Companhia Paranaense de Energia (ELPC) 2018 Q1 法說會逐字稿

Good morning, and thank you for waiting.

Welcome to Companhia Paranaense de Energia Copel's Conference Call to present the first quarter of 2018 results.

(Operator Instructions)

Before proceeding, we would like to clarify that forward-looking statements that might be made during this call related to Copel's business perspectives, operating and financial projections and targets are beliefs and assumptions of the company's management as well as information currently available.

Forward-looking statements are not guarantees of performance.

They involve risks, uncertainties and assumptions as they refer to future events and, therefore, they depend on circumstances that may or may not occur.

General economic conditions, the industry conditions and other operating factors may affect the future performance of Copel and may lead to results that differ materially from those expressed in such forward-looking statements.

In this call, we have the presence of Mr. Jonel Nazareno Iurk, CEO of Copel; Mr. Adriano Rudek de Moura, CFO and Investor Relations Officer; Mrs.

Ana Letícia Feller, Corporate Management Officer; Mr. Harry Françóia Júnior, Legal and Institutional Relations Officer; Mr. José Marques Filho, Business Development Officer; Mr. Vicente Loiácono Neto, Governance, Risk and Compliance Officer; Mr. Sergio Luiz Lamy, CEO of Copel GeT; Mr. Antônio Sergio de Souza Guetter, CEO of Copel Distribuição; Mr. Adir Hannouche, CEO of Copel Telecom; and Mr. Antônio Justino Spinello, CEO of Copel Comercialização.

The presentation that will be made by Copel's management may be followed at the company's website, ir.copel.com.

Now we turn the floor to Mr. Jonel Iurk.

Good morning, everybody.

I thank you very much for your participation in our call.

A short while ago, we had the opportunity to talk about the results of the last quarter of 2017, which had been filed on the last April 12 with a reservation by the independent auditor, vis-à-vis the comparative balances related to the 2016.

We will get into more details during the presentation, but I would like to mention already that last Tuesday, we have filed with the CVM the restatement of the financial statements already without the statement or -- and the opinion of the results of the first quarter also do not include any reservations whatsoever.

Just to emphasize a notice that we made to the market last week about the postponement of our general shareholders' meeting previously scheduled for May 15, 2018, due to the aforementioned restatement of our financial statement of 2017.

The same is rescheduled for June 15, 2018.

Now talking about the first quarter, as we said on Slide #3, we see that the adjusted EBITDA of BRL 863 million is in line with our expectations and even slightly better than the adjusted EBITDA of the same period last year and Moura will show you in more detail this conciliation.

And the other thing that I would like to highlight is the cash generated by the operating activities of approximately BRL 944 million, a 37% improvement vis-à-vis the same period in 2017 in terms of investment.

As we have been emphasizing, our focus is to conclude the projects already underway as soon as possible and we believe that we are on the right track as we can see in the investments in the quarter that totaled BRL 633 million, most of that refers to projects that are about to be concluded, such as Colíder, Baixo Iguaçu and the Cutia Wind complex.

Besides, our funding plan is adjusted to meet our level of investment this year as well as the payment of short-term debt maturities.

As a consequence, we have just concluded last week another funding operation of BRL 600 million, accumulated BRL 1.2 billion since the beginning of the year and another highlight of the quarter is the Encouraged Retirement Program, as we said in our last talk, the PDI, as we call it, was enforced since October 2013 and it was closed in March 2018.

And the outlook for the closing of the program drove a large number of enrollment in the first quarter.

585 people enrolled in this PDI, as we call it.

So with a posting of BRL 91 million as provision for indemnification, which impacted the cost in the quarter.

But generating a potential savings of BRL 162 million per year as of 2019, should these people decide to leave the company by the end of this year.

Besides, it is with great pleasure that I introduce the new members of the Executive Board: Mr. Vicente Loiácono Neto, Governance, Risk and Compliance Officer; and Mrs.

Ana Letícia Feller, Corporate Management Officer.

