Companhia Paranaense de Energia - COPEL
Q2 2013 Earnings Call Transcript

Published: 16 Aug 2013

[Operator:]

Good morning, and thank you for waiting. Welcome to COPEL Paranaense Energy Company conference call to present the first half of 2013 results. [Operator Instructions] Before proceeding, let us clarify that forward-looking statements made during this conference call regarding COPEL's business perspectives, 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 can also affect the future performance of COPEL and lead to 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'll give the floor to Mr. Luiz Eduardo Sebastiani.

[Luiz Eduardo da Veiga 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 Hydropower Plant is taking place, although the plant has already started commercial operations since July. It is worth reminding you that Cavernoso Small Hydropower Plant has 19 megawatts of installed power. Talking about the highlights in the first half, we reported BRL 650 million net income, which is 29% higher than the first half last year. A 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 Investor Relations, Felipe Pessuti, our Manager; also our Accounting Officer, Adriano Fedalto [ph], our controller in stakes and participation; our Finance Manager, Carlos Lúcio. So we have our team of executives to answer your questions. So I was talking about our net income. And also I want to speak about the transfer of funds from the CDE funds. As you all know, the last few months were marked by higher energy costs, which reflected in the costs of all distributors and led the authorities to adopt the Decree 7945, to use CDE economic development funds to offset through this transfer of energy -- of funds the higher costs of energy and charges incurred by the power industry. During the first half, approximately BRL 570 million were approved for COPEL in order to offset these higher costs of energy and charges referring to monthly quota, and BRL 221 million referring to the good results of Portion A variation compensation accounts, which were approved during the tariff review of June 24. So talking about CDE funds related to an advance of amounts approved by ANEEL to cover for discount to tariff from May to November, in compliance with Resolution No. 1719 (sic) [ 1711 ] of May 29, 2013. ANEEL authorized an average adjustment of 9.55% in COPEL Distribuição rates and postponed BRL 256 million, which will be adjusted and included in the next tariff review. Finally, we want to highlight the acquisition of 7 wind farms and a stake of 30% in Baixo Iguaçu Hydropower Plant, which will be built in Paraná. We will give you further details further on. Now fourth slide to 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 Portion A variation compensation account, during the tariff review processes in March 2013. So the company received BRL 593 million from CDE to cover for energy expenses and charges, including the BRL 228 million approved in the tax review and received in the end of July, while we report BRL 99 million to be received related to May and June. However, Resolution No. 2701 of July 29, 2013, ANEEL approved BRL 76 million for this period. The difference of BRL 23 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 BRL 570 million, BRL 262 million allocated to offset energy costs and BRL 308 million refer to other charges. Considering the second quarter, we received BRL 365 million, BRL 167 million refer to energy costs and BRL 198 million refer to other charges. Still about the CDE transfer of funds, according to Resolution 1711 of May 29, 2013, we received BRL 135 million related to in advance of amounts approved to cover for discounted rates, established by Decree 7891 of January 23, 2013, which regulates Brazilian Law Act Number 12783 of 2013. It's important to remember that in the end of 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 for regulation before the constitutional deadline. Now the transfer of -- the CDE funds transfer to COPEL to cover for tariff discount, as determined and approved by Resolution, was BRL 19 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 BRL 19.3 million per month up until November. Now Slide #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 BRL 4.5 billion. Main reasons for revenue increase were

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Carolina Carneiro from Santander has a question.

[Maria Carolina Carneiro:]

I have a question about growth strategy. Actually, 2 questions. First, about acquisitions. We read on the newspaper today that we will very soon have a final solution for Grupo Hedi. 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 Hedi 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.

[Luiz Eduardo da Veiga Sebastiani:]

Well, COPEL is paying very close attention to these new projects. Specifically, Carolina, about Grupo Hedi, we actually had some interest in participating together with another company in the bid of Grupo Hedi, but our focus were 2 companies, one in the south border with Paraná, further south, and we believe it's a small company located in Guarapuava in Paraná -- in the interior of Paraná. 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 not 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 [indiscernible]. 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 Iguaçu 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 had been offered, enlarge capacity to attract profitability, and in the future, 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 analyze 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 profitability for the company. We will have an auction in the next few months, and we will keep the same stance, 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

[Operator:]

[Operator Instructions] Mr. Antonio Junqueira from BTG Pactual has a question.

[Antonio Junqueira:]

I have two questions. First, about Anexho [ph], if you can, so 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 Seneg[ph] has, perhaps a private partner? And a more philosophical question, does it make sense to expand the distribution if your distributor is not enough? I mean, what kind of competitive advantage do you have to transform an inefficient distributor into an efficient distributor, or by Anexho [ph], which already has efficiency, to further increase perhaps this efficiency?

[Luiz Eduardo da Veiga Sebastiani:]

Yes, when we identified Anexho [ph] as an interesting asset in Grupo Hedi, it means that we had conducted an analysis, [indiscernible] 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 Anexho [ph], 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 Distribuição. All our focus is directed to COPEL Distribuição 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 their 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 Distribuição, which is as I said, our #1 focus. If we continue to have good results, as we have already identified -- and just an important detail, the results of COPEL Distribuição will 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.

