Companhia Paranaense de Energia (ELPC) 2013 Q2 法說會逐字稿

Good morning and thank you for waiting. Welcome to Copel Paranaense Energy Company conference call to present the first half of 2013 results. We inform you that all participants will be in a listen-only mode during the Company's presentation after which we will have a questions and answer session when further instructions will be provided. (Operator Instructions)

Before proceeding, let us clarify that forward-looking statements made during this conference call regarding Copel's business perspective, forecasts, operating and financial targets are based on the beliefs and assumptions of the Company's management as well as on information currently available. Forward looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events that may or may not occur.

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

In this conference call, we have Mr. Luiz Eduardo Sebastiani, Finance and Investor Relations Officer. Presentation by the Company management is available at Copel website, www.copel.com.br/ri.

Now I will give the floor to Mr. Luiz Eduardo Sebastiani.

Good morning everyone and welcome to our first half of 2013 earnings conference call. First, let me thank you all for participating in this conference call and highlight that it is always a great pleasure and it is important for the Company to talk to those of you who track our Company.

Unfortunately our President, Mr. Lindolfo Zimmer will not be with us today because right now as we speak the official inauguration ceremony of Cavernoso II small hydro power plant is taking place although the plant has already started commercial operation since July. But it's worth reminding you that Cavernoso small hydro power plant has 19 megawatts of installed power.

Talking about the highlights in the first half, we've reported BRL650 million net income, which is 29% higher than the first half last year. Large portion of this net income is the result of the energy allocation strategy that we adopted in our subsidiary Copel Generation and Transmission in the first quarter, also our efforts to control costs which has contributed for a better result for the Company.

Let me also remind you that today we have with us our Distribution Director Engineer Vlademir Daleffe; and also with us is Superintendent of Investors Relations Felipe Pessuti, our manager; also our Accounting Officer [Adriano Vivaldi], our Controller in Tax and Participation, our Finance Manager [Carlos Luchu]. So we have our team of executives to answer your questions.

So, I was talking about our net income and also I wanted to speak about the transfer of funds from the CDE fund. As you all know, the last few months were marked by higher energy costs, which reflected in the cost of all distributors and led the authorities to adopt Decree 7945 to use CDE economic development funds to offset through this transfer of funds, the higher costs of energy and charges incurred by the power industry.

During the first half, approximately BRL570 million were also approved for Copel in order to offset these higher costs of energy and charges referring to monthly quota and BRL221 million referring to the good results of Portion A variation compensation accounts, which were approved during the tariff review of June 24.

Still talking about CDE funds related to an advance of amounts approved by Aneel to cover for discounts to tariff from May to November in compliance with Resolution Number 1719 of May 29, 2013. Aneel authorized an average adjustment of 9.55% in Copel Distribuicao's rates and postponed BRL256 million which will be adjusted and included in the next tariff review.

Finally, we want to highlight the acquisition of seven wind farms and a stake of 30% in Baixo Iguacu hydro power plant which will be built in Parana River. We will give you further details further on.

Now 4th slide will give you more details about the transfer of CDE funds. As we mentioned, the government issued Decree 7945, which calls for the transfer of CDE funds to cover for costs that came from exposure to short-term market limited to the amount not met by quota allocation; B, hydrological risk of quotas; also system service charges ESS, specifically referring to thermal dispatch out of merit order or for energy safety, in addition to the positive results of CVA or Parcel A variation compensation account during the tariff review processes in March 2013.

So the Company received BRL593 million from CDE to cover for energy expenses and charges including the BRL228 million approved in the tax review and received in the end of July. We reported BRL99 million to be received related to the May and June. However, Resolution Number 2701 of July 29, 2013 Aneel approved BRL76 million for this period, the difference of BRL23 million between the amounts reported. And the amounts received will be adjusted in the next period.

So the amount effectively received in the first half was BRL570 million, BRL262 million allocated to offset energy costs and BRL308 million refer to other charges.

