Companhia Paranaense de Energia (ELPC) 2013 Q4 法說會逐字稿

Good afternoon, and thank you for standing by. Welcome to Companhia Paranaense de Energia or COPEL's conference call to present the results of the 2013.

We would like to inform you that all participants will be in listen-only mode during the Company's presentation. Afterwards, we will have a question and answer session when further instructions will be given. (Operator instructions.)

Before proceeding, we would like to clarify that forward-looking statements that might be made during this call related to the business perspectives of COPEL's operating and financial projections and targets are beliefs and assumptions of the Company's management, as well as information currently available.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they refer to future events, and therefore they depend on circumstances that may or may not occur.

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

On this call, we have Mr. Lindolfo Zimmer, CEO of Copel, Mr. Antonio Sergio Guetter, CFO and Investor Relations Officer, and Vladimir Daleffe, President of COPEL Distribuicao.

The presentation will be made by COPEL's management, and you may follow it at www.copel.com.br/ir. Now we would now like to give the floor to Mr. Lindolfo Zimmer, CEO of Copel. Mr. Zimmer, you may proceed.

Good afternoon, everyone, and welcome to COPEL's 2013 results conference call. First, I would like to thank you for your presence, those who follow us on this conference call, and say that it is always a great pleasure to talk to you.

And I would like to start by introducing our new CFO and Investor Relations Officer of COPEL. Mr. Guetter is a career employee of COPEL, graduated in civil engineering by the Federal University of Parana, and he has an MBA in finance and management.

He was the CEO of COPEL Renovaveis S.A., the company that was recently created to manage our wind farms. And between 2011 and 2013, he was working for COPEL Social Security Foundation, and he was CEO and also the Administration and Security Officer there.

Mr. Guetter joins the Company with a mission to deepen the cost efficiency quest and maintain financial discipline in acquisitions when doing new projects, continuing the work developed by Mr. Sebastiani, who took over the Finance Secretary's office in our state.

It is also important to mention that other changes happened also regarding the CEOs of two subsidiaries of our Company, COPEL Renovaveis replacing Mr. Guetter. Mr. Luiz Antonio Leprevost was appointed, and he was already Assistant Officer in the same company.

And in COPEL G&T, the new CEO or President is Mr. Sergio Luiz Lamy, electrical engineer who, over 30 years of career with COPEL, held many different positions, among these superintendent of the consortium in charge of the construction and operation of the Maua HPP, the largest project build in Parana in the last decade.

Now let's talk about the main highlights for 2013. As you can see on slide number three, our net income was BRL1.1 billion, 52% higher on a year-on-year basis.

As you already know, most of this growth stems from the better prices in the energy sale agreement and also the allocation strategy adopted by our subsidiary, COPEL Generation and Transmission, or G&T, which sold energy in the spot market.

Another highlight for our market was that -- last year 9.6% growth, and the efforts on the part of our distribution in terms of reducing its PM. All told, it was a BRL111 million reduction and we believe BRL300 million by 2013.

Another important fact recently occurred was the approval of the credit facility of over BRL1 billion in BNDES funds, mainly for the financing of the Colider plant. Of this amount, over BRL800 million have already been transferred by the end of 2013, and the remaining BRL200 million will be released with the evolution of the project that should start up in 2015.

Besides, we raised an additional BRL115 million in promissory notes issued by the wind farms that we are building in Rio Grande do Norte. Still about the wind farms, we acquired the wind project portfolio of Galvao Energia, including the remaining stake of 50.1% in Sao Bento Energia and Cutia Empreendimentos Company, in which COPEL already had a 49.9% stake.

With this acquisition, we consolidated the creation of a 100% COPEL wind complex in Rio Grande do Norte with 11 wind farms already built or under construction, amounting to 278 megawatts of installed capacity. Besides, we have a project portfolio with 570 megawatts potential in the region, which could lead our complex to rate 848 megawatts of power in the future.

In the transmission segment, we conquered the right to build and to operate two additional projects that will bring us an additional revenue of BRL94 million annually.

In an unprecedented step in the history of the Company, we conquered this by means of consortia, the rights to explore and produce gas in four blocks located in Parana. This is a long term project that could bring very good results to the Company.

