Companhia Paranaense de Energia (ELPC) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and thank you for waiting. Welcome to the Companhia Paranaense de Energia COPEL's Conference Call for the presentation of the first quarter 2013 results. [Operator Instructions] Before we proceed, I would like to say that any statements made during this conference call involving COPEL's business outlook or financial and operating forecasts and targets constitutes the beliefs and assumptions of the company's management and the information currently available. Forward-looking statements are not guarantees of performance and involve risks, uncertainties and assumptions given that they refer to future events and thus, are dependent on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could come to affect the future performance of COPEL and lead to results that are materially different from those expressed in said forward-looking statements. Participating on this call this morning are Mr. Luiz Eduardo Sebastiani, CFO and [ph] IR; and Vlademir Daleffe, Distribution Officer of the company. This presentation, which will be delivered by the management of COPEL, can be followed on the company's site, www.copel.com/ri. And now we would like Mr. Luiz Eduardo Sebastiana to take the floor. Mr. Sebastiani, you have the floor.

Good morning, and welcome to the COPEL's conference call presenting the first quarter 2013 earnings. I would like to thank you, all, for tuning in, to listen to our call and say that this is very important to us, and this is a very important moment for us, too. Unfortunately, our CEO is not present today. He is traveling, but we have with us a very important person also, Vlademir Daleffe, who's our Distribution Officer, who took this job at the beginning of April. And he has already -- he is a career employee of COPEL. He's been with COPEL for a long time, and he was Distribution Officer in 2010, and came back to this position with a mission to align our distributor and assigned by our CEO to align our distributor with the new cost reality. So this is very important to COPEL in our situation [ph] between the financial department and reality, in the distribution company with so much -- so many challenges. Talking about the highlights of the first quarter, we reported a net income of BRL 399 million, as you can see on our slide, which is 25% higher than the first quarter of last year. So year-on-year, we had a good growth, 25%. And much of this income is a result of the strategy adopted by our subsidiary, COPEL Geração e Transmissão, COPEL GeT, which allocated the energy which was available in spot marketing, resulting in a revenue of BRL 390 million from the spot market and the more consolidated [ph] situation. And the first quarter also was important for the increase of virtags [ph] energy, which was led to the cost of [indiscernible] . And also this increase in prices led the government to issue the Decree 7945 which held as an objective compensate [ph] through the transfer of resources from the energy development account for the energy and charges relative to the current situation of the electric sector. COPEL received BRL 204 million to offset these costs from the first quarter. We would also like to say something about COPEL's commitment to cost control since it is starting to address the first results that it delivered in the first quarter. Now let's detail these facts. On the first slide, we can see that we have a defined vision by the company. And now the finance department with the company and COPELs distribution, we are stringently controlling costs. So COPEL GeT has, in the first quarter of 2013, gone to the spot market's one contracted energy, 9% of our offshore energy, guaranteeing a revenue of BRL 390 million. But as described on Slide #4, besides the effect of this allocation, the average price of energy commercialized by COPEL GeT increased considerably as from the beginning of 2013. And this increase occurred in view of the strategy adopted by the company of reallocating energy, which was contracted in the regulated environment to the free environment, which offers better and more attractive margins. And also because of the average price of sales, this leads to the reallocation to the free market for the energy allocated in 2005 and 2012, about 900 megawatts on average. And also, we can see here the actual level of prices should keep steady in the next few years, reminding that the amounts shown are current until March and will be readjusted according to inflation. Regarding the contracting of energy, our focus continues in prioritizing allocation to the free market. We are focused now on the allocation of available energy in the next few years. And the commercialization that we do will always be through auctions. On Slide 5, we can see the CDE results or funds transfer. And as we have mentioned, the government issued Decree #7945, which designed the transfer of energy development, the current funds, to control the exposure to spot market, limited to the amounts not included in the currency allocation; and secondly, to cover the system service charges, ESS, which refer particularly to the dispatch of thermal units that are outside of the order of priority. We have also, in the last balance sheet, we posted BRL 213 million, which refer to the CDE funds, BRL 119 million, which will go to the government line of charges of BRL 94 million on the cost of energy item. We received BRL 204 million from CDE in the first quarter. According -- BRL 204 million in the first quarter. And the difference of BRL 9 million was estimated by the company, and transfer by CDE will be adjusted