Companhia Paranaense de Energia (ELPC) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to this conference call to present the third quarter 2016 results of Copel (Companhia Paranaense de Energia). We would like to inform you that all participants will be in a listen-only mode during the call. Later, we will move into Q&A session when further instructions will be given. (Operator Instructions)

Before we proceed, let me mention that forward-looking statements made during this call regarding Copel's business, projections, operating and financial targets are based on beliefs and assumptions of the Company's management and also on information currently available to the Company. They involve risks, uncertainties and assumptions, because they relate to future results, and therefore depend on circumstances that might or might not occur. General economic factors and other operating factors might influence the future of Copel and lead to results which differ materially from those expressed in these forward-looking statements.

With us today are Luiz Fernando Leone Vianna, the Company's CEO; Mr. Luiz Eduardo da Veiga Sebastiani, CFO and Investor Relations; Mr. Jonel Nazareno Iurk, Business Development Officer; Mr. Gilberto Mendes Fernandes, Corporate Management Officer; Mr. Antonio Sergio de Souza Guetter, CEO of Copel Distribuicao; Mr. Sergio Luiz Lamy, Copel Geracao e Transmissao; Mr. Ricardo Goldani Dosso, CEO of Copel Renovaveis; and Mr. Franklin Kelly Miguel, CEO of Copel Comercializacao.

The presentation, which will be delivered by Copel's management may be followed on the Company's website, www. copel.com/ri.

Now we would like to ask Mr. Luiz Fernando Vianna, the Company's CEO, to take the floor. You may proceed.

Good afternoon and welcome to the third quarter Copel earnings conference call. I would like to thank you very much just for being here. It's always a pleasure to talk to you.

I would like to start our conversation talking a little bit about the operating highlights of the Company. This was the first quarter of Copel Distribuicao with the effects of the results of the fourth tariff cycle review. Although the downturn in the consumption of energy had negatively impacted the result of the distribution company, the remuneration of the new asset base allowed the subsidiary EBITDA to come back to positive figures. The result could have been better if it were not for the continuous crisis in the distribution segment, which suffers from the energy consumption reduction and inflation effects.

In transition segment, the highlights are the re-measuring of the cash flow estimate, which refer to the RBSE. As you already know, the MME through the (technical difficulty) 2016, published in April this year, determined the integration of RBSE, based on a regulatory remuneration and updating of asset values since 2012 and net payment to the indemnity through the RAP [as from the] tariff process of 2017. Based on the best estimates available at that moment, the Company posted a positive effect of BRL978 million in the operating revenue of the second quarter. However, based on Aneel's inspection notes that signaled that the lesser amount would be received than that estimated in the second quarter of 2016, we remeasured the cash flow which contains RBSE, which has led to a reduction of BRL206 million in the asset balance, reflecting on the earnings of the third quarter, as we have shown in slide 3. It's important to mention that Aneel has still not yet rectified the (technical difficulty) of the report and the values recognized based on the best current estimates of management. Besides that we must remember that the improvement of the regulation concerning the calculation of the cost of capital to be added to the RAP, or transmission utility, is put up for public hearing.

On slide 4, we would like to talk a little bit more about our investment program. 2016 has been a year of challenges, but with a lot of work and good reserve we are achieving our objective and improving our Company. We have already carried out about 84% of the CapEx projected for 2016, totaling more than BRL2.7 billion in investments until September of this year. A very important part of this investment was used for finishing some projects, like the small hydroelectric plant of Guaraciaba, which received its operating license, which was granted on August 30, allowing the commercial operation of more than 600 kilometers of transmission lines and a substation, adding a RAP of BRL49 million for Copel. Another project was the conclusion of a transmission line of 967 kilometers, which belong to the Paranaiba plant, which is awaiting the issuing of the operating profit to begin commercial operation. And we believe that this should happen this month, adding [BRL32 million] to Copel's RAP.