Lastly, we are proposing a payout of BRL560 million in dividends and interest on owned capital, equivalent to 50% of the adjusted net income of 2013. Of this amount, BRL325 million have already been paid at the end of last year. So, we still have BRL235 million to be paid out in order to reach this amount, which will be submitted for approval by the General Shareholders' Meeting.

Now I would like to give the floor to Mr. Antonio Sergio Guetter, our new officer, who will be talking about the Company's results.

Thank you, CEO. Thank you again. Good afternoon. Once again, I thank you for your presence in the COPEL's results conference call.

It's a great honor for me and a great expectation to take on the position of CFO and IRO of COPEL, a company to which I have devoted my whole professional career.

The challenges ahead are many, but I would like to highlight a few. First, stepping up our cost reduction endeavors; also continuing with the expansion policy with value generation to our shareholders; and thirdly, the re-leveraging of our balance sheet, not forgetting the alignment with the dividend policy. And I'm sure with a lot of dedication we will be able to overcome all these challenges one by one.

Before talking about COPEL's results, I would like to talk about the results of the efforts made in the control of manageable costs by our distribution subsidiaries.

As you can see on slide number four, we have segmented the cost of COPEL Distribuicao by Portion A, PMSO, construction costs, depreciation. As you can see in the comparison between 2012 and 2013, the cost of COPEL Distribuicao went up 5.6% driven by the 35% increase in construction costs, which are not considered in the regulatory balance sheet.

PMSO cost, or their parent, had a 5.9% reduction, whereas the IGP-M, or consumer price index, went up 5.5%. Net of the non-recurrent effects of the physical and accounting adjustments, the PMSO reduction was 7.3%, equivalent to, as our CEO said, BRL111 million.

And the biggest contribution came from the lower payroll costs and the voluntary redundancy program that allowed us to reduce 9% our payroll expenses, and our internal restructuring that allowed us to cover 163 management positions in the distribution company.

You can see that the reduction is equivalent to a difference of almost 13% vis-a-vis the IGP-M of 2013, the consumer price index. And this shows that we are on the right track regarding cost reductions.

Besides, I would like to stress that our savings were not higher only because of the distributor had a cost of BRL20 million coming from the enrollment of 148 employees in the incentivized redundancy program at the end of the year. More people enrolled than we thought.

About the CDE resources, the agency published Decree 7945 at the beginning of 2013 for the transfer of resources to the distributors. On the next slide, we have details of these amounts.

Over the year, the Company posted BRL827 million in CDE resources, referring to the compensation of cost of energy charges and to cover the tariff discounts. But, the problems of 2013 very probably will not be repeated in 2014.

This is why, on March 7th, the government issued the Decree 8203, ultimately Decree 7945, allowing the transfer of CDE resources to cover costs incurred due to the involuntary exposure of distributors, referring exclusively to January 2013. And BRL114 million were transferred to COPEL Distribuicao to help to cover expenses of this month last week.

The government announced new measures that should help solve the problem of involuntary exposure and also of the cost of energy to the distributors. But, all the details have not been clarified yet. We will not be able to tell you how much or when it will be transferred to COPEL.

On slide number six, regarding the consolidated results for the Company, you can see that operating revenue went up by 8.1% in 2013, going beyond BRL9 billion.

The main reasons were the 27% increase in revenue from sales to final customers due basically to the 9.525% adjustment applied to tariffs, as well as June 2013; also the increase in the energy parcel and the recognition of revenues after the third tariff review cycle realized in June 2012. Besides, we had the increase in revenues from sales to final customers, a 190% increase in the sales to the free market of COPEL G&T.

The second item in the sales to distributors, the rise of 19%, stemming from the higher settlement of energy in the spot market with a high spot price.

And the increase in the average price of sales to distributors due to the reallocation of part of the energy portfolio of COPEL G&T regarding, by lack of agreements after the expiration of the regulated contracts, about 900 megawatts, occurred at the end of 2012.

This all does -- has to do with the TUSD and TUST. The use of the power grid had a reduction of 28% due to the periodic tariff review effect of COPEL Distribuicao, which was in June 2012, and the extraordinary review after the Provisional Measure 759 and also the extension of the transmission assets agreement. That caused a reduction of about BRL189 million, and the drop in COPEL G&T.