in the next quarter. The next slide, we can see here our earnings. As you may observe, which has to do with operating revenue, it's grown 17.6% year-on-year, totaling BRL 2.4 billion due, first of all, by the growth of 72.1% on the line of sales to distributors, basically the allocation of energy short term or to the spot market as we've already mentioned. Second, the increase of 26.8% in revenue of sale of energy due basically to the growth 216.7% in the energy sale to the spot market to -- or the free market that COPEL Geração e Transmissão. Another reason for this growth is the increase in the percentage of the booked revenue, as seen in the delivery of COPEL Distribuição, a fact which is a consequence of the prior adjustment in June 2012, which can also justify the reduction of 31.5% on the revenue for the use of the grid, which is the TUSD [ph] . Also, when you look at the bar grid item, it is important to say that this revenue line was impacted by the extension of contracts both excelled last 2001 of transmission assets, which has led to a reduction of BRL 189 million of the annual allowable revenue, the RAP of COPEL GeT. Other revenues, which includes construction, telecom, gas and other revenue, were 50.8%, totaling BRL 371 million, driven mostly by the growth of construction revenue and by the increase of rentals revenue of the thermoelectric plant at Elocanya [ph] , which dispatched for this period. In the first quarter 2013, the operating costs plus expenses increased to 90.1%, vis-a-vis the previous year because of 2 basic factors: First, the increase of 6 -- 36% of electric energy both for resale and second, an increase of 5.6% in the account portfolio [ph] retail or an increase of 39.5%, which totaled BRL 842 million or transfer [indiscernible] which is explained further on. The -- first of all, for the purchase of energy and the second factor, the entry of new energy contracts, as we have -- Rio as a team [ph] have a plan and substituting contracts like conduits of the regulated markets, regarding 2005 until 2012. And other factor [ph] , greater costs regarding the charges of good use [ph] and the electric costs to the [indiscernible] charges. Besides greater costs to the regulated market, the cost of the purchase of energy grew, motivated by the increase of the appreciation of the dollar. And we can see that also we had the transfer of the CDE account. On the next slide, we have the goal [ph] for COPEL cost segmented in the partial A PMSO and construction costs. We can see that in the comparatives, which we made year-on-year comparisons, the costs increased 22%. All this increase, however, can be explained by the increase of 26% in partial A or portion A, and by the growth in construction costs, which are not considered in the regulatory balance sheet. I'm sorry, I have no sound. The cost for PMSO dropped 2.3% and the IGP-M on the period is 8%, this is very important. [Technical Difficulty] Analyzing just now, materials, purchases and others, it was possible to observe that the personnel line, which encompasses the science crossed with salaries and charges, the costs of pension plan shows a growth of 6.5%, also from the IGP-M of the period. And also regarding the succession and voluntary redundancy program, we would like to inform of 712 layoffs for 2013. 135 occurred in the first quarter and 113 are employees of COPEL Distribuição. By the end of the year, another 577 people should resign from COPEL. Our expectation is that this program bring a reduction of 3% in the fall table [ph] in 2013 and 7% in 2014. And this is very important. And so we would no longer have a growth of our overall -- and 8.2 reduction of moved [ph] , of 10% in real terms in 2014. Slide 9, EBITDA. The consolidated EBITDA in the first quarter grew 10.4%, vis-à-vis what we've seen in the first period of 2012, BRL 675 million and 28% as of next revenue, almost in line with what we've seen in the first quarter 2012. COPEL accounts for 84% of the generation of consolidated cash, and the revenue of EBITDA of negative -- which was negative and a COPEL generation and transition account of 4% in generation of consolidated cash. COPEL distribution was BRL 101 million negative basically because of the strong growth of the cost of energy that has been already detailed. On Slide 11, you have the net income of COPEL to BRL 399 million in the first 3 months of the year, 25% above the same period of 2012. The size of revenue with the sale of energy to the spot market has also contributed to the increase of income and the higher financial revenue. We may observe that COPEL GeT closed the quarter with a profit of BRL 407 million and a net margin of 47%. While COPEL Distribuição presented roughly BRL 68 million, consequently a negative net margin of 5%. So generally speaking, we are what we have to give to you and convey to you at this market revenues [ph] call. And we are now ready for our Q&A session. And as I have said, we also have our Financial Director and our Distribution Officer, Vlademir Daleffe. Thank you.

And now, we'll go on to the Q&A session. [Operator Instructions] Our first question comes from Mr. [indiscernible]

I have a question regarding distribution. You have an increase of cost with Parcel A. So part of this has been offset by funds which came from CDE. What I would like to understand, firstly, in this quarter, was there an increase which has not been transferred to the tariff? So what would be the CDE of the quarterly distributor and what would be the level of the current EBITDA?

Marcelo, I will ask Felippe to take the floor. He's our Investor Relations Manager, to answer your question.