Mr. Loiácono is a lawyer and career member of the company.

In the last 7 years, he held many important positions in Copel, which I would like to mention that he was an assistant to the Legal and Institution Relations Department and assistant of the Corporate Management Area, Manager of the Regulatory Area of Copel Distribuição.

And since March '17, he was an assistant to the Sales Office.

Mrs.

Ana Letícia Feller is also a lawyer and she has been with Copel for 16 years over her career in the company.

She held important positions, amongst which she was the Coordinator of the Permanent Compensation Committee, coordinator of the Corporate Management Area; Superintendent of Human Resources, member of the Board of Ethical Orientation and recently she was assistant to the Corporate Management Area.

And the appointment of both reinforces our policy of having career people in strategic positions in the company and I am sure that they will contribute even more to a management focused on sustainable development, and I would like to reaffirm our commitment with the continuity of a transparent and result-oriented management in order to further strengthen the position of Copel in the markets where we operate, always aiming at a long-term sustainable growth and with the dedication of all this commitment is being complied with.

And lastly, I would like to mention that according to what we have clarified to the market in this notice on May 11, referring to the news published by the media in last few days and that mentions Copel as the object of possible negotiations between representatives of Paraná state and Contern Con-strucoes e Comercio Ltda.

in 2014 related to the acquisition of 6 plants of the Araucária Thermoelectric Complex in Brazil.

I would like to make it clear that we have no knowledge whatsoever of any requirement recommendation received by -- from the government of Paraná or any public agency for the acquisition of any of the plants of the Araucária Thermoelectric Complex.

And we reaffirm that the company has independent management and autonomy in decision-making, which are consistent with the protocols of government inherent to the regulation of this electric sector of the CDM amongst other norms and policies that are applicable.

As we have explained, the Araucária Thermoelectric Complex was an alliance together with another 31 projects as an asset that could maybe be invested in the rate of the invitation to bid 003 of March 5, 2012, with the objective of looking for opportunities in businesses in the energy array.

However, none of the projects included in this invitation to bid was the objects of investment by Copel because they did not fit the technical, regulatory or financial criteria established by the company.

Lastly, we would like to inform that Mr. Deonilson Roldo, mentioned in the news, is no longer the Corporate Management Officer, a position that he held between April 12 and May 11, 2018.

Now going to Slide #4.

We can see that although timid economic recovery already has a positive impact on energy consumption with the grid market of Copel Distribuição, delivering a growth of 0.4%, in line with the one that was presented in the National Energy Market of a -- also with 0.4%.

Whereas in the South region, there was a drop of 0.3% influenced by milder temperatures during the summer.

And we believe that there will be a resumption of the economy for 2018 in spite of all the uncertainties, however, slower than we expected last year.

And as you know, the Central Bank indicators recently published that function as more of an estimate of the national GDP already show a performance lower than expected.

And in spite of that, the state economy, once more, has been delivering a good performance.

The industrial production of Paraná grew by 2.6% in the last 12 months.

And the sectors that gave the highest contribution to the consumption of energy were: food, pulp and paper and wood.

Another important factor was the generator of jobs in the state in the first quarter.

Totaling 26 new positions, a 57% increase on a year-on-year comparison.

And another highlight is the gradual reduction of the delinquency ratio of Copel Distribuição.

We closed the first quarter of 2018 with 1.5% coming from major efforts to tackle this theme and besides we continue to work to reduce acquisitions, ADD, that closed the first quarter at BRL 22 million, a reduction of about 10% in a yearly comparison.

I'm still talking about the distributions company.

We closed the first quarter with important advancements in quality indicators, such as ELC, closing the period at 3.01 and the EFC at 1.89.

Figures that show, once again, the maintenance of the indicators at levels within the limits required by ANEEL and which means more quality in the supply of energy to our consumers and complying with the basic requirement for the maintenance of the concession.

Going into more details about our investment plan.

The Cutia Wind Complex was a project that required the most funds, BRL 300 million in the period.

