Copel's (ELP) CEO Luiz Fernando Leone Vianna on Q3 2016 Results - Earnings Call Transcript

| About: Companhia Paranaense (ELP)

Companhia Paranaense de Energia (NYSE:ELP)

Q3 2016 Results Earnings Conference Call

November 16, 2016 12:00 PM ET

Executives

Luiz Fernando Leone Vianna - CEO

Luiz Eduardo da Veiga Sebastiani - CFO and IR

Adriano Fedalto - Accounting Superintendent

Jonel Nazareno Iurk - Business Development Officer

Gilberto Mendes Fernandes - Corporate Management Officer

Antonio Sergio de Souza Guetter - CEO, Copel Distribuição

Sergio Luiz Lamy - CEO, Copel Geração e Transmissão

Ricardo Goldani Dosso - CEO, Copel Renováveis

Franklin Kelly Miguel - CEO, Copel Comercialização

Analysts

Carolina Carneiro - Santander

Vinicius Canheu - Credit Suisse

Pedro Manfredini - Itaú

Lilyanna Yang - HSBC

Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to this Conference Call to present the Third Quarter 2016 Results of Copel, Companhia Paranaense de Energia. We would like to inform you that all participants will be in a listen-only mode during the call. Later, we will hold the Q&A session when further instructions will be given. [Operator Instructions]

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

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

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

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

Luiz Fernando Leone Vianna

Good afternoon and welcome to the third quarter Copel earnings conference call. I would like to thank you very much for being here. It’s always a pleasure to talk to you. I would like to start our conversation talking a little bit about the operating highlights of the Company.

This was the first quarter of Copel Distribuição with the effect of the result of the full tariff cycle review. Although the downturn in the consumption of energy had negatively impacted the results of the distribution company, the remuneration of the new asset base allowed the subsidiary EBITDA to come back to positive figures. The results could have been better, if it were not for the continuous crisis in the distribution segment, which settled from the energy consumption reduction and inflation effects.

In transition segment, the highlights are the remeasuring of the cash flow estimates which is referred to the RBSE. As you already know, the MME through the ordinance number 120/2016 published in April this year the term of the integration of R&BSE based on the regulatory remuneration and updating record values since 2012 and payments have been generated through the RAP as from the current process of 2017. Based on the best estimates available at that moment, the Company posted a positive effect of 978 million in the operating revenue of the second quarter. However, based on Aneel’s inspection team notes that signaled that the lesser amount would be received than that estimated in the second quarter of 2016, we remeasured the cash flow which confirms RBSE, which has led to a reduction of 206 million in the asset balance, reflecting on the earnings of the third quarter as we have shown in slide three.

It’s important to mention that Aneel has still not yet rectified the final result of the report and the values recognized are based on the best current estimates of management. With that said, we must remember that the improvement of the regulation concerning the calculation of the cost of capital to be added to the RAP of transmission utilities is up for public hearing.

On slide four, we would like to talk about more about on investment program. 2016 has been a year of challenges but with a lot of work and perseverance, we are achieving our objective and improving our Company. We have already carried out about 84% of the CapEx predicted for 2016, totaling more than R$2.7 billion in investments until September of this year. A very important part of this investment was used for finishing some projects like the small hydroelectric plant of Guaraciaba, which received its operating license which was granted on the 13th of August, allowing the commercial operation of more than 600 kilometers of transmission lines and a substation, adding R$49 million of Copel. Another project with the conclusion of the transmission line of 967 kilometers, which belongs to Paranaíba, which is awaiting the issuing of the operating process to begin commercial operation, and we believe that this should happen till this month, adding R$32 million to Copel’s RAP. Looking towards the next year and 2017, we foresee the conclusion of another four transmission projects which altogether will bring about an increase of R$195 million to Copel’s RAP.

In the generation segment, we will conclude the Colíder hydroelectric plant and the first phase of the Cutia wind farm, which includes 7 of the 13 wind farms which make up the complex and it will come into operation in October 2017 adding to Copel’s portfolio another 632 megawatts of installed capacity.

Before we ask CFO to talk about the figures of the third quarter, I would like to talk about Copel’s anniversary on the last 26th of October. Our Company celebrated its 62nd anniversary and collaborations once again came in the form of recognitions. This year, we will receive several awards among which I might mention the ABRADEE price for the best energy distributor in Brazil according to the plant’s evaluation. This is the fifth time in the last six years that Copel Distribuição has received this price.

Copel Distribuição also was elected for the fourth time in the last six years as the best distributor of Latin America. The award is promoted by the Comissão de Integração Energética Regional, CIER, main entity for the Consultivo electric power sector. And also our distributor won the transparency award in 2016 granted by the National Association of Finance, Administration and Accounting Executives ANEFAC. After 14 years, Copel has come back to the ranking which recognizes the quality and transparency in accounting information rendered to the market and being the only state-owned company among the five companies of the electric sector awarded in the 20th edition.

