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Companhia Paranaense de Energia’s (ELP) CEO Luiz Fernando Leone Vianna on Q3 2015 Results – Earnings Call Transcript

Companhia Paranaense de Energia (COPEL) (NYSE: ELP ) Q3 2015 Earnings Conference Call November 12, 2015 12:00 pm ET Executives Luiz Fernando Leone Vianna – CEO Luiz Eduardo da Veiga Sebastiani – CFO & IR Officer Gilberto Mendes Fernandes – Business Management Director Sergio Luiz Lamy – CEO, Copel G&T Ricardo Goldani Dosso – CEO, Copel Renováveis Acacio Massato Nakayama – Assistant Director, Copel Distribuição Adriano Fedalto – Accounting Superintendent Analysts Carolina Carneiro – Banco Santander Lilyanna Yang – UBS Operator Good afternoon and thank you for waiting. Welcome to the Earnings Call for Companhia Paranaense de Energia Copel to discuss the results of the Third Quarter of 2015. All participants are in listen-only mode during the company’s presentation. And later, we’ll have an Q&A session, when further instructions will be provided. [Operator Instructions]. Before proceeding, we should mention that forward-looking statements that might be made during this conference call related to Copel’s business outlook, projections, operating and financial projections are based on beliefs and assumptions of the company’s management as well as on information currently available. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may also affect the future results of Copel, and could cause results to differ materially from those expressed in such forward-looking statements. With us today in the conference call we have Mr. Luiz Fernando Leone Vianna, CEO of the company; Mr. Luiz Eduardo da Veiga Sebastiani, CFO and IR Officer; Gilberto Mendes Fernandes, Business Management Director; Mr. Sergio Luiz Lamy, CEO of Copel G&T; Mr. Ricardo Goldani Dosso, CEO of Copel Renováveis; and Acacio Massato Nakayama, Assistant Director of Copel Distribuição. The presentation will be delivered by Copel’s management, and can be followed on the company’s website www.copel.com/ir. Now, I will turn the conference to Mr. Luiz Fernando Vianna, CEO of the company. Please Mr. Luiz Fernando. Luiz Fernando Leone Vianna Good afternoon. Welcome to the conference call for the 3Q ’15 earnings. Events which are considered to be very important to discuss about our company and also about some perspective of the sector, I remember that in our prior opportunity to talk, we were close to have the Provisional Measure 68 disclosed and it has been published mid-August. It brought important change in the rules for the power plant auctions that it had expired contracts and also the perspective of other GSF restructuring. Since then the discussion is about the provisional measure and its consequences really have taken us a lot of our time. About the restructuring of the GSF, we have discussed a lot on this matter internally and we have participated actively in tutorial discussions all aiming the best scenario for the company. From the beginning of November and now by the means of the technical standards of 238/2015 has presented the conditions for the restructuring. Right now we are concentrated in the analysis of the feasibility of this agreement that the renewal of the injunctions that protect the generators of the cost related to GSF since June of this year. Now about the power plant auctions which contract has not being renewed the new rules that allow the concession to keep part of the energy to be produced became more attractive for the assets but on the other hand, the demand paying the payments of grant fee which becomes a great challenge for project especially our sectorial scenario that hasn’t told the restriction, cash restriction to generators and also our economic scenario that also limits the funding option. On the part of the distributors we had an important advance and the expansion perspective for the concession contract. The Federal Accounting Board had its questions answered and now has concluded the process recommending to the MME the expansion of 40 concessions among them further distribution. The agency also has already presented proceedings of the amendment for that expansion and there are conditions for the efficiency in two dimension, service quality and economic finance management, sustainability. So right now we are analyzing other conditions and we are going to submit our decision to shareholders in an extraordinary general meeting that is already being set for December 2. The third quarter also was marked by a more profound Brazilian economic crisis and that has impacted the energy consumption; it’s rough 2.7% vis-à-vis the third quarter of the prior year, according to EPE data. Considering our [indiscernible] market the figures are much better but also negative. The captive market had of drop of 1% vis-à-vis the same period of the prior year and the total market that considers the captive market and for consumers had a drop of 2.5% that impacted the economic results of the distributor in this period. Along the last month also we have seen an improvement in the hydrology especially of regions South and Southeast and along with the reduction of the demand has encouraged the government by the Electric Sector Monitoring Council to switch off the most expensive thermal power plants after August with that reduction in the cost of energy for the system and also the reduction of the tariff that dropped from 55 megawatt-hours to 45 megawatt-hour and releasing a little bit of cost up here for consumers. It’s important to mention that our TPP Araucária has not been impacted by that measure; it’s still operating and available for operation. Along the third quarter that plant has operated during 55 days and made conservative with 548 gigawatt to the system. Still talking about hydrology, the improvement in the reservoir and the switching off of the TPP have allowed higher energy production coming from the HPP, therefore, reducing the exposure to GSF that was an 86% in the 3Q ’15 above the 80% that we have seen in the first half of 2015 and aligned to what we have seen between July and September of 2014. Now Slide number 4, I would like to say that the Federal Regional courts of the 1st Region has approved Copel’s DNT request and suspended any time of bonus related to the concession contract for either HPP up to the moment when analyzes that administrative process that deals with the request to exclude the liability relating to the delay and the conclusion of the plant’s work. With that injunction we are protected about delivery energy in the contract [indiscernible] since the beginning of October is still in the legal area we should highlight the decision of the Supreme Court that has ignored a decision from the Parana Court that determined that Copel should pay R$540 million to Ivaí Engenharia related to concession work of CCH Derivação do Rio Jordão in the 1990s. Copel now is waiting for the publication of this court’s decision and also the answer of Parana Justice Court and with shareholders and the market informed about the process. So we mention the period’s results I would like to highlight that all in parts that are part of the portfolio Brisa Potiguar Complex are already operating. Therefore, we have reached 278 megawatts in an commercial operation we have already produced 422 gigawatt-hour of wind energy in 2015. It is also important to highlight that the four wind parks São Miguel do Gostoso Complex, which it has 108 megawatts of installed capacity and it is a partnership between Copel and Voltalia are also ready to operate. We’re just waiting for the conclusion for this transmission lines and that activity is on the direct accountability of other agents and after that we will start commercial operations. Now the challenge is to start the concession of the wind with Cutia Wind Complex that has 13 wind parks and totals 332 megawatts of installed capacity, and that has provided answer that to — precursor