Companhia Paranaense de Energia (ELPC) 2017 Q3 法說會逐字稿

Good morning, and thank you for waiting. Welcome to the presentation of Companhia Paranaense de Energia Copel for the presentation of the results for the third quarter of 2017. (Operator Instructions)

Before proceeding, I would like to clarify that any statements made during this conference call involving Copel's business outlook for financial and operating forecasts and targets are mere beliefs and assumptions of the company's management and the information currently available. Forward-looking statements are not guarantees of performance, as they involve risks, uncertainties and assumptions given that they refer to future events and they are very dependent on circumstances that may or may not occur. The general economic conditions, industry conditions and other operating factors could come to affect the future performance of Copel and lead to results that are materially different from those expressed in such forward-looking statements.

Here with us today are Mr. Adriano Rudek de Moura, CFO and IR Officer; Mr. Fabio Malina Losso, Governance Officer, Risks and Compliance; Sergio Luiz Lamy, Director President for Copel Geracao e Transmissao; Mr. Antonio Justino Spinello, Director President of Copel Comercializacao; Mr. Dinorah Botto Portugal, Director of Copel Comercializacao; Acacio Massato Nakayama, also Director of Copel Distribuicao; Mauricio Dayan Arbetman from Copel Telecomunicacoes; Mr. Rafael Moura de Oliveira, CFO of Copel Telecomunicacoes. The presentation by the management of Copel can be followed through the website of the company, ir.copel.com.I would like to give the floor to Mr. Moura, CFO and IR Officer.

Good morning, everyone. I would like to thank you for your participation in this conference call. Initially and exceptionally, the presentation of the results of this quarter was delayed by a few days mainly due to issues related to the financial statements of a subsidiary of the company, an indirect subsidiary called Araucaria TPP as communicated to the market on November 14. It is in summary an investment that is still being assessed by the company with the support of independent experts. This task is not concluded, but we are doing all we can to finalize it as soon as possible and we will keep you informed. The expectation at [3.2% of ITR], we will -- you will be able to find additional information on this subject.

Now moving on to Slide 3, I would like to initially highlight the reversal of losses of BRL 75 million posted in the third quarter of 2016 with posting of net income of BRL 390 million, which is posted in this quarter. With those results, we already accumulated year-to-date a net income close to BRL 1 billion and it's still slightly lower than that of 2016 where the year-to-date net income in the same period of -- is BRL 1,058,000,000. This results stems from a combination of factors that we will elaborate more during this presentation. However, I would like to mention 2 extraordinary events that positively impacted the result in this quarter.

First of all, the adhesion to PERT, the special program for tax regularization stemming from an understanding with the Brazilian IRS in terms of taxation of CBA. And just to give you a brief history, in June 2016, the Brazilian IRS issued a new understanding to Cosit's Reply to Inquiry #101 and that's changed the taxation of CBA according to the accrual basis and no longer through cash basis with effect since December 2014. This understanding is supported by the amendment to the concession contracts in December 2017, that ensures that any residual balance from Sectorial Financial Assets and Liabilities will be indemnified at the end of the concession. And as a consequence, any impact from this adhesion in changes in the taxation regime from Sectorial Assets and Liabilities had a positive impact in net income of Copel Distribuicao of BRL 114 million this quarter. This impact did not affect the company's EBITDA and was also recognized in the income tax line and also the line of financial results.

The second extraordinary and relevant item that has positive effect in the quarter was the impairment reversal of some projects amounting to BRL 158 million. In this case, this amount had a direct impact on Copel GeT EBITDA, as we'll see further on. Thus, the operating performance measured by EBITDA of BRL 644 million, which is up by 48% when compared to the same period of 2016, also includes the positive impact of the impairment reversal of BRL 158 million that includes EBITDA of Copel Distribuicao as we received further on. I would also like to highlight growth in our operating -- consolidated revenue of 25%, which mainly reflects the growth of 5% in the grid market of Copel Distribuicao and the average adjustment of almost 6% applied to the tariffs of Copel Distribuicao as of June 24 of this year.

I would like to remind you that operating revenue in the third quarter of 2016 was negatively impacted by nonrecurring effect of BRL 206 million related to the remeasurement of RBSE. Operating costs and expenses were up by 16%, mainly reflecting higher costs with energy purchase due to higher GSF. That, on average, was 82% in the third quarter of 2016 going up 64% in the third quarter of 2017 and the higher PLD result price available was BRL 436 per megawatt hour. This quarter, an average of 112 megawatts were in the same quarter, almost 4x higher. So recently, there's impact comes from a drought hydrological imbalance in the country, the highest in many, many years.

