Companhia Paranaense de Energia (ELPC) 2018 Q3 法說會逐字稿

Good morning, and thank you for waiting.

Welcome to the conference call for Companhia Paranaense de Energia - COPEL for the earnings to discuss the results of the third quarter of 2018.

(Operator Instructions)

Before proceeding, we should mention that forward-looking statements that might be made during this conference call related to COPEL business outlook, projections, operating and financial projections and goals are based on beliefs and assumptions of the company management and on information currently available to the company.

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.

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 this call, we have Mr. Jonel Nazareno Iurk, CEO of COPEL; Mr. Adriano Rudek de Moura, CFO and IR Officer; Ms. Ana Letícia Feller, Business Management Officer; Mr. Vicente Loiacono Neto, Governance, Risk and Compliance Officer; and Mr. Antônio Justino Spinello, CEO, Copel Commercialization.

The presentation that will be delivered by COPEL's management may be followed on the company's website, ir.copel.com.

Now we turn the floor to Mr. Jonel Iurk, CEO of the company.

Good morning, everyone.

Thank you very much for participating in our conference call for the results of the third quarter of 2018.

I would like to start by highlighting that we are delivering another result with relevant improvements, vis-à-vis the same period of last year, and our adjusted EBITDA of almost 105 -- BRL 750 million in the third quarter is 52% higher than the one that we had in 3Q '17.

Therefore, we have already accumulated almost BRL 2.4 billion in the year, also better than the prior year as we'll see in details further ahead.

I'm sure these results show that we are on the right track and that -- and despite of all economic and political uncertainties as well as some unexpected situations, which we'll mention further on, we are doing our own part.

We are following our strategic plan and delivering consistent improvement in the results.

Right now, we are focused on the conclusion of ongoing work, trying to put into operation a series of undertakings because this will bring us a relevant additional cash generation, in addition to the transmission line at Araraquara II-Taubaté concluded in July of this year, which is already generating additional cash.

We started this quarter the operation of the Cutia Wind Complex with 86% of the wind turbines already in the test stages, just waiting for the operating license to start commercial operation.

Also we highlight that we have started this week the test for the Bento Miguel Wind Complex with the operation of 14% of wind turbines that are part of this farm.

We should highlight also that Bento Miguel Wind Complex had its startup planned for January of 2019, that is we are starting the operation of this wind farm ahead of time.

Baixo Iguaçu has a partnership between COPEL and ANEEL Energy, and it's in its final stage of construction.

And second stage of diversion actions have been concluded with the positioning and locking of the 16 spillway gates.

The Rio -- Iguaçu River is flowing through the openings and the right margin dam already has 1/4 of the landfill in place.

In the powerhouse, assembly certification is underway.

We already have a pretest of machines 1 and 2 as well as we are taking other measures to implement the substation, the transmission system as well as property and socio-environmental program.

The -- in the beginning of commercial generation for our unit 1, it's estimated for the end of January of 2019.

And for units 2 and 3, for February and March of 2019, respectively.

As we have mentioned before, we had to change our schedule for Colíder because during the commissioning trials for the unit -- generating unit #1, we found an unexpected problem in the downstream floodgate.

At that moment, based on the best estimates of engineers and technicians, we expected to solve the problem within 2 months.

But while protective measures were being carried out, we concluded that the final solution would need us to change the project of floodgate guides and that would mean additional time, considering that the operating start date for the first operating -- generating unit has been revised for the month of December of '18, and the third and last turbine should start working in April of 2019.

In addition to that, as part of our strategy of improving profitability in our current portfolio, we are evaluating several projects add we won several of them, and they are going to be important for our strategies.

They will add value to our business.

And at Eletrobras asset auction, we bought for BRL 105 million Lot J, which corresponds to 75% of SPC Uirapuru Transmissora de Energia, which is a transmission line that has 100 in kilometers of extension going from Ivaiporã to Londrina, which will be in commercial operation with an annual allowable revenue of BRL 34.2 million.

