranhao. And it positions COPEL in the new frontiers of expansion.

And in fact, COPEL exceeded its 2015 expansion goal for the transmission business and climbed from the 11th to the 8th position among the raking of the largest transmission companies in Brazil.

I want to state again that all and any acquisition by COPEL done under this management will not destroy value for its shareholders. All of the bids placed by the Company and its partners are done under criteria's technical analysis. We dare but always with the responsibility and commitment to create value.

And that is why project returns or return on projects, will always be significantly higher than our equity cost. I'd like to highlight that these investments should mature within two to three years so that their effect on the results will not be immediate.

Another area to be explored from now on, are investments in generation based on renewable sources. In 2011, we studied exhaustively, wind generation projects, so much so that we acquired 49.9% of the recently created Sao Bento Energia, a company that has 94 megawatts divided in four wind farms in the state of Rio Grande do Norte.

We also have a stake of SB Cutia Empreendimentos Eolicos with a goal -- the strict goal of implementing about 140 megawatts in a number of wind farms in the north eastern region. We are working hard to -- in 2012 announced new wind generation project. Obviously, it will all depend on the growth of the Brazilian economy and of the Parana economy in the coming years.

To give you a good update on the progress of our generation works, I want to say that the Maua plant which is almost complete should start operating in mid year. In addition to Maua, the [SSB cover nouso to] works advance as planned, and the project should have its commercial startup in this year 2012. We expect it to have a startup in October of this year. So it's within the estimated budget and schedule.

Only last week, I was in the construction site of that plant, and could see that the works are unfolding smoothly. With regards to Colider plant, the works are proceeding strictly according to schedule, and we are working with a possible early startup which was initially planned for late 2014.

With regards to distribution, in COPEL, one more time, I was recognized for its operating excellence. The equivalent, less of interruption per consumer per year, DEC, had a drop of 7.2% in 2011 and reached 10.64 hours equivalent per consumer while FEC, the equivalent frequency of interruptions per consumer per year which informs the average amount of interruptions per year, dropped 12.7% reaching 8.26 interruptions in 2011. These were the best ever results of this company since its establishment.

COPEL was recognized as the largest electricity company in the southern region of Brazil according to the top 500 survey conducted by Magazine Amanha and PricewaterhouseCoopers.

COPEL's Class B preferred shares will continue to be part of the ISE, BM&F Bovespa in 2012 portfolio, which includes Brazilian companies which are sustainable and socially responsible. All of this shows the seriousness and commitment of COPEL's management to perpetuate the COPEL brands.

Like once again to draw your attention to the great growth potential and appreciation of COPEL. The year of 2011 was dedicated to the organization and preparation of the Company for its expansion. We set the foundation for a sustainable growth and in coming years we will definitely be reaping the fruits.

I would like to thank you all for your participation and we will now start the Q&A.

Thank you, we will now start the Q&A session. (Operator Instructions). Our first question comes from Mr. Vladimir Pinto from Bradesco.

Hello, good morning Ricardo and Rodolfo. Thank you for the call. My question would be about two topics. Firstly, the recent bid for transmission, how much do you intend to invest in these two lots to transmission lines won by COPEL and partner so that we can understand the profitability of the project?

And my second question was about the behavior of the operating account, what do you expect for 2012? From what we understood in 2011 we had an increase in personnel expenses because you had to hire more people and you had to adapt the Company to the new reality of the state of Parana. And there were some other items that contributed. What do you expect will be personnel expenditures for 2012? Will we see a continuation of these measures adopted in 2011 or will we start seeing the benefits?

Vladimir, thank you for your participation and questions. To answer your first question, the bid for the transmission lines. Firstly, I'd like to say that it was quite below or lower than what initially predicted by ANEEL. And have a favorable condition in the region. It doesn't have a lot of forests. It is a leveled field and the price of land is lower than in other states and that helped us optimize quite a lot the bid.

On the other hand, we had some prerogatives which are characteristic to our company.

Our partner is very experienced in transmission. Actually their core business is transmission in their country of origin. So, they brought this technology and support to work so that we could also optimize the project, this one's 1,605 kilometers, couple of lots is about BRL1 billion, 49.9% of growth.

