Companhia Paranaense de Energia (ELPC) 2020 Q3 法說會逐字稿

Good morning, and thank you for waiting. Welcome to Companhia Paranaense de Energia Elétrica COPEL Earnings Call to discuss the results of the third quarter of 2020. (Operator Instructions)

Before proceeding, we inform that forward-looking statements that might be made during this conference call related to Copel business outlooks, projections, operating and financial projections and goals are based on beliefs and assumptions of the company's management as well as on information currently available. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur. General economic conditions, industry conditions and other operating factors may also affect the future results of Copel and cause results to differ materially from those pressed in such forward-looking statements.

With us today Mr. Daniel Pimentel Slaviero, CEO of the company; and Mr. Adriano Rudek de Moura, CFO and IR Officer. Copel's presentation is available at the company's website at ri.copel.com. We now turn the floor over to Mr. Daniel Slaviero, CEO of the company.

Good morning, everyone. I would like to thank you very much for your participation in this conference call. I hope that all of you are doing well and healthy. Considering that most of you or probably all of you have read in the release that we published yesterday, me and Moura would like to bring to you a shorter presentation so that we have more time for questions and answers about the results and future perspectives of Copel. It is with great satisfaction that I start this call, mentioning the most relevant fact of the recent history of the company, which is the sale of Copel Telecom. This is a process that we are building since the beginning of our management and this week's result was an important landmark, BRL 1 billion of goodwill over the minimum price around 15x the adjusted EBITDA. These are figures very significant. And that amount, as we understand it, is thanks to a well-structured process, both internally as well as externally.

I especially thank Wendell de Oliveira, Telecom's CEO; (inaudible), CFO of Telecom and also Cassio Santana, New Business Officer. And the 3 of them have being at the head of this process and on behalf of them, all the employees that worked on the project. Also, I would like to praise the work of Rothschild Bank and Cescon Barrieu offices for their important support throughout this period of time. It's important to say that this movement is in line with our strategic planning, which is to focus in our energy for business. And the main question is, what do we intend to do with these proceeds? First, we wanted to increase our investments in Copel distribution. Second, we aim to look for opportunities in generation and transmission, and we should focus on brownfield projects. But also, we are going to look at opportunities in auctions for the next months and years, always being very strict in terms of capital allocation. And third, to implement a dividend policy that is more adjusted to the new reality of the company.

We end another quarter with sound results and very consistent ones. Moura is going to go into the details, the improvement of our EBITDA performance, our net income and also the robust cash generation for Copel, both in the quarter as well as in the year-to-date. But I would like to highlight other topics that I consider to be very relevant over these 3 -- third quarter. And special the approval that just happened yesterday by our Board of Directors of a Model for the UNITs program. You may have read it in the material fact that was published yesterday.

And it brings the general guidelines for the program. We will have 5 shares issued by the company, 1 common share and 4 preferred shares, class B and a stock split that will be still defined, aiming to maximize the liquidity of its securities. And what I consider even more relevant, the improvement of corporate governance with a migration to the Level 2 of B3 governance. It's crucial to say that all this model and the implementation of it depend on the approval of the shareholders' meeting that is still -- should be happening. But other additional operating topics should be highlighted, and you can see it on the screen. But I would like to say a few things here. To stress a few of them, we are concluding today another voluntary redundancy program. In the first stage, we had 218, and we estimate that it will be around 300 people, and we will have annual savings of BRL 63 million. If these figures are confirmed by the end of the process, we will be having 6,700 employees, much less than the 800 employees -- more than -- if we compare to September of last year.

Also, we have, by Copel GeT a dispatch of (inaudible). And this is allowing it to recover all its fixed costs for this year and partially already the fixed costs for 2021. There was also a significant improvement on the operating performance of Copel generation and transmission. This is going to be mentioned by Moura, and the process but -- it already shows a very efficient work and competent work also of our teams.

And now we are focusing on the regulation of the GSF by the preliminary calculations of CCEE, Copel's compensation will be of around BRL 800 million, but it still can be reviewed specifically because it has to be -- the capital cost that has to be analyzed in ANEEL's regulation that should be concluded in the beginning of December. And Copel distribution in this quarter, we felt impacts of COVID here in Paraná with a drop in the grid market of 2.8%. Nevertheless, the discipline and cost control have brought positive results also a regulatory efficiency of 8.7% if we consider the last 12 months.