And considering also our undertaking to our Copel GeT, we'll have synergy in using the resources for operation and maintenance, therefore, diluting operating cost.

In auction A-6 from August 31, 2018, we won SHPP Bela Vista, an investment of BRL 200 million, and at SHPP Bela Vista has a capacity of 29 megawatts of installed capacity and assured power of 16.6 megawatts and will be built in River Chopim in the Southwest of the State of Paraná.

We have sold 14.7 average megawatts in an agreement to start up supplying on January 1, 2024, term of 30 year -- 30 years, an annual adjustment by the IPCA.

This focus on operating efficiency also motivated a swap of asset with Eletrosul, especially with Costa Oeste, Marumbi and Transmissora Sul Brasileira de Energia, which were then controlled jointly.

With the swap of assets, now Copel GeT holds 100% on Costa Oeste and Marumbi, which will allow us to have scale gains with the integration of the management of these undertakings through the other assets of the company, considering they are all in Paraná State.

I would like to highlight that capital allocation for these new investments have followed a strict criteria of risk and profitability evaluation, and that we'll keep on following sustainable projects that may, with safety, improve profitability and always something that fits into our financial ability.

Talking about investments, we have already invested BRL 1.9 billion up to September of '18.

And of that, BRL 1 billion was exclusively to investments that are being concluded.

And again, I should highlight the Cutia Wind Complex that had BRL 673 million invested.

In Copel Distribution, we invested BRL 462 million up to September, following our increased line on the remuneration base and improvement in productivity.

For Copel Telecom, investments were of BRL 220 million focused on the expansion of the fiber optics network in Paraná, increasing scale and profitability.

Finally, I should mention the reduction of the program of investments for 2018 for approximately BRL 300 million, which has been approved by the Board of Directors in last -- yesterday's meeting.

Because of the change in the construction work scheduled, we are still considering the effects of the compensation agreement with suppliers of Brisa Potiguar Wind Complex.

The estimate now is that we are going to invest BRL 2.6 billion in 2018, considering the amount that we have already invested up to September.

As we always highlight, the reduction of manageable cost also has been a priority.

And as we see can see on Slide #4, the results of the third quarter have shown a drop of 2.3% in cost with headcount figures that grow when they are compared to the inflation of 4.5% in the same period.

This effort has been reflected in the results of Copel Distribution that has reached an EBITDA of BRL 261 million, a growth of 94%, vis-à-vis 3Q '17.

As you can see on the charts, we have been able to grant Copel Distribution results closed to the regulatory extent.

And thanks to the cost reduction, the difference is going to be even lower starting 2019.

It's important to say that this improvement seen in the distributing companies resulted also for its adjustment.

In addition to that, Copel Distribution has been working hard to reduce delinquency, which had an improvement and ended September at 1.24%, the lower level in the past 8 years, while allowances for doubtful accounts have ended the third quarter at BRL 13.4 million, a drop of around 48% of the amount that we had in the same period of '17.

What is also important is that growth is also in line to an increase in the quality indicators, which is also a consequence of investments in new technologies especially related to the program called Mais Clic Rural saying that the installation of 3,000 automatic reclosers, known as TripSaver, have allowed us to reduce 35 minutes in the total ELC of COPEL.

Before turning the source of motive for detail in the results, I should mention another step of COPEL in the consolidation of the best practices of Corporate Governance Report, CVM.

I still want to highlight 2 achievements that make us very proud.

In August, we received the award Viva Voluntário 2018, an acknowledgment from the federal government to entities and citizens that favor volunteer work in Brazil.

The ceremony happened on the National Day of the Voluntaries, and COPEL was awarded in the category of public sector.

And also, we are still one of the 150 better companies to work on as the ranking was published in Você S/A magazine.

To be once again among those people or those companies is a reward for us at work every day.

We dedicate ourselves to thank COPEL from the period.

Thank you, Jonel.

Good morning, everyone.

I also would like to thank you for being here with us on this conference call.

As Jonel has already mentioned, I think it's clear that we are going forward in several aspects.