BRL1 billion then would be investment in 49.9% of these transmission lines. ANEEL was expecting a lot more than that, about BRL2 billion. Obviously, COPEL continues to negotiate to lower this value. This value is going to be lower significantly which will allow to return rate of this project to be for sure above the cost of equity for transmission.

We are completely convinced and sure of that. This is a standard set by the board and the top management under the guidance of Lindolfo that we will not destroy value of this company in any new project, let alone in possible acquisitions.

Vladimir you also asked about what we expect for our 2012 operating expense? We'll have the effects of the collective bargaining agreement of last year that will apply for 2012. We have the career plan that will bring an increment to our payroll in 2012, but that is not the most important thing.

The most important thing is that the CEO and the top management are fully committed and dedicated to control the Company's costs. Our CEO announced a while ago, our program will cost zero weight and things are moving quite well as we also created a working group with members of all the departments and this working group is going to analyze all of the costs of the companies with the support of our financial department and is going to be able to size and understand all the costs, I am sure that we're going to be very successful in this program.

I am not sure this program will be completed by 2012 or that it will bring marked results in 2012 but by the end of 2013 we will feel the effects of this program, as well as of the program of the -- of the permanent voluntary resignation program.

This year and this is important to mention, we will implement the zero-based budget in the Company that will allow us to have a much better cost to control and to lower our cost budget. However, the effects will not be seen all in 2012, it will be seen partially in 2012, but primarily as of the second half of 2013.

Okay. Thank you.

Our next question comes from Mr. [Bruno Bascom], from Goldman Sachs. Mr. Bascom

Good morning, thank you for the call. My question is related to COPEL's tariff review cycle. The proposal presented to ANEEL, the surprise regarding our figures was particularly related to the asset base and the assets totally depreciated, ANEEL suggested BRL2.6 billion of totally -- are depreciated assets.

And if we compare COPEL's growth space in the last cycle which was BRL6.7 billion with this proposal of BRL7.0 billion, we would be talking about a 1.4% nominal growth a year on average and a decrease in real terms of minus 2.7% a year, which at least comparing to our numbers in -- of the investment in distribution will not be aligned with the investment volume by COPEL.

I would like to understand how did the Company get to that preliminarily proposal by ANEEL regarding the base and what are the main points that the Company intends to discuss in the public hearings process that will end with a tariff review in June [24]?

Bruno, thank you for your question. Right now we have ANEEL's inspection at COPEL, they are working in accounting and distribution. Indeed the announcement of 0.85% reduction in the tariff is a preliminary figure. This is at the stage of a public hearing and ANEEL's inspection will continue at COPEL until April 5th, and it will allow us to change many of these figures.

So, the net remuneration base is about [2.4 or 2,400] and we hope to have a net remuneration base which is higher. We are totally confident that this will happen and that we will not be at the [BRL570 million] that was published -- BRL574 but that the value will be much higher value. That's what we'd expect.

There is another very important item which was not considered in the net remuneration base, the so-called BRL. We do not consider [CM and CA], CM would be for smaller components which would be its crews and such things, and CA, the traditional costs refer to labor. So, the reality is we can't disclose anything just yet but we are very optimistic, regarding the optimization -- a significant optimization of this 0.85% negative.

Thank you very much.

Our next question comes from Marcio Loureiro from Votorantim Corretora.

Good morning. Good morning, Ricardo and Lindolfo. I'd like to thank you for this conference call. I'd like to ask two questions regarding your investment plan. In 2009 you were at 30% below what was planned. And now, you have an investment plan which is relatively high. How are you going to manage your investment and follow-up your investment plan? That's my first question.

My second question has to do with your strategic plan for the Company. You talked about your focus. What about the telecom assets? Do you expect to sell these assets?

Marcio, thank you for your question. You asked about the budget in 2011. We invested BRL1.430 billion and we had estimated to BRL2.060 billion. We had a new management taking over. We reviewed the plans and that is why we invested less.

In addition to problems of delays in the bidding process, which always occur, we are predicting BRL2,257 million for 2012. We do have significant investments to make. The main one's BRL1.1 billion in distribution and then we have the Colider plant, almost BRLBRL570 million. Maua that is being built, it is almost complete.

We still need to invest about BRL90 million in it. But the feeling we have regarding this investment plan is, and we have to understand that the investment plan which is approved for 2012 in the end of 2011 by the Board says that we will invest up to BRL2.257 billion.