Marcelo, regarding your question, yes, you analysts have been conservative. What we can say is the partial of variation [ph] compensation account is that we have a long financial outcome for '11, which was BRL 85 million in this period. And for some reason, this was not concluded basically because after then, this was not in line. It was not relevant to be disclosed. We have the BRL 35 million of financial performance, which liken to the price difference regarding exposure to CCEE contracts. And very technical trading [ph] regarding COPEL Distribuição. And they were not reported in our explanation of CVA because they're not significant enough. In this quarter, the value is greater, so we will not -- could not identify in time that we took it in the value as well in our line. But this does impact the economic balance. So BRL 85 million was the amount, and it was predicted to be expected in the future as well. But this does this not impact directly our result. It will be recovered in the future.

What was the number you said?

BRL 85 million, 8-5, plus 40 million CVA. Well, if it had been compensated, EBITDA would've been positive, yes. We also have a superintendent of accounting, which classifies this information.

Our next question comes from Mr. Eduardo [ph] from [indiscernible].

I would like to repeat what you said because I'm not sure I understood. The CVA last quarter was 85 million plus 40 million. Is that right, BRL 105 million? And then I have another 2 questions. Regarding the revenue with CDE, you said it was BRL 390 million. I don't remember having seen that in the release. Could you tell me about that? And what is the amount of energy associated with the BRL 390 million? That's one question. And another question is about the Distribuição area. What are the steps that you are mounting, that can be taken to recover the profitability of the distribution area?

So in fact, the question, the CVA, in the first quarter is BRL 125 million. Regarding your second question, is it the energy which we booked in the first quarter was not a supply or COPEL GeT of BRL 700 million, and we can also see on the purchase of consumers this BRL 393 million, which is -- but it isn't reported separately with your energy supply. It's [indiscernible] this from $212 million to $130, million, it's under the sale of energy line. And the amount of energy sales, do you have that? 9% is our energy in terms of megawatts, 170 megawatts.

And another question is [indiscernible] COPEL Distribuição?

. Eduardo, [Technical Difficulty] -- the first step taken on the 1st of May was the restructuring of COPEL Distribuição, allowing us to have to -- from 11 to 6 superintendencies, and this allows us to take the commitment of [indiscernible] . Well, our expectation is that our costs be reduced by 500 employees. And until 2014, we should have 700 we will -- by the end of 2014, we will have about 6,000 employees to go, with that 7,500. Besides that, we cut -- or managerial reductions will contribute to this besides the 30 management positions, which will be reduced. And as soon as we conclude the hiring of the consultancy, which will identify questions of productivity, our structure will be much leaner as well. Regarding Eduardo, allow me to say the following. With the presenting of our paratry [ph] for 2012, we reiterate that now in the final phase to be taken to the market for the first processes, international competition and liquidation. The contracting of a consultancy company specialized in analyzing organizational systems and productivity is employed in order to allow us to -- and in the next few days, at the end of May, we hope to hire this company. We hope that they will be taking significant service to help us here and set it in effect. So this announce to you that we are announcing this to the market, and this service will be contracted.

Our next question comes from Antonio Junqueira of BTG Pactual.

I have 2 questions. One is to -- it's on the cost of personnel. If you take your details reported and go back to the BRL 125 million and BRL 29 million in the pension plan expense, and we have operating expenses that are not financial, we can see that the EBITDA of BRL 65 million more or less in the distribution company, by all account the regulatory EBITDA of COPEL, is issued quarterly. [indiscernible] it gives us double of that. So in your distributor business, you are having half the efficiency of the benchmark company. So could you tell us about that? And will the reduction of your 700 employees, because of the revision of certain processes, do you have an expectation of reporting a number in line with the regulatory demands? What is the magnitude that you expect? What will you gain with this improvement of systems and reduction of the headcount? That's my first question.

Hello, this is [indiscernible] speaking. And I'm going to ask Vlademir here to answer because it has to do with COPEL Distribuição.

In fact, our selling to the PMX fold [ph] our expectation is that we will have in 2014 BRL 800 million. We are working with a reduction of 20% by the end of 2014. This will make us certainly amongst the -- a new benchmark. So our expectation is to recover all of this by 2014.

Still on reducing the headcount issue. There was recently the voluntary redundancy program. The number that I referred that you have in the beginning of 2013, is that the 700 number that you have at the beginning of 2012, could you say that?

Well, not yet Antonio because we've started really working on this in April. So year-on-year, this has not happened. But by the end of the year, just for the voluntary redundancy program, we had 400 employees but none of these 400 vacancies will be refilled. The natural turnover of the distributors during the year is 309 for next year, but would not be refilled again. So we are quite sure that we will have 700 employees left, even though we will not have any incentive policy. And last question?