So now moving on to Slide 4. It's clear to see now the performance of each business, where we will show EBITDA recorded per subsidiary. Starting with Copel GeT. Feel the most relevant results in all of our business, EBITDA was BRL 381 million, up by 76% vis-a-vis the third quarter of 2016. As we already mentioned, that there is extraordinary impact related to the reversal of impairment related to generation assets amounting to BRL 163 million mostly impacted by the reversal related to Araucaria TPP and the wind farms stemming from a discount rate reversal and also the assumptions related to the available energy for long-term sale.

In relation to Araucaria TPP, in October, we signed a new contract for gas purchase with Petrobras' contract is for the supply of 2 -- nearly 190,000 cubic meters a day that does not include the take or pay clause. With that, the plant is now available for the SIN of National Interconnected System as on October 14, when it is added to [ONS]. In terms of this contract, it's worth mentioning that on November 24, we filed an amendment to the contract that it aims at extending its effectiveness until December 31 of this year, and that also includes the possibility of presenting corporate collateral from the parent company as a guarantee for the payment of the contract. However, the impairment reversal was just not higher due to BRL 43 million of provision for Colider HPP operation. The start-up of the plant had been reviewed because recently the EPC contract had difficulties with the National elevation of equipment at the Brazilian [RRS] and it should start up in May. The second turbine, could start up in July and the third should start up in November 2018.

Another aspect that influence the performance of Copel, just was the like-for-like comparison due to the nonrecurring negative impact of BRL 206 million in the third quarter of 2016 related to the remeasurement of RBSE.

Now Copel Distribuicao posted an improvement of almost 43% of EBITDA vis-a-vis the third quarter of 2016, which is the equivalent to an increment of BRL 15 million and this mainly reflects the performance of the grid market. And the improvement in managerial cost and lower balance for provisions mainly related to allowance for doubtful account. Now in terms of consumption performance, consumption of energy and the concession of Copel Distribuicao. The economy of Parana was up by 1.6% in the first 6 months of 2016 mainly boosted by agribusiness and industry.

The industrial production in the state was up by 4.6% until September, which has highly contributed to the generation of jobs. Parana created 28,603 formal jobs from January to September of this year, according to the general registry of employees and unemployed and [casuals], recently published by the Ministry of [Labor], the best results in the last 3 years. And this rebound of the economy also brings about positive results to Copel. In the third quarter of this year, the grid market of Copel Distribuicao, as we mentioned before, was up 5% vis-a-vis the same period of 2016, whereas energy consumption in Brazil was up by only [0.4%]. And in the south of the country close to 4%, according to data published by EPE.

Now speaking about the reduction of costs in the [Distribuicao]. There was a reduction of BRL 14 million of provisions mainly PECLD whereas manageable costs of Copel Distribuicao excluding some estimated markets, provisions and reversals presented a reduction of about 1% and or accumulated inflation of 2.5% in the last 12 months.

Copel Distribuicao selling cost with personnel and managers presented growth of 1%, a lower performance considering the adjustment of 9.15% applied to salaries as of October 2016, and this is the result of a very rigorous discipline to reduce costs in all areas of the company, including a reduction of 228 employees due to a policy of not filling up vacancies.

In the first 9 months of 2017, Copel Distribuicao had an EBITDA of BRL 462 million. This result was much better than that posted in the same period the year before. Obviously, this didn't happen by chance because it reflects very strict improvement plan to improve profitability of the company, so that we can resume the regulatory levels as soon as possible. Copel Telecom on the other hand, posted growth of 32% in EBITDA in the third quarter and this is mainly due to the increase in the number of customers.

Now, moving on to Slide 5. In order to make a better comparison, we present the recurring EBITDA for subsidiary. That is we are excluding impact stemming from extraordinary items that we already mentioned. Thus, not including the effect of the impairment reversal amounting to BRL 163 million this quarter and the negative impact of BRL 206 million related to the remeasurement of RBSE in the third quarter of last year. GeT presented a reduction of 50% in EBITDA reaching BRL 219 million. And this mainly stems from higher cost with the purchase of energy, which went from BRL 12 million in the third quarter of 2016 to BRL 195 million this quarter. In addition to increases in cost with taxes for the use of the grid resulting from an -- the adjustment that occurred in July of this year.

However, the accumulated EBITDA, the recurring EBITDA of Copel GeT is over BRL 1.2 billion, only 36.5% lower than on the same period the year before and it continues to be the highest contribution in terms of EBITDA of Copel with 46% -- accounted for 46% of the total.