And (inaudible) project continue accelerated and the first wind turbines should start operation in the second half of 2018.

Copel Telecom invested over BRL 51 million with the extension of the fiber-optic network of residential Internet for an additional 16 cities all located in the Northeast of Paraná state and with this increase in our services, the company goes from 64 to 80 cities covered by residential Internet, increasing by 20% its area with Copel Fibra products.

And although large companies of the region already had connectivity connections -- connectivity solutions by Copel Telecom, the new networks allows us to offer extra broadband for residential and SMEs with speed up to 200 Mbps.

Copel GeT invested BRL 165 million divided in projects such as Colíder and Baixo Iguaçu plants and the Araraquara-Bateias transmission line, all in the final phase of implementation.

And specifically about Colíder, the estimate for startup is in June next.

And still about Colíder, I would like to mention that the Federal Court of the first region deferred -- fully granted the advance notice of the appeal filed by Copel GeT against the request for exemption from liens, charges or restrictions to rights stemming from the displacement of the plant implementation schedule.

In spite of this injunction this is an important victory in the sense of exempting the company from liabilities of the factors that led to the delays in the plant.

These were the main operating points that I wanted to highlight.

And now Moura will talk about the results of the period.

Thank you, Jonel.

Good morning, and I thank you very much for participating.

And as Jonel said, I would like to start by talking about the first quarter results aligned with our expectations.

And on the same comparison basis, net of extraordinary impact, as you can see on this page, EBITDA BRL 863 million was slightly better than the one delivered in the year before in the same period.

Nevertheless, the EBITDA of BRL 768 million in the quarter in this case, including the extraordinary effects, was 24% lower than the one delivered in the same period 2017, which was approximately BRL 1 billion.

Talking about the extraordinary effects both in '18 and in '17, as we can see here on this page, in '17, the result was positively affected by BRL 183 million referring to the remeasurement of the RBSE transmission assets but negatively impacted by the impairment adjustments of BRL 30 million here adjusted for comparison purposes.

In relation to the first quarter of '18, the most relevant effect was the BRL 91 million provision for indemnification of 585 employees that enrolled in the Encouraged Retirement Program that we call PDI.

And last year, we only had BRL 7 million posted, and we will be talking about this during the presentation.

Besides, we had the significant recording of provisions for labor claims in this quarter, and the main one corresponds to BRL 24 million.

On the plus side, still in this quarter based on the recognition of the Federal revenue of Brazil, we posted a tax credit of BRL 80.2 million related to the levying of Pasep from July '88 to July '95, coming from the effects of the resolution by the Federal Senate #49 of 9th October 1995 that suspended the effects of Decree-Laws 2,445 and 2,449, considered as unconstitutional by the Federal Court -- the Supreme Federal Court of the total BRL 80 million, BRL 55 million were posted under financial revenue and BRL 25 million under other operating revenue, impacting the EBITDA in this period as we show on the slide.

And considering the results adjusted by the subsidiaries, I would like to mention that the EBITDA reported by Copel GeT, Copel Dis and Copel Telecom were also impacted by the higher balance of provisions regarding labor claims and the provisions related also to the program of Encouraged Retirement.

In the case of Copel GeT, this results the strategy of energy allocation that was lower than 1Q 2018.

In the case of Copel DisCo, the 1.4 growth and the adjusted EBITDA totals BRL 200 million in this first quarter, and this already affects mainly the reduction in manageable costs of the subsidiary.

It is important to mention that the reduction of manageable costs of Copel DisCo is in the agenda of other subsidiaries as well and results from a series of measures that the company has been adopting to reduce costs, among which the reduction in our payroll.

In the last 12 months, 291 employees left the company.

And many others have already enrolled, as already mentioned, with a potential of an additional reduction as of 2019.

Copel Telecom posted a growth of 10% in the adjusted EBITDA going from BRL 33 million in the fourth quarter to BRL 36 million in the first quarter of 2018.

And this performance reflects the expansion in the client base.

