Companhia Paranaense de Energia (ELPC) 2012 Q4 法說會逐字稿

(interpreted) Thank you for waiting. Welcome to Copel's Conference Call with Results of 2012. All participants will be in a listen only mode during the company's presentation. Later, we will conduct a question and answer session, when further instructions to participate will be given. Should you need any assistance during the conference call, please dial star zero for an operator.

Before proceeding, let me mention that forward-looking statement are limited to Copel's business projections, and operating and financial goals are based on the beliefs and assumptions of Copel's management and on information currently available to the company. Forward-looking statements are not guarantees of success and risks, uncertainties and assumptions, because they relate to future events, and therefore on circumstances that may or may not occur in the future.

In that case, you should understand the general economic conditions, the industry conditions, and the other operating factors could also affect the future results of Copel and could cause results to differ materially from those extracted in such forward-looking statements. This conference call is attended by Mr. Lindolfo Zimmer, CEO of Copel, and Luis Edouardo Sebastiani, CFO and IRO. The presentation will be made by Copel's management and may be followed through the company's website at www.copel.com/RI. We now turn the floor to Mr. Lindolfo Zimmer.

Good afternoon to all and welcome to Copel's 2012 results conference call. Before saying anything, I am delighted to introduce our new CFO and IRO, Mr. Luis Edouardo Sebastiani, who is given a two-fold mission, to continue and improve a close relationship with the capital market, and to align the market's view with the management's view regarding our short, medium and long-term.

Mr. Sebastiani is an economist, that graduated from the Federal University of Paraná and was a Master of Degree in Economic Theory from the State University of [Palplinas]. Among other previous positions he was [Curuchia]'s Secretary of Finance for six years, and he was recently the Chief of Staff of the State Government of Paraná and Fiscal Advisor to the Paraná transmission company, [Cenepas] into company Paranaense CNG of Copel.

I would also like to mention two other important changes in the company management, particularly with the office for the Environment and Corporate Citizenship, we appointed an engineer from [Juerica] who holds a Master's Degree in [Coral] science and a specialization in environmental engineering.

Up until recently, he was a Secretary for the Environment of Paraná. Soon, engineer [Partia Dalesi] will take over as the Submission Officer. He is specialized in energy utilities management, having graduated from the Federal Technology University of Paraná. Chief [Dalesi]'s has been with Copel for many years, and has served as Copel's Distribution Officer previously. These changes of key floor management will drive the improvements that we want to bring about.

Now, 2012 was an intense year for the Brazilian electric sector, full of novelty. The (inaudible) wealth of 783 preceding controls on the extensions of concessions engaged a good deal of our attention. Copel's management, based on the rationale to maximize the present value of its cash flow, chose to accept the government agency's proposal to anticipate the extension of the transmission assets in agreements of 0-60 in 2001.

Given our strategy to work as a consolidating agent in the transmission business in Brazil, and the result need to capture economies of scale and optimize the use of our teams of specialists in this area. Now, let's look at January of this year, the annual permitted revenue of the extended agreement will be R$160 million down from R$305 million.

Also, as of January of this year, Copel has been receiving in 30 monthly installments, the indemnification for transmission assets, which started operating after May of 2000. Indemnification amounts to R$894 million, restated by ITC, and extended to the consumer price index, plus the price 0.59% per annum. We will also receive an indemnification for assets which started operating until May of 2000, amounted to R$160 million.

By the same token, we resolved to reject the government agent as the vote to extend the concession of the power plant of (inaudible) should pay one more than we have established, which together counts for a little bit less than 6% of our installed capacity. The conditions for extension in this state were clearly unfavorable to the company, which after a full analysis, chose to keep these assets only until the current contract expires.

The current energy position of SIM, the Brazilian interconnected system, put out in the full energy balance that resulted in price increases in the short term, ended up proving that our decision was rightly made. Actually, this prolonged the drought and the pressure on the cash flows of our generation company and distribution company basically explains our work results on a year on year comparison.