to start commercial operations in 2017 and in 2019. Now I will turn the floor to Luiz Eduardo Sebastiani, our CFO and IR Officer and he’s going to go into the details of our earnings in the quarter. Luiz Eduardo da Veiga Sebastiani Thank you very much, Mr. CEO, Vianna, this is very important moment for the company. The relationship with investors, with the market relatively new information, information important for about our company and we have here superintendents in addition to the officers already mentioned, we have our financial superintendent and also our business development director among our other directors. So good afternoon everyone. Thank you once again for taking part on this conference call about our results. On Slide 5, as you can see we have operating revenue that has increased 20% in the first nine months of 2015 overcoming the R$11 billion. The main reason for that expansion is the growth of 35% of the revenue and that is a result of adjustments defined by Aneel and applied to the tariffs of Copel Distribuição. And we had just an annual adjustment in June and an extraordinary adjustment in March and that was needed to pay increase of energy cost and charges. Also, we have the recognition of almost R$1 billion regarding the result of assets and liabilities in the period. That amount was registered in the first half of the year and it comprised mainly by the tariff deferment and those end up being recovered by tariff after the adjustment in June 24 of this year. And when we consider adjusted figures of the third quarter that is a negative recognition in R$16 million. Now the supply revenue that it has major product of the phase of Copel GeT and total phase of Thermoelectric Araucária reduction of 5% up to September. In Slide 6, we have cost of operating expenses that reached R$10.4 billion between January and September of 2015, 27% higher than the one we had in the same period of last year and that can be explained mainly by the elevation of energy cost that were marked for resale that increased 44% vis-à-vis the same period of last year. That increase is a reflection of the higher cost with acquisition of energy at Itaipu that has increased due to the tariff adjustment and also the dollar appreciation. In addition to that also contributed to the adjustments of contract that were adjusted by the inflation, at the end of transfer of funds from CDE and ACR accounts that offset cost is over $1 billion last year. Also we had an increase of 46% in charges cost reflecting mainly in higher ESS related to the dispatch of thermal power plants out of the order of merit. Manageable cost has increased 16% in the first nine months of 2015 due to the higher expenses with personnel and outsource services and as a consequence of the inflation that has reached around 10% investors at time and the cost increase needed to sustain the growth of the company and to keep the quality standards. I would like to highlight that we have here in Parana along the year a lot of events, climatic events that were very severe and they have generated extraordinary cost. It sounds like [indiscernible] EBITDA is 10% lower than the one we had in the same period of last year totaling R$1.6 billion with a margin of 14% on the operating revenue. The cash generation of Copel GeT accounts for 66% of the consolidated EBITDA positively sound 10% and Copel Telecom 5%. Other companies of the group account for 19% and the main contribution here comes from Araucária TPP. About the EBITDA margin in Copel GeT has closed the first nine months of year with the margin of 30%, Distribuição 2% and Telecom 43%. On Slide 8, we have the consolidated net income for Copel has reached R$863 million up to September of 2015, 19% lower than the same period of 2014 due mainly to lower GSF and also the reduction of the POD sale. Analyzing the subsidiaries’ results we can see that Copel Distribuição it had a net income of R$98 million reserving the loss that happened in the same period of last year. Copel GeT close the period, the first nine months of the year was a net income of R$705 million, 29% lower than the same period of last year and Copel Telecom R$43 million of net income aligned with the same period of 2014. So these were our highlights, we are now available for your questions. I would like to ask your permission Mr. CEO and also our analysts or investors that are following us. We would like right now to make comments or announcements or explanations due to analysis that has been already published in the market and that is about Copel Distribuição balance sheet. Here we have with us, our accountant superintendent that has an important role in the company but also in the sector. He has done accounting of the first in this area and also in the regulating energy sector, and so it’s very important to have him with us and he’s Adriano Fedalto and we are already anticipating to listeners a few comments on that matter. Thank you very much Mr. Adriano. Adriano Fedalto Good afternoon everyone. Thank you for this opportunity to add a little bit more information about our figures of Copel Distribuição. We have seen that this work is our intense quarter for all the distributors; they are going into a process of renewing concessions that is our case as well, and we had very specific events here of Copel and we would like to talk about them so that we can add more information about what has already been seen our accounting for the third quarter, so I would like to ask your permission to tell you a little bit more in my accounting language so that you can have more information. You have seen just like all of us the third quarter and we will be talking us specifically about the third quarter of 2015. We have seen that Copel Distribuição had a negative EBITDA of R$85 million. This is the figure that we would like to go over with you. We have some very specific events in the sector and some specific events for Copel, and we will bring to you a brief review of those. So now I will ask you, your permission to break the ground. Well let’s start by talking about the revenue of Copel Distribuição. We had an event advance now in the third quarter that has generated R$36 million of PIS and COFINS, taxes that has not been recognized. We have a practice here at Copel and all the distributors, everyone operates in the non-cumulative regimen of pace and [indiscernible] and we have been following those movement in credits and we adjust our tax bracket in a way that we have to charge our consumers. But now in the third quarter 2015 that amount, that amounted to R$36 million; the adjustment required time. So you will see the adjustment in these brackets of our consumers now in the fourth quarter and we will recover part of that amount or actually the full amount in the fourth quarter, so this is the first adjustment when we do the reconciliation of R$85 million of the negative EBITDA. I would ask you to follow that up with us so that we come up to the total amount that we really reflect the reality of the company in terms of the EBITDA so right now are just R$36 million. A second event that have also impacted specifically the third quarter is related to the tariff flag. We had an adjustment of R$33 million in the quarter due to effective receivables in June of 2015 and you may see that in our document, so we have other sectorial assets then they have been adjusted for the third quarter and R$33 million so this is another event because of the tariff receivables that was being posted as sectorial assets and it has been adjusted in the third quarter. We have revenue adjustment of R$5 million that is in accounting, that is re-accounting of CVA, we have been seeing CVA and the movement they become even more complex with time so their adjustments here some re-accounting and those were R$5 million, so please consider that as a non-recurring adjustment. Now going forward with the revenues, we have R$14 million from estimates of