Now, I’d like to ask Sebastiani, our CFO and Investor Relations to take the floor, and he will go into further period about the period earnings.

Luiz Eduardo da Veiga Sebastiani

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

As President Vianna has already said, some non-recurring events affected the results of the third quarter, and we will talk about that on slide five and the following one.

In the line of operating revenues, we may mention three facts, which contributed to the downturn of 10% compared to the third quarter 2015. The supply to our customers which showed a reduction of 24% totaled about R$1 billion was impacted by the results of the 4th cycle of tariff review of Copel Distribuição which reduced tariff about 13% since the 2014 June and by the reduction of 9% of the captive market, a reflection mainly of the migration of customers to the market.

The electric power sales to distributors totaled R$684 million and showed a drop of 9%, which stems from remarkable activation of the Araucária thermal plant, partially offset by the sale of energy on the short-term marketed by Copel Geração e Transmissão. Revenue from the use of the power grid was R$503 million , a downturn of 22% regarding the third quarter 2015, a consequence of the impact of the R$206 million, which refers to the remeasuring of cash flow of assets regarding RBSE, as our CEO has said.

The other item of operating revenues made up the telecom revenue, gas and another distribution showed the growth of 16%, reflecting mainly the increase of 16% in Copel Telecom’s revenue due to an expansion of customer base.

The next slide six, we detail the costs and operating expenses, which was R$2.7 billion in the third quarter of 2016, 14% under that of the same period of 2015, which has been greatly to the reduction of 19% on the costs of the purchase of energy, reflects of the repeating [ph] of energy contract, which were substituted by the contracted energy which comes from the quota system and the reduction of Itaipu tariff. The charges with the use of the grid show the drop of 6% due to the lessened expenses with charges from the reserve energy. The manageable costs went up 5% in the third quarter of this year and reflect more expenditures with personnel and third-party services offset by the loss reduction in the switching off sale of assets when compared to the third quarter 2015. The line of provisions and reversion still a R$100 million and was influenced by the booking of R$49 million, which referred to administrative and labor litigations, R$34 million tied to loan loss provisions and R$15 million was referred to the loss of the reduction of the impairment of the Consórcio Tapajós.

Slide seven shows the EBITDA was 43% year-to-date compared to the books in the same period last year, totaling R$428 million in the third quarter this year with the margin of 15% on operating revenue. The growth is broadly explained by a reduced cost with GSF and the result of the 4th cycle of tariff review of Copel Distribuição. Cash generation of Copel Generation and Transmission accounted for 51% of the EBITDA consolidated, and Copel Distribuição 21% with Copel Telecom 7% and other companies as a group accounted for 21% and the major contribution Elejor.

Slide eight shows us the net profit consolidated of Copel. In the third quarter, the Company’s result was negative R$75 million compared to the net profit of R$91 million registered in the same period last year. This result was impacted by greater expenses, financial expenses, a reflection of a greater balance of financing and debentures, with a provision of R$122 million for the non-levying and the social contribution referred on assets and regulatory liabilities of Copel Distribuição, and analyzing the results of the subsidiary Copel Generation and Transmission closed the period with the profit of R$45 million, Copel Distribuição a loss of R$127 million and Copel Telecom a profit of R$13 million. It is important to say that year-to-date the Company has booked a net profit of more than R$1 billion, which is a growth of 23% vis-à-vis the same period in 2015.

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

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

Question-and-Answer Session

Operator

Thank you very much. Ladies and gentlemen, we would now like to start our Q&A session for analysts and investors. [Operator Instructions] Our first question comes from Murillo [ph]. You may proceed.

Unidentified Participant

Good afternoon and thank you for the call. I would like to know if there is anything new regarding the balance of the Company, and the main going off the balance sheet?

Unidentified Company Representative

I’m sorry, I did not understand. We couldn’t hear you properly.

Unidentified Participant

If there is anything new regarding the guidance, which was off the balance sheet like the fiscal question of [indiscernible] which you have and maybe other items off the balance sheet? What the impact was as Copel has acted more strongly in the last trading discussions? I’d like to know if there is any novelty here.

Unidentified Company Representative

Thank you, Murillo [ph]. I would like to ask Superintendent of the Company to take the floor.

Adriano Fedalto

Good afternoon, Murillo [ph] and all. We did have some divergence for the first half of the year as we have mentioned some examples. And regarding [indiscernible] we are still in the negotiations with those responsible and you can see and continuously note about 70 million shares classified as possible loss and we restated R$150 million was for probable, accounts receivable, about R$15 million. So we received the communication regarding the subject, as said it was one of the main events for the quarter, which influenced our contingency account. Another example is Cofins, it continues. We had last quarter a significant reduction and we have the second running here in [indiscernible]. We also have got on with this and there will be a possibility of reversion still this year. We should have good news regarding the second suit. One event in this quarter was the provision for the non-activation of the deferred income tax. This is a provision and we are still discussing internally with our consultants and we should go after this credit again but they negatively impacted our performance in the period.