Again, I would like to reinstate the consistent improvement in the result of Copel Distribuicao. There's a growth in recurring EBITDA of almost 42% in the quarter and an improvement of over 24x in the year-to-date results with an increment of BRL 443 million being the second most important business of the company. In the case of Copel Telecom, we must also acknowledge the relevant increase in EBITDA, both in the quarter, year-to-date of 32% and 18% respectively, mainly supported by the growth in our customer base.

In summary, in like-for-like comparison, I think the main message is that recurring EBITDA had a significant improvement in Copel Distribuicao and Copel Telecom, both this quarter and year-to-date when compared to the same period of the previous year. And in the case of Copel GeT, EBITDA was negatively impacted due to the relevant increase in cost with the purchase of energy also impacted by the GSF and PLD, posting the worse level during the last few years, especially in this third quarter.

Just to give you an idea once again, the average GSF in the quarter was 64.2%, whereas in the same period of 2016, the average was 82.8%. In the case of the average PLD in the quarter of 2016, it was BRL 112, and this quarter BRL 436.

Year-to-date, this impact was diluted at Copel GeT , mainly due to the good performance in the first quarter, whereas in the contrary, GSF and PLD were very positive.

The bottom line is that consolidated EBITDA in the quarter was down 26% when compared to the same basis, the year before. However, it improved almost 24% year-to-date in recurring basis.

In the next page, next slide, you will see a summary of what we just said.

Moving to Page 7, here we can see in more detail the growth of operating revenue of 25% this third quarter, when compared to the same period of 2016, surpassing BRL 3.6 billion. In order to run a better comparison, I would once again remind you that the revenue of the third quarter of 2016 had a negative impact of the adjustment of BRL 206 million related to the remeasurement of RBSE. However, excluding this effect, we will have an increase in revenue in this quarter of 17%.

Now elaborating a little bit further on the impact of revenue, let's talk about the notice of revenue of energy to distributors posted growth of 12%. It basically explained by a growth of 0.8% in the volume of energy sold to and consumers and the readjustment apply to Copel Distribuicao tariffs as of June 24 this year, and which resulted in about 10%.

Now sales to consumers. We already have [Copel Distribuicao] sales to Copel Distribuicao. This is the first full year of operations at the subsidiary that this quarter alone posted revenues of BRL 216 million. Now, availability of the network, posted an increase of 12% and that was impacted by a growth of almost 5% in the grid market by the distributor, and also the tariff adjustments by -- of Copel that resulted in an adjustment of TUSD of -- 85% as of June 24, 2017. Now, Telecom's revenue was up by 29% and this was like the expansion of the customer base of Copel Telecom, as I mentioned before. Now the acknowledgment of the CVA line reflects mainly higher costs with energy purchases by Copel Distribuicao impacted by GSF and PLD in the period. And finally, the reduction of 33% in other operating revenues mainly reflect lower revenues of construction given that some assets contributed to the [decline] in the third quarter of 2016 and they started up in the last 12 months.

Next slide on Page 8. We give you more details on costs and operating expenses that reached BRL 3.2 billion in the third quarter of 2017, up by 16% when compared to the same period of 2016. However, we would like to remind you that in this quarter, we acknowledge a BRL 158 million in impairment reversals, partially offsetting the other increases. Excluding this impact, the increase in profits would be around 22%, mainly explained by higher costs with the purchase of energy. This cost with the purchase of energy total BRL 2 billion, up by BRL 784 million in comparison to the same quarter of 2016.

And as I said before, GeT alone had an increase of BRL 183 million, with [cost] -- with the purchase of energy. But with the distributor, it is worth mentioning that the cost related to GSF are part of the Sectorial Financial Assets and Liabilities line as I said before. There was a reduction of about 15% in costs with the use of network, due to the increase in the spot price throughout 2017, partially offset by higher costs with services -- service cost in the system, due to higher thermal dispatch and there the readjustments in the tariffs of the transmission line or Itaipu.

In the case of provisions and reversals, excluding the reversion of the impairment of BRL 158 million, there would have been a reduction of BRL 36 million, equivalent to 38% and this mainly reflects a lower provisions in PECLD and labor issues. Now, manageable costs had a stable flat performance in comparison to the third quarter of 2016, despite salary adjustments of about 9.15% and other adjustments that we will elaborate further in the coming slides.