With this prolonged drought, we expected the (inaudible) TPC to dispatch during the year of 2013, throughout the year. In January, 8% of the energy was generated by [com], this should positively reflects of the first half of 2013. First, we adjust the liquidity prices considering transfer prices and generation from those assets, which expected contrary extensions and the reduction of central charges, Copel's distributing cell was subjected to an extraordinary service review which determined at an average 19.3% service reduction, coming to effect as of January 24th of 2013. This however will not affect our distribution company's capacity to generate cash.

I would also like to remind you that our distribution company went through the further tariff review cycle in June of 2012, and therefore we expect no more surprises in this line of business in the coming year. This recurrent move by the concession of [Florenti] has made it even more urgent to focus on cost reduction.

Immediately, Copel management decided to conclude the permanent and voluntary resignation of redundancy program [BFED] by the end of 2012, to encourage people to join an extra [bed] of reduction in this still low cost. The result was that almost 1,200 employees joined, of which 790 in 2012, although that program will entail a reduction of at least 10% in payroll costs to be seen already in 2014, and it ended up putting pressure on our 2012 results, because we had to position around R$170 million worth of neighbor indemnifications in several spaces.

I would like to add that we have to find our cost optimization program, and as soon as possible, we will disclose the agreed-upon guidance. As to our expansion plans, we will actively participate in the expansion of cycle of the transmission system, which will include, according to EVE, additional 10,500 kilometers of transmission lines in 21 substations.

Other than that, we're working to deliver on new generation in transmission project with an up budget and time frame. We will continue for MOIs and other possible operating assets. We came in over in supplies or commitment for the principle of value creation and the [walk] generations or shareholders in this expansion mode, In other words, any and all of our positions to be made by Copel shall be guided by the rationale from maximized cash flow and return to shareholders.

Finally, we propose the payout of R$269 million in dividends and interest on equity to our shareholders, a little over 38% of our reported net income, of which R$138 million were paid in advance in January, the remaining portion of which approval by our general shareholders meeting, to be held on April 25th, 2013.

I should also state that the management of Copel is aware of the demand by minority shareholders who are asking for improvements in our dividend payout policy, and we intend to review it in due course. And now, from the floor, Luis Eduardo Sebastiani to present Copel's 2012 economic and international results.

I thank the CEO of the company of Companhia Copel. Good afternoon. And I thank all of you who are participating in this conference call. To me it is a great delight and honor to take over as Chief Financial Officer and Industrial Relations of Copel, a company that I have always deeply admired.

Given the role we play in the economic history of the state of Paraná. And being an important company for the development of our state and ultimately of [refill]. Around this year's results of 2012, the challenges are many. And I was attracted to take over this job position because of these challenges.

I now take on the commitment to overcome these challenges, i.e. cost optimization which is absolutely necessary for the company and for all companies in the industry. We have aligned strategies to cope with this need to reduce costs, a [probably] key to the company.

We will kick off a program and that required very quickly and very confidently. Optimize and is the challenge to review our dividends payout policy. The dividend payout policy is always linked to the results of a company and should reflect a positive result. Another challenge is generate value for our shareholders, who are making [quickly] investments, and this will include results to our shareholders. This is our focus.

We are seeing negotiations with the state of Paraná, to leverage firm and new investments, into the consistency of our dividend payout policy. So we have very substantial challenges ahead of us. But we have a very devoted team at Copel. Now, we'll be working side by side with them to drive important results for our company, and to increase efficiency in the Brazilian electric sector.

I'd like to move to slide 4, where you can see our results. Here we can see another grade in revenue growing 10%, year on year reaching the mark of R$8.5 billion. Risk was driven by a number of taxes, 12.6% increase in electricity goes to end customers, and 2.5% increase in greater visibility stemming mainly from market expansion.

The capital market grew 3.5% in 2012, and from the 2011 12 tariffs we just uncycled whose average increase was 3%, partially offset by a .65% reduction related to the third tariff review cycle that Copel went through in June of 2012.

On the next slide, we have some comments to make. Electricity is sold through distributers went up 12.8%, primarily due to price increases, and the power plant agreement in the regulated market, which is halting increase in bilateral contracts and frequently to bring higher revenue in CCEE's stock market, pushed by an increase in stock market prices or [field this], as revenue coming from electricity sales, concentrating electricity sold to end-customers and electricity sold to distributors, and a greater availability, grew 8.4% in those areas.

Our operating revenues grew 93.3% mainly caused by higher revenue from the lead of the add out [Patia] as planned, as just mentioned, that following contractual adjustments with Petrobras and it's the [switch] between March and December of 2012. It is an improvement to higher lines, also a [700%] increase in telecommunications revenue, basically due to new customers, and a diversification in our product and solutions work portfolio.

The customer base of Copel telecommunications further increased to 3,141 customers, 117% up compared to 2011. And Copel telecommunications operating all 399 municipalities of Paraná state. We have 100% of the State of Paraná and another two municipalities in Santa Catarina state.

Also the 18.6% revenue increase in distribution of piped gas, supplied by [Comparacaras], basically forward tariff adjustments of 8.5% as of August, 2011, 4.5% as of March 2012, and 8% as of August 2012.

Now, we would like to talk about operating costs and expenses. In 2012, operating costs and expenses increased by 16.5% year on year, due to the following facts. Number one, a 14.4% increase in electricity purchased for resale, and we'll get into more details on that later.

The second point, a 22.1% upturn in charges for the use of the main transmission grid, strategically straight up with new assets in the first time and higher charges. Our reserve energy EER in systems services DSS, was partially offset by the large three customers left the basic network.

Thirdly, the 42.5% increase in natural gas and supplies for the gas business, following higher prices for the natural gas acquired by Copel Gas, mainly because of the depreciation of the Brazilian Real and the price increase in the oil basket, which determines the gas and position price.

On the next slide, we talk specifically about the personnel account. We have the following situation, a 26.9% increase in personnel expenses. [Relatively go] for the reason to leading to this personnel increase. This has been a high increase and needs to be founding, so we give you a detail in a detailed information on that.

There was a rate increase of 7.4% as of October of 2011, and 5.54% as of October, 2012. Also the indemnifications in the succession and voluntary redundancy program amounting to R$168.8 million. We, this was approved, and a necessary provisioning for the health of the company.

And after this program is completed, there will be a reduction in this personnel account. I have already mentioned the wage increases and I stress that 7.4% as of October 2011, and again, 5.58% as of October of 2012.

Here, it is important to mention that we also reviewed the career and compensations structure in the company. We needed to align on the salaries that we paid, with market salaries so that we could reduce turnover. Also, we run the risk of losing our executives to the market, so we needed to review the career and compensation structure, and that led to another personnel cost increase.

But again, I wanted to mentioned that DSDC, the succession and voluntary redundancy program, it means a cost now, but later on it will show a relief in our personnel account and [will update our costs]. They well, when all of these employees are terminated, there will be a payable cost reduction of around 10% to be felt in 2014.

On slide 7, we break down the energy approaches for resale, and we compare with a 2011 value. To be highlighted here, is the higher cost related to the energy purchases at auctions and the regulated market, the so-called CCEAR, expresses to purchase energy from CCEE, and [Impaimpo].

The purchase of energy in the regulated market grew for a couple of reasons. One, market growth, I would to remind you that the captive market grew 3.5% in 2012. Secondly, monetary restatement of contract IPCA was 5.84% in 2012. And thirdly higher costs with CPP contracts given the increase of the relative share in the purchase of energies and an acceleration of the spot new market prices in the fourth quarter caused the CPPs to dispatch energy.

The expense increase in CCEEs stems from a significant stock market price increase, year over year, with the average price in the range of R$30 per megawatt hour in 2011, increasing to R$160 per megawatt hour in 2012. And also stems from electricity generation below the physical guarantees observed in the first quarter of 2012, which cost us R$63 million to cut out [Jetasao] and transmission.

Finally, the excess increase related to the [output], driven mainly by the Real depreciation vis-à-vis the dollar, around 20% when we compared the average exchange rate of 2012 percent of 2011. On slide 8, we give you the consolidated EBIDTA for 2012, which shrunk 18.9% compared to 2011, totaling R$1.5 billion and an 18% margin of the operating revenue, as you can see on slide 8.