Operator

Our next question comes from Carolina Carneiro from Santander.

Carolina Carneiro

Good afternoon, I have two questions. The first, do you have any update on the commercialization of energy of the generator rate of free [ph] energy 2017, 2018? Have you closed new contracts? And certain new cost [ph] performance. You said that you were going to hire a consultancy company to evaluate provisions and could we see any cost reduction? There has been an improvement I think of cost, but they are still high especially in the distribution company. So, could you give us some novelty regarding the better performance of the distribution company?

Antonio Sergio de Souza Guetter

This is the CEO of Copel Distribuição. I would like to call on Sergio Lamy.

Sergio Luiz Lamy

Sergio Lamy from COPEL Generation and Transmission. Regarding your question about the level of contracts or new contracts regarding generation and transition, today in the large sale auction which we announced and the contract for [indiscernible] we managed to get for 2017 82% of contracted energy in our portfolio and for 2018, 61% contracted and 2019, 51%. This is not our closing position yet for the year because we have already published for the next week another auction of sales energy of Copel Geração e Transmissão where as a prospect, we will close the objective of the year for 2017 and also increase a bit more the level of contracts for the years of 2018, 2019, 2020. I hope that I have answered your question.

Carolina Carneiro

Can we work with the same price levels of 150 and a 160 or has there been any change in the price levels?

Sergio Luiz Lamy

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

Carolina Carneiro

Thank you.

Unidentified Company Representative

Carolina regarding your other question, the second question regarding costs, it’s not just similar [ph] coincidence but an important coincidence. Today was the first meeting of the cost management coordinated by the CFO demanding a joint operation and coordination of all subsidiaries identifying good practices in the different subsidiaries. And the best practices can filter down to all the Copel group of companies, so we identify very important practices for cost reductions, cutting of headcount, reducing the fleet or Copel Distribuição which transfers these practices to Geração e Transmissão in the same way Geração e Transmissão transfers it to other subsidiaries of the group. But a job coordinated under the coordination of the CEO of Copel Holding Company to bring more immediate and practical results regarding cost reduction. So, our main objective is to reduce costs maintaining our systems as it is with the quality which is so important to Copel, brand and better quality. And now we will have the also the brand of cost reductions. And your third question, I will ask the Copel Distribuição CEO to take the floor to get this, talk about that.

Antonio Sergio de Souza Guetter

Hello Carolina, this is Antonio Guetter. Regarding cost and cost reduction, the numbers show the efforts that we are making. To avoid the crisis which affected us and the economic crisis, but we have had been very strong in our actions and we’ve had the less level of clarity in the year. So, we have already passed the inflection on the curve and we are improving and allowance for loan losses. We have covered that. And we had unexpected costs, but even with the problem of oil, we managed to get a much better loan loss provisions and the provisions are being packed [ph] by the management so to say, because these are the two indicators that impacted our business, the loan loss provision and judicial actions. One of our main banners is that our cost reduction especially on the distributors company, because it has to be an efficient cost management to reduce regulatory amount.

Operator

Our next question comes from Vinicius Canheu, Credit Suisse.

Vinicius Canheu

Good afternoon and thank you for the call. We have seen in the quarter volume [indiscernible]. And Luiz mentioned also there was a problem of temperature, the weather. So, anything that you can predict for the quarter or for the half year, just this third quarter, will it continue or will there be an improvement?

Unidentified Company Representative

I’ll let Sergio Guetter from Copel Distribuição.

Antonio Sergio de Souza Guetter

Well, I think as I have said in the previous question, we have been through a difficult time. Our market is reacting at level so that we are passed the work. Recession is weakening, it’s slowing down. And so, the results have improved. The tariff review that was made at the middle of the year, we are now reaping the benefits, almost the double of the distribution, which doubled our remuneration. So, I think with the trend that the numbers are sharing, we will have a very good fourth quarter.

Vinicius Canheu

Can you give me an amount?

Antonio Sergio de Souza Guetter

No. Unfortunately, I cannot give you a quantitative data. I can just extrapolate the market which is developing. We had a drop in the first half of the year but it recovered in the second half of the year and the recovery of the market as a whole. And this market reversion is making things more optimistic for the next, the beginning of the year, first half year. For the question, all you have to do is [indiscernible].

Operator

The next question comes from Pedro Manfredini, Itaú.