And the results is basically aligned with our plan.

And as Jonel said, as of this result, the cash generated by the operating activities reached BRL 944 million in the first quarter of '18, which represents an improvement of 37%, vis-à-vis the same period in 2017.

The details can be seen in the cash flow statements.

And just to finalize, basically the others have to do with the better results in the Wind Farms that started to produce effect already.

Now going to Page #6.

Here we can see in more details the growth of our recurrent operating revenue of 7.5% in the first quarter comparing to the same period in 2017, already exceeding BRL 3.3 billion in revenue, eliminating the extraordinary effects.

In order to have the better comparison, that you can see, that the revenue from this year to end customers went up by 16%, explained basically by the adjustments applied to the parents of Copel Distribuição in June 2017 that adjusted the energy tariff in about 10% and also the sale of 480 gigawatt hours to free clients, carried out by Copel Comercialização.

The revenue from sale to distributors dropped by almost 15% due mainly to the strategy of energy allocation of Copel GeT, as we mentioned.

And the grid availability line dropped by 20% and was impacted by the elimination of the balance coming from revenue among companies of the group.

GeT and Distribuição referring to the RAP partially related to the RBSE that was recognized in the GeT revenue over 2016 and '17 and the increase of the annual quota of the CDE use, which were recovered by -- via tariff as of June '18.

TelCo revenues grew 24% and which reflects the increase in the client base of Copel Telecom, as we mentioned before.

And the expected recognition in the CVA lines reflects mainly the higher costs with the purchase of energy by Copel DisCo due to restatement carried out by CCEE of the MCSD of New Energy, referring to the period of June to October 2017 and by the increase in the annual quota of the CDE use already mentioned.

And finally, the -- about 7% reduction in other operating revenues reflects mainly the lowest posting of revenue -- construction revenue because some assets that contributed to this line in the first quarter of '17 started up in the last 12 months.

On the next page, we detailed the recurrent operating costs and expenses that reached BRL 2.6 billion in the first quarter of '18, 4% higher than the period in 2017, explained mostly by the increase in costs in the purchase of energy that amounted to BRL 1.2 billion in the first quarter with a growth of BRL 114 million on a year-on-year comparison, also coming from the highest amount of gigawatts purchased by Copel Comercialização that reached 681 gigawatts, vis-à-vis 650 in the same period 2017.

The charges for the use of the grid grew by 86% due to the higher costs with charges for the use of the system due to the adjustment in the energy transmission tariff of Itaipu and also the TUST due to the increase in the RAP that started to remunerate the assets related to the RBSE.

The provisions and reversed supplies adjusted by the extraordinary events had an increase of BRL 18 million compared to the first quarter of '17, a growth that stemmed mainly from higher balances related to claims -- legal claims.

Manageable costs were stable vis-à-vis the first quarter of '17 and if we compare to the inflation of the last 12 months, that was 2.68%.

There was a real reduction of 2.5% in manageable costs as we will show you on Page #8.

You will have the evolution of the PMSO where you can see that net of the BRL 91 million provision related to the PDI indemnification, that is to say, the Encouraged Retirement Plan, payroll costs increased 0.6% even after the adjustments of 1.63% applied to salaries in October '17.

This performance reflects among other measures, the policy adopted by the company of not replacing these vacancies.

And this has been contributing to reduce our headcount that closed March 2018 with 8,158 employees, a reduction of 336 people in the last 12 months.

So talking about our payroll costs, as Jonel said, the voluntary retirement plan closed in March and 666 employees could leave the company still this year and the potential reduction would be of BRL 200 million as of 2019.

The cost with third-party services increased by 10% and reflects mainly costs related to consultancy and auditing services, communication, processing and data transmission, maintenance of the electric system and the revision of contracts.

According to the indices applied in the Other operating costs and expenses dropped by 13% and they reflect among others the posting of BRL 25 million related to tax credits referring to Pasep, extraordinary effects that I've already referred to on Page 9.