And the other revenues, which includes construction, telco, gas, and others, grew 33%, as you can see on the last part of the slide, and reached BRL1.9 billion, driven mostly by the increase in construction revenues, which is a consequence of investments made in distribution and transmission, and the increase in the rent revenues of the Araucaria TPP that did (inaudible) for eight months in 2013.

On slide number seven, you see the operating cost and expenses of 2013, with an increase of 7.6% on a year-on-year basis. And we can attribute this in major part to the 19% increase in expenses with the electric power bought for retail, BRL3.3 million in the period, already considering the BRL294 million received by means of the CDE transfers.

The costs were charges for the use of the grid, as you can see there on the second part, had a 47% reduction this period, influenced by a lower cost we are charging for the use of the system with the publication of Law 1278, that extended the transmission concessions and further clearances of BRL320 million in CDE funds in the period.

Payroll costs, the third part, include the benefits. But, Social Security had an 11% reduction in 2013 due to the lower expenses for compensation and charges, considering already the salary adjustments for the period and the lower provision for indemnification related to the voluntary redundancy program.

Now, the costs for third party services were impacted by the higher expenses with maintenance of the facilities and also data communication and processing. And they closed 2013 with a 4% increase, however still lower than the inflation in the period, reflecting our operating -- controlling our costs.

On slide number eight, we break down our expenses with the energy bought for resale. As we said already, we bought 19%, amounting to BRL3.3 billion in 2013. The energy purchase in the regulated market grew basically because of three factors.

First, the higher cost with the CCEAR contracts because of the plant dispatch, new thermal and hydro energy contracts, and the replacement of the existing energy contracts that matured in December 2012, and also the monetary restatement of the contracts based on the inflation in the period.

Besides that higher cost, the base cost in the regulated market, the costs of CCEE grew because of the high spot market, and Itaipu due to the appreciation of the dollar.

On slide number nine, we go back to our results of COPEL. You can see that the consolidated EBITDA grew by 18% in 2013, amounting to BRL1.8 billion, and the 20% margin on the operating revenue, higher than the previous year.

Cash generation of COPEL G&T accounted for 85% of the consolidated EBITDA, whereas COPEL Telecom accounted for 5%, and the other companies in the group 10%.

COPEL Distribuicao had a negative EBITDA of BRL138 million in 2013 as a consequence of the higher cost of the purchase of energy, as we have already mentioned.

The margin for COPEL G&T reached 57% and COPEL Telecom 47%.

On slide 10, we show you the consolidated net income of COPEL, BRL1.1 billion in 2013, 52% higher on a year-on-year basis. As our CEO has already mentioned, the net margin was 12%, higher than last year as well.

Analyzing the results of our subsidiaries, you can see that COPEL G&T closed the period with BRL1 billion net income, 33% higher on a year-on-year basis, and a 37% net margin.

COPEL Telecom posted BRL48 million net income, an important 70% growth vis-a-vis the same period in the previous year.

COPEL Distribuicao posted a loss of BRL78 million.

Very well. These were the main highlights regarding COPEL's results. And I would like to give the floor back to our CEO who will say a few words about cost reduction endeavors and give you a bird's eye view about the events in the sector.

Thank you, Guetter. As we said before, COPEL Distribuicao submitted an organization and cost reduction plan -- restructuring plan, namely at matching the results of the subsidiary to the regulatory reference.

As you can see on slide number 11, we transferred the CRC account credit of COPEL Distribuicao to COPEL Holding Company. And this allowed us to settle an intercompany loan between the distributor of the holding company and the transfer of about BRL470 million to the distributor's cash.

And this operation will be finalized by the end of March. The plan also contemplates a BRL300 million reduction in operating costs of the distributor by 2015.

As we've said since the beginning of this call, the savings obtained in 2013 were 7.3%, equivalent to BRL111 million. And for 2014, the estimate is a BRL100 million reduction in the PM in total cost in conversion to what we achieved in 2013.

And the higher contribution to this result will be through lower payroll costs and as a consequence of a reduction of our CAGR, that will decrease 9% in 2013. And you can see this on the slide. 871 people left COPEL in 2013.

502, or 60%, left in the last quarter, a number higher than the one that we had forecast, thanks to the adoption of a new voluntary redundancy program that has the enrollment of 180 people in Q4, 148 of them from the distributor.

And I would like to mention that over the last three years, 1,200 people left the Company. And I would like to highlight that the great results of 2013 point to the fact that the target of BRL100 million will be reached.