But still, the execution of our strategic plan is following strictly our goals.

I should highlight that the continuous improvement of our results is thanks to great efforts from all the areas that are totally aligned to our sustainable growth in 3Q '18 compared to the prior year.

As explained in part by the post of losses in the equity in the third quarter of '17, coming from impacts of tariff reviews and SPCs of that period.

But even if we exclude that fact, the EBITDA is still relevant for this quarter reaching 32%, vis-à-vis the same period of last year, which is supported by the growth of the distributing company as we will see ahead.

And also, we have this consistent growth in the distributing company, as I have said.

We have already accumulated in the year BRL 2.4 million in EBITDA approximately, not the nonrecurring effect, basically related to impairment of generation assets, some labor claims and voluntary redundancy program, as we will see in details on Page #5.

Therefore, we have gone over cash generation in the year of BRL 2.6 billion, 18% better than the prior year.

So we are meeting our investment demands.

And also we have been able to meet other commitments.

On the next page, we will see the cash generation for the business.

Considering the results for the subsidiaries, Copel GeT is still the main contribution in terms of EBITDA, around 44% of total.

And when we compare that to '17, there was an increase of 37%, which was partially benefited by the losses that we had in the tariff reviews of last year, as I have already mentioned.

I would like to highlight, once again, the adjusted EBITDA of BRL 263 million of Copel distributing company that had a growth of 86% compared to '17, which we consider the market growth as part of an explanation for the growth applied since June of '18.

The growth seen, also thanks to several initiatives for productivity improvement that aim the reduction of cost with headcounts and third party as well as efforts to lower delinquency rates and to collect overdue bills.

I should highlight that the regulatory EBITDA and the realized EBITDA had -- have a difference of only 20%.

Two years ago, it was up to 80%.

And last year, it was 38%.

So we are going forward in regards to have that regulatory EBITDA, which is very relevant for our operations.

In Copel Telecoms, there was a growth of almost 4%, going from BRL 42 billion in 3Q '17 to BRL 44 million in the third -- 3Q '18, basically related to a client-based expansion.

On this page -- on Page 6, we can see the cash generation for operating activities, which have reached in the quarter at BRL 615 million, an improvement of 9%, vis-à-vis the same period of '17.

Once again, I should highlight the operating cash generation accumulated in the year of over BRL 2.6 billion, and that is almost BRL 411 million higher than the prior year.

And you might check the details in the cash flow report in the quarterly returns that were published last night.

And we should remind you that with the beginning of the operations of all projects that are already at the final stage of conclusion, as Jonel mentioned, we will increase our installed capacity in over 700 megawatts, which is equivalent to a growth starting next year of almost 13%.

Therefore, we might consider an additional and relevant operating cash generation today estimated in BRL 400 million, based in current preferences.

Now turning to Page 7 -- on Slide 7, we can see the details, the growth of operating revenue, which is recurring, of almost 18% in this quarter, vis-à-vis the same period in '17.

And we have practically reached BRL 4.3 billion in revenue, here already eliminated the extraordinary effects so that we could compare that.

The supply revenue grew around 21%, thanks to the growth of 6.1% in the energy sold for end consumers.

We should highlight also the growth of almost 30% in the consumption of the pre-industrial market served by Copel GeT and also the commercialization company.

And the tariff adjustment of Copel Distribution is valid starting on 24th of June 2018.

Adjusted the tariff for energy at 13.6%, supply revenue grew 5%.

And thanks to an increase of the energy supplied by Copel Comercialização that has sold 1,153 gigawatts hour in 3Q '18.

The grid availability line had an increase of 20%, thanks to the improvement of 1.7% in the grid market.

In the quarter, as I already mentioned, with the tariff adjustment of Copel Distribution with an increase of 16.4% in the TUSD starting in June of 2018.

And higher effective interest revenue in transmission lines, thanks to the increase of the financial asset base, stemming from investments related to the contract for the lot of transmission auction of 5, in addition to improvements that we had from the last tariff adjustments.

