Companhia Paranaense de Energia (ELPC) 2013 Q3 法說會逐字稿

(interpreted) Good afternoon. And thank you for waiting. And welcome to the Companhia Paranaense de Energia Copel presentation regarding the earnings of the first nine months 2013.

I would like to inform you that all participants will be in a listen-only mode during the Company's presentation. And then we will start the Q&A session when further instructions will be given.

(Operator Instructions)

Before we continue, we would like to clarify that any forward-looking statements made during this call which refer to COPEL's business projections and operating and financial targets are based on beliefs and assumptions of the Company's management and also depend on currently available information.

Forward-looking statements are not guarantees of performance as they involve risks, uncertainties and assumptions as they refer to future events and, therefore, depend on circumstances which might or might not occur. Investors must understand the general economic conditions, industry conditions and other operating factors will affect the future performance of Copel and could lead to results which differ materially from those expressed in these forward-looking statements.

We have with us this afternoon Mr. Lindolf Zimmer, CEO of Copel, Luis Edouardo Sebastiani, CFO and IR Officer Vladimir Daleffe, the CEO of COPEL Distribuicao.

This call may also be followed on the Company's website, www.Copel.com/ri. We would now like to ask Mr. Lindolfo Zimmer, CEO of Copel, to take the floor.

Good afternoon and welcome to COPEL's call regarding the first nine months of 2013. First, I would like to thank you all for coming or if you are listening in to our call. It's always a pleasure to talk to you.

Now, talking a little bit about our highlights, we have booked a net income of BRL923 million between January and September of 2013, which was 12% higher than that presented in the same period of last year.

As you already know, a large amount of this growth is the consequence of better electric energy, [contracts], and also the strategy of allocation adopted by our subsidiary Copel Geracao Transmissao in the first quarter when we sold energy on the stock market at high prices.

However, it is necessary to mention that our efforts in the control of manageable cost have also been contributing to the Company's best results. And this is just the beginning since we are convinced we will still reduce the costs even more.

We have written a plan for economic [feasibility] for Copel Distribuicao, and we have established a target to reduce our costs by BRL300 million until 2015.

Another highlight is the restructuring through which the Company is going. And it should bring greater agility and greater cost control in different segments.

Regarding new investments, we would like to give you an overview of how work is progressing, including the seven wind farms that we have acquired recently. And the (inaudible), where we have we have saved 30%.

And finally, I'd like to draw your attention to some good news. COPEL's Board has just approved, just over an hour ago, the pre-payment of dividends of BRL325 million to shareholders. This amount has to do with a net income of BRL650 million retained in the first six months of the year, which is therefore a payout of 50%. And this is in keeping with the expectations of the shareholders so that they might participate also in this good moment.

And now I'd like to ask Mr. Sebastiani to go into further detail about the dividend performance, and also comment on the period's earnings.

Thank you very much, and good afternoon. And thank you very much for coming to COPEL's earnings call. First, I would like to say a few words about how pleased I am, together with our CEO, to communicate the pre-payments of dividends.

As you know, since I took over as CFO, I have been committed to cost control and with financial discipline investments, and with the alignment of COPEL's capital structure with our peers in the market. Today, positioning is a very important phase of this.

First, on our cash flow, when we realized that there was space to carry out our prepayment, which was (inaudible) percent of the retained earnings in the first half of the year.

We will be distributing BRL180 million of interest on equity, which corresponds to the maximum possible (inaudible) benefits. And BRL145 million in dividends up to a total of up to BRL325 million. And the shareholders who have a right to dividends are those who held the position on 26 November. And the shares will become (inaudible) on the 27 November. Payment will be carried out on 16 December.

Regarding results, as you may see on slide number four, operating revenue increased 10.6% between January and September 2013, totaling BRL6.7 billion. The main reasons for the growth of this revenue was the increase of 34% in the revenues of energy supplied to new customers, basically due to the readjustment of 9.55% applied to be carried out from the 24 June 2013.

Second item, because of the increase of the energy process in the revenue bookings after the third cycle of current review carried out in June 2012. And besides that, we may highlight the increase in revenues (inaudible) customers with (inaudible) bills of 197.2% and the supply of the energy to the free market of Copel Generation and Transmission.

As far as electric energy supplied to distributors goes, it was 20%. And funds from the allocation of energy on the short term carried out by Copel (inaudible) in the third quarter.

The increase of the average price of electric energy supplied to distributors due to the relocation of part of the energy portfolio, Copel Geracao and Distribuicao from bilateral contracts after the regulated contract expired.