Copel (inaudible) transmit accounts for 73% of the cash generated, while Copel distributed some considerate with 8%. On the next slide, slide 9, we review Copel's net income, which was R$726.5 million in 2012, 38% down compared to 2011. In addition to those, it put pressure on our operating cash revenue, adjustments made in the asset days of our distribution company, that contributed to a net income reduction.

These adjustments are related to the third tariff review cycle that we had in 2012. Many companies are going through this process, with the monthly financial situations at companies. And secondly, the extension of the life cycle of assets as of January 2012 as determined by NEL. Together, these effects to an additional financial expense of R$401 million in 2012, related to the reevaluation of the set value of our distribution assets. The highest impact has been absorbed in 2012.

And that is important, looking forward. Thus, the consolidated profit margin was 8.5% in 2012, with our generation company hitting the mark of 31% while our distribution company posted a negative .7 net profit, due to the factors mentioned previously.

On slide 10, we have the data and consolidated net income of the company for 2012, net of extraordinary effect. And it compares in forward 2011, and if we were to disregard the negative CDA movement of R$125 million. The energy approaches in the spot market, to cover the physical guarantee of our generation company amounting to R$63 million and the PFC [in the nificage] amounted to R$170 EBIDTA onwards have been $1.909 billion in 2012.

And if we were to eliminate the previously mentioned factors that impacted the EBIDTA, R$4,401 million related to the reevaluation of, the value of our distribution assets. We have mentioned before it's a new estimate of the life cycle of these assets, the depreciation rate to the non-recognition of our asset base, we would have reached a net income of R$1.185 billion in 2012 compared to R$1.165 billion in 2011.

So net of these demands, we would see a certain stability which does not eliminate our challenge and our focus to reduce costs. We have to pursue the orientation of our (inaudible) of having the company altogether move towards a cost reduction. In a nutshell, these were the highlights of Copel's results. It is clear that 2012 was a year of adjustments and we are working to deliver much better results in 2013.

I've observed that Copel's shares have traded at much lower multiples than the multiple of our peer companies. And I want to tell you that my actions will be geared primarily to align our multiple and recover the value of our shares.

This is our model, the determination of our company, of our [afilio] and we will follow to deliver good results, because we have a very high level of second coping in the electric business, and have all the right conditions to rate of our for Copel. Thank you very much for your attention.

Ladies and gentlemen, we now will begin the question and answer. (Operator Instructions). Our first question comes from Miss Lilyanna Yang from UBS. Miss Yang, please go ahead.

Thank you for the opportunity. I would like to comment on your strategy to commercialize energy of Copel [Jeracao]. In this year, reallocations were made in January, but for 2014 and 2015, I would like to know what is the level of contracting, how do you believe is the best way to commercialize this electricity?

The second question. I would like you explain the dividend payout policy. Do you understand that the company should be more leveled than it is now? Or perhaps get down to two times the net debt over EBIDTA inflation?

To answer the first question, regarding the commercialization of electricity. In the future, I can tell you that for 2013, we are fully contracted. The surplus that we had, 8%, which was the reserve, was, sold very early at a very attractive price.

And now, as of yesterday, recognized to our new management, that the long rule of seasonality of energy, to have to be forecasting. The further situation is quite good for 2014, 2015, in terms of shortage of electricity and energy.

I believe that the conditions will also be favorable, perhaps not the same as 2013 but we know that the system has just enough to meet the demand, and even considering the debt to GDP growth, we know that all CBDs will be dispatched during 2013, about 15,000 megawatts being dispatched by thermal power plants.

Including all of us then, so that the costs are significant. That will make our energy wind power, which is cheap, will be an excellent opportunity to help in this commercialization. We have not defined as yet what will be the right strategic mix. We have to know how the industry will behave. We have to know how the economy of the country will behave and the demand, and that will define the costs for contracted energy, and for our own generated energy.

This is Sebastiani, I would like to answer your question about the dividend policy. This is indeed a challenge for the company. The main challenges to our debt, the dividend payout policy, we are aware that it is necessary to our image with the average of the electric industry.