R$57 million of amortization of [indiscernible] two specific event first R$14 million once again, we have closed with the best information possible in June 30 and when you concluded the date, we have to do an adjustment of R$14 million. Now the amortization of CVA usually the amounts were not representative and in our cases specifically with the deferral of R$1 billion that we had accumulated in the sectorial asset account and transferred that after June. We have a specific effect of R$7 million which is recurring from June to July. Also, they have been adjusted now in this third quarter, so these event is specific event and I would like to have your understanding here just making it very clear these were specific events. And finally the last adjustment that we see in revenues that we had revenues not accounted, not posted R$42 million. Now that happened now here in the R$42 million that has impacted our results. As soon as the market recovers this will be also posted either in the fourth quarter or when the market recovers itself in the first quarter of next year but this is not a loss for the company, just an adjusted because of the fluctuation of the market as we have seen in the last quarter. So this fact of situation of events total R$130 million, R$137 million and, therefore, we have negative EBITDA 85% and you can take that out we’ll have a positive EBITDA of R$20 million which will bring it best to reality. We had several off timely events, I mean, once in a lifetime event and they had some temporary effect here. Now going forward, the cost we had some specific events once again for the sector for the company that have reviewed the concession or are reviewing the concession. We discussed a lot with Aneel and distribution sector and especially the companies that are right now that just gained a renewal of their concessions and or July 7 most of them have their contract expired and we need it to reflect the debt on our balance sheet. And what was the better estimate for a financial balance, how much I will be reimbursed if I have to give away my concession. So since we operate it up to the expiration of course we need to deal with that number. So what was the best disclosure of our balance sheet in September are now have guided us by the means of a report directed to the whole sector. And so given if a concession is replaced we’ll have at least 24 months to do that adjustment, a possible bidding so that the new concession takes over the process. So the criteria was to work with 24 months of that financial asset transfers to an intangible asset. Therefore, our quote will increase and we’ll work with that amount divided by 24 and that is going to affect the revenues that I am receiving to operate the concession. So that even is going to be reflected in all concessions areas that are undergoing the process at Amanhã (phonetic) and also that reflects the moment of the slow down also that has impacted our EBITDA reducing it to R$11 million in the quarter. Follow-up that figure again in our reconciliation. Something else that happened specifically in Copel is what we had low additional costs. We are already working with process for tariff review in our distributors. We are receiving them now and we are preparing ourselves so that our base can be referred with the lowest addition as possible. Therefore, we analyze all our work, everything we are doing in a serious so that we can adjust ourselves to the regulating standards that we consider reasonable and that quarter there we had an adjustment of R$11 million. Also there was a reclassification our financial expenses to operating expenses. Therefore, this impacted the EBITDA and R$13 million that was to VACATICV (phonetic) or amount that we pay are consumers. 2015 was intense climatically speaking. We then were closing that as financial expenses. As all companies in the electric sector we are adjusting ourselves with the conditions and characteristics of the sector and to the new accounting rules. And so we have the R$13 million financial expenses there being classified now as operation of expenses, so this also once again there is one-time thing. And finally in other adjustment in the results, in the third quarter of 2015 when we compare it to the second one is it an increase for the allowance of provision or doubtful debt account. We are very close now — there was an increase in the third quarter because of the increase in our traffics but was an event that we thought in this third quarter of 2015. Consequently, all these adjustments in our account of expenses reflected R$45 million. So if we start at 85 of our average and add up all of the events or the expenses we then will be with an EBITDA that should be over R$111 — sorry once again ask your permission to say it, and I just want to help our shareholders and investors. We are seeing specifically our expenses with depreciation and amortization it is only adjusted for EBITDA purposes and now is R$67 million and we see that if we calculate it in a more macro manner and building our base of 2015 you’re going to reach R$87 million. So we have an expectation of depreciation. We will adjust our EBIT expectation and we find our adjustments relating our EBITDA expectations. And I will conclude saying about the supply. I notice that this known in the market in the sector but we Copel use a criteria that is very sophisticated so that we have a better disclosure of our figures and we work with 30 days and 31 days. So in the quarter that closes 30 days we will see a little bit higher amount of that, and for September 30 we have variable R$10 million because of the 30 days that will also be adjusted in October because of that criteria. So in summary, now to open the Q&A session that I’m sure everyone is interested and that’s what I had to say. If you have any questions I’ll be available to answer them and I want all of you to be helping you to bring transparent figures, transparent numbers, that’s our objective always. Thank you very much. Question-and-Answer Session Operator Now we are going to start the Q&A session. [Operator Instructions]. Our first question is from Mr. Marcus [indiscernible] at JPMorgan. Mr. Marcus? Unidentified Analyst Good afternoon, Vianna and Sebastiani. Thank you for this opportunity. I have two questions, both related to the Distribuição. The first one is related to the renewal of the assets that have been proposed by Aneel. My question is, is it really worthwhile for Copel to renew that asset? If we check the leverage level that was indicated by Aneel so that you could renew the concession and should you have to have extra funding there maybe if I can just restate in R$1 million so if we analyze the adjusted EBITDA going to need an even if we completed that and we work with an EBITDA higher R$300 million a year it is still very far. So my question is would it be good to renew even if it’s better to try indemnity? We have the assets of R$2.5 billion and to work with something close to R$4 billion, would that make more sense to investors once within we have better return this way rather than having an asset with a low level of efficiency? If you despite keep this asset what sort of measures can we see in terms of distributor recovery efficiency gain so that we could work closer to the regulating agencies to generate value to shareholders, that is, in the last three years the company was very clear relating to your level of efficiency in the near future and when we look the figure three years later we see that there is a long way to go. So I have data here from the Distribuição. If it were adjusted material services the third quarter of 2015 vis-à-vis third quarter of 2014 the quarter yield has increased to 28% way above inflation. So that’s only a fact in terms of a trajectory of manageable cost, are they feasible to be reduced? And I already thank you for your answer and for this opportunity. Unidentified Company Representative Good