I always repeat myself 3 years ago, our inefficiency in Copel distribution was close to 50%. And so this process, this reversal and the path that we are moving through with this increasing base for next year improvement, specifically in cost control, allow us to have this adjusted EBITDA of over BRL 1.2 billion in the next -- in the past months. And finally, I would like to highlight a significant growth in the commercialized or sold energy and great financial results in Copel Mercado Livre.

Finally, I would like to say that both in terms of operating performance, as well as in terms of the major strategic objectives we are executing what has been defined in our plans, I consider that this shows an alignment between what we said we were going to do and what we are doing and that values even more our Copel. Now I turn the floor to Moura, so that he can talk about the results in the quarter.

Thank you very much, Daniel. Good morning, everyone. I also would like to thank you all the participation in our call, and I hope you all are doing well. Before we talk about the results of the third quarter, obviously, I would like to say that I'm very happy about the auction's result in the last day or the last night, where we have reached another relevant target in our strategic agenda.

With a lot of responsibility and discipline in the capital allocation, we will more than ever analyze all improvement opportunities of our capital structure, aiming the continuation of sustainable projects as well as a dividend policy that can provide a long-term view to our shareholders with clear and more objective rules always based on the best practices in the market.

This now is probably the most important subject in our strategic agenda in addition to what has already mentioned by Daniel and approved by the Board of Directors. Yesterday, the implementation of the UNITs program with important improvement in governance. So this is a great positive agenda that will be fruitful to our shareholders.

Turning to the next slide, I think it's self-explanatory. But I highlight that the results here continue to be sound and consistent and they do reflect a full alignment of all the businesses under the Copel Group with a clear strategy of efficiency improvement in all areas. This continuous search for profitability and efficiency improvement in each one of our businesses continue being part of our agenda and only increases our responsibility because we know that great results in the past are not guarantee of great results in the future.

So in summary, BRL 1.2 billion of EBITDA in the quarter, BRL 608 million of net income, growth of 28% and 11%, respectively, these figures do include the results of our telecom operation. And according to accounting criteria, specifically CPC 31, there was a reclassification for discontinued operations in the published results, as well will further explain.

I highlight that the main driver of this quarter's results was the relevant improvement of the adjusted EBITDA of GeT, basically because of the higher energy -- higher volume of energy sold, facing the strategic seasonalization of Copel GeT that also aligned to a lower exposure of prices and the spot price in addition to the positive impact in the review and readjustment of the transmission company contracts. Also in this, we had a tariff adjustment and an increase in the revenue of portion B, in addition to the recovery of the grid market growth in September. Although the year-to-date is still negative, it has a positive trend from now on. And the year-to-date up to September, as shown, the adjusted EBITDA was 16% higher. That's a very relevant increase considering the crisis we went through this year, and we end this period with over BRL 3.5 billion of EBITDA and the record net income in the nine first (sic) [first nine] months was BRL 2.8 billion. Before we turn to the adjusted results, I also would like to go to some highlights in the quarter in the next slide.

The main message here is that Copel is still or does -- still have a sound financial position right now even with the relevant adverse events, as we said, COVID. And I think this quarter had -- didn't have much impact from COVID. And even with all these adverse effects, operating cash generation in the quarter was 70% higher, reaching BRL 1.6 billion. In the year, it's already BRL 4 billion in the year-to-date, a record figure also. Therefore, we maintain a comfortable cash position, reaching those BRL 4 billion, even paying all the debts that were due this year. And if this was Copel's strategy to have no funding, specifically because of the high cost. And unfortunately, we did not need

to have new fundings. And we paid basically all maturity except the BNDES loan of BRL 432 million for Lot E of transmission. And out of those, almost BRL 270 million have already been released, and the remaining of that will now depend on the work. And those work should be concluded in the first quarter of 2021. The material fact that has reinforced cash position was the COVID account incoming of BRL 870 million in June. And that will start to be charged by 2021. I also highlight the leverage of 1.3, a significant reduction vis-a-vis what we had in 2019, 2.2. And remember that this was one of the main reasons for our rating upgrade, which now is AA+ with a positive perspective. By the way, we should say that very few companies in Brazil during the pandemic had the rating raised and even more than that with the positive perspective. Now looking ahead, we have a low debt maturities around BRL 2 billion in the next 12 months, specifically after the second quarter of 2021. Another indicator, which is a consequence of that strong cash position is our sound liquidity. Our current liquidity is at 1.4x.