Looking towards the next year, in 2017, we foresee the conclusion of another four transmission projects, which altogether will bring about an increase of BRL195 million to Copel's wrap. In the Generation segment, we will conclude the Colider hydroelectric plant and the first phase of the Cutia wind farm, which includes 7 of the 13 wind farms, which make up the complex, and it will come into operation in October 2017, adding to Copel's portfolio another 632 megawatts of installed capacity.

Before we ask CFO to talk about the figures of the third quarter, I would like to talk about Copel's anniversary. On the last October 26, our Company celebrated its 62nd anniversary, and celebrations once again came in the form of recognition. This year, we have received several awards, among which I might mention the ABRADEE prize for the best energy distributor in Brazil according to the client evaluation. This is the fifth time in the last six years that Copel Distribuicao has received this prize. Copel Distribuicao also was elected for the fourth time in the last six years as the best distributor of Latin America. The award is promoted by the Comision de Integracion Energetica Regional, CIER, main entity for the Continent's electric power sector.

And also, our distributor won the transparency award in 2016 (technical difficulty) by the National Association of Finance Administration and Accounting Executives, ANEFAC. After 14 years, Copel has come back to the ranking, which recognize the quality and transparency in accounting information rended to the market, and being the only state-owned company among the five companies of the electric sector awarded in the 20th edition.

Now I'd like to ask Sebastiani, our CFO and Investor Relations, to take us forward, and he will go into further detail about the period's earnings.

Thank you, Mr. Vianna. Good afternoon. And once again I would like to thank you all for being here. Good afternoon. And I would like to thank you for being at this call.

As President Vianna has already said, some non-recurring events affected the result of the third quarter and we will talk about that on slide 5 and the following ones. In the line of operating revenues, we may mention three facts which contributed to the downturn of 10% compared to the third quarter 2015. The supply to end customers, which show the reduction of 24%, totaled about BRL1 billion, was impacted by the result of the fourth cycle of tariff review of Copel Distribuicao, which reduced tariffs about 13% since June 24, and by the reduction of 9% of the captive market, a reflection mainly of the migration of customers to the free market.

The electric power sales to distributors totaled BRL684 million and showed a drop of 9%, which stems from the non-activation of the Araucaria thermal plant, partially offset by the sale of energy on the short-term, marketed by Copel Geracao e Transmissao.

Revenue from the use of the power grid was BRL503 million, a downturn of 22% regarding the third quarter 2015, a consequence of the impact of BRL206 million, which refers to the re-measuring of cash flow of assets regarding RBSE, as our CEO has said. The other item of operating revenues made up by the telecom revenue, gas and other distribution showed a growth of 16%, reflecting mainly the increase of 16% in Copel Telecom's revenue, due to an expansion of [clients -- of] customer base.

The next slide 6, we detail the costs and operating expenses, which were BRL2.7 billion in the third quarter of 2016, 14% under to the same period of 2015, which is a sign greatly to the reduction of 19% on the costs of the purchase of energy, reflects (inaudible) energy contracts, which were substituted by a contract of energy which come from the quota system and the reduction in the Itaipu tariff. The charges with the use of the grid showed a drop of 6% due to the later expenses with charges from the reserve energy.

The manageable costs went up 5% in the third quarter of this year and reflect more expenditures with personnel and third-party services, offset by the loss reduction in the switching off and sale of assets when compared to the third quarter 2015. The line of provisions and reversion totaled BRL108 million and was influenced by the booking of BRL49 million, which refer to administrative and labor litigation; BRL34 million tied to loan loss provisions and BRL15 million, which refer to the loss of the reduction of the impairment of the Consorcio Tapajos.

Slide 7 show that EBITDA was [14.3%] year-to-date compared to the books in the same period last year, totaling BRL428 million in the third quarter of this year, with a margin of 15% on operating revenues. The growth is broadly explained by reduced cost with GSF and the result of the fourth cycle of tariff [due to] Copel Distribuicao. Cash generation of Copel Generation and Transmission accounted for 51% of the EBITDA. Consolidated and Copel Distribuicao 21% with Copel Telecom 7%, and other companies of the group accounted for 21% and the major contribution in as well.

Slide 8 shows you the net profit, consolidated of Copel. In the third quarter, the Company's result was negative BRL75 million, compared to a net profit of BRL91 million registered in the same period last year. This result was impacted by greater expenses, financial expenses, a reflection of a greater balance of financing and debentures, by the provision of BRL122 million for the non-levy and the social contribution deferred on assets and regulatory (technical difficulty) Copel Distribuicao. And analyzing the result of subsidiaries, Copel Generation and Transmission closed the period with a profit of BRL45 million, Copel Distribuicao a loss of BRL127 million, and Copel Telecom, a profit of BRL13 million. It is important to say that year-to-date the Company has booked a net profit of more than BRL1 billion, which is a growth of 23% vis-a-vis the same period in 2015.

Before we go on to the questions, I would like to remark that we are concluding the development of the new website of IR with investors, which should go live in the next few days. The reformatting of this website had as an objective to improve one of the known communication channels of the Company with investors, capital markets professionals, and the public in general with a more modern and simplified layout and an easier menu to navigate. The new website shows a more efficient organization and there is more quality and agility for the users, reinforcing the commitment of the Company regarding transparency and access.

So these were our highlights, and we are now available for questions. Thank you very much.

(Operator Instructions) (inaudible).

I would like to know if there's anything new regarding the (inaudible) company and the main point of the balance sheet.

I'm sorry (inaudible), I did not understand-- we couldn't hear properly.

Is there anything new regarding your guidance, which were [off] the balance sheet, like the fiscal question of COFIN, which you have and any other item off the balance sheet, what the impact was, if Copel has acted more strongly in the last trading [session] I'd like to know if there is any novelty?

I would like to ask the Superintendent of accounting of the Company to take the floor.

We did have some challenges in the half of the year, as you mentioned (inaudible). And regarding (inaudible) we chose the negotiations. They were responsible and you can see in the [continued] keynotes about [17 million] shares classified as profit and loss and we restated [BRL130 million] which (inaudible) accounts receivable about [BRL15 million]. So this is the communication regarding the subject. I'd say that it's one of the main events of the quarter which influenced our contingency accounts. Another example is COFIN. It continues. We had last quarter a significant reduction and we have the second running here in (inaudible). We also have got on with this and there would be a possibility of reversion still this year. We should have good news regarding the second [suit]. One event (inaudible) in this next quarter was a provision (inaudible) activation of the deferred income tax. This is a provision and we are still stressing internally with consultants and we should go after these credits again, but they negatively impacted our performance in the period.

Carolina Carneiro, Santander.

I have two questions. The first, do you have any updates on the commercialization of energy of the generator of free energy 2017-2018? Have you [cleared] new contracts? And second, the cost performance. You said that you were going to hire a consultancy company to evaluate provisions (inaudible) and predicting a cost reduction. There has been an improvement it seems of cost, but they are still high, especially in the distributing company. So could you give us some novelties regarding the better performance of the distribution company?

This is the CEO of [Copel Distribuicao]. Please I would like to call on Sergio Luiz Lamy from Copel Generation and Transmission regarding your question.

About the level of contracts or new contracts regarding generation and transmission, today and the last sale auctions which were held, I think 82% of contracted energy in our portfolio and for 2018, 61% contracted, and 2019 51%. This is not our closing position yet for the year, because we have already published for the next week (inaudible) auction of sale of energy of Copel Geracao e Transmissao, where the prospect will close the objective for 2017 and also includes a bit more the level of contracts for the years of 2018 and 2019 and 2020. I hope that I have answered your question.

Can we work with the same price level [150 and 160] or has there been any changes in the price level?