afternoon. [indiscernible] everyone. This is Acosta (phonetic), I am the assistant director of the distributor. About your question, first, the expansion of the contract yesterday the approval was a rectification of the contractor or the proceedings of the contracts have been approved for the expansion of the distributor contract. In fact, the new contract comes with a few innovations also related to the economic financial sustainability of the concessionary agent. So this is new vis-à-vis what we had in a prior client contract and now it’s we have a strong management in terms of the performance of the contract for keeping the concession more 30 years. As far as Copel is concerned, we have no doubt that we should renew the contract. Obviously Copel is adapting itself and was waiting for the condition and you can see that we are trying to be compliant with the new condition, especially about the sustainability and that is going to be renewed especially checked in the next five years. So in terms of cost then and mitigation and other indicators that will be considered especially quality indicators we are already working. Yet, we have the variables that are not controllable the same but we do understand that for cost reduction and in order to reach the quality index for the new contract we depend on the company’s action. Here we could mention an automation program for the rural sector where we still have a strong contribution in the quality topic and we have already started planning starting in 2016 for the next three years the company will invest in automation in the rural sector. And surely in controlling the duration of interruptions and reducing that according to our target. And with that we will also automate the rural grid and at work, and of course, we are working as well to reduce cost and to work faster and to reduce the displacement that we have and the number of people that we need to have complete the target stated in the new contract. And obviously that’s an investment means more working more remuneration. I’m sorry to insist that you understand that these measures are business mention I’m not to have to company close to the regulatory EBITDA or you have additional measures for that? It is obvious that these are specific measures that we are adopting and we see that there is a greater facility and a scale gain. And of course we — if we consider continuing the actions we are already practicing. Then terms of course this is major effective tool to the compliance with the regulations. Thank you. Operator Our next question is from Mr. [indiscernible], Credit Suisse. Unidentified Analyst Hello everyone, good afternoon. I have a quick question. About the auction of expired concession you said that you’re interested in keeping public disclosure, public disclosure is one that does not have the grant an impairment. What is the idea of Copel about this auction? Are you going to take part on that? Are you going with your own capital? Can you give us any idea how these things work? Luiz Fernando Leone Vianna This is Luiz Fernando. Yes, Copel will take part on that, this is Lot B, and we have not decided what we are going to do, if we are going to go in alone, it will have a partnership, we are deciding between today and tomorrow, and we already have funding for that operation. And [indiscernible] on capital and third-party capital. Unidentified Analyst And finally, your objective is Parigot de Souza or other product lines as well? Luiz Fernando Leone Vianna No, only Parigot de Souza and the other small clients that come with it. Unidentified Analyst Okay that’s fine. Thank you. Operator Our next question is from Ms. Carolina Carneiro, Santander. Ms. Carolina? Carolina Carneiro Good afternoon everyone. About the auction, can you give us an overview? Are you going to take part on the A minus 1 auction that should happen this year? And can you talk a little bit about the selling price of those? And if you can also talk about contracting energy, we know that you have certain amount of energy for next year, so I would like to know if you have anything else to tell us about that contract? Thank you. Sergio Luiz Lamy Good afternoon Carolina, this is Sergio Lamy, Copel GeT. About the first question Auction A minus 1 of this year, no, it’s not going to be possible for Copel to participate because we do not have energy for sale after 2016. Therefore, we would not be able to participate on the A minus 1 auction. For the other years 2017 on this we would have a commercialization strategy and that strategy starts to be deployed at the end of 2015 and it will continue along 2016. I would like to add we even started the participation of A minus 1 but with disclosure of the selling price, as we have mentioned, we decided to stay out of it and wait for another opportunity. Operator Ms. Carolina. Next question is from Mr. [indiscernible] from Citigroup. Unidentified Analyst Thank you for the call. About Colider with the injection of Copel did not do anything else on this quarter, so what is the talk, what the regulator do you have a perspective about when this is going to be analyzed? And another question on the distribution, should we keep on waiting for the next quarter increase that we saw in the last quarter; should we see a reduction what is the perspective for the short term? Thank you. Sergio Luiz Lamy Good afternoon, Katie, this is Mr. Luiz Lamy, Copel GeT. About the first question Colider product plant. Our request to anticipate to takeover was because we understand there was a delay from the agencies to decide about the responsibility for Colider? So now to bring directors had meeting results, and in that meeting they promised us that this would be discussed in April. And so far in October nothing has happened but we understand that there was not another possibility other than to try and anticipate that and that has been done in the first region. I don’t know if that answer is enough for you but maybe Acacio now can talk about the distributor. A – Acacio Massato Nakayama Good afternoon, Katie. Yes, of course, there is special attention in terms of cost and to be close to the regulatory cost, the major variation that we have seen is that we still keep on we intend to decrease cost but the climate and other factors have been causing the increase in manageable cost. The idea is that as we have seen previous technologies that might mitigate that to try and re-establish effective possible in our system reducing backend improving quality and maximizing our productivity reducing cost. Now going back to Colider, we should not expect much or an answer in conclusion in the short-term, am I right? Unidentified Company Representative No. On the contrary, there is decision, this board decision of anticipated guardian or trust that should happen, we expect to have an answer of the deliberation still this year that is what we expect. Thank you. Operator Our next question is from Mr. Marcello Scott from UBS. Unidentified Analyst Thank you all. I would like to go back to cut out questions. I understood that you had 20% of contracted energy and that contract increase in the long year, when you say that you have no energy available to sell, is that because they want to have a buffer for GSF or may be a protection for Colíder or other power plants that might be delayed, that is my first question thank you? Luiz Fernando Leone Vianna Good afternoon Marcello, yes, that is yes, we have certain amount of contracted energy and we are saving time for a buffer for the GSF for taxes in the next year and just to cover Colíder that should just become operational and in the midst of next year okay. And what you have in terms of forecast of GSF for next year and another question, if you have a favorable decision about Colíder, if you get this waiver from now, do you understand that you could have an offset which in theory you have already said in terms of energy, so do you understand that you