We highlight the level of leverage where we can see that the net debt-to-EBITDA ratio of the last 12 months is 3.3x lower than the cap of 3.5x of our covenants.

And we understand that the additional cash generation by the new projects as well as the combination of many initiatives, some already implemented, such as cost reduction, balancing of the physical and financial time schedule of some projects already are being reflected in the improvement of our leverage.

And we are focused on the rolling out of our debt now that have a duration -- average duration of about 4 years with relevant maturities in the short term in the next 12 months, almost BRL 2.5 billion.

And we continue to evaluate many alternatives of funding and initiatives for cash generation with this objective.

Our funding plan is totally adjusted to meet the demand of the new investments focused on the conclusion of the projects that are already underway as we said and the rollout of shorter debt, and it is according to our plan.

We have just concluded BRL 600 million funding operation.

And we are so far having BRL 1.2 billion in funding.

And I would like to emphasize that we continue to follow a rigorous financial discipline in the evaluation of new investments as well as making our best endeavors so that the projects underway may be finalized as quickly as possible, meeting the regulatory demands and the contract terms and mainly the cash generation provided or estimated for these projects.

And lastly, on Page #10, we show you the net income reported in the first quarter of 2018.

BRL 340 million, a 19% reduction vis-à-vis the BRL 417 million reported in the first quarter of '17.

And I would like to remind you that adjusting the extraordinary items, we have the impact of extraordinary items impacting 2018 and 2017.

And eliminating them, we would have a better net income vis-à-vis 2017.

And the main contribution to this income is Copel GeT with 65% of net total.

Before going to the Q&A session, we would like to remind you that the management proposal to be decided by the shareholders' meeting that was postponed to June 15 due to the restatement of the financial statements of 2017, as mentioned, contemplates the total payout of BRL 289 million in dividend and interest on equity, and BRL 266 million have already been declared in December 2017 corresponding, therefore, to a payout of 25%.

And the date for the payment of this amount will be defined in the shareholders' meeting.

(Operator Instructions) Our first question comes from Mr. Andre Sampaio from Santander.

What could come in the short run, while the question was cut?

Andre, could you repeat the question, the company asks?

My question is whether you could give us some more details about the asset divestment process?

If there's something in the short run?

Any news regarding investments or divestments?

Thank you for the question.

And as I mentioned in the last call, this process is already underway.

And we should be concluding the contracting of our legal advisers and financial advisers in the next few weeks, and this will be submitted to the Board of Directors during our next shareholders' meeting in June.

And based on this, we will be informing the market about more details.

(Operator Instructions) Mr. Marcelo Sá from UBS.

I have 2 questions.

One is the following.

Could you give us more color about the cash generation of the company in this quarter?

At least in the last 2 years, I think this is the first quarter in which you generated positive cash.

So I would like to understand what improved in this quarter in order to lead to this.

And also I would like to know your view about the energy market from now on in this spot market and more details about your energy allocation during the year.

Marcelo, thank you for the question.

I'm going to answer the first part, and then I will give the floor to Lamy.

Cash generation first.

It was significantly affected by the result net of the extraordinary impacts, and we also had an improvement in our accounts receivable.

And this was a significant impact as well, also a positive impact from the RBSE receivings, which is helping us in cash generation.

And we start to see already some positive impacts in wind -- coming from the wind energy.

It is still a little bit timid, but we believe that when we have all the projects up and running, including Colíder and Baixo Iguaçu, as I said in the last call, we believe that we will be adding an additional BRL 500 million to our cash generation as we estimated this for 2019.

Basically, this is the reason and if you want more details about our statements, about our cash flow and the whole variation vis-à-vis last year, we may -- we can give this to you and I would like to give the floor to Lamy.

Good morning, Marcelo.

In relation to your question about our view of the energy market, I think that what we could stress in this regard is the still high level of delinquency in the spot market at the CCEE.

This has been affecting all the companies who have credits in the spot market and there -- includes Copel, of course -- and there is a positive expectation in relation to the approval of the conversion of the provisional measure 814.