Now moving on to Slide 9. It is possible to notice that even with the adjustment of 9.15% applied to salaries in October 2016 and costs of the personnel and managers and excluding provisions related to indemnifications to retirees and other costs, even though all that, we still posted a growth of almost 2% vis-a-vis the third quarter of 2016. This performance reflects among other measures is the policy adopted by the company of not filling out vacancies. This can be noted through the number of people employed by the company. In September 2016, our headcount was 8,563 employees. Whereas, this year, by the end of September, we had 8,418 employees, a reduction of 145 people in 12 months. And still talking about costs of personnel. The total cost was BRL 353 million this quarter, and currently there are 170 people who adhere to the voluntary redundancy program.

Only in the third quarter alone there was 67 people that adhered to the program with an additional cost of approximately BRL 12 million. Moreover, I would like to say that salaries did not have an actual increase in 2016, and the readjustment applied is up until but this year was just reflecting the INPC of September that reached 1.63%. Cost with third-party services and others presented a reduction, mainly reflecting the review of all of the contracts that we reviewed recently. The manageable costs were down by 0.2%. However, considering that the inflation in the period of 2.5%, this cost would present an actual drop -- real drop of 2.7%.

Another important point that should be highlighted refers to the control of manageable cost that the management carried out in comparison to the budget forecast. There was a reduction of over [BRL 240 million] in the first 9 months of 2017 and a budget forecast of BRL 2.3 billion for PMSO.

On Slide 10, here I would like to highlight our leverage level where we can see a slight improvement vis-a-vis the previous quarter, now slightly below 4x. However, there is still topics that may require our attention. I would like to remind you that this increase in net debt over EBITDA ratio of the company is a consequence of a more aggressive strategy of investments in the last [2] years. It should improve organically with the start-up of these projects starting next year. We understand that the additional cash generation of these new projects had the -- as well as the combination of several initiatives. Some are already deployed. Healthy reduction of cost, the fiscal and financial schedule of some projects should also reflect in an improvement of leverage.

And as we are talking about the appreciation of the asset divestment, I would like to say that in the -- last Wednesday, we reported to -- we recorded a material fact about the participation of [Copel] as selling the public offering of a follow on of unit of SANEPAR. Initially it will be [6.4 million] units. We are still talking about the leverage level of the company. We are very focused in reducing this leverage and still in keeping with the charges of the covenants of at the most 3.5x. I like to emphasis that we continue pursuing a very rigorous financial discipline to evaluate new investment as well as looking at all -- doing all we can to focus on the projects that we have underway to comply with all of the contractual demands and terms. So as to preserve the flow of resources, which are already posted for such projects.

Before going to the Q&A session, I would like to say that during the Summit of Leaders of the [Global Pact] conducted in New York, last September 22, Copel was chosen by the UN to coordinate the office of the Global Pact for Cities Programme in the South Region of Brazil. This proposal involves the government, company, civil society and universities to develop innovative projects and also to look for solutions for several urban challenges. Copel reinstated its commitment towards the development of society and business in a sustainable manner. Moreover, more recently, we launched a public offering to attract start-ups interested to engage in innovative partnership in technological areas related to their areas of operation. So as to look for projects, products, solutions and services that can add value to the businesses of the company.

In exchange, the start-up selected, we will see some (inaudible) to deploy products, solutions or services in the Copel environment in addition to contacts and exposure to partners. I must also say that for the fifth time in a row in the last 7 years, Copel Distribuicao was elected the best distributing company of energy in Latin America.

The announcement was made during the international seminar promoted by the Commission for Integration of Regional Energy, CIER in Montevideo, in Uruguay. And in addition to that, Copel was also recognized by customers as a benchmark in information and communication and social responsibility. This acknowledgment stems from our investments to improve the quality of the energy we provide to customers and the highlight goes to a program called Mais Clic Rural in August recently did the first phase of the project that involves the new technology that will be utilized to reduce the shutting of some -- in some rural areas of the entire state of Parana. In the first phase, we inserted 916 recloseres. And for each installed equipment, on average, we reclose some equipment, especially in end services and this has the purpose of optimizing maintenance and services of our technical teams of Copel that have to be relocated.

So this is all of the highlights and now we're available to take your questions.

Thank you very much. And now, we will initiate the Q&A session. (Operator Instructions) Our first question from Marcelo Sa from UBS.

I have 2 questions. The first question is about transmission. There was a legal barrier imposed by Aneel saying that you could not participate in transmission auctions and now this has -- this ban has been released. So my question is, whether you're still interested in participating in the auction that will take place this December, considering the facts that now the rainfall came again, it's beginning to rain again. And so, considering that the rainfall will be within the average is probably that GSF will be lower and maybe the spot price should be lower next year. What is your view about that considering that you'll have more than 30% of energy already contracted for 2018?