could have some type of exemption because of what is already paid for. Luiz Fernando Leone Vianna Can you please repeat your question? Yes, the first question is GSF for 2016 and my second question is that if you have a favorable decision about what you have already paid in terms of penalty. Luiz Fernando Leone Vianna Okay, our expectation for GSF in 2016 is of 84% more or less that’s an average for the year, and decision about Colíder will redirect our strategy related to the amount of energy we have for 2016 depending on the decision where we will have a favorable expectation about what we have requested and obviously that could place us in a more comfortable situation in terms of energy for next year and we could look for commercialization. Unidentified Analyst So just confirming, you expect 84% of GSF for 2016 right? Luiz Fernando Leone Vianna Yes. Operator Our next question is from Ms. Lilyanna Yang from UBS. Ms. Lilyanna? Lilyanna Yang Thank you for this opportunity. Good afternoon everyone. About Copel Distribuição, can you tell us a little bit, what you expect to have in terms of demand for next year and were you short or long in managing distribution for this year? And can you talk about the recurring of EBITDA for the next year, I want to understand if you have a specific program, some specific effort to reduce your PMSO that’s around R$80 million higher than the regulatory levels? Second question about your dividend policy do you intend to pay on the net income, I would like to have an idea about the capital structure because now we’re showing 2.5 times higher net for EBITDA. Thank you. Luiz Eduardo da Veiga Sebastiani Lilyanna, this is Sebastiani. Lilyanna, can you repeat your question especially the one related to the distributor? Lilyanna Yang Of course, about distribution, I would like to have an idea of specific measures you would have to reduce the level of operating cost that team has sold now R$280 million higher than what would be the target regulatory level? And can you give us perspective of volume and demand for next year and is in this year now that you have an exposure or with the surplus of energy at Copel Distribuição because I’m trying to understand the result of the third quarter in addition to the items that have been mentioned by you on the beginning? Luiz Eduardo da Veiga Sebastiani Thank you very much, Lilyanna. Good afternoon, Lilyanna. The distributor will keep on working to reduce cost especially now in a more adjusted manner because of the no contract that is under analysis on our side and obviously some rules have been added and the distributor will adjust itself to comply with the concession contract, that show that the measures that are providing results are compliant with the contract. So we will keep on following the same path. About contracting energy, so far that this year is not exposed and is within the regulatory condition. Lilyanna Yang What about the demand? Can you tell us anything about it? Luiz Eduardo da Veiga Sebastiani About the demand and consumption we have seen a movement because of economic scenario of the country that is reflecting on the energy consumption as well as with a strong impact on the residential market because of the tariff increase. It is a natural movement, but in our market in Parana, we have seen a low retraction and we expect to see a recovery after 2016 when [indiscernible] starts moving again and considering that Parana has an agro-industrial area that is strong in with mechanism to mitigate impact. Lilyanna Yang Okay, the second question is for Mr. Sebastiani that is related to the dividend levels. Luiz Eduardo da Veiga Sebastiani Thank you very much, Lilyanna. There are no chances in the payout policy of the company. We are at a very interesting level wanting companies that are found and even that we might have an increase in the dark because leverage and investments. We have not concluded the need of payout operations right now. Thank you. Operator Please wait while we wait for more questions. Our next question is from Carolina Carneiro, Santander. Ms. Carolina. Carolina Carneiro I am sorry it got disconnected. I just would like to add a question to my prior question. What is under your assumption, is it 0.84 is that for next year? What type of the demand drop are you working with to reach the figure in considering that you foresee a GSF so high for 2016? Just to make it clear this was though was not able to listen, I got disconnected earlier on. But why are you not considering with the Provisional Measure 688 with the final — its final terms? So what would you have to change in the provisional measure, so do you see any possible changes to it so that you would consider being complaint about GSF for 2016? Unidentified Company Representative We estimate an instability from now on. In terms of the demand, we should not have significant changes in our forecast and of course that this figure takes into consideration that you’re are not able to recover reservoirs such as a southeast even if we have a good rainy season, if not able to recover that trap we expect that this recovery should happen in a longer term. So we still believe on the possibility of having a GSF very low for next year. About Provisional Measure 688, since we have most agents and that provisional measure and the part of it that talks about has a hydrological risk for non-contracted energy in the ACR in the regulated contracted environment the proposal and the current proposal really does not please use, does not please Copel, and I can tell you that it does not believe most of the generators agents, and of course, we have not made a final decision yet in terms of that situation. We’re doing our math and obviously we request that more openly soon. But there is nothing that I can tell you right now, the way that is being placed — a set for non-contracted energy. Does not – the decisions has not been made. We’re [indiscernible] all studies to make a final decision. Yes, we of course sees the possibility of having a final proposal of change from the government. Well obviously the measure is still under evolving. There is a possibility of some adjustment done to it, but we do not believe in major changes there. We do not expect to have important and relevant changes in what has already proposed in that provisional measure. Thank you very much. Do you have an expectation for a long-term contract…. Carolina Carneiro Do you have an expectation for a long-term contract to price? How many — I’m sorry five yes, it could be five years? Yes, you have a stronger commercialization, I don’t know how liquidity is, but do you have a price expectation for three, five years? Unidentified Company Representative Carolina, we are working internally following strategies of the company and — it will not be wise to disclose that information was more objective data available. So we will keep our internal work being done about that information, and I apologize for not being able to tell you more. Thank you very much. Operator If there are no further questions, I would like to turn before to the company or management for final remarks. Luiz Fernando Leone Vianna This is Luiz Fernando Vianna, and my final remarks are that the sectorial crisis will impact the companies and the sector. We’re taking all measures needed to mitigate great crisis and in spite of the results we believe that we have been able to successful [indiscernible] and we expect that Provisional Measure 688 that should be appro1ved next week and we expect it will help us unlock the short-term market, because it’s totally strong. And that prioritization ends up worsening the crisis. But maybe the sector has to grow through this problem to find a solution and then have the market going back to work. And that’s all we have to say, thank you very much. Operator The conference call of Copel has concluded. Thank you very much for your participation and have a nice afternoon.