And new to the power grid, which is broken down into both charge for [usual] distribution and transmission, shows the drop of 32% due to the effects of tariff review of Copel Distribuicao carried out in June 2012, of the extraordinary review after the MP 579 and the extension of the contract of (inaudible), which led to a drop of about BRL189 million in the RAP of Copel GDP.

Other revenues, including revenues from construction, telephone, gas and others, totaled [39%], a total of BRL1.3 billion, due in part to the growth of our construction revenue (inaudible) the investments and distribution transmission and because of increased rent revenue from (inaudible) electric plant in Baixo Iguacu, which had a greater dispatch in the period.

On the fifth slide, we go further detail about the costs and operating expenses between January and September 2013, which showed an increase of 12% further than the same period of the previous year, which can be attributed greatly to the increase of 19% with investments for electric while compared to [bought for] retail, a total of BRL2.3 billion in the period (inaudible) to the BRL264 million received to transfer the [CD].

The use of goods charges shows a reduction of 50% in the period, impacted by lower costs (inaudible) for the use of the system over the grids charges, the Company's publication of Law 12738/13, which extended transmission concessions, and because of the transfer of BRL330 billion and reinforcement of CDE in the period.

Personnel costs, including pension plan benefits, showed the reduction of 7% in the first nine months 2013, due to lower costs of remuneration, and charges, even considering the wage adjustment of 5.6% and 1% as from October 2012 and May 2013, respectively. And a non-recurrence provision for indemnity, which refers to the professional voluntary termination program which was closed in December 2012.

Now, turning to third parties, shows a slight increase of 1.3% due to business where expenditures for services which have to do with communication and data processing.

In the next slide, we separate expenses with energy for resale. And (inaudible) 19% and totaled about BRL3.2 billion in the first nine months of the year. Energy purchased in the regulated market grew due to two factors. First of all, it was adjusted by inflation.

Second, the start up of new unit thermal and hydroelectric energy contracts, and the contribution of the existing energy contracts which expired in December 2012, in lieu of new higher costs with some of the electric contracts because of the [class defect].

And the third, power costs with the regulated market contract costs we received in CCEE Energy Purchase Group in lieu of the high spot market costs, while the cost of [Imapaipo] grew due to the appreciation of the dollar.

On slide number seven, we detail the transfer of our CCEE resources. As you know, the government issued Decree number 7945, which includes the transfer of CCEE resources.

Through the first nine months of 2013, the Company booked a total of BRL584 million of resources CCEE and BRL764 million which refers to the offset cost of energy at BRL220 million, which refers to the compensation of costs with charges, as I have mentioned.

Please note that the amount which refers to the third quarter is very low, which would be expected because now the entire adjustment of Copel distributor and high costs of energy and charges of formal dispatch was included in the tariff. And was what led to a readjustment of 14.61%, remembering that 9.55% was applied in June, and the rest BRL256 million will be corrected by IGPM and will make a financial component, which will be applied in the next adjustment in June 2014.

On slight number eight, we show the evolution of COPEL's distribution costs broken down into (inaudible) and construction costs. We can see that in the comparison between the first nine months of 2013 and the same period in 2012, costs went up about 9%. And this increase is explained by the 92% increase in construction costs, which are not considered in the regulatory balance sheet. Costs with PMSO dropped by 0.5%, whereas the IGPM (inaudible) 0.4% in the period.

And if the analyze the PMSO (inaudible), it's possible to observe that expenses with payroll that includes the size of costs with salaries and charges, the expenditures with Social Security and dropped about 8%, a very considerable readjustment granted in the period.

You may notice that payroll reduction of about approximately BRL50 million in COPEL Distribution alone. And when we consider the consolidated value, the reduction is BRL65 million. A net of extraordinary costs with the voluntary redundancy program, it is approximately BRL40 million for the first nine months of 2013 of 4.8%, which shows an important downward trend that should continue in the next few quarters. You can see the importance of this item for the Company.

Distribution of Copel (inaudible) shows a major challenge for all the companies in the sector. And dealt with a lot of confidence by Copel Distribuicao.

Going back to the distributor cost and its expenses represented a 10% increase in the period, motivated by non-recurring costs as related to the recurrent accounting reconciliation event and (inaudible) these losses, and so costs would go up 2.3%, in spite of the market growth and the inflation in the period.

Going back to the results, on slide number nine, we can see that the consolidated EBITDA grew by 5% between January and September 2013, amounting to BRL1.6 billion and a 23% margin on the operating revenue, in line with what we saw in the previous year.

Cash generation by Copel G&T accounted for 78% of consolidated EBITDA, whereas for Copel Telecom represented 5%. On the other hand, Copel Distribuicao presented BRL37 million EBITDA, reversing the downward trend that we saw up to June -- until the last quarter.