And finally, I highlight investments of BRL 430 million in the third quarter, while in the year-to-date of September, CapEx was BRL 1.2 million. And the CapEx for the year of 2020 is BRL 1.8 billion. And as Daniel said, we are now touching our investment plan very much. On the contrary, we were very careful so that the plan was fully carried out, and we have been able to fulfill it.

As we said, we also had accounting changes in the quarter with the restatement of telecom business for -- as discontinued operation, considering the perspective of the sale of this asset at CPC 31 and also reinforced by the auction of the last day of this 9 of November. This change has as an objective to show how the comparable basis work. And this also has resulted in the restatement of our financial statements of 2019.

Turning to the -- just for comparison basis. In the next slide, we have nonrecurring items. As you can see, we -- just considering here continued operations EBITDA was BRL 1.135 billion, including discontinued operations results, that is EBITDA of Copel Telecom. We reached an EBITDA of the recurring base of BRL 1.2 billion, in line to the results of 3Q '19. I highlight the main nonrecurring items for the prior year, which have been the positive reverse of over BRL 180 million of impairment of wind generation assets and the posting of over BRL 100 million in tax credits, PIS and Cofins and Compagas as well as write-offs at Telecom, which have been excluded. While the result this year was negatively impacted by nonrecurring events of provisions for litigations of BRL 94 million and the reversal of the fair value and purchase and sale of energy of the commercialization company and, BRL 103 million. And then we have the adjusted result of BRL 1.2 billion with a growth of 28%.

And year-to-date, the first 9 months, adjusted EBITDA you can see here, it's self explanatory, BRL 3.5 billion. These are the same nonrecurring items I have already mentioned. Turning to the next page.

We here have the adjusted EBITDA per subsidiary. As I mentioned, I highlight the result of GeT, growing 42% vis-à-vis last year, we already explained why this is [analyzation] strategy, lower costs stemming from energy in the spot price and also the tariff review of the contract 060. On the -- despite of the drop of 2.8% in the grid market, which was negative in the market and September is positive, the EBITDA growth was 4% vis-à-vis the same period of last year, impacted by the large increase of 1.6% of revenue with energy supply.

A consequence of a growth of 5.7% in the Residential segment and the reduction in 9.8% of expenses with energy -- electric energy bought for resale, by the volume reduction and also prices of energy in spot prices.

These great results show that we are on the right track and cost control and that the work that we are doing is right. We are focusing on financial discipline. And the effect is right. It's important to say that we are maintaining the efficiency levels of 8.7% above the regulatory EBITDA. The telecom also, the adjusted EBITDA of BRL 48 million in 2020 -- in line with 3Q '19. And Copel Mercado Livre, starting now to bring positive results and EBITDA of BRL 3.7 million vis-à-vis a negative EBITDA of BRL 600 million in 2019, and that can be explained by the relevant increase of 64% in the energy supply revenue because of a higher energy volume for free clients and bilateral contracts, partially offset by the growth of energy purchased for resale. Here, we should say that this quarter, the company had a gain of over BRL 100 million with the mark-to-market of its energy contracts in the period, and that amount is considered nonrecurring, as we already mentioned.

On the next page, we have the performance of manageable costs PMSO in the third quarter of this year when compared to the third quarter of '19. On P line, you can see that we had a reduction of BRL 11 million in employees payments and BRL 3 million in benefits. And that is a consequence of the reduction of 507 employees in the last 12 months. Also, Daniel mentioned it. Obviously, here, we do not have the impact of this PDI impact.

On the other hand, costs have been negatively affected by the increase of BRL 37 million in the provision for profit sharing program and performance incentive program because of the improvement of the recurring results. And that excluding these effects, the line P would have had a 4% increase facing inflation. In material lines, we had a reduction of BRL 5 million in expenses with materials. On the other hand, we had an increase of BRL 24 million in third-party services, basically here in the distributing company, and that reflected higher expenses with the electrical system maintenance.