Portfolio Rebalancing: 2 Approaches And A Practical Example

Summary A well-constructed, diversified portfolio typically starts with a well designed asset allocation plan. Similar to a garden or landscape, however, entropy can leave your portfolio looking like it had no plan, with potentially frightening implications for your risk level. I will create and track a hypothetical portfolio, expose the risks of leaving it in an untended state, and walk through two variants of rebalancing over a five-year term. I will offer practical suggestions that you may be able to apply to your own portfolio. Finally, I will offer a few thoughts on cost and tax considerations, as well as links to suggested further reading. I think most investors would agree that having a sound asset allocation plan is a large factor in success, particularly when taking a long-term view and working towards a goal that will ultimately have a real and measurable impact on the quality of one’s life. For example, when I built The ETF Monkey Vanguard Core Portfolio , I diversified into three very different asset classes: 1) Domestic Stocks, 2) Bonds, and 3) Foreign Stocks. When doing so, I did not just randomly select some allocation percentage pulled out of thin air. Instead, I used Vanguard’s Target Retirement 2035 Fund (MUTF: VTTHX ) to select a suitable asset allocation for a 45-year-old, with approximately 20 working years until retirement. Portfolio Drift and the Need to Rebalance However, much like the landscape around your home, your asset allocation needs regular maintenance. When you landscaped your home (or started a garden, as the case may be), you likely worked with design and installation professionals to pick exactly the right plants for each location depending on your climate zone, the correct sun/shade mix and similar factors. No doubt, it all looked absolutely spectacular upon completion. However, left untended, your landscape or garden will not look nearly as good even weeks later, not to mention a year or more. In fact, it might ultimately look so bad that it would be hard for an impartial observer to discern that there had ever been a design or plan. People with a scientific mind call this entropy, one definition of which is “a gradual decline into disorder.” Your asset allocation, left untended, is also subject to entropy. Another way to phrase this is “portfolio drift.” Fundamentally, this is not a bad thing. Likely, you purposely designed your portfolio such that it was diversified, which typically means it contains asset classes with low correlation ; where one may outperform at the same time another underperforms. Over time, however, this behavior can result in your asset classes drifting far from their initial weighting. In turn, this has the potential to raise the risk level of your portfolio far beyond what you ever intended. Let’s take a look in the rear view mirror, so to speak, at a hypothetical portfolio constructed on October 31, 2010. In this portfolio, our investor selected the following investments: A 35% weighting in the S&P 500 index, intended to form a solid foundation of large-cap domestic stocks. An “adventurous” weighting of 10% in the NASDAQ index, in an attempt to spice up the overall return of the portfolio. A 20% weighting in the FTSE 100 index, to gain some exposure to foreign equities. A 35% weighting in a total market bond offering. Note: For our purposes, please don’t get hung up on whether these were four great choices, the proposed weightings or anything else like that. I simply used these because they serve well to make the main point of this article. I am also ignoring the effects of any dividends received and the resulting cash balance. In the picture below, have a look at how those asset classes performed over the five years ending October 31, 2015: ^SPX data by YCharts From one perspective, this is all wonderful. Certainly, we are happy to have the 76.38% return generated from the S&P 500 index, and we are positively ecstatic over the 102.2% return from the NASDAQ index. The next picture shows the actual results of this hypothetical portfolio, assuming an initial investment of $100,000. (click to enlarge) The good news is that our $100,000 has grown to $138,859. In large part, this is a result of the amazing performance of U.S. stocks over the past five years. Now for the bad news. Take a look at the “Current Weight” column. You will note that I feature two numbers in bold red. The weighting of the S&P 500 index now stands at 44.46%, almost 10% above our well-designed plan! Let’s go a step further. The S&P and NASDAQ indexes, combined, now comprise $81,953, or 59.02% of our portfolio, almost 15% above our intended weight of 45%. Conversely, the other two asset groups, foreign equities and bonds, are now horribly under-represented. Foreign equities are underweight about 4% and bonds by more than 10%! As featured, this is a double-edged sword. We are happy for the returns we received. At the same time, were there to be a sharp downturn in the U.S. market, we might be shocked the next time we opened our statement. Also, were the FTSE index to move up nicely in a positive direction, our underweight allocation would cause us to miss out on the full intended benefit. Before we move on, ponder this thought as it relates to why our hypothetical portfolio looks the way it does. The asset classes that offer the greatest returns tend to have the greatest volatility . You may notice that, with a 45.6% variance, in percentage terms the NASDAQ index has strayed the farthest from its original weighting. In other words, the asset classes that give you the best chance for outsized returns also offer the greatest potential for leaving your portfolio in a far riskier place than you ever intended. Sadly, while the example in this article is hypothetical, the problem is real. For example, with respect to 401(k) plans, according to this 2014 article : A recent TIAA CREF survey found that 25% of workers have never made changes to how their money is invested and an additional 28% have not made changes . . . in more than one year. The answer, of course, is to periodically rebalance the portfolio. This simply means that funds are taken from the asset classes that have outperformed and moved to those that have underperformed, such that each asset class is restored to its original weighting. Let us next look at two ways to do so. Time-Based Rebalancing: A Simple Example The simplest form of rebalancing is time-based , or period-based , rebalancing. In this version, the investor selects a specified interval of time at which to rebalance the portfolio. This is a common option offered in 401(k) plans. The investor may choose to do so in an automated fashion; perhaps once per quarter, six months, or year. What, though, are the effects of rebalancing on a portfolio? In the picture below, I will show the results of performing a simple annual rebalancing transaction on our hypothetical portfolio. Following the picture, I will share several observations with you. (click to enlarge) To begin with, for the benefit of readers who may wish to verify the accuracy of my work, allow me to first explain my methodology. I used the same YCharts tool used to generate the “5-Year” view of the portfolio displayed as the first picture in the article. However, I changed the periods to one year at a time, starting with the period 10/31/2010 – 10/31/2011, and continuing in the same fashion until I got to 10/31/2014 – 10/31/2015. Each row of green boxes represents one year, from left to right. The value displayed in the Annual Return Column represents the return for each asset class for the given period. I then show the Current Balance based on those returns, and the Current Weight of each asset class before rebalancing. In the rightmost box, I show the amount of the rebalancing transaction, and the New Balance after all asset classes are restored to their original weighting. Finally, I reference the New Balance as the Initial Investment for the next year and repeat the process. Now, some observations on the performance of the portfolio. First, please note that this rebalancing strategy is “brainless” in the sense that no active thought or research goes into its implementation. A date is simply set on the calendar, and the portfolio is rebalanced. Next, if you are like most investors, you likely noted that you have $4,013 less ($138,859 vs. $134,846) in the rebalanced version than in the untended version. This leads to a “theoretical vs. real-world” issue with rebalancing, as follows: Theory: A diversified portfolio contains asset classes whose returns should offset each other over time. Therefore, if you rebalance from the best-performing groups into those that underperform, not only should your portfolio contain lower volatility but you may