We are not considering possible acquisitions that might come our way. But we believe that this amount, BRL2.257 billion are in the end what we will be investing BRL1.9 billion, BRL2.0 billion, not considering possible new acquisitions.

Regarding our strategic planning, our core business continues to be energy generation, distribution and transmission of electricity. TELEPAR is an excellent investment to us, it can only bring us benefits in our balance sheet.

We have many synergies to be explored with TELEPAR. We have met with the management of TELEPAR. We are working jointly so that we can optimize disturbances. You see we serve the same municipalities in the State of Parana. We can think about joint revenues, joint readings, and so many other possible synergies, widely TELEPAR was and will always be an excellent investment for COPEL.

And as of telecommunications, we are evolving quite well. We now serve corporate clients. As you all know, the number of clients increased more than 40% from 2010 to-date. It is a small business. The revenues generated are not too high, however, it is a business which is highly profitable.

Recently, we launched a program that our CEO might want to comment on.

Marcio, our investment plan for this year -- well, cannot be definitive. We cannot be fully convinced that we're going to invest everything that we have planned for. That depends on the growth of the Brazilian GDP and that will guide the demand for electricity as a whole. That will dictate the chronology of auctions for generation and transmission, which are promoted by the [competing] power.

We had an auction that should happen in the beginning, at the end was found to mid-year. It is possible that it will not even occur this year. It will depend on the demand. So, we somewhat depend on these events.

We are assessing a number of projects that we received an invitation to tender. Some of the projects are being built, some others are being -- are already operating and they are being offered. We might be successful in bidding for some of those and that would consume most of our budget. Obviously, we cannot disclose which ones they are because we need to maintain confidentiality in that regard.

I would like to add that telecommunications was a business set up to meet the corporate need of our company. We need to have complete and effective control over all of our areas of operation or plants that we operate and that we control. We needed to have them protected; all the substations have to be under control.

So, all of our business now is under absolute control that makes telecom quite important. Obviously, the additional capacity is not available to the market because it does not hurt the Company to get some additional revenue with telecommunications. Okay?

Thank you.

Our next question comes from Mr. [Edwardo Gomiti], HSBC.

Good morning to all. My question has to do with volume of energy of generation that will be de-contracted by 2013. That volume is about 20% of COPEL's capacity. How do you intend to sell this energy and what would be the expected price? Thank you very much.

Edwardo, thank you for your question. You see, for the year 2012 we have commercialized, we have sold all the energy for 2013. We have some left, I haven't got the figures here, but I think that we have left approximately 21%; for 2014, 42%. COPEL's strategy is to sell that energy in the free market. And we have been very lucky because we have reached values which are significantly higher than the price of electricity in the regulated market.

Why is that? Because the first auctions which started back in 2004 and 2005 had very low tariffs, in terms, we're about BRL50 per megawatt hour and now we can sell in the end of last year at BRL106 per megawatt hour.

In the beginning of this year, the prices were somewhat lower. We signed some contracts which are not long term, they are one-year or two-year contracts and we have sold at prices slightly lower, below BRL100. But what we are observing now is that with the increase in PLD, because of higher rainfalls, we are starting to reach very interesting prices.

And on average, the average price of electricity sold in the free market right now, today, if we could close the projection with these prices, the tariff which would be reaching BRL130 on average for the free market in 2013, a [BRL128] of what has been sold for 2014, and so on and so forth.

So we are very happy. We're doing very good work at COPEL's commercialization area and we hope things will continue quite smoothly. Well, our core strategy is to sell all of the energy in the free market.

Thank you.

Our next question comes from Ms. Maria Narcuedo from Itau BBA. Please proceed.

Actually, I'm Severine, not Marianna, ma'am. Good morning, Lindolfo and Ricardo, some questions I'd like to make. The first regarding the transmission line auction that you participated in. I would like to know if this contract has been signed or not and if the contract is still being negotiated or not?

Secondly, what kind of PC are we talking about? Is it a turnkey PC? Is it a mixed PC, depending on the cost structure, can we suffer any pressure in coming years?

Recently we saw come companies signaling a CapEx increase for many reasons by vast reasons. I would like to know if your negotiations will eliminate this type of risk or not?