And lastly, it's important to give you an idea about the investments that we are making. In generation, we will be adding 405 megawatts in installed capacity at COPEL G&T in the next few years. We have already exceeded 60% of the schedule of the Colider HPP.

And right now we are doing electromechanical assembly of powerhouse components in the Baixo HPP, of course on schedule. And we participate with a 30% stake there. And the work is concentrated on the JVs and foundations, on the sites where the generation circuit and the powerhouse will be built.

At the wind farm, we are consolidating a complex up to 848 megawatts of installed capacity, the 94 megawatts generated from the Bento Energia already concluded and adding an additional BRL60 million in revenues to the Company. In addition, 184 megawatts are being built and should be started up by March 2015.

In the transmission segment, we are adding 2,500 kilometers of line to our portfolio. And this will give us an additional (inaudible) of BRL296 million, increasing threefold our revenues in this segment. I would like to mention that most of the projects should be started up in one year.

Overall, these were the highlights of COPEL's results for 2013. Now we would like to open for questions.

Now we will start the Q&A session. (Operator instructions.) Please stand by while we wait for questions. Pedro [Musagini], Credit Suisse.

Good afternoon, everyone, and welcome to this new challenge. I have a few questions. The first one has to do with the CDE. We saw a very detailed report. You said you have given back 75% in the half year. And based on note number 37, I saw that most of that comes from other financial components as well. And I don't really understand what you mean by other financial components. So, could you please tell us what originated this amount? This is my first question.

The second question had to do with generation. What about sales regarding the remaining energy of 2013 that you still have and regarding the strategy for energy sales? What about this year? So, could you give us some color about these topics?

Pedro, thank you for the questions. Thank you for participating in this talk.

Your first question will be answered by the President of our distribution company, CEO or President, Mr. Daleffe. And he will be giving you the necessary information.

Good afternoon, Mr. Musagini. I think you remember that last year the majority shareholder decided to defer 4 points and 7% in this increase. And this in turn had a BRL125 million impact on the balance sheet of last year, and will have an additional one equal to this one this year. So, this is the difference that you refer to, okay?

So, for the second question, could you repeat it? Oh, I'm going to ask Sergio Lamy. He is in charge of our generator, our generating company, and he's going to answer your second question.

Good afternoon. This is Sergio Lamy. Regarding generation, I jotted down two questions here. One had to do with the strategy of sales of free energy that we have today. This is 170 megawatts. I think this was your question.

In the short run, the energy will be sold in the spot market. So, there are some considerable values in the spot market to be obtained. So, our expectation is that the spot prices will remain high at least until the end of this year. So, our priority is to maintain this in the short run.

Of course, we are still waiting for the rules that will have to be established for the A Minus Zero auctions. And depending on the rules that are established for this auction in terms of prices and in terms of schedule, of course we will be adjusting our strategy to the new reality, okay?

On the second question, at the beginning of the first month of the year, this was more pronounced and more pronounced for the remainder of the year. But, we do not have a significant distance between one and the other. There are small differences over the year.

A lot was said in the last few weeks about a possible change in the calculation or the rules of the spot price. It would be a reduction on the level, or it could be a change going to the average cost of dispatch -- of each one of the dispatch. Have you considered this hypothesis? What do you think about that, because this would impact -- most of the Company, because those were more wrong, could be negatively affected. So, is there anything you could tell us about that?

As you know, a decision has not been made about it yet. So, we are waiting for the agency at the Ministry of Mines and Energy to publish a definition about that.

So, we do not have any position regarding this, or a strategy or whatever. We will just have to wait for the guidance and for the rules to be published by the ministry to define what our strategy in this regard will be.

(Operator instructions.) Lilyanna Yang, UBS.

Thank you for the question. I have three questions. One has to do with dividends. Do you intend to pay about 50% of the net income from now on?

The second one is about the CFC account. What is the status of your negotiation with the Parana government?

And the last one is gas contract for Araucaria. I understand that COPEL has the lead contract with Petrobras today and the CFC contract with them. So, what would be the variable cost -- an updated variable cost, and could this change from now on?

I would like to ask Guetter to answer your first question regarding dividends, about future dividend policies.

In terms of dividends, our strategy is to maintain and align our dividend policy with what is the practice in the sector. Of course, we will be assessing this over the year, but our strategy is to keep the same policy.