Well, you have had a position, as I see it very interesting in the auction, the transition auction. You did due diligence, you did your calculations in a very competitive market, you dropped out. So I think this is what people were expecting. But I want to know if since you have made the investments and since the opportunity was not interesting, you took the right decision. When do you think that this company will increase its payout?

Well, as regards this question, yes, this is the way to go, and we're working on this. It's still -- to do what we just did recently. We will present [ph] the company's capital, and we will not present proposals if conditions are not favorable to profitability, regardless of all expectations which people might have. And so, of course, it's important to find new sources of revenue, but we are very careful about getting into new projects to bring the profitability. And this really important outlook of aligning COPEL to the companies with electric power section regarding payout, roughly with BRL 12 million [indiscernible] showing that it's very important for this company to take up a position at this level. But we will do this cautiously to be able to progress on these new projects. COPEL does not have such a strong dividend policy aligned with the sector. But internally, we will seek to align the company to this and more than having a level of dividend we wish to present at the right moment when the company manages to have good results. And this certainly will occur in the next few months to have a better policy to present. But it is within our outlook to have aligning or to align COPEL with the other companies in this sector, companies like Faneebe [ph] and others. They have a very well-defined policy about dividend, and this is our target. And this is a -- much in our line. What we are trying to do at the moment is optimize our cost and have the best results to present to the market and to the shareholder to improve our quality, combined with lower cost reduction, and building the income of the company. And then, we will be able to define our dividend policy better. And I repeat, aligned to all the companies with the power sector in Brazil and throughout this year. In the balance sheet of 2012, we will have an evaluation of our financial results. I would wait for the moment for -- to announce this special policy. So it has already been an important growth from last year to this year, and our results will have a more specific impact on this.

Our next question comes from Gabriel Salas [ph] from [indiscernible].

So let me try again the importance of what has been reviewed up to now. Distribution, we recognize you are on the track to regulatory target. And dividend management continues well. You're also discussing this. So could we join the 2 events. COPEL's management will only be favorable to dividend payout seeing the regulatory efficiencies being achieved or will you be waiting also for, let's say, the increase of average price generating a financial flow, which management would consider sufficient to improve its remuneration level of the shareholders?

Well, these are 2 questions -- it's important to consolidate our EBITDA with COPEL Distribuição. And so we -- the goals are certainly important, what this would create for the company and this strengthening of the company certainly will give us much better conditions to align and conclude our dividend policy. And so it is -- the better our financial condition, the more able we would be to present to our shareholders a return or a payout of that dividend. And generally, this will be good for the company. So this is actually important. So your question is important. And that we are very focused on this as well to improve conditions for all.

So what about the timing or the recurrence or seasonality of these discussions of yourselves and the top management about the question of the payback of the shareholders? Is it once a year, or once -- or twice a year or every meeting? So I'd like to know how the schedule works.

See the management's discussion or the management's outlook is that in second half of the year, we will discuss this question more in view of the results, which we will have -- already have on the balance sheet. Therefore, the outlook for the second half of the year. So let's just wait for the end of the balance sheet, and then we will present this. We know that this is important currently for the market and for the company and compatible and necessary as a negative growth for the company. So what we have to do is to have significant results as we are striving towards to define this payout.

Our next question comes from Ms. Lilyanna Yang from UBS.

I'd like to know if you're discussing the receivable from the State of Paraná, and how do you see the opportunity of the business class which could come from that? Do you think that this already has -- will be earmarked for new projects, or do you think that the pet [ph] level lows should continue at these levels, or do you think that you might have an extraordinary dividend?

Lilyanna, I think it is possible to do a little bit of both. First of all, we have to define whether this will be conveyed to the market through to the end when we have something to declare about the CRC. We'll continue to discuss this with the government of the state regarding the amount and then, we know that the records or the reference are withdrawn [ph] in general and the retrofit [ph] on the level that [indiscernible] have used on the value. And having the prospect of achieving this value, and the entry of this from the -- COPEL, we will then have a plan for the use of these funds. And we will not see the start of this growth of dividend. So we will have this -- I would say that we have already been working with the government of the state for some time now, but nothing has been officially said about the amount, which will establish these covenants [ph] . But it's not -- what we do not want is to have these important funds to take the company without a plan to use them, and investment plan for these funds. We will not take any projected steps before we have this to present to the company and to the investors, to the shareholders and also the neighbor [ph] shareholders until we have this.

Well, could you elaborate please. As we see it, this transaction, once it's concluded, do you have to have a shareholders meeting, or can the board decide on this and the management?