Considering the second quarter, we received BRL365 million, BRL167 million referred to energy costs and BRL198 million referred to other charges. Still about the CDE transfer of funds, according to Resolution 1711 of May 29, 2013, we received BRL135 million related to an advance of amounts approved to cover for discounted rates established by Decree 7891 of January 23, 2013, which regulates Brazilian Law Act Number 12,783 of 2013.

It's important to remember that in the end of the May, the federal government authorized the early transfer of funds to power distributors. To ensure the discounts in energy rates, there was a risk because the Senate had not voted the regulation before the constitutional deadline. Now, the CDE funds transferred to Copel to cover for tariffs discount as determined in a [proof] of resolution with BRL19 million established by Resolution 1431 of January 23, 2013. Although they were received earlier, they are still being reported on an accrual basis, that is BRL19.3 million per month up until November.

Now slide number 5 talks about our results. Our operating revenue in the first half increased 10.6% compared to the same period in the previous year reaching BRL4.5 billion. The main reason for revenue increase were, first, in 27.8% increase in energy sales, basically thanks to a 213% growth in energy sales to Copel GeT free market and an increase in the energy portion of revenue after the third cycle of tariff review. Also a growth of 26% in sales through distributors Copel GeT short-term energy allocation and higher average price of sales through distributors because of a reallocation of a portion of Copel GeT energy portfolio through bilateral contracts after the termination of CCEAR from 2005 to 2012, which happened in the end of 2012.

In addition, the use of power grid which is a function of revenues that includes charges for the use of the distribution and transmission grids had a 32% reduction periodic tariff review, BRL189 million annual allowed revenue. Now, the other revenues including construction attained BRL878 million, but chiefly lead by the growth in construction revenues, so the leasing of Araucaria Thermal Power Plant. As we analyze the second-quarter 2013 numbers on this slide, we can see that the operating revenue increased 3.7% compared to the same period in the previous year reaching BRL2.1 billion. You can see that in the second quarter, the revenue from sales through distributors had a reduction of 20% compared to the previous year, which was already expected because we have less energy available for sale because of the strategy adopted by Copel GeT in the first half of 2013.

Sixth slide, we see details of operating cost and expenses in the first half of 2013, which increased 10% compared to the same period in the previous year, mostly because of 15% higher expenses to purchase electric power to resell which totaled BRL1.5 billion in the first half of 2013, BRL842 million in the first quarter and BRL674 million in the second quarter.

Now, we want to highlight that the energy cost reduction in the second quarter compared to the first quarter is explained by the transfer of CDE funds previously described. The costs with charges for the use of the grid had a reduction of 51% in the first half influenced by the transfer of CDE funds and lower charges for use of the system after the publication of Law 12,738 of 2013, which extended the duration of concessions.

Now, we reported a 5.3% reduction in the personnel and managers cost as we did not have indemnities with the Redundancy Program that was closed in December 2012, also lower expenses of compensation and charges already offset by the 5.6% wage increase as of October 2012 and 1% as of May 2013. Now, the cost for third party services had a reduction of 1.8% because we had lower expenses with services related to the maintenance of the power grid. So we continue to maintain high quality, although we had this reduction.

On the seventh slide, the next, you have a breakdown of the expenses to purchase energy we resell; up 15%, as compared to the same period last year. Now the purchase of energy from the regulated market grew for three reasons. Number one, monetary adjustment of contracts by inflation, new thermal and hydro power contracts as planned in the planning of our distribution unit and replacement of energy contracts that ended in December. Third, higher cost of thermal energy contracts considering the dispatch and a higher spot price in this period. In addition to higher cost of contracts in the regulated market, the purchase of energy and the electric power trading chamber also went up, the high spot price and appreciation of the US dollar.

On the 8th slide, we have the evolution of costs for Copel Distribuicao segmented in Portion A, PMSO, and construction costs. Now, to make a comparison between the first half of 2013 and the first half of 2012, the same period last year, our cost increased by 6.5%. This is explained by an increase of 90.6% in construction cost which is not considered in the regulatory balance sheet. So, this is an accounting adjustment. We do not have these costs in the regulatory balance sheet. Now, positive highlights, the costs of PMSO, personnel material services and other remained stable or rather had a reduction of 0.3% whereas the inflation indexed IGP-M soared 6.3%. As we analyze PMSO individually, we can see the personnel line which includes wages, labor charges and also expenses to pay for social security benefit had a reduction of 4.6%. This is important and it was necessary under the current circumstances.