I remember that the cyclone that caused the damages in the state started in the beginning of July. On the other provision lines, the main impact is the BRL 156 million, out of those BRL 143 million refer to litigation, especially tax litigation, BRL 46 million in tax and civil BRL 67 million almost. And reversal of BRL 124 million vis-à-vis 3Q '19. In that period, we had the impairment reversal of assets for wind generation in the amount of BRL 183 million in the quarter. Therefore, there is a total variation of BRL 280 million.

This way, we have a total in our PMSO of BRL 802 million. But excluding nonrecurring items and the provision lines, the manageable costs totaled BRL 708 million in 3Q and a growth of only 7% vis-à-vis the adjusted cost of BRL 661 million in 3Q '19.

Still, if we exclude the increase of BRL 37 million in the profit sharing program, PMSO have increased just 1.5% vis-à-vis the same period in the last year, considering the inflation of over 3%. Turning to the next slide. We can here see the history of our investments. It is clear that GeT and major investments are related to the conclusion of some works and the Lot E of transmission, and we have already invested BRL 341 million in the 9 first (sic) [first 9] months of the year, and we still have disbursements of almost BRL 300 million by the end of the year. The telecom, we just have the needed investments to activate customers totaling BRL 21 million, BRL 53 million in the year-to-date. And this is our focus now. We are having now a large concentration of our investments in the third quarter. We invested BRL 320 million, a growth of over 40% vis-à-vis 3Q '19. And the year-to-date, we already reached BRL 827 million, maybe one of the largest investments of the past few years or maybe the all-time high for our distributing company. And we only have BRL 248 million to go, and we should reach BRL 1.1 billion, and that is our commitment.

Finally, in the last slide, but it's also self-explanatory. We already mentioned that this is the performance of our leverage. We reached 1.3 in the year-to-date or in the last 12 months and progress, consistent progress when we compare it to last year when we had a leverage of 2.2. That's what I had to bring to you. Thank you very much for being with us. And now I turn the floor to the Q&A session.

(Operator Instructions) Our first question is from Carolina Carneiro, Crédit Suisse.

My question is about the new dividend policy. You mentioned in the beginning of the call that you could announce it soon. And you already mentioned in a few meetings that you would be considering that. Can you give us more color on it? When can we expect that what you were thinking about it? And if you allow me a second question. With this migration process, the unitization process, actually going to the level 2 of Bovespa. Are you also considering to review your bylaws, any type of changes there?

Thank you very much for your question. Yes, that's exactly -- these are our next steps, what you said in your second question. Yesterday, the model was approved, as we said, and now we are working and concluding the review works and the modernization of our bylaws as well. And here, we will include governance improvements, the committees, the statutory committees, sustainable development, ESG. So that reorganization and improvement, considering the best practices, the best cases in the market, and that's what we are going to be doing in the next few weeks or months. And that the dividends policy will be included in this package. We are already discussing this. I think the figures and the low leverage at 1.3 brings us to that. But we want to offer that. And when it has approved it, everything is going to be under the same package to be submitted to the Board of Directors.

So I would say that this is going to happen in 60 days, probably at the most or 60 or 80 days, I would say. Very soon this package will be available with all the information. But we are working on it so that it meets the company's expectations as well as, obviously, of all shareholders and stakeholders.

Next question from Mr. Marcelo Sá, Itaú.

,

Congratulations on the results. Well, picking up on Carol's question on dividends policy. I think your leverage is very low, and you were successful with the sale of Copel Telecom. Can you comment how -- what is going to be the use of proceeds? If this is going to be used to pay more dividends? If you are going to use that to grow? We talked before and it probably -- there is a possibility that the focus and growth can be M&A. Can you comment on that? And also, about the concession because of the GSF agreement, I know that you probably will try to concentrate this extension in something specific, and this is going to be a decision of the companies. And it's not something that you have to divide by all the plants as Daniel had proposed. Do you have room to work on that? Can you -- did you have any -- did you move forward in that discussion?