The revenue from telecom had a growth of 15%, and it reflects the increase in the client base, as we have mentioned.

The posting in the CVA line that reflects cost with energy purchase by Copel Distribution that was basically stable, so it was slightly up less than 2%.

Finally, an increase of 53% in other operating revenues reflect mainly a growth of 40% in gas distribution revenue because of increase -- of an increase of 18% of natural gas consumption and tariff adjustment.

On Page 8, now we go into the details of cost and operating expenses recurring once that were BRL 3.8 billion in the third quarter of 2018, approximately 15% higher to what we had in the same period of 2017.

That is explained by an increase in cost with energy purchase that totaled BRL 2.3 billion in 3Q '18, an increase of BRL 351 million, vis-à-vis 3Q '17, also reflects of a higher amount of gigawatt hours purchased by Copel Commercialization that have -- has reached in this quarter 1,611 gigawatt hour versus 1,103 gigawatt hour in the same period of '17.

The charges for the use of the grid had an increase of 24% because of CCEE decisions in 3Q '17 in transferring the exceeding funds -- accrued funds to the CONER account to the -- generated a reversal in the line of ESS, in addition to an adjustment in the tariff of energy transmission in Itaipu.

The line of provisions and reversals adjusted by extraordinary events had an increase of BRL 15 million compared to the third quarter of '17, and that was especially because of new labor-client provisions for 3Q '18.

Recurring manageable cost had a drop of 7%, or BRL 50 million, mainly because of the recovery of Copel Distribution invoices and the reduction of the financial compensation by using water resources.

Finally, other results -- or other costs did have an increase 28%, mainly because of an increase of 65.9% in cost with natural gas and also effects variation and also greater gas consumption in the period.

In the next page, we have our PMSO performance, where we can see that if we do not consider the provision for the voluntary redundancy program, cost with personnel, including pension plans, had an increase of 2.3% only, and that is mainly explained by the adjustments of 1.6% applied to wages in October of '17.

But considering inflation of 4.5% in the last 12 months, the cost with personnel had a real reduction of 2%, thanks to the reduction in our headcount that ended September of '18 with 8,064 employees, a drop of 354 employees in the last 12 months.

COPEL today is a more efficient company.

Our plan of productivity improvement and cost reduction is consistent is -- and is already showing positive results.

We also count on the help of experts and consultants, and we have goals for improvement in the short and the medium term.

We are investing in technologies to support productivity in operating areas.

Therefore, we are already including in our budget reviews and also in our business plan for 2019 that has approved yesterday, important reduction of cost in several areas as well as an improvement of cash generation.

The cost for third-party services had an increase of 4.7%, in line with the period's inflation.

And the line on others had a reduction of almost 42%, thanks to efforts to recover overdue invoices, as we already mentioned, and they helped in explaining the growth in our results.

Therefore, manageable cost has dropped a little over than 7% in the quarter.

But if we consider the inflation of 4.5% in the last 12 months, manageable cost did have a real drop of around 12%.

On Page #10, we highlight the maintenance of our leverage.

This is very important for us.

And here, we can show you that we have been able to hit -- actually, we are lower than the COPEL limits.

And we have ended the quarter at 3.2x in our net debt EBITDA ratio.

We understand that we are working hard to be under 3. I think this is our goal, by extending the debt.

And also we understand that additional cash generation for new undertakings that we mentioned already for BRL 100 million, aligns to the combination of several initiatives.

Some of them already implemented, such as cost reduction, process improvement that could reach an annual additional economy of -- or savings of BRL 200 million for next year as well as capital reduction, which is already estimated for next year after we conclude several projects.

This will contribute to a consistent drop in our leverage.

Right now, we are focused on expanding the debt.

Right now, we have an average duration of 4 years with maturities that are relevant in the next 12 months.

Additionally, our funding plan, which totally adjusted to meet the demand of investments focused in concluding the ongoing works, as we are already said, as well as in rolling out the investment of the short term.