Marcelo, and thank you for your question. Here is Sergio Luiz Lamy from Copel Geracao e Transmissao. To answer your first question about Copel Geracao e Transmissao's participation in the next auction of new transmission concession, in fact Aneel recognized their mistake once they impose that legal barrier, so that Copel could not participate in the auction. So once that case has been solved, I can assure you that Copel will participate in the next transmission auction. Very much in keeping with its strategic objectives. Now about your second question. We said that Copel Geracao e Transmissao would be in the range of 30% of energy not contracted for 2018. In fact, this number -- it's a pure figure for energy contracts terminated and does not reveal anything considering the start-up of generation projects. In fact, if we take into account, the schedule of the new start-ups, I may tell you that we have been preparing ourselves to participate in this new auction of 8 plus 1 plus or 8 minus 1 minus 2 in the auction of 2019 and '20.

Looking at all of these aspects, we believe that our contract level would be about 85% of contracts for 2018. So the energy contract terminated be around 20%, which is absolutely in keeping with our projection for PLD amount and GSF amounts for the coming years. I could even say that we could state that there is no expectation of having a very favorable GSF or very favorable spot price for 2018. It will be -- I mean, our expectation is that certainly our position will be much better than that of 2017, but we still believe that the amounts will be reasonably high in 2018. Therefore, unless, of course and I'm saying that considering the fact that we will have a good level of rainfall in the Southeast region still in line with the long-term average and this long-term average will not be able to recover the reservoirs, because in order to recover the levels of our reservoirs, we would need a much higher rainfall in the long run. As we do not have that expectation, so certainly in 2018, we will still have some reasonable levels of PLD. Therefore, we believe that this level of contract is still safe and comfortable and it will give us better results further down the line.

Let me just summarize to see whether I understood it correctly. So today, you have 30% of energy contracts terminated, then there will be an auction at the end of the year and then you could probably reduce that number, so then your target would be to have next year 15% of contracts terminated or today, you are more -- I mean, you have more contracts terminated. And if the rainfall is still within the current average, it wouldn't be enough to recover the reservoirs?

Yes.

The PLD projection for next year is around BRL 150 per megawatt hours. We are continuing very optimistic projection. But if you consider the platform, there is a projection of around BRL 185 per megawatt hours. Copel's projection is an average PLD of BRL 200 per megawatt hour of -- for our average PLD. Unless, we have a much higher rainfall level, especially now in the Southeast region? And I still have another question related to transmission. Now, you're participating in the auction. Your leverage level is still high. As you increase your net debt in the last quarter and that's why -- I mean, your EBITDA was up, so your net debt over EBITDA ratio was down a bit. It was not due to cash generation and accordingly, do you think that in order to participate in transmission, you will start with a final offering?

I can probably ask our Financial Officer to answer that question. The major disbursements for new projects will occur in the next few years. So our cash level is very much aligned, so we don't see any problems in that area.

Our next question comes from (inaudible) from HSBC.

We saw that the equity income line had a weak result, especially because of the low performance of the transmission projects. I would like to elaborate further on what happened there or whether that was something that was a one-off thing? And my second question is about the divestment plan. We notice that you will not participate in the secondary offering of SANEPAR, but in addition to that, you will participate. What else do you intend to do? Do you intend to sell more assets?

Okay, thank you for your questions and once again this is Sergio Luiz Lamy. I will answer your first question about our equity income, particularly related to the [Geracao e Transmissao and generation] transmission. And then on your second question related to divestment plans, I will refer your question to our director for new businesses, who will answer that question. Now, in terms of equity income of [Geracao e Transmissao], the issue is very simple, because it was heavily impacted by the tariff review of Aneel in -- more recently. The main reason behind this performance is that tariff review. And now, I'll give the floor to (inaudible).

So, yes, we already have a preliminary study on divestments. And as of next year, we intend to initiate that plan initiating in January.

(Operator Instructions) Our next question is (inaudible) from HSBC.

I just have one more question. Still on the energy auctions. Do you think there will be great demand from distributors and also I'd like to understand your view about competition?

Once again, this is Sergio Luiz Lamy from Copel Geracao e Transmissao. Once again, thank you for your question. I think, our expectation is that there will be some demand. I cannot say whether there will be a lot of demand, but there will be some demand. And there will probably be a reasonable level of competition.

(Operator Instructions) As there are no further questions from the participants, we will now give the floor back to the company for their final remarks.

We would like to conclude this conference call. Thanking you very much for participating. Thank you and have a very good weekend.

Ladies and gentlemen, Copel's conference call on the results for the third quarter 2017 is now concluded. Thank you very much.