Marcelo, great questions, and I'm going to separate the first part, and I will start backwards about the GSF and the concession extension. And then we talk about the Telecom, the investments. And then Wendell I would like you to give him an overview for the next steps because these funds will take some time to come to us. We expect it to happen by May or June of next year. So Marcelo. The second question and I'm starting by the second question. This is what we have. These BRL 834 million that we have in the previous calculations of CCEE, we believe that we have the cost of capital included there. This is something that Copel is working on and other companies in the sector, but always ahead of that. And there is an expectation on our side because this is the understanding on the law that this cost of capital needs to be contemplated, and that would also improve the figures. Second, you also said it. It is part of our strategy and of our understanding that the regulatory asset is of the concession here not of the plants but you could allocate them on the plant.

But our strategy of this understanding is the one that rules. And because there is this history in the past -- of Copel in the past and the reserve auction, the energy reserve auction, we had provisions for 2 different purposes and it allocated only in one plant. So this is not rectified yet. We are talking to other Board members and to assistant and we believe this is going to be the final decision, but we are not sure that this is going to come out in the final regulation. We are working with this possibility. We will advocate for this because then we can have this available for the plant, maybe in the future and so that we can execute our GVM plan in which we already have the company. In March, we're already hired financial and legal assistance to help us in that operation. So this should be happening in the second half of next year. That's how we are working.

Now about the first question, before turning the floor to Wendell, I would like to say that the funds when they come in by the end of the first half of next year, they will already be reinforcing our cash structure, and they will be following that sequence that I mentioned in the beginning of the call. Our priority is to invest on Copel distribution to improve the network and that's how we work to improve the regulatory base of this year. And we understand that these investments because Copel has a history of 100% investments being considered prudent for ANEEL, and this is very positive for the company.

And that reduces costs and improves service to consumers and increases our base. And anyway, we are already looking at opportunities in brownfield. Some of the projects that were available in the beginning of the year that have been removed because of COVID. When we have information coming from our financial assistants that they tend to come back to the market either by the end of the year or at the beginning of next year, and we look at that, and we'll prospect that actively, but always with full responsibility in terms of our capital allocation because we see a lot of competitive opportunities. We have seen discounts in transmission lines, all the market knows about it, and these are very aggressive. And so we do not intend to do anything that is not going to generate value for the company in any -- and Wendell, if you can now give us an overview of the next steps from now up to the closing and transition process.

So on the 9th of November, we were successful in the auction, and right now, we are analyzing documents so that we can have the approval of the bidder of this auction. There is a period of time that should be respected, and this is the normal statutory process, and we expect to have the contract signed by the midst of January, and this is an important moment. That's when we call -- that's the period that we call signing. And after that, we can submit the process to Anatel and our antitrust agency so that they can evaluate the whole transaction and give us the approval for the final signing of the contract, the transfer shares and payment. If that happens in January, there is a period of time for these 2 agencies that take more or less 3 months. So we believe that by June, July, at the most, the whole process will be concluded, and then the shares will be transferred to the new buyer. And Copel will receive the money, and then we can still offer a service of operation and maintenance, this new service -- or the system to the new buyer. That's it.

That's great. If you allow me a final question. I think it's relevant to be discussed. The last week, ANEEL has published a proposal, discussing the new methodology for operating costs. Actually, I would like to understand your impressions about this document. What drove my attention was the average efficiency rate. ANEEL was checking the data reported by the companies and their calculations. And now they are determining an arrival number as the efficiency maximum was 20. So your average efficiency has to be 83, so that you can get to that amount. And it seems to be a little bit dangerous because before it was based on data and now there is a discretionary definition by ANEEL. And there are other discussions on new measurements on how do you -- how you measure laws, quality and even labor lawsuits in the model, I would like to hear from you because probably this was a positive change for you, Copel and CEMIG gained more efficiency when you compare them to 2018. Copel gained 15 percentage points and according to ANEEL's ranking at 89.3 and the average efficiency is at 83. So can you comment on that? I would appreciate.