All of that is following as planned.

And we have just concluded a funding process of BRL 1 billion for Copel Distribution and BRL 290 million for Copel GeT.

Therefore, we have fundings of almost BRL 3.5 billion in 2018, so far.

Simultaneously to capital market operations, BNDES has approved 2 loans to COPEL, being that BRL 619 million for Cutia Wind Complex and BRL 194 million for HPP Baixo Iguaçu.

Relevant amount of these funds should be transferred to COPEL in November, and they represent the important step in our strategy of extending our debt.

And also, it's very important for our project.

Considering all markets operations -- capital market operation and BNDES, this year, 2018, we should be funded in BRL 4 billion, showing that we do have a great financial capacity and we can execute this funding plan for 2019.

We are still abiding by a strict financial discipline and the evaluation of our projects, and that has been proven by the well-succeeded auction in the purchase of Bela Vista and as well as the transmission line of Uirapuru.

As Jonel has mentioned, this is part of our strategy in improving our current portfolio regarding profitability.

Finally, on Page 11, we have our net income for the third quarter of 2018, which has totaled BRL 361 million, a drop of 13%, vis-à-vis the BRL 417 million reported in 3Q of '17.

But in the third quarter of '17, there was an extraordinary gain because Copel Distribution entered into the special program for tax settlement, PERT, at that time.

The main contribution for the figures of 3Q '18, still been coming from Copel GeT that has contributed to 54% of the net income.

Now we'll turn to the Q&A session.

(Operator Instructions) Our first question is from Andre Sampaio, Santander.

I have 2 questions, actually.

The first one is about the divestment plan.

Do you have an update there?

Are you planning concluding this plan?

Could you have anything done still in 2018?

And my second question is on Araucária.

Can you let us know anything about the gas contracts, the public hearing?

These are my 2 questions.

Andre, thank you for your questions.

This is Moura speaking.

About the divestment plan, we have nothing different from what we already mentioned in the first quarter.

We have might have something in the beginning of the year.

And obviously, we'll bring that forward to our Board of Directors as soon as we have anything.

But right now, we have nothing to add.

About Araucária, I will turn the floor to Jonel, and he will comment on that.

I understood that your question is regarding the dispatch of the plant of Araucária.

Is that it?

Yes.

My concern is about the gas contract if this is settled and if you will be able to dispatch from there.

Well, if there is a dispatch out of the order of merit, we do have a contract with the Petrobras, and we would not have a supply problem.

We are ready to dispatch.

We're enabled for that.

We already had the approval by the ANEEL, and we have no problems there.

We are just waiting for the demand in order to dispatch it.

We are also preparing ourselves to participate on the auction of A-1, and there are no difficulties related to gas agreements.

(Operator Instructions) Lilyanna Yang from HSBC has a question.

Carolina from Crédit Suisse has a question.

I would like to take this opportunity and ask about cost performance, especially in provisions.

The consolidated on the release, probably, you had an impairment reversal of BRL 38 million.

But the results of the distributing company also in the manageable costs, your provision line -- actually, there is a provision line that is a little bit better year-on-year.

So did you have any other provision reversal that is specific or any specific actions that might have explained this performance?

Can you give us more color on that?

So Carol, thank you for your question.

Well, we did have some significant improvements in terms of cost and productivity.

So in terms of relevant factor and nonrecurring, we did have some labor claim, in addition to that.

And for generation, the impairment reversal for Cutia, that was very relevant.

And despite of the delay in Colíder, which has generated an adjustment, this was positive.

If you check the presentation on Page 5, this will be clear.

(Operator Instructions) Ms. Lilyanna Yang from HSBC has a question.

You mentioned in the strategic plan that has been approved by the Board of Directors yesterday.

Can you give us some details about the pillars, the priorities and the targets of this plan?

And how do you intend to deliver this plan?

Lilyanna, this is Moura once again.

Thank you for your question.

I think our strategic plan has no surprises regarding what is already being done in the market.

Our focus is cash generation.