[Operator:]

Mrs. Sandra Boente from HSBC has a question.

[Sandra L. Boente:]

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 great. 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 for profits in the first half of the year and this year, apparently, you're not doing the same. So what is your plan in terms of dividend payments this year?

[Luiz Eduardo da Veiga Sebastiani:]

I will immediately give the floor to the President or Director of COPEL Distribuição, Vlademir Daleffe, to answer your questions.

[Vlademir Santo Daleffe:]

Good morning, everyone. Now the first half of the year will be split into first quarter and second quarter. First quarter, we had a negative result, but we had a recovery or a rebound in the second quarter. The actions we took to reduce operating cost 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 effects.

[Sandra L. Boente:]

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

[Operator:]

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

[Vlademir Santo Daleffe:]

Sandra, so back to your question about the margins we expect. Now we expect to have EBITDA approximately BRL 500 million in 2015. So it's up 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 we're looking at.

[Sandra L. Boente:]

Yes, exactly. And I'm sorry, what is the amount, debt-to-EBITDA?

[Vlademir Santo Daleffe:]

400 and 5,500.

[Sandra L. Boente:]

Okay. The other question. It's about dividend, the dividend payout.

[Luiz Eduardo da Veiga Sebastiani:]

Yes. Sebastiani now. Now COPEL bylaws calls for the payout of dividends, and we have been doing this because it's 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 to 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.

[Operator:]

[Operator Instructions] Lilyanna Yang from UBS has a question.

[Lilyanna Yang:]

I have two questions. First, how do you view generation prices? 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 Foz[ph] rate? 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're going to have different quality targets, audits or different kinds of regulations in the extension of the concession?

[Luiz Eduardo da Veiga Sebastiani:]

Let me give the floor to Solange [ph], she will answer your first question.

[Solange Elizabeth Maueler Gomide:]

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 of both 120 megawatt-hour. So this is the idea of price, and we would like to have long-term contracts because only 1 year, then it's not really what COPEL generation wants. So the idea would be first to participate in auctions. COPEL is a state-owned company. We must have a transparent process to sell energy. So we are participating in energy auctions, but the idea is for us to always have a margin to be allocated to 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.

[Vlademir Santo Daleffe:]

Now, Lilyanna, about the concession renewal for COPEL Distribuição, as you know, the date is June 24. And so the expectation, and according to the regulations, the government, the Ministry of Energy would have to manifest its position about the renewal. But actually, there are 2 issues that have to be analyzed by the government

[Operator:]

Mr. Felipe Leal from Bank of America Merrill Lynch has a question.

[Felipe Leal:]

It's 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?

[Luiz Eduardo da Veiga Sebastiani:]

While we have concluded what has been presented to us, I think you'll remember, we only established the maximum deduction. Actually, it's a maximum limit, 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.

[Operator:]

Mr. Daniel Campino [ph] from Itau has a question.

[Fabiano Custodio:]

This is Fabiano Custodio. My question is about rates or tariffs. COPEL has implemented 2/3 of the adjustment and postponed 1/3 of the adjustment, approximately 5%. When we look at the variables for tax -- for tariff review next year, the increase will also be high if the foreign exchange rate is BRL 2.36, 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 up regulatory assets -- would ANEEL need another authorization? Would -- or, so this is my question.

[Luiz Eduardo da Veiga Sebastiani:]

Let me give the floor to Daleffe, our Distribution Director.

[Vlademir Santo Daleffe:]

Fabiano, this amount then is postponed, 4.6% for next year, will have a real effect on June 24 next year of 2.9%, because there is a financial compensation or 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, thermal dispatch, the foreign exchange rate, which can be significant to determine this indicator. So if we identify that the cost would not possibly be tacked on to the tariffs, 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 an issue, an approval of 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 this formalization or approval by the government.

[Fabiano Custodio:]

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

[Vlademir Santo Daleffe:]

Well, ANEEL allowed BRL 256 million to be a financial contribution for the next tariff review, unless we ask for a new postponement.

[Operator:]

[Operator Instructions] Natalia Vigucci[ph] from Getlau Denecier [ph] has a question.

[Unknown Analyst:]

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

[Luiz Eduardo da Veiga Sebastiani:]

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

[Unknown Analyst:]

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 this correct?

[Luiz Eduardo da Veiga Sebastiani:]

Well, in fact, yes. In the beginning of the construction work, 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. 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.

[Operator:]

[Operator Instructions] Now since there are no more questions from participants, we'll give the floor to Mr. Sebastiani for his final considerations.

[Luiz Eduardo da Veiga Sebastiani:]

Okay. Thank you. Now I want to thank you all for participating and I confirm our commitment with efficiency and cost reductions. This is a commitment we've had with the mobilization of the whole company, the whole COPEL, focusing more on COPEL Distribuição. 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 quality and results, as we've had. Now again, I thank you all very much for participating and we, our Investor Relations team and Solange Gomide and Bruno Desogen [ph], the Investor Relations team, are at your service. Also, Finance Director and Distribution Director, we are all at your service. Good morning, everyone. Thank you for participating.

[Operator:]

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.