even improve your returns. Practice: Not that simple. In the case of our portfolio, U.S. stocks (S&P & NASDAQ) significantly outperformed both of the other asset classes (FTSE and Bonds) over an extended period of time. Therefore, our consistent annual rebalancing exercise moved assets into classes that continued to underperform. However, it is good to remember exactly what I featured, namely that our hypothetical example was performed over a time period where U.S. stocks soundly outperformed virtually any other asset class. In some ways, this was a “worst case” scenario for disciplined rebalancing. At the same time, we are in a far better position should U.S. stocks be subjected to a severe, and possibly extended, stretch of underperformance. Recall that in our untended portfolio, fully 59.02% of our assets were in U.S. stocks. In our rebalanced portfolio, we are only at 46.44%, not far from our target allocation of 45%. Threshold-Based Rebalancing: A Simple Example A more “active” variant of rebalancing is threshold-based rebalancing. In this variant, we actively monitor the portfolio and rebalance at any time an asset class deviates from its target weighting by some set percentage. I wish to make clear at the outset that this is not blatant market timing. In other words, it is not going all-or-nothing into one asset class or another on a “bet” that we will achieve higher returns. Instead, we are simply “buying low and selling high” according to how the markets, and our chosen asset classes, behave. Let’s see how this variant works out using a simple example of threshold-based rebalancing of the same portfolio. In this example, everything is the same as in our time-based example except that I only rebalanced once, at the end of Year 3. (click to enlarge) I purposely kept this example very simple in the hopes of making it very easy to follow and understand. You will notice that I used the same five annual periods as in the first example. Therefore, the periods and returns are exactly the same. The only thing I did differently was apply a hypothetical deviation threshold of 5%. In other words, I would “let my winners ride” until an asset class deviated by at least 5% from my target allocation. If you look at Year 1, this did not happen. So, I just let the portfolio carry on without rebalancing. The end of Year 2 rolled around and, still, no asset class had deviated by 5%. Even my overall weighting in domestic stocks (S&P 500 and NASDAQ) had not deviated by 5%. Once again, I stood pat. In Year 3, however, spectacular returns in the S&P asset class drove it to a 41.28% weighting, a deviation of 6.28% from my target allocation. So, I rebalanced everything. In Years 4 and 5, once again we did not experience a 5% deviation based on the portfolio as rebalanced at the end of Year 3. So, I stood pat on both occasions. As you can see, this slightly more active involvement resulted in, arguably, the best of both worlds. My portfolio balance is $136,305, some $1,459 above the time-based variant and $2,554 below my rather “fortunate” untended portfolio. At the same time, no asset class is horribly over or underweighted. I might note that, at a weighting of 50.82% for the S&P 500 and NASDAQ combined, my overall U.S. stock weighting has a deviation of more than 5% from my target allocation, so I certainly might consider rebalancing once again at this time. Again, though, the choice is mine. Threshold-Based Rebalancing: Fine-Tuning the Concept In the simple example above, while I employed threshold-based rebalancing, I only examined the portfolio once a year, on October 31. Clearly, that doesn’t take full advantage of the technique, as the market does not somehow magically select October 31 as the best day of the year to rebalance. With that in mind, take one more look at the picture below. It’s the same 5-Year YCharts graph I developed to start the article. However, I captured a screen shot of that image and then added some arrows. (click to enlarge) The arrows above the line (pointing downwards) feature specific points along the way at which we may have been interested in selling certain overvalued asset classes. In contrast, the arrows below the line (pointing upwards) feature specific points at which we may have been interesting in buying into undervalued asset classes. Since, however, most of us don’t have crystal balls with which to predict the future, how do we know when such opportunities manifest themselves? To answer this question, allow me to share a high-level glimpse into my own portfolio. As can be seen, at the present time I break my portfolio into, and track, seven separate asset classes. In total, my portfolio contains 20 components (16 ETFs and 4 individual stocks). The pictured summary comes from an Excel spreadsheet I have built for myself. The spreadsheet originates from a download of my portfolio (in .CSV file format for you techies) from the Fidelity website. I then use Excel’s tools to sort and subtotal the data by symbol. I “tag” each symbol with the correct asset class. Finally, what you see here simply summarizes it all. The purpose of this entire exercise is to develop the two rightmost columns in the summary above. These reveal the extent of deviation of each asset class from its target. Let me explain those two columns explicitly. The Difference column reveals the actual difference in the weighting percentage. So, in the case of Utilities, 5.22% exceeds the 5.00% target by .22%. The %Diff column represents the percentage of variance . So, 5.22% is 104.30% of 5.00%. The last column is the one I focus on. My personal approach is that when the percentage of variance of any asset class varies by 5% from its target weight , it goes on my radar as a possible candidate for rebalancing. This helps put the greatly differing weightings of my asset classes into big-picture perspective. In other words, at 40% of my total, my Domestic Stocks allocation has to deviate by 2% to have a 5% deviation in percentage terms. At only 5% of my total, my Utilities allocation only has to vary by .25% to hit the same relative threshold of deviation. (NOTE: Again, for you Excel techies, you can use Conditional Formatting on cells like this to, for example, turn the cell yellow if the value exceeds 105% and red if it exceeds 110%. This is no biggie, it just gives you a visual cue when targets are hit.) In summary, I view this as what I call “Active management of a passive portfolio.” Other Considerations When Rebalancing The last thought I wish to leave you with is a reminder that various costs are involved in rebalancing, and you need to factor these in when making your ultimate decisions. For this discussion, I will feature just two: 1) Trading costs and 2) Tax consequences. Trading Costs – In many cases, you may invoke some level of trading commissions to execute your rebalancing transaction(s). So, let’s go back to my Utilities groups. At only 5% of my portfolio, I shared previously that the weighting only has to deviate by .25% to achieve a 5% deviation in percentage of variance. At the same time, this may not be a large amount in dollar terms. Therefore, I may have to exercise some judgment in deciding whether the cost of rebalancing the asset class is justified. In my case, as a Fidelity Brokerage client, I get around a lot of this by using commission-free ETFs for the major asset classes. As an example, I use the iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ) and the iShares Core MCSI Total International Stock ETF (NYSEARCA: IXUS ) as commission-free tools to rebalance my weighting in Domestic Stocks and Foreign Stocks. Tax consequences – To the extent that your investments are in taxable accounts, you must also be aware of the tax consequences of rebalancing. In the case of our hypothetical portfolio, clearly we had gains, perhaps even substantial gains, in our S&P 500 and NASDAQ positions. To the extent that these are long-term in nature, one can benefit from the lower long-term tax rates. Whatever the case, however, this must factor into your ultimate decision. Summary and Conclusion I hope that you have found this article helpful, from both a theoretical and practical perspective. I have discussed the reasons to rebalance an investment portfolio, shared two variants of rebalancing a hypothetical portfolio to hopefully expose some pros and cons, offered some practical suggestions on how to track and evaluate your own portfolio, and closed with a couple of cautions with respect to the various costs of rebalancing. Happy investing! Further Reading U.S. Securities and Exchange Commission – Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing Smith Barney Consulting Group – The Art of Rebalancing The Vanguard Group – Best Practices For Portfolio Rebalancing

Agriculture, Coffee And Sugar: The Next Rally?