Pedro Manfredini

Good afternoon. I have two questions. First, regarding the current investments in the distribution company and you have already got a basis, you had a review in June, so there will be a recurring CapEx in the distributor in the next year or two years. I’m also asking this because we analyze the EBITDA for the last quarter, we will come to an EBITDA with a profit of R$400 million in the year; you have a CapEx more than R$600. So, are you going to equate the CapEx to know what the generation of EBITDA of the Company will be in the next two years and also transmission. Copel has recently had some transition projects but those were not favorable, the effects were not very favorable. Now that they are, we have had some new entrants in the auction. What about Copel? Can we expect 2017 with a conclusion of several projects. Can we once again see Copel coming through -- or I can get the same amount with the schedule. [Ph] I would like to talk about Copel Transmissão.

Unidentified Company Representative

Hello, pleasure to speak to you. The distributors have invested specifically in the last two years to return to quality and strengthen our grids where we needed. Idea every since the renewal of the concession is to continue to invest up to the level that you’ve already mentioned. And our objective is not only to expand our grid, but also modernize this grid. Today, the distribution network has to be modernized and we need a lot of intelligence built in and we have discussed this thing a lot.

Sergio Luiz Lamy

Hello. This is Sergio from Copel Geração e Transmissão. Regarding your question of Copel situation in the transmission auctions. In fact, Copel in the past has shown the strong appetite for transmission auctions and at a time when the returns were not all that favorable. But we know that the situation now is more favorable, it’s much better and this does not reduce at all Copel’s appetites in the wonderful large auction, we won a large lots of transmission of line and substation here in the State of Paraná and Santa Catarina. We just did not go to the last auction for strategic reason. And this strategic reason is considering the project that will come up during the next auction. So, as I said to you that we are foreseeing better opportunities much more aligned to our strategic ideas and in the next auction which will be occurring next year.

Pedro Manfredini

Perhaps just a follow-up, historically, you have partnered in these auctions. In 2017, will Copel come in with [indiscernible] or will it be the same partner that you had announced two quarters. Anybody contracted to do the project if Copel should win any of the ones? This is really something further down the road.

Unidentified Company Representative

Okay. Pedro, I would say that we are still setting the last -- we really have information of the last that will up for auction in the first half of the year, we don’t have any information, much information but the second but at least first we do and we are studying partners, but we have nothing closed yet. There are several possibilities, which will materialize in the beginning of next year. I would say that also completing, answering your question, we are not yet thrilled regarding the transition [ph] of Copel Geração e Transmissão or with partners. Generally, we have a mix depending on somewhat the auction starts with the bidding of Copel alone and then depending on the lots partner joins us. So all these alternatives are up for analysis. And I would think that maybe in February or so, we will have this program mapped up for the next auction, which is being published by the [indiscernible] of energy from March of next year.

Operator

Our next question is from Lilyanna Yang of HSBC.

Lilyanna Yang

Thank you for this opportunity. Mr. Sebastiani, are you walking with any effect of financing anyhow and what about revenue for the projects -- what about cost reduction? And a more strategic question to Mr. Vianna, what about the organic growth for generation transmission or even distribution, what makes the Copel that it’s now? And you said [indiscernible] level of event much as your competitors.

Luiz Eduardo da Veiga Sebastiani

Thank you, Lilyanna. It’s a pleasure to speak to you. And regarding the level of indebtedness, we are all very alert to these problems. We have a good eye on covenants. And Copel, when it goes beyond a certain level of commitment and leverage, which is significantly positive for the Company, we also have an expectation of the improved revenues because of the assets which are coming into operation that are coming this year and the beginning of next year which will reduce the percentage of commitment of debt over revenue. And like cost program, we want to increase our investment capacity with equity overall maintaining leverage standards. And there we are at the moment -- the highest level of the leverage and there will be a drop because of the revenue that we are expecting and cost reduction will result that we will begin to have in the first month of next year, we will see it. So, this is a daily job to keep an eye or revenue. And this is influenced by the economic scenario which brings us interesting opportunities to Brazil, a slight inflection here on the curve from recession to stability and those. So I think we have an interesting prospect for next year but it means it calls for constant analysis of the level of debt, increasing revenue and reducing costs.

Lilyanna Yang

What it would be about 2.5 times the net debt to EBITDA or do you think that’s too much?

Luiz Eduardo da Veiga Sebastiani

That’s challenging, something very complex but we work with levels below this [ph] -- we work within our comfort level. So, the Company, for example, if something drops off prospectus, investment with important return, like the Copel Geração e Transmissão CEO mentioned in the transmission sector, we will have leverage to make those investments and also the necessary investments of Copel Distribuição. So, we have to have levy in our debt level, so that at the right moment, we can use the leverage and under favorable conditions. At the moment, it is not really most favorable plan for funding, but when adequate, have a funding connected to an investment plan.

Luiz Fernando Leone Vianna

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

Operator

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

Luiz Fernando Leone Vianna

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

Operator

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

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