Now, regarding the succession and redundancy program or voluntary termination program, we wish to inform that of the 712 terminations planned for 2013, 245 already occurred in the first half. Large portion, 198, were employees of Copel Distribuicao. Up until year end, 467 people will leave Copel voluntarily, which is very significant. Now, one more time, we inform that our expectation is that this program will bring a 3% reduction in our payroll in 2013 and in 2014 a 10% reduction with the redundancy program. This is also important for us to keep consistency with our plans.

Now, again, talking about our results, consolidated EBITDA in the first half increased 10.4% vis-a-vis the same period in 2012 totaling BRL1.1 billion and 25% margin over operating revenue, in line with the numbers reported in the first half of 2012. Now, Copel GeT, Generation and Transmission, accounted for 82% of the consolidated cash generation, Copel Distribuicao had EBITDA very close to zero which can be explained by a significant increase in energy costs as we explained before, especially in the first quarter this year.

Now if you look at EBITDA of Copel Telecom reached BRL23 million which corresponds to 44% growth compared to the same period on the previous year.

In the next slide, we show you Copel consolidated net income, BRL650 million in the first half of the year, 29% higher than the same period in 2012. Now, looking at the results of our subsidiaries, we can observe that Copel GeT closed the first half of 2013 with BRL556 million net income, 54% higher than in the first half of the previous year, net margin 39%.

Now, Copel Telecom, we already said, reported a net income of 23%, 44% growth.

Now the Copel Distribution results in the first six months of the year was close to zero, again explained by higher energy costs. However, we'd like to highlight that Copel Distribution results in the second quarter was BRL68 million as a result of the transfer of CDE funds and our efforts to control costs at the Company.

Slide 11, now talking about Copel Distribuicao, we'll give you more details. As you all know, Aneel authorized an adjustment that averages 14.61%. However, because of the timing of this authorization, we requested suspension of this adjustment and a postponement of ratios authorized. So Aneel approved our request and the postponement and we did not have any losses for the Company.

So they authorized an average increase of 9.55% and exceptionally approved the postponement of BRL256 million as a financial component which will be adjusted by IGP-M and it will be considered in the next tariff review. So we had no loss. The amount as shown is equal to the difference between the applied and the authorized increase. As I said before, the impact of this adjustment will not affect the Company's financial soundness.

On this slide, you can see the recent history of CVAs. We had a transfer of the CDE funds equal to BRL228 million approved during the tariff review to offset CVA's reported between June 2012 and June 2013. Finally, let me remind you that as we've already announced, we acquired seven wind farms in the state of Rio Grande do Norte with a total installed capacity of 184 megawatts. They belonged to Salus FIP, successor of Casa dos Ventos.

As you can see in the table on slide 12, the energy from these plants were sold in 20-year contracts in the second auction of alternative power held in 2010 and the fourth auction of reserve energy held in 2011. In addition to the wind farms, we signed an agreement with Neoenergia and we now hold 30% of Baixo Iguacu power plant which will have an installed power of 350 megawatts. And it's going to be the last power plant to be built in new Iguacu Parana. Our experience and technical capacity will contribute in the construction and operation of the plant and will certainly bring operating and financial synergies. This plant will be ready in the first half of 2016.

Now to underline, these were the main highlights of Copel. We will now begin the questions and answer session talking about all the topics that has already been presented and we have our team of executives whose names we've mentioned to answer your questions in this conference call. Thank you.

(Operator Instructions). Carolina Carneiro, Santander.

I have a question about growth strategy -- actually two questions. First, about acquisitions. We read in the newspapers today that we will very soon have a final solution for Grupo Rede. I know Copel did not participate in the bid for the full group but I'd like to know if you would be interested in negotiating a stake in portions of Grupo Rede or if you believe that the group has assets that could make sense for you to acquire.