Summary We discuss the long term bullish case for Rogers Agricultural Index ETN. 3 billion additional middle class consumers will support the demand for agricultural products over the next two decades. We discuss why Rogers Agricultural Index has been in a bear market since early 2011 and what is needed for the next bull market to start. We mention that coffee and sugar might be good investments already in the short term in light of the fundamentals. In 2007 Jim Rogers lent his name to a new line of exchange-traded notes. One of them was dedicated to the agriculture: The Elements Linked to Rogers International Commodity Index Agriculture Total Return Note ( RJA). Jim Rogers has been very positive on agriculture and farmland investments. There are probably tens of interviews where he cites to be more bullish on agriculture than any other commodity. So, why Rogers Agriculture Index has been such a horrible investment since 2007 and could this change? Was Jim Rogers wrong? These are the topics we will discuss in this article. We will also mention a few isolated picks in the agricultural sector that we believe to have more upside potential in the short term in comparison to Rogers Agricultural Index. For those not familiar with Jim Rogers, he was among the most successful and famous hedge fund managers on Wall Street. Currently he is living in Singapore and travels across the world as a guest speaker at investment conferences. Chart Analysis Rogers Agricultural Index is trading 50% below its all time highs reached back in 2008. This index contains around 20 most popular agricultural futures contracts such as corn (13.61%), wheat (13.61%), cotton (12.03%), soybeans (10.00%) and coffee (5.73%). (click to enlarge) Figure 1. RJA ETN price chart. Chart : Ycharts.com The price drop in RJA can be explained by the strengthening of the U.S. dollar, at least partially. Most producers get paid in U.S. dollars. Supply-Demand Fundamentals We went through OECD-FAO Agricultural Outlook 2015 report. This report suggests that the global inventory levels, supply and demand of the agricultural commodities are in a reasonably good balance right now. In the short term we believe that most agricultural commodities will stay at their low price levels. The bull market might be getting ready to start – but not right away. When To Buy Rogers Agricultural Index? Rogers Agricultural Index might not move up before a big change takes place in the global currency markets. The U.S. dollar should start to weaken against other major currencies. However, there is an another major price catalyst in the making. Asia has already 525m middle class consumers. That is more than the whole EU population. Over the next two decades, the middle class is expected to expand by another 3 billion. That will create a spectacular rise in demand. In parallel, the global arable land is expected to increase by only 5% by 2050. That will be a challenge. That means that 90% of the supply increases must come from the yield and farming intensity improvements. We believe that such a staggering increase in the yield might be very difficult to achieve. One option would be to consider genetically modified organisms (GMOs). Changes In GMO Policies and Consumer Habits A major policy shift is occurring in EU in 2015 with a more accommodating approach towards the use of GMOs across the whole European Union . This will surely add more supply to the markets. However, the additional 3 billion middle class consumers will make both European consumers (over 500m) and farms look very small. The demand for several crop products will grow parabolically. The meat consumption is expected to double by 2050. Now, consider that producing 1 lbs of beef does not require 1 lbs of feeds. It requires as much as 5 lbs. For chicken this would be 2 lbs respectively. Consequently, Rogers Agricultural Commodity Index will have a very strong tailwind from the increased meat consumption. Sugar Might Become A Sweet Investment (click to enlarge) Figure 2. The iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (NYSEARCA: SGG ) and the iPath Dow Jones-UBS Coffee ETN (NYSEARCA: JO ) price. Chart: YCharts.com Sugar is cheaper today than it was in the ’70s. The current supply-demand balance is currently in a deficit and several price catalysts are emerging: New fuel policy in Brazil lifting gasoline prices – this will increase the demand for both ethanol and sugar. Indian sustained drought conditions. Too low sugar price – farmers might as well do nothing for the same close to zero earnings or transfer their cultivations over to something else. We believe that sugar will be pushed higher with these catalysts already in the short term. The flex-fuel cars’ ethanol usage in Brazil might even double in 2015 due to the new policy. Besides sugar we think that coffee is a good investment right now. We covered coffee and the iPath Pure Beta Coffee ETN (NYSEARCA: CAFE ) in an earlier exclusive Seeking Alpha article . Risks and Opportunities We believe that an unexpected breakthrough in genetically modified crops might be among the risk factors hindering the bull market in Rogers Agricultural Index. The recent months low inflation rates, felt globally, could also continue to press the commodity prices lower. Also a short dollar rally could push the prices lower. Rising agricultural prices would be advantageous for the farmers not earning a decent income these days in most producing countries. Through higher salaries and incomes these rural regions would start to prosper. The rising salaries and incomes in the producing countries would increase the inflation levels. Higher inflation would mean higher crop prices. This vicious circle might get stronger and stronger and support the next bull market in the agricultural commodities. Conclusion We are bullish on both Coffee and Sugar, and over a longer term RJA. As the world will count over 3 billion additional middle class consumers over the next two decades, we will see an unprecedented growth in the agricultural products’ demand. In parallel the arable land surface area is going to increase by less than 5%. The changing patterns in the climate continue to reduce the harvests even more frequently. We do not recommend our readers to buy a tractor or a pair of rubber boots. Following up the agricultural commodities prices could do it for the short term if the farmlands’ productivity increases will be sufficient. Disclaimer: Please do your own research prior to investing and taking investment decisions. This article is provided for informal purposes only and any information mentioned may change at any time without a notice. Please consult your investment advisor for finding a proper allocation for your portfolio that is adjusted with your risk levels and personal situation.