So you can see a reversal of the downward trend already in this quarter. The EBITDA margin of Copel G&T reached 60%, and Copel Telecom 52%. Copel Distribuicao delivering an EBITDA margin of 1% positive.

On slide number 10, we show the consolidated net income of Copel, BRL923 million year-to-date to September, 12% higher on a year-on-year basis. But we have already set net margin was about 14%, in line also with the previous year.

Analyzing the results of subsidiaries, we can see that Copel G&T closed the period with BRL734 million net income, 33% higher on a year-on-year basis. And a net margin of 36%.

Copel Telecom closed at BRL35 million net income, corresponding to 62% increase on a year-on-year comparison. The year-to-date net result of Copel Distribution for the nine months was BRL43 million.

Then, while these were the main highlights about COPEL's results, I would like to give the floor back to our CEO, Mr. Lindolfo Zimmer. And he will be talking a little bit about the restructuring of the Company, about the prospects of our cost reduction plan and also investments that we are making.

Thank you, Sebastiani. On slide number 11, we show the configuration of Copel. After the conclusion of restructuring, the cost effect is already underway and this shows that we tried to streamline our internal processes and facilitate the separation of costs and separation of activities of two different subsidiaries. And among the changes already carried out, Copel Holding Company reduced from 10 to five the number of executive areas.

Now, besides the CEO's office, the Holding Company has executive offices of finance and investor relations, corporate management, institutional relation.

And regarding subsidiaries, besides the ones that already exist, Copel G&T, Copel Distribution and Copel Telecommunications, the Company now has Copel Participation, which was created with the objective of managing the Company's stakes and also Copel (inaudible) that concentrating the Company's investments in energy generation from renewable sources, including the recent acquisition of seven wind farms in Rio Grande do Norte.

On slide number 12, we describe the economic sustainability plan of Copel Distribution submitted in October to ANEEL and the objectives (inaudible) costs and match the retails of the subsidiaries to the regulatory (inaudible).

And the plan calls for a cost reduction of Copel Distribution with a PMSO of 6% a year, between 2013 and 2017. And will expect a BRL300 million reduction in operating costs by 2015. The highest contributions for this result will be made by the reduction in our headcount by means of a voluntary redundancy program and the extinction of 163 management positions, equivalent to 60% of management positions, driven by the restructuring implemented by the subsidiaries as of October 2013.

Now, more specifically about the voluntary redundancy program -- 337 people will be leaving the Company in the last month of 2013. For the whole year, the total decrease in headcount will be 706 people. And among these, about 500 are Copel Distribution.

It's important to remember that since we launched the voluntary redundancy program in 2011, there was 1,000 people have already left the Company.

Still talking about the voluntary redundancy program, in order to meet the need to continue reducing our payroll costs we recently launched a new program called incentive redundancy program which should allow us to further reduce our headcounts.

And besides reducing our costs with payroll, the Company carried out 400 cost reduction initiatives with MSO. And with that, we had savings amounting to BRL30 million in 2013 in Copel Distribution alone.

I would like to highlight that the planned increased the transfer of the CRC credit from Copel Distribution to Copel Holding Company. And this action, which is still subject to approval by ANEEL, will allow us to settle the inter-company loan with Copel. And the transfer of funds to the distribution company (inaudible) guarantees a sound capital structure for the subsidiary in the next few years.

And it is important to see that the cost reduction is not limited to Copel Distribution. Similar measures, such as intensified cost reduction and also reduction in management positions are also being carried out at the other subsidiaries.

In Copel Geracao, over 300 proposals coming from our employees are submitted with the objective of cost reduction. And on slide number 13, finally, it's important to give you an overview about the investments that we are making.

In the generation segment, we will be adding 636 megawatts of installed capacity in the next few years. And we have already reached 60% of the (inaudible) scheduled.

As of the beginning of October, we concluded the diversion of the (inaudible) River, an important step but still has to continue the construction work for the dam up to the left bank of the river by (inaudible). Construction work has already started and follows the schedule with no intervention or delay.

The wind farms (inaudible) this year (inaudible) holds a 49% stake, completing construction of the [four] farms. And they are already being remunerated as per our contract (inaudible) operations, although the transmission lines have not been concluded yet. And the projects for the seven wind farms recently acquired (inaudible) and should be concluded by the end of 2014.

In Transmission, we are adding 2,015 kilometers of lines to our portfolio, which (inaudible) as an additional (inaudible) of BRL203 million, thus doubling our revenue from this segment.

In general, these are the main highlights for COPEL's results. And now I would like to open for questions from our listeners.