Price level, it's gone up a little bit Carolina, the price level for this auction. Unfortunately, I do not have the updated material, but it's not exactly this value. It's more -- let's say about 15% above the value that you mentioned

Carolina regarding your other question, your second question regarding costs, it's not just mere confidence, but an important coincidence, today was the first meeting of the cost management coordinated by the CFO, demanding a joint operation and coordination of all subsidiaries, identifying good practices in the different subsidiaries, and if these best practices can filter down through all the Copal group of companies, so we have identified very important practices with cost reduction, cutting of headcount, reducing the fleet of Copel's distribution, which transfer these practices to Geracao e Transmissao, in the same way Geracao e Transmissao transfers to other subsidiaries of the Group, but a job coordinated under the coordination of the CEO of Copel holding company to be more immediate and practical results regarding cost reduction. So our main objective is to reduce costs, maintaining our system as it is with quality, which is so important to Copel brand and better quality. And now we will have also a brand of cost reduction. And your third question, I will ask the Copel Distribuicao CEO to take the floor, Sergio Guetter, who is going to talk about that.

Hello Carolina, this is Antonio Guetter. Regarding costs and cost reduction, the effort we are making to avoid the crisis, which affected us, the economic crisis. But we have had been very strong in our actions and we had the next level of [PAT] in the year. So we have already passed the inflection on the curve and we are improving. And the allowance for loan losses, we have covered that. And we had unexpected costs that even with the problem of [Oyi], we managed to get a much better loan loss provision. And the provision are being tracked by the management, so to say, because these are the two indicators that's impacted our business. The loan loss provision and judicial action. One of our main banners is that our cost reduction, especially on the distributor company, because it has to be an efficient cost management to reduce the regulatory amount. Thank you.

Vinicius Canheu, Credit Suisse.

We have seen in the quarter figures and volumes that weren't very high at all and you have mentioned also that there was a problem with the temperature, the weather. So anything that you can project for the quarter or for the half year? This weakness in the third quarter, will it continue or will there be any profit?

I will like to ask Sergio Guetter from Copel Distribuicao.

I think, as I have said in the previous question, we have been through a difficult time. Our markets are reacting, and level show that we have passed the worst recession, hence weakening is slowing down. So the results have improved. The tariff review that was made in the middle of the year, we are now reaping the benefits, almost the double of transmission and distribution, which doubles our remuneration. So I think with the trend the numbers are showing a very good fourth quarter.

Can you give me an amount?

No. Unfortunately, I cannot give you the quantities of data. I can just extrapolate the market, which is developing. We had a drop in the first half of the year, but it recovered in the second half of the year, and the recovery (technical difficulty). And this market reversion is making things more optimistic over the next -- beginning in the first half year.

(Operator Instructions) Pedro Manfredini, Itau BBA.

I have two questions. First, regarding recurrent investments in the distribution company, and you have already got a (inaudible) we had a review in June. So, there will be a recurring CapEx in the distributor in the next year or two years. I'm also asking this, because we analyze the EBITDA of the last quarter, we will come to an EBITDA with a profit of [BRL400 million] in the year. We have a CapEx, more than BRL600 million. So are you going to equate the CapEx to know what the generation of EBITDA of the Company will be in the next two years? And also transmission. Copel just recently had some transmission projects that were not very capable -- the sectors weren't very capable, now that they are -- we have had some new entrants in the auction. Then what about Copel? Can we expect 2017 with the conclusion of several projects? Can we once again see Copel coming to the -- or arriving in the same amount?

Mr. Pedro, I would like to talk about Copel Transmissao. The distributors have invested significantly in the last [few] years to return to quality and strengthen our grid where we need it. Idea (inaudible) the renewal of the concession is to continue to invest up to the level Guetter already mentioned and our objective is not only to expand our grid, but also modernize those grids. Today, the distribution network has to be modernized and we need a lot of intelligence built in and we have discussed this theme a lot.