The challenge is to look at the financial capacity to generate profit, to leverage new investment, so that we can have a higher dividend payout. This is an interesting and complex challenge, but fundamentally, put a change in the company's agenda, as I mentioned during the presentation, we should have a more, let's say firm policy for dividend payout.

This is understood by our financial department, our CEO shares the same understanding. But the dividend payout policy needs to be firmer. So the message to our shareholders is that this going to be tackled. This will be important for the growth of the company. It is one of the challenges.

Now, thank you. I'm just trying to understand your leveraging, your debt is too low. For example, your net debt over EBIDTA ratio is around two times wide. Do you think you need a more aggressive investment policy? More aggressive than what we've seen in the last few years?

Oh, actually, we see another that we will follow, the company will definitely see that the company has an important debt level. The same kind of alignment that we have to have in terms of dividend payout policy, we have to have in terms of the investment to be made by the company in the electric sector.

We have to analyze the company's condition to get more of that, but you see, Miss Yang, we're following our guidelines and we have to work together with the engineering department of the company to state and define the opportunities for investment in the market. Well, that kind of comment has to come from the engineering group, and we will thoroughly consider these investments.

This is important for the company, for the partners of the company. Anyone buys out the dividend payout policy, so again, new investments have to get our full and total attention, because we have to look for new sources of revenue. This is absolutely key to contain expenses.

So this is something that is also part of our work agenda.

Thank you very much.

Ladies and gentlemen, please wait as we reconnect our speakers. Ladies and gentlemen, please wait as we reconnect our speakers. Please wait as we reconnect our speakers.

Our next question comes from Mr. [Osvaldo Peres] from [Basque] Securities Company. Mr. Peres, you may go ahead.

Good afternoon to all. About these two topics that you mentioned, one is about the CRC negotiation. I want you to elaborate a little bit more. I would like to understand where the negotiations stand.

And the second question has to do with the personnel reduction, headcount reduction. Is 10% reduction in payroll costs, can we expect that effect to be seen in 2013, and the cost, with the cost reduction, be directly related to the amount of indemnifications paid, or do all the indemnifications account for more than 10%?

Hello, Mr. Peres, good afternoon. About your question about CRC. You all knew the situation between our company and the government of the state. The state has a debt to Copel like R$1,340 million, that is the amount of the debt.

Initially, the interest [rate CJ], so it would be GPM, GPM, I am mentioning, and GPM for a certain percentage. In the file of the debt, it is such that the State of Paraná forward in time [fund] to a revision of the payment of the debt, not with regards to Copel. They are renegotiating other debts as well.

And the debt that they have with us is a good debt, and we once again, these financial resources at low interest rates, not based, they are not backed to our GPM. I'm going to have some dollars, if I'm not mistaken, this is an operation that is ongoing.

For it is up to us to analyze this proposition, because we could have the funds anticipated to us, if this year's in negotiation comes about in a very transparent way, and it could be any different than that, the funds would be linked to inputting investment in the company, and the leveraging interest is a revenue for the company.

And it would be a guarantee that Copel would not face a default. That's actually happened in the case of Minas Gerais state where over the history, there was an accumulated of defaulted payments and that led to a compulsory contract review and it was very complicated, an unstable situation.

So we are looking to this year's negotiation very carefully from the standpoint of the company. It could be quicker than that, of credit work, but we have to take into account the interests of Copel, with the risk having anticipation of this payment brought forward linked to strong program of business for the company and of investment for the company, but that would be an important deliverable if the negotiation comes about.

But we're still halfway in the process. We still have some details to define, but from the [mentally], Copel has to conduct a study that would be a [stop city] to go on with this, with this main negotiation, that we are bringing forward to the CRC payment.

And as of the second question, if the 10% will be focused on 2013, and the answer is no. We said in the presentation and we reaffirm here that this benefit, a 10% reduction in payroll costs will be felt in 2014. In 2013, the factor will be on average 3% only. It is still an interesting result.

We are preparing the headcount of the company. And these people who are resigning from the company are very experienced people, and we are working to have them find another position offer.