(Operator instructions). Our first question comes from Carolina Carneiro from Santander.

Good afternoon. I would like you to clarify today's meeting and what was approved. You admit a change regarding the policy of dividend payouts to 50%. Was that it? Or was it just a decision to pay -- at this moment to pay this (inaudible) income?

Was it an effective change? Is this a minimum (inaudible)? Or is it just a prepayment of the payment, which does not necessarily mean that the payment for the year will be 50%.

Thank you very much, Carolina. I'll start with the end of your questions.

Well, this will be this year and next year, 50% for the two years. And it's important that we have the amount with which to pay -- it's important for the Company -- for Copel and the aligning of the Company with other companies in the electric [part] sector. And it's important that the analysts know of the commitment which we have with this outlook.

It's very clear to us that this is the track we will follow regarding dividend payouts. We subtract (inaudible) of 25% payout and now (inaudible). And now we have reached this level that is more positive.

So, obviously, we point to an outlook -- or there's a possibility of an another level of payout for the Company. Therefore, this is a decision taken as from the possibility for Copel to do this for the payout this year. And this is all part of a process -- an important part of what the Company is doing. And there is a long way (inaudible) consolidation in the near future.

And one more question to clarify what has changed in the mind of the Company. I remember that at other calls you always said that you wanted to participate in several auctions. And you have a very intensive CapEx program. And, obviously, cost reductions.

But you have an intensive CapEx program regarding purchases, both in distribution and generation. Do you still have this view of this aggressive approach and keep your (inaudible)? Or are you going to analyze things on case by case basis and then identify what the payout will be?

And another question regarding this and another point is I would like you to explain a little bit about the balance between the [pill out] payment, which is now higher vis-a-vis the fact that you have not yet received all the tariffs that you have to receive this year. And, obviously, not wanting to speculate, but so much for next year we know that you will still have a balance to receive from this tariff. But the tariff should grow also with the distribution business.

So do you have a (inaudible) of how much will be transferred and what your balance will be? Or do you still not know this clearly? And will you evaluate things next year according then and what your payout will be if you don't get the (inaudible) tariff balance as you should?

Well, at this moment, things look favorable, according to what we have presented to the market. And we also have an important cash flow and investments have been significant in equities. We have booked (inaudible) already this year. So think conditions are favorable from now on.

And (inaudible) we had the operations of the BNDS for financial (inaudible). And a very important to finance (inaudible) financial funds. And we have income from that. So I think that what we have at this moment -- Yes. We will continue with our dividend payout.

And also we have other important sustainability levels. Not by chance, we have very favorable conditions. No debt level and (inaudible), and much optimistic (inaudible) the future for the Copel Holding Company, and very favorable element, and therefore, and also with the cost optimization.

But there's still a lot to be done on this subject. We have to find more efficiencies for our Company. So I think that there is everything to be done to consolidate with spin-out without (inaudible) hampering our financial finance discipline.

But as (inaudible) said and you know, that we have taken important investments. We are doing this in wind industry and renewables to also make results efficient. This is part of COPEL's structure. And we're working hard to -- this is a very important step for Copel and alignment with the rest of electric power sector.

Thank you.

Mr. (inaudible) from Credit Suisse.

Good afternoon. Good evening, in fact. Thank you very much for the call. I had a question about dividends, but it's already clear. But there are two other points that I would like to raise about the ceiling prices for the A Minus One auctions. And you have a very good exposure there.

So I would like to know if you intend to participate in this auction. And what kind of products will you be bidding for if you bid?

And regarding the next round of [locks], you're listed to participate. So I would like to understand your strategy for this area? And how this fits into the remainder of the Company? Are you going to participate in a control issue? And what is your strategy?

This is (inaudible) from Distribution. We need to buy 966 megawatts, which is a significant amount. And our expectation is to have an attractive tariff. But I believe you would like to know about the strategy of the Generating company, Copel [Generadora]. Right?

We have been talking, and he's not here. But the value is attractive. And I cannot talk about his strategy because it hasn't been defined yet. And we should be waiting for a few days until the auction is realized.

And what about gas? What about the strategy for gas?

The Company has already been accredited. And we have partnered with [out]. And we believe it's very important for us to be present at this moment when a new source of energy arises and with a very significant participation.

And the situation -- the other countries encourage us to do this. And we couldn't just stay outside and not participate in this possibility. So we are studying and we're drafting a plan and directing our project. And then we will be deciding whether we will be participating in the auction or not. Thank you.

Next question which is Felipe Leal from Bank of America. Mr. Leal, you may proceed.

Good afternoon. I would like to know if you have any news about the negotiation of the prepayment of CRC with the state government.