Second question about growth in new projects, we will have a few auctions very soon. I'd like to know if Copel is interested in projects that will be auctioned or if you already have specific information about these auctions. Thank you.

Well, Copel is paying very close attention to these new projects specifically, Carolina, about Grupo Rede. We actually had some interest in participating together with another company in the bid of Grupo Rede, but our focus were two companies, one in the south border with Parana further south, and we believe it's a small company located in Guarapuava in Parana, in the interior of Parana.

We identified that the time was very short to present a proposal which would have to be presented actually in the judicial system in court. We did not really feel very comfortable to confirm a proposal at that time or to confirm a bid at that time. Now we have a more open scenario, our focus will again [CVFO] and we do have an interest not only in these assets but all other assets, we are very disciplined financially and we always analyze the cost of capital involved.

Now we had recent acquisitions of wind farms and the participation in Baixo Iguacu power plant because we identified the right level of profitability and the right synergies to invest our capital in several projects.

We have a participation, one of them in the case which the Company could offer something in addition to what has been offered, a large capacity to attract profitability and in the future in the [SINOP] asset was identified as interesting for Copel. So perhaps this could only become effective with a bid possibly with another company together with us if we can identify the right level of profitability. So we not only analyzed the level of profitability but also the possibility of synergies with our Company but we will only present a bid if we have the right level of profitability for the Company.

We will have an auction in the next few months and we will keep the same stand, that is identify the assets, conduct our previous studies and when we have the right level of profitability, then Copel will present a bid as we have always to consider these factors, profitability and synergies.

Yes, it's okay. So for this year you may look into a few other assets in the next auction. So we may have news in the second half, no doubt. In addition, Copel has presented its interest in assets offered by the market, and we are currently analyzing these assets. But we are always keeping a very strict discipline and focus on profitability, but yes, we are paying very close attention and we are working on possible acquisitions.

Okay, thank you.

Thank you.

(Operator Instructions). Antonio Junqueira, BTG Pactual.

I have two questions. First, about Enersul if you can become controllers of this concession, the idea would be for you to have 100% or perhaps have a structure similar to what CEMIG does, perhaps a private partner. And a more philosophical question, does it make sense to extending distribution if your distributor is -- I mean, what kind of competitive advantage do you have to transform an inefficient distributor into an efficient distributor, or by Enersul which already has efficiency to further increase perhaps this efficiency? Thank you.

Thank you, Antonio Junqueira, good morning. Yes, when we identified Enersul as an interesting asset in Grupo Rede it means that we had conducted an analysis not only us because we were already considering the possibility of a private partner that could help us where we could share the management.

So we do not have anything previously defined. As I said before, we will analyze if we have an opportunity to present our bid for Enersul so we will analyze very carefully and also identify the opportunity to work together with other companies. This is something we do consider. Our concern is Copel Distribuicao, while our focus is directed to Copel Distribuicao in 2013. And we already have some very promising results, some results that keep us highly motivated in terms of maintaining the same pace in the cost reduction process.

What we are doing now is an important benchmark for what we can do in future acquisitions that is if we take the control or if we present a proposal to acquire other assets. We are considering that. We will only acquire other distribution companies or other companies if we can actually improve the results. But because we are already harvesting good results in the cost reduction program, we believe this is very promising for our future work.

We will concentrate our efforts in Copel Distribuicao which is, as I said, our number one focus. If we continue to have good results as we have already identified -- just an important detail, the results of Copel Distribuicao, we'll be much better now with this program of cost control and process reevaluation but also the adjustment that will already show in our balance sheet in the next quarter. We will also continue to work in other areas of the distribution. As I said, our focus is the distribution unit.

Thank you.

Sandra Boente, HSBC.

I have two questions, first about your distribution business, what are your expectations for the second half of the year? If you look at the second quarter, the expectations are not very bright. So do you think that you will have a positive operating margin or you will still be facing operating issues? And question also about 2014, what is your prospects in terms of margin and profitability in the distribution unit? And the other question is about dividends, what is your plan in dividends payout? In the past, you have paid dividends before profits in the first half of the year and this year apparently you are not doing the same. So what is your plan in terms of dividend payments this year?

Okay, thank you Sandra. I will immediately give the floor to the President or Director of Copel Distribuicao, Vlademir Daleffe, to answer your questions.

Thank you, good morning Sandra. Good morning everyone. Now the first half of the year will be split in to first quarter and second quarter. First quarter we had a negative result but we had recovery or a rebound in the second quarter. The actions we took to reduce operating costs was more intense in the second quarter and we could already see the results. But actually we will see more results in the future, that is, we had a better result also because of the transfer of CDE funds. But we have restructured our Company, we have fewer headcount, and a very strong cost control so that we will see stronger results in the second half of the year. And even more in 2014 because many people who agreed to participate in the voluntary termination program will leave the Company next year only. So we are sure that we will have good results this year and this result will be even better next year because the actions we have been taking will produce their effect.

What is the operating margin that you pursue and that you believe you can attain next year for example?

Ladies and gentlemen, please remain connected. The conference call will continue in a few minutes. Now you may continue.

Sandra, so back to your question about the margins we expect. Now, we expect to have EBITDA approximately BRL500 million in 2015. So as of the second half, we will begin to have a ramp of growth towards that.

So this is going to be 2015, that's the normalized year that you are looking at?

Yes, exactly.

And I'm sorry, what is the amount debt -- EBITDA?

BRL450 million, BRL500 million.

Okay, thank you. The other question is about dividends, the dividend payout.

Yes, Sebastiani now. Now, Copel by law calls for the payout of dividends. And we have been doing this, this has been our policy. And this year we will be doing the same thing. So with the results that we have disclosed today to you, we will have an internal discussion now and soon we will have a definition of the percentage that will be paid out in dividends. And we will communicate the market as soon as we have a definition. That is -- what I can tell you is that we will continue to have dividends payout as we've had in the last few years.

Okay, thank you.

Thank you.

(Operator Instructions). [Vivian Neann], BES.

I have two questions. First, how do you view generation crisis? A large portion of your capacity has not been contracted in the short term. So are you waiting or do you want to be exposed to the spot price and what can we expect in terms of energy price, 110, 150, 200 megawatt hour?

Second question, your distribution contracts or your distribution concession which will be terminated in 2015, so is this going to be renewed or extended or is there going to be a change in this renewal, if you are going to have different quality targets, audits, or different kinds of regulations in the extension of the concession?

Thank you, Viviane. Thank you for your question. Let me give the floor to Solange. She will answer your first question.

Good morning, Viviane. Good morning everyone listening to us. Actually today in the morning I spoke with our superintendent and he told me that recently we participated in an auction in July 12. So from 2014 to 2017, a price above 120 per megawatt hour, so this is the ideal price, and we would like to have long-term contracts because only one year then it's not really what Copel generation wants. So the idea would be for us to participate at auctions, Copel to state-owned companies. We must have a transparent process to sell energy. So we are participating in energy auctions, but the idea for us is always have a margin to be allocated through the free market as we did in the first half.

I'm not sure whether I answered your question, but the idea is to seek for higher prices, which obviously depends on how much energy you sell, I mean the number of megawatts. But the idea would be to be around 130-135 megawatt hour. This would be our projection for the near future now for Copel.

About your second question, let me give the floor to Vlademir Daleffe. He will answer your second question.

Viviane, about the concession renewal for Copel Distribuicao, as you know the date is June 24th. So, the expectation and according to the regulation, the government, the ministry of energy would have to manifest its position about the renewal. But actually there are two issues that have to be analyzed by the government; quality and financial capacity. We have no doubt about quality. Copel has become a reference in the industry for quite some time. And there are no signs that the government could request changes regarding quality.

Now, in terms of the financial capacity, this has been discussed here. We have a very strong recovery plan. We firmly believe this is going to lead us to results that will give no margin for the government to question the possibility of renewing the concession. Although, the criteria will be disclosed by the minister possibly in August and certainly up until year end, this is something we heard from a secretary in the -- from a secretary to the minister. And so as soon as we have this information, we will take action to ensure the concession renewal. But we have the best possible expectations. We do not believe that it could not be renewed. That is, we believe it will be renewed.