We believe that this fact could give a significant contribution to the reduction of the delinquency levels in the market and could transfer cash funds that are rather important for the companies and Copel included -- regarding the price of the spot price.

For energy, in our view, the prices are leaving a positive moment, a favorable moment.

For the sale of energy, the prices are reaching attractive levels.

And in relation to the allocation of energy by Copel GeT, I think that you saw that we made an allocation, a slightly lower allocation in the first quarter and we reserved a higher amount of energy for the second half of the year because what we foresee is a situation that is quite severe, so to say, in hydrology terms for this year.

And this would bring about very low GSF levels for the second half of the year, mainly from June to September.

For this reason, we have to take protective measures.

And we want to leave Copel in a more comfortable situation, vis-à-vis negative exposures in the second half of the year.

When we talk about the GSF solution, I would like to understand if you believe that Copel would have a chance to recover some additional protection for the amount that you sold in the free market?

I don't know whether due to regulations, you could have some benefits.

Do you believe you could have some benefits or not?

Well, we are extremely interested in that.

We are the most interested party.

This is Lamy talking.

We are the most interested party in the approval of this conversion.

We renegotiated the hydrological pace to the regulated market, so we have no commitment with our contract for the free market.

We have a relevant percentage of our sales, and this makes it possible for us to foresee this perpective, and we foresee major benefits for Copel GeT.

Lilyanna Yang from HSBC.

I have 2 questions.

One, if you can give us some more color about Colíder and Baixo Iguaçu?

Could you compare the return on investment on this project or these projects vis-à-vis Cutia and transmission lines?

And the other question, about Araucária.

There still -- is there something to be negotiated vis-à-vis this project still?

This is Lamy from Copel GeT.

In relation to Baixo Iguaçu, we have a very positive outlook in terms of starting up commercially still by the end of 2018.

So I believe that we will surely be able to operate commercially the first machine, maybe the second and the third one would be -- the third one would be started up at the beginning of next year.

Of course, we are still studying a constructive technique that would allow us to start with the 3 machines still before the end of this year, but we cannot assure that the safer information would be 1 or 2 machines this year and then the other one at the beginning of next year.

And Baixo Iguaçu mainly after being recognized by ANEEL, that is to say, the exclusion of responsibility that was mentioned in the presentation, this brings this project back to a very positive level of returns, with a very good improvement vis-à-vis the others where we have not been successful yet in terms of the same recognition by ANEEL.

So overall, you can say that Baixo Iguaçu is a project that will be giving a satisfactory level of returns.

Regarding UEGA, we have already signed the gas contract with Petrobras, UEGA.

And it is in force up until December 31 this year.

And we have some expectation, this is a plant that operate in the merchant mode and due to this characteristic, has a relatively high variable cost.

Nevertheless, there is a positive outlook for that due to the energy conditions that we foresee for the second half of the year.

So there is a possibility for us to start operating this plant still within 2018.

Could you talk about transmission maybe you or Adriano and compare this to Baixo Iguaçu and Colíder?

Well, this is difficult because I don't have the exact data here.

But I would say that Cutia and Baixo Iguaçu are more or less on the same level in terms of returns.

So these are good projects.

But unfortunately, I do not have the data here.

While the transmission data are rather good as well, except the project that we are about to conclude still this month, the 500 kv transmission line of Araraquara in the state of São Paulo.

The other transmission assets are at very good levels.

Overall, I think this is the information that I could give you right now.

(Operator Instructions) As there are no more questions from our participants, I would like to turn the floor over to the company for the closing remarks.

I would like to close this call by giving a special thanks to those who contributed to the restatement of the financial statements of 2017 and the related documents.

A very big team involved.

There are many work fronts, many weeks of hard work and that required us to postpone the meeting.

I would like to thank the participation and the understanding on the part of our shareholders that understood the reasons for that.

Ladies and gentlemen, Copel's conference call about the results of the first quarter of '18 is closed.

Thank you very much.