Regarding the CFC, it's about BRL10 million. Well, you know that this is a more expensive area, and we already have an agenda to evolve this issue. But, you know that it depends on the state government. And now, I'm telling you there I think it will evolve as best as possible. We have a few items to talk about in this regard.

About gas, I am going to ask -- our CEO will answer.

We have a contract with Petrobras, and that guarantees the operation. BRL690 is the amount, and it shows the direct consequence of the cost of gas.

So, we have no bearing over that. We cannot have any influence on that, which means that the Company will continue to discuss, because the spot price is at this level. So, we see no difficulty there at Araucaria.

It's not only important because of the -- it's the center of gravity of the south region, the transmission system. And it is very often called to dispatch for the equilibrium of the system so that the supply may be secured. So, the dispatch is because it brings about reliability to the whole system. Thank you.

Juliana Rozenbaum, Itau BBA.

Good afternoon, everyone. I have two questions. I would like to have an idea of how you see the renewal of concessions of COPEL vis-a-vis summer.

And the second has to do with weaker hydrology. How do you see the scenario of rationing of energy? And do you believe that the south system could offset the weak rainfall that we are having in the southeast?

Juliana, thank you. I am going to ask Mr. Daleffe to answer about the concessions. And his area is the most affected by a decision on this matter.

Good afternoon, Juliana. The concession contract has two basic assumptions. Those are the quality of the services delivered and the economic sustainability of the concession.

If you talk about the first one, COPEL doesn't have any reason to complain or to be concerned, because we are a benchmark in terms of quality. And regarding the second one, it has motivated the very strong cost reduction effort for the distributor. We already have a plan that was already implemented with excellent results.

We were able to reduce over BRL100 million, and we will continue this this year. And as of 2015, we will be at levels very close to the regulatory benchmarks. So, there is no technical reason whatsoever for COPEL not to have this ensured as of next year.

On the other hand, the ministry had some difficulty in terms of establishing the rules. And the distributors should manifest interest in the renewal 36 months beforehand, and the agency would have 18 months to answer. And this didn't happen. These 18 months ended in January, and the agency has not manifested itself.

And that gives us a very strong sign that the trend regarding renewal, not only because of the basis of COPEL, but you can see that it's difficult for the government to define the rules, because renewal -- you have periodic tariff reviews, and these are the mechanisms for adjustment of prices. So, it's not really on our list of concerns, that is to say the nonrenewal of the concessions.

Regarding hydrology and the importance of the south, last year -- or regarding rationing, which is politically rather sensitive, we are sure that the risks are high. You know very well that nobody can really see the future and see the behavior of hydrology in the future.

But, due to the current situation of the reservoirs of the Brazilian system and due to the fact that we are already at the end of the so-called rain period in the southeast, it's coming to an end already and the hydrology of the southeast system is quite regular, so the risks do exist. They are not negligible.

In our opinion, this is not going to happen in the short run because we have a more comfortable situation. In 2008, for instance, the impact was -- this could help delay a critical situation.

And what everybody knows is a figure that a consultancy company is working with, and which is 24% probability of rationing. This is not ours. This is a specialized consultancy company that came to this figure regarding hydrology.

So, reiterating what I said, we have reached the end of the rain period of the southeast system, which has a very regular hydrology, and this puts us in a very sensitive position. On the other hand, the south system is totally irregular. The south system has the biggest floods and the biggest dry season.

So, that means that in the south we could even have a big rainfall in the winter. And in this case, the south could give a very good contribution to the Brazilian system as a whole. However, this is not a major contribution. You know that south system is small if you compare it to the Brazilian system as a whole, okay?

(Operator instructions.) As there are no more questions, we would like to give the floor back to the Company for the closing remarks.

Before finalizing, I would like to thank you all for participating. And I reiterate our commitment with cost control, which will be even stronger in 2014.

We will keep focus on generating value to our shareholders and seeking higher operating efficiency, maintaining financial discipline in the evaluation of new opportunities, and so on and so forth.

We know that the energy scenario for the next few months requires caution, and the challenges are many. But, we are sure that we will be able to overcome them.

Once again, thank you very much for your participation. And our Investor Relations area is at your disposal. Thank you very much.

COPEL's conference call is closed. We thank you for your participation, and wish you all a good afternoon. 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.