Okay, thank you.

[Philip Leal], Bank of America Merrill Lynch.

Just a brief question, if you have news about the negotiation of prepayment of CRC. The Board has already approved a 10% deduction in the amount but I'd like to know if this negotiation has progressed.

Well, we have concluded what had been presented to us. I think you remember we only established the maximum deduction. Actually it's a maximum limit. So it's not a maximum amount. And now, we will have a definition, we already have a process at the national level and so the government would provide this loan. So to pay for the CRC, we are waiting for this definition, the state government and the national government. We will communicate to the market when this is consolidated, when this is concluded, even before we can pay for CRC. So currently we are waiting for the state government. Thank you.

[Fabiano Gustado], Itau.

My question is about rates or tariff. Copel has implemented two-thirds of the adjustment and postponed one-third of the adjustment, approximately 5%. When we look at the variables for tariff review next year, the increase will also be high, if the foreign exchange rate is 236 and if we have thermal dispatch and other factors. Now, my question is the following.

Do you agree with this scenario and what do you expect that may happen next year? Do you think the Company will be able to implement the full adjustment next year added to the 5%, so that we would go back to normal levels? Now, if you don't have the opportunity to increase this additional 5% next year, I know that you are building your regulatory assets. Would Aneel need another authorization, would -- so this is my question. Thank you.

Fabiano, let me give the floor to Daleffe, our Distribution Director.

Fabiano, this amount postponed 4.6% for next year will have real effect on June 24 next year of 2.9 because there is a financial compensation offset that would be removed next year. So, if we apply it fully, it's going to be less than 4.6%. But of course, we have different cost variables, they are more dispatched, the foreign exchange rate which can be significant to determine this indicator.

So if we identify that the cost would not possibly be passed on to the tariff, then we can discuss again, we can rediscuss and even another postponement could be considered. But it's still too early to think about that, but every year when we have tariff review, Copel declares to Aneel the index that must be applied and Aneel will approve or not, that is they issue an approval resolution or not.

So your question, if again we will ask for a postponement, we still don't know because next year what kind of values will be included in the calculation and of course everything depends on the formalization or approval by the government.

Yes, but the authorization that you already have with the current tariff review, will it last for 12 months?

Well, Aneel allowed BRL256 million to be a financial contribution for the next tariff review, unless we ask for a new postponement.

Okay, thank you.

(Operator Instructions). [Natalia Risuki, Genodinus].

The construction of Colider plant will have a delay in the beginning of its generation. Now do you know the financial impact of this delay, have you reported that?

In fact, yes, there is an expectation of a more intense operation. So no, there will not be a delay. It is just that we expected to have earlier starts, but because of environmental licenses, this problem has already been solved.

But the first one was programmed for early 2014 and now you are talking about the first half of 2015 and you don't have a specific date. Is it correct?

Well, in fact, yes, in the beginning of the construction, well, we spoke about 2014, but then officially we learned about the environmental licenses, the state level licenses, but this issue has been solved, it has been overcome. So this date which is the first half of 2015, this is our plan and this has been our plan from the beginning of this year. So, we made this definition quite some time ago.

Okay, thank you.

I mean, this is just to say that there are -- that we are not considering a possibility of delay, that is we keep our plan of starting from 2015, the first half of 2015.

Okay.

(Operator instructions). Now, since there are no more questions from participants, we will give the floor to Mr. Sebastiani for his final consideration.

Okay. Thank you. Now, I want to thank you all for participating and I confirm our commitment with efficiency and cost reduction. This is a commitment we had with the mobilization of the whole Company, the whole Copel focusing more on Copel Distribuicao. With that, we've been able to observe progress and we expect the changes in internal processes will help us further reduce cost and improve our quality and results as we've had.

Now, again I thank you all very much for participating and we, our Investor Relations team and (inaudible) the Investor Relations team are at your service. Also the Finance Director and Distribution Director, we are all at your service. Good morning everyone, thank you for participating.

Ladies and gentlemen, Copel conference call about the results of the first half of 2013 is now concluded. Thank you all very much and have a good day.