Felipe, we follow this very closely. We are here in the state of Parana and we follow in the local press, of course, the development of the best solutions regarding the decisions of the state government.

Yesterday, the governor of Parana, Beto Richa, met with the President, Dilma Rousseff, and she mentioned that these processes that are being analyzed should be completed very soon.

But to the announcement that was made by the state government yesterday, we are expecting the release of those financing to be provided by private banks and then be able to settle the CRC and COPEL is already prepared to settle the account that the state government had with COPEL. And we will be able to identify by the end of the year, or maybe the next or the first three months of next year. So we'll have the inflow of these funds in order to settle debt of about BRL1 million.

Thank you very much.

(Operator instructions). Our next question, Marcelo (Inaudible) from (inaudible) Partners. You may proceed.

Good evening. Continuing on with the last question. In case you receive CRC resources in the first quarter or by the end of the year, will you be distributing this to common shares to select stockholders? Or will this be used to strengthen your cash position?

Well, we think that there will be a mix between these two possibilities that you mentioned.

Obviously, distribute these extraordinary resources that will the Company's cash. But also to leverage new investments to that we can have good earnings. But one situation does not eliminate the other. And I think that there will be the possibility of having a mix of these two points. But regarding of -- well, regarding payouts of dividend and also financial strengthening.

Next question, Mr. Bruno Pascon from Goldman Sachs.

Good evening. And thank you for your call. Also a question regarding investments. ANEEL was approved on Tuesday, including prices for the auctions for the (inaudible) plants. And the whole sector has its eye on that and this (inaudible) a lot of interest.

So I think for the price of BRL107 bidding price, for COPEL, it is attractive to the Company to participate in this auction, which will happen now in December.

Well, obviously, there is a possibility of new acquisitions for Generation. But the Company also has the responsibility of (inaudible) for a very healthy and sound way to what it feels confident in doing and have good return for its stockholders.

The price of BRL107 ceiling does not allow us to take a final decision. It seems very low, to begin with, at first sight. And we will -- we cannot participate in an auction under these conditions. Things might change, but at the moment, no.

Thank you very much.

Mr. (inaudible) from (inaudible).

What about the stock buyback? Is it linked to the dividend payout policy?

No. We are not going to carry out any stock buyback plan. The goal was to achieve and increase our dividends. And this is what we focused on during this period and creating all the favorable conditions in order to make the decision. However, we do not intend to carry out any stock buyback right now.

Ms. Lilyanna Yang from UBS.

Thank you for the opportunity for the call. And what is the ideal capital structure that you foresee for 2015 for COPEL -- 2014 and '15, taking into account all the new projects and et cetera?

Good afternoon again. Our goal is to be better everyday. Let's say 55% -- 55% our own capital. Everywhere on this basis and also based on our short term assets. And also our programs, such as cost reduction, increasing our investments and our dividend policy. And we want our capital structure to be a consequence of all these measures. And this is our target.

We have very significant management targets. And that has to do with better and better strategies to be delivered to our customers and will be compatible cost. And this will lead to the ideal capital structure. And linked to this, of course, we have new investments and maintaining our cost ability levels.

About the CRC funds? (Inaudible). Well, you said the beginning of 2014 to close this transaction. And I understand you do not know yet how you will be using these resources between dividends and investments? Could you explain that? Is it different from what you had in the past?

I understand that you have been following the CRC issue and we have not changed our position in this regard. We know that there is this perspective and, of course, we will be distributing dividend payout -- dividend as much as we can. And the majority stockholders works with this focus.

And the most relevant point for the majority shareholder was to have the swap. But that swap had been a lighter debt vis-a-vis the conditions established in the current situation of this debt.

But I think COPEL will not necessarily keep this in cash. And we can work both ways, this paying out dividends to a good extend. I can affirm that. But we also want to bring more value to our company so that part of this additional value may mean investments that may bring a higher profitability in the medium and the long run for the Company. And our perspective is very much focused on dividend payout. Yes.

Thank you.

As there are no more questions, I would like to give the floor back to Mr. Lindolfo Zimmer for his closing remarks. You may proceed, sir.

Before finalizing, I would like to thank you all for participating in this call. And I reiterate our commitment with cost control. And you can see the evolution of our endeavors already. And we expect that the adaptations of our internal processes may further decrease our costs and thereby, improve our results.

I have already talked about the prepayment of our dividend, 50% of net income in the first half. And this is a very important part or step for the management of the Company. And we intend to cater to all our stakeholders. I would like to place our (inaudible) area at your disposal. And thank you again.

COPEL's conference call is closed. Thank you very much for your participation. And have a very nice evening. Thank you.

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.