Marcelo, yes, really, this resolution was published. We have seen some reports and also reactions coming from the market and the companies themselves. We have a critical understanding, but we have not analyzed it deeply to come to a consolidated and public position. What we see is that we have to award those that are doing their homework based on real data. This is the principle of regulations from ANEEL, and that cannot be lost -- by cannot be lost in estimates, but we do not have a position yet. Our teams are still under Max supervision, working to have a detailed analysis on it. Max, I don't know if you want to comment on it. The analysis is still in the very beginning, we need to go deeper on that.

Yes, that's what we need to do. And also highlight possible improvement points so that we do not [hinder]. And also this consider companies such as ours, who are knowing their homework. And we are doing our homework and all investments. And next week we will have -- we'll hold a huge event here in the state. The minister will be here and other ANEEL's authorities and will be here as well, which is the Smart Grid and also we will have micro networks. These are consistent investments in technology that improve service and reduce costs. Only in this Smart Grid program, we will have BRL 720 million in the first stage with equipment that is the top -- state of the art internally interconnected. This is a pioneer project, not only a pioneer project, but it is the largest in the sector. So these initiatives always aim to improve efficiency and operating costs.

Next question from Mr. Gabriel Francisco, XP Investments.

Congratulations on the excellent results. You're doing a great job. I have a question about Compagas, that we have seen after the auction, the governor mentioned other possibilities, and he did mention Compagas. I know some things go through Copel. And also, there are other items that are under the legislative area. So if you can give us an update on that, if you see any progress that turns this operation feasible. And also, I would like to understand that it's happening at the same time of the divestment of Gaspetro Petrobras. That's my question

Gabriel, excellent question. I think the governor was very clear and precise on B3. Because he talked about his state understanding and he listed some projects that he understand -- understands as important for the state, which are highway auctions over 4,000 kilometers with the Ministry of Infrastructure, airports and so on. This is an agenda he announced.

Regarding ourselves, and he also talked about Compagas. And he set challenging goals so that we can move forward with the process. In the current stage, really, we are renewing the concession. So the executive power already submitted bill of law to solve the legal problem of this concession, if it would end in 2024, 2029 -- or 2019. The government understood it was '19, and we went to court, and we were -- we got the concession up to 2024.

The second then is the renewal of the concession. So the government is concluding studies for that process, and we understand that over the first half of the year, and this was -- its main topic here is the conditions will be there to renew the concession. So it is based on that, that we intend to work to be able to conclude and -- the process and to sell that asset over the second half of 2021. We don't know the month yet, but it's going to be over the second half of 2021.

And then it goes with your other question, how Gaspetro is going to be. So it's good that it works more or less like that because Gaspetro process should end in the first quarter of 2021. And then there will be a 30-day period for Copel to be able to have the preferred right, and I can tell everyone at this hearing us that we do not know which will be the terms, but we intend to see that option of the 24.5% that we'll see -- that we'll have there if that doesn't happen, is that we know that we have information that they also have someone to sell the process. And I think that if we have higher percentage there in the company of shares of our company there, it probably will appreciate in the second half of the year. So we'll be watching it and working on it so that everything is concluded by the end of next year.

(Operator Instructions) If there are no further questions from participants, we now turn the floor back to the management for their final remarks.

Once again, I would like to thank you very much for your participation. And if there are no further questions, I believe the topic and the main topics and then the main subjects have already been tackled. And once again, I would like to say that we have had a great process with Telecom. We had a goodwill with legal security and as the governor said, on Monday, this was the first privatization in the State of Paraná after 20 years. So this is symbolic. It is very representative. But what matters is that -- in this case for us is that we are executing our strategic plan, which is to focus in energy generation, transmission, selling and distribution of energy, and we will continue working on our strategy, which we consider a coherence between what we say and what we do. And this is what all of us are doing.

My colleagues here are fully committed to the continuous process of value generation for the company. We are very happy. Thank you very much. We did have a great reaction in the market and above it all, we are very happy, very excited about this new strategy about the path we are moving through and the opportunities of new businesses, expansion in renewable and wind sectors, solar, also gas market opening to the free market. And also, we know we'll have challenges for next year, but we have a full agenda, but we are very happy about Copel's perspectives for the next years. Thank you all very much, and have a nice weekend.

Ladies and gentlemen, Copel's conference call for the results of the third quarter of 2020 has ended. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]