This is Sergio from Copel Geracao e Transmissao. Regarding your question of Copel's situation in transmission auction, in fact, Copel in the past has shown strong appetite for transmission auctions, and at a time when the returns were not all that favorable. But we know that the situation now is more favorable, it's much better, and this does not reduce at all Copel's appetite. In the one before last auction, we won a large lot of transmission of line consultation here in the State of Parana and Santa Catarina. We just did not go to this last auction for a strategic reason, and the strategic reason is considering the projects could all come up during the next auction. So, I could say to you that we are foreseeing better opportunity, much more aligned to our strategic ideas and in the next auctions, which will be occurring next year.

Perhaps just a follow-up. Historically you have partners in these auctions. In 2017, will Copel come and make a partner, or will it be the same partner that you had in the last two quarters? And, anybody contracted to do the project if Copel should win any of the lot further down the road?

Okay, Pedro, I would say that we are still studying the lots. We already have information of the lots that will be up for auction in the first half of the year. We don't have any information -- much information about the second, but at least the first we do. And we are studying our partners, but we have nothing cleared it. There are several possibilities, which will materialize in the beginning of next year. I would say that also completing answering your question, we are not yet closed regarding the (inaudible) or with partners. Generally, we have a mix, depending on some lots, the auction starts with the bidding of Copel alone and then depending on the lots a partner joins us. So all these alternatives are up for analysis and I would think that maybe in February also we will have this program mapped up for the next auction, which has been published by (inaudible) of energy for March of next year. Thank you.

(inaudible), HSBC.

We think about (inaudible) are you working with any effective financing and how? And what about revenue for the project -- or what about cost reduction? And a more strategic question to Mr. Vianna. What about the organic growth for generation, transmission or even distribution? What makes sense to Copel at this moment? And you said you don't have a level of debt as much as your competitors.

Regarding the level of indebtedness, we are already alert to the problem. We have a good eye on covenants and Copel, when it goes beyond a certain level of commitment in leverage, which is significant positive for the company, we also have an expectation of improved revenues, because of the assets which are coming into operation, will it come in this year or beginning of next year, which will reduce this competitive commitment of debt over revenue. And now to the cost program, we want to increase our investment capacity with equity or maintaining our leverage standard, and they are down at the -- we are at the moment the highest level of the deleverage and there will be a drop because of the revenues that we are expecting and cost reduction with the results that we will begin to have in the first months of next year we feel. So this is a daily job. So keep an eye on revenue and this is influenced by the economic scenario, which brings the interesting opportunities to Brazil, slight inflection here on the curve coming from recession to stability and growth. So, I think we have an interesting prospect for next year, but it's deemed to call a competitive analysis of the level of debt, increasing revenue and reducing costs.

What it would be? About 2.5 times the net debt over EBITDA, or do you think that's too much?

That's challenging. It's something very complex, but we work in levels below what we are feeling, we'll work within our comfort level. So, if the Company (inaudible) something crops up a prospected investment with important returns like (inaudible) CEO mentioned in the transmission sector, we will have a leverage to make those investments and also the necessary investments for Copel Distribution. So, we have to have leeway in our debt level, so that at the right moment we can use the leverage under favorable conditions. At the moment, it is not the most favorable time for funding, but when adequate -- have our funding connected to an investment plan.

Regarding our investment policy, this is Vianna Luiz speaking. According to what has already been mentioned, we are prioritizing new investments and managing -- investments in the Group that we are analyzing generation, transmission and operations. But we are prioritizing in greenfield investments.

(Operator Instructions) If there are no more questions, we would like to ask the Company for its final remarks.

We wish to once again thank you for being present in our call, and we hope to have you back next quarter. And wish you all a very good week.

Ladies and gentlemen, Copel's call on the third quarter 2016 earnings is closed. Thank you very much and have a good afternoon.