Thank you very much.

I'd like to remind you that if you want to ask a question, please dial star, one. Our next question comes from Mr. [Soligen Henson] from MSF.

Good afternoon. Thanks, thank you for letting me into another question. When the new governor takeover in Paraná a few years ago, the hope was that the environment in your state would be very conducive to investing, and yet the stock has, the Copel stock has been quite poor relative, down almost 30% just even over the past year.

Investors have had absolutely no confidence with the capital allocation strategy of your former management, and that's why I'm assuming to a new management team. The stock trades at 60% of book value, six times consensus 14 estimates, which tells you that investors have absolutely no faith in the outlook for this company.

And so as you think about formulating the strategy specifically on a capital allocation strategy, I just wanted to ask a couple of specific questions for those of us who are actually, are investors in the company, and frankly, large investors in your company, the dividend payout policy has been pathetic, beyond pathetic, and frankly if you just raised your payout ratio from 38% to 50% and costs in incremental, around R$150 million, shareholders would hit the ground, that the company actually responded to shareholders.

You have many extraneous assets, like your [polaform] assets that could have been sold at a very high price. If I wanted to go invested in the power com companies, there are many very good companies in Brazil. No one buys Copel stocks for its polaform assets, and so could you actually help me understand what sort of investment criteria will be used in terms of your expected returns above the company's trust to capital going forward, and that this capital allocation strategy can be put in place so that some value can be finally realized in Copel's stock. Thank you.

Good afternoon. I would like to thank you for your question. Unfortunately, you were cutting off, and I would like to apologize if we don't answer your question in full.

I believe you asked about the dividend payout policy of the company. If it will continue or grow. There was a slight growth this year, especially compared to 2011, with 38% of our reported net income in 2011 around 35%. And in the free issue related to the investment policies of the company.

And that's where the secret lies, I guess, the main issue. These things are not disconnected to us. On the contrary, we want to have these two policies linked, a more important dividend payout policy will be able to give the company new investments, transfer new investments. And new investments that will give us a prospect of return above the cost of capital.

We are being very diligent in pursuing this. The electric sector is growing. We are identifying new energy sources, new frontiers, the geographic frontiers in our country. We are no longer limited to Paraná for quite a while. Now, we are diversifying now, we are diversifying projects, projects that are operational, that have ensured revenue, or assured revenue and we have to identify opportunities to have the return on capital, given the efficiency of the company, the current efficiency of the company.

And we intend to increase our efficiency, given our engineering team. We intend to have a return of profit asset capital.

And this is the CEO and I would like to add, since the beginning of our management two years ago, we committed that our investments would be healthy and solid since to add value to the company, to generate, to create into (inaudible) and this is how we have been operating.

And so the investments we've made all of them have a better return than other investments made in the past. We would want to maintain this policy. It could not resist, frankly I would tell you, for the 19 acquisitions to make investments that would not bring a result to shareholders.

This is the reason of our existence, so that we're making a sense to change that. The control issue holder, the City of Paraná wishes to have that relentlessly. The government of Paraná also needs the resources to invest in the social programs and to supply the needs of the State of Paraná and all of the other shareholders, they also want to have their investments growing healthily.

So this policy, I can tell you, will be definitely maintained, and incremented if possible. Obviously, it would pay to look on it on the speed of the growth in the electric sector. Sometimes, they move the economy and the growth of the sector doesn't happen as fast as we would like. But we want to have investments always that will bring us healthy results.

I'd like to remind you that if you want to ask questions, please dial star, one. Well, if there are no more questions, then we would like to give the floor to Mr. Lindolfo Zimmer to say your closing final remarks.

Before ending, I would like to improvise what was said by our CFO, Sebastiani. 2012 was a year of adjustments, and I am sure that 2013 when we will turn the page, and have a totally different year, a better year in of our lines of business. Once again, I would like to thank you for joining us, for participating. We remain available, our Investor Relations department remains available if you want, if you need any further clarification. Thank you very much.

Ladies and gentlemen, Copel's 2012 results conference call is now finished. We thank you for participating and wish you a good afternoon.

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