We are focused on our debt level.

This is a relevant pillar, that is our investments and our investment-related cost, they have to be fully adapted to our financial capacity.

So we have a goal to reduce our leverage in a relevant fashion for next year.

We do not expect to start new investments and expect for these new investments, which are Uirapuru and Bela Vista.

And those will already bring the improvement to our profitability.

So if we think in terms of generation and transmission, this will be our main focus, to conclude the construction works, the current ones that we have, making sure that we will have that cash generation starting next year of around BRL 400 million that will help in reducing our leverage.

Another important aspect is concentrated on the distribution company investments.

Our target here is the remuneration rate to start on '21 will be remunerated by the investments of the first few years.

We're focusing on investments in technology, so that this could also add and improve our productivity, so that we can have a better cost.

And the objective here is to meet our regulatory goal.

As I mentioned today, that regulatory goal is much closer than what we were last year.

And we are going to be much closer next year.

I think that's clear for us.

About the telecommunication business, we're making all needed investments, so that the business is attractive and it may continue providing sustainable profitability.

We are using all market opportunities in our market in Parana.

And finally, the commercialization company, which is a relevant business, is becoming a more relevant to COPEL.

We will take all opportunities there.

This is a business that has a lot of players in the market.

But I think we have great opportunities.

And remember that in this specific situation of the commercialization company, our main focus is the risk limited that COPEL will take.

This is very well aligned with the board and also with the officers.

So our plan is consistent.

COPEL will start delivering the results of all investments made in the past years always with a lot of financial discipline, clear goals with the support of the executive board.

And I am very confident on the results we'll provide.

And I would say that, really soon, we'll be disclosing figures.

As I said yesterday in the board meeting, this plan was approved.

And I think that we will be able to tell you a little bit more about the level of investment.

Maybe in the coming weeks, we'll publish the detailed dates for that.

Now a follow-up on the telecommunication area and the scenario that you will be investing, so that this business is robust.

How are you going to work on the return on investment because this is the high investment, right, in actual figures, especially compared to operating income?

Do you believe that this business is not mature yet?

It has to be more mature to become profitable or maybe you wanted to have lower costs there?

Lilyanna, I'll turn the floor to Adir, the CEO for Telecom.

But I should start by saying that they -- telecom has become a relevant business to COPEL in terms of amount and value.

This business has started almost from scratch.

It was created with the objective of improving the synergy of business in COPEL.

And today, that's a very valuable asset.

You have a reference of (inaudible) so the telecom branch recently with very relevant multiple.

So this is a business that, while we did not decide where are we going to go with it, we will maintain that as an attractive business.

This is our financial scenario.

And now Adir is going to comment on it as well.

Lilyanna, this is Adir.

This company -- since 2013 up to today, the company has 3 pillars that ensure the assertiveness of what we have proposed in terms of business.

The first is capacity of telecommunications that we have created in 2013.

This [framework] is updated and it's already in its fifth generation to ensure that for the next 5 years, we can bring broadband for small and medium companies, any type of needs within that platform.

Second, digital transformation, that's very important because when you will scale your company to retail, you need to have growth in order to have profitability, so you have to do more with less.

With a team that you have, and digital transformation will scale the system, and will bring the support to do more with less at lower cost.

And so today, Copel Telecom is in the Copel Group.

Therefore, we can maintain our main target, which is the EBITDA assured for the next 5 years.

And third, we always add value to what we do, and we are sure of that.

The Copel Group being a sound group, and although it's an intensive capital company, it assures us the sustainable capital, so that within the service chain that is already designed within our technological platform by also reducing cost with digital transformation and making sure that customers will come for the product.

With the quality and with the service we provide, I'm sure that in the next 5 years, this will be a competitive company and will maintain the same behavior it has shown in the -- these past 5 years, which is a model that is working.

(Operator Instructions)

We thank you very much for your participation, and have you all a nice day.

Ladies and gentlemen, the conference call for COPEL about the results of the third quarter of 2018 has ended.

Thank you very much.