Another question regarding the project has to do with the financing. How do you expect the financing for these transmission lines? Are you working with a possible BNDES lending? Would you be using Chinese equipment? What is the alternative for BNDES loans? And what kind of costs do you expect for this transmission line if you are not using the BNDES loans? Are you considering some type of hedging for this transmission line?

And my final question has to do with environmental licensing. Do you see any risk with that, any changes in the basic project over time? Again, some companies participating in auctions in the past saw their project being altered, modified and that led to cost increases. Do you believe that this might happen or not? These are my questions. Thank you.

Severine, thank you for your questions. Thank you for participating.

We are quite sure about the participation of this auction, about our values and about our budget. We did not get to auction with the expectation of getting certain results. We went to the auction feeling sure regarding of the results to be achieved.

We have reestablished contracts that would ensure the expected returns and I can tell you more to our pleasant surprise. The partners that were participating, they were at certain moment more conservative than we were. So we are absolutely at ease, ensure that we will deliver the budget. And I believe that we can spend even less than budgeted.

We are convinced that we are not only going to spend less, but we are going to bring these works, the setup forward, because it is in our interest to complete everything on time. We believe that we can have an earlier startup for some of the works, but for that we need the transmission line. That means in earlier results for the transmission in generation areas.

The [tele spirias] plant itself also requires, quote-unquote, that we make an effort in that direction because it is in our interest to have (technical difficulty) startups. We are very optimistic with this project. We have received [GSPF]. The managements have been defined and we are just fine-tuning because we will go to the auction with a great contract. We are just now doing an operational fine-tuning for the execution.

Perfect. So to clarify, any additional cost pressure that you might have along future months or years will not impact COPEL's return on investment. So we should not expect any announcement in coming months saying costs increased to 20%, 30%. So do you believe this is zero risk of the construction company? We'll assume that kind of loss or perhaps the equipment provider will assume that risk, but not COPEL, is that what you're saying?

Well, we have a pre-contract and the value is better than the initial conditions set. The values were even improved. Well, naturally, circumstances may occur, adverse circumstances may occur and we might need to make adjustments, but I do not believe that this will materially impact our initial forecasting and to end, if you allow me, this will be external funding, not BNDES lending.

I am Ricardo. The funding will be via BNDES because all of the equipment is Brazilian. So, mostly BNDES funding -- lending and we are in negotiating with SPE in internal funding.

So, it's not Chinese equipment. It's Brazilian equipment?

Yes, 100% Brazilian equipment.

Just to give you an idea, because you seemed to be concerned about cost increase. In the end of last year, we had Foz do Iguacu, Cascavel transmission line and it was executed strictly within the budget. The return on that investment is going to be very good, a two-digit return in real terms.

The [work telecom] is complete and we had BNDES loan taken a few weeks later. We did not feel any cost increase pressure. It was strictly within budget. In the budget we include the calculation of risk. And we include unexpected possible events. Everything is taken into account. So, indeed, we are not concerned.

Thank you very much.

Thank you.

If there are no more questions from the participants, we would like to give the floor back to Mr. Lindolfo for his final remarks.

Thank you very much. I'd like to make some final comments. We launched a number of measures to optimize our costing structure. One of them was the continuity of the Permanent Voluntary Resignation program.

But I would like also to add that there are other measures that are being implemented simultaneously, our zero-based budget, which was mentioned by Ricardo, a deep analysis of our PMSO, the zero-waste program, which includes the optimization of inventory, stock room and all of that. We have to reduce those costs to a minimum as possible.

Deciding and reallocation of our staffs, I would like to specially mention this item, because we are working with an expansion plan and with the auctions to come there will be no addition of personnel. We will reallocate our staff in order to deal with our works. We will be reallocating the present staff. I believe that this is going to be extremely positive. In addition to reducing our costs, it will allow us to better train our staff and so on and so forth.

It is COPEL's intension to move towards the highest efficiency standards in the coming years. This is our vision and this is our action. We are moving in that direction.

Nothing else to add, I would like to thank you for your participation. Our Investor Relations department is at your disposal. Thank you very much for participating.

Ladies and gentlemen, COPEL's earnings conference call for the fourth quarter of 2011 is closed. Thank you very much.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring the Event.