Well, it is already defined. This has already been done, and that we are not to be approved by the board. The government had a very important meeting with the board. At this time, there will be no conflict of interest. But certainly, it really -- it will be discussed by the board now and the evaluation and approval of the mill [ph] will have to be well consolidated because we must have all measures taken [indiscernible] , announce to the market every concrete step that will be taken, so this will be done in a very transparent way for COPEL with regards to -- rather than restructuring our debt. To us, it has to be something very important to increase our possibilities of new revenue and couple of investments.

Our next question comes from Sergio Tamashiro from Banco Safra.

I have 2 questions. First of all, with contracts in 2013, 2014, only adjusted to seasonality for next quarters. And what about contracts, medium term, long term, what about the energy markets and the prices? Second question is about the auction. You have said that you have changed your position, you are more diligent, and the internal rate of the term is increasing. And I'd like you to elaborate on the next auction. And another question, that you talked about distribution, is -- so yellow, red light has gone on. You have a negative EBITDA. Now doing a quick calculation on the side of distribution, you have EBITDA with a revenue 74%. It seems fantastic. But if we take the BRL 390 million to 58 [ph] total revenue EBITDA of BRL 256 million with a revenue of BRL 478 million. In other words, EBITDA dropped to 54%. So the question is I see that the management for distribution BRL 156 million and the distribution, BRL 56 million. In other words, we're talking about [indiscernible] [Technical Difficulty] well, what was the -- particularly with generation, it seems the generation has a very, very high headcount.

Well, Sergio, regarding your first question and with slowing the energy contracts, no, our generation was going to be asked [ph] Sergio.

We presented in Slide 4 of our call all the commercialized energy of COPEL Distribuição. You will see the example, in 2013, we had 9% of this energy, which was commercialized in January. In 2014, we have 18% first to be contracted. COPEL Duracell [ph] is doing many contracts and auction now on the 5th of March and auction in some markets, it's already been sold to the free market. This is why we have still 18% to be commercialized by the end of 2014. The strategy is to see how the price of the spot market would change until August. We would see whether we leave a technical result or to, say, sell to the spot market next year. But we think we'll still have 18% of energy still free to be contracted. In 2015, we have 23% of energy and 2016, 31%; in 2017, 49% of energy to be commercialized. And this then is a gain for COPEL generation to be able to have this. And as has already been said during the conference call, 2012 to 2013, we already have a gain of margin in terms of average price. So the average price in 2015 [ph] was about BRL 98 and now in 2013, it's BRL 132 per megawatt hour.

But we auctioned 1 contract for more than a year or to 5 years. So what about this, what about this contract for 3 years? Could you elaborate on that, please?

In fact, these are 3- to 5-year contracts, Sergio, and it's a little -- it's a question on strategy. The average that we have contracted up to now -- contracts in the future, well, this is a price which we cannot disclose. Well, it has improved, vis-à-vis last year, yes, quite frankly. You can see on our Slide #4 that the average price at BRL 98 and now, it's BRL 132. So we must say that 2012 was 105% of our contracted energy in the regular market. When the regulated market of 2005 to 2012 finished, the 800 megawatts, much of this was already with the free market. Now we have 51% of contracted energy to free market and 40% in the regular markets -- regulated market.

If there are no further questions, we would like to ask Mr. Sebastiani to take the floor for his final remarks.

We would like to thank you very much for your participation, and it is very touching to us to be able to, personally myself and all of our team, to be with you. We always want to be very close to the market. And I'll say about that commitment with costs and our financial controls, and we're trying to field [ph] these questions why we have taken the positions that we have and that we did at the last auction. Our financial positioning is tied to our mission of financial cost control. And we will not place ourselves at risk conditions. And as I have said, we are -- we will have a consultancy. Our customers have done this, and we know that COPEL will also, and all COPEL's employees, will respond positively to this challenge of cost reduction, making COPEL even more efficient in the electric power section. And therefore, we are -- we were delighted to be with you, and we are always at your disposal. We ask that all the investors and all those interested in the company to send questions about the company, expectations, our work plan, et cetera. So I would like to say goodbye now and goodbye to all of those who have been with us and particularly on behalf of Mr. Daleffe and [indiscernible] at some point I'm very honored and very happy to have him back here with us in our company -- to have revenue [ph] back with us. And we are committed to the quality of the company and know that this is ultimately possible with cost reduction. So this is what I wanted to highlight and also to speak on behalf of our President. Mr. Lindolfo unfortunately could not be with us today, but he is following us, I'm quite sure. So thank you very much, and have a good weekend.

Today's conference call is now concluded. Thank you for your participation, and have a good day.