Companhia Paranaense de Energia - COPEL (NYSE:ELP) Q3 2023 Earnings Conference Call November 9, 2023 7:00 AM ET

Company Participants

Daniel Slaviero - Chief Executive Officer

Adriano Rudek de Moura - Chief Financial Officer

Conference Call Participants

Fillipe Andrade - Itau BBA

Gustavo Faria - Bank of America

Giuliano Ajeje - UBS

Antonio Junqueira - Citi

Operator

Good morning, ladies and gentlemen. Welcome to the videoconference of Companhia Paranaense de Energia, COPEL to discuss the Results of the Third Quarter of 2023. This video conference is being recorded, and its replay is available at the company’s website, ir.copel.com. The presentation is also available for download. We would like to inform you that all participants will be only watching the videoconference during the presentation. And at the end, we will initiate a Q&A session when further instructions will be provided.

Before proceeding, I would like to emphasize that forward-looking statements are based on beliefs and assumptions of COPEL’s management as well as information currently available. These forward-looking statements may involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should understand that macroeconomic events, industry conditions and other operating factors may lead to results that differ substantially from those expressed in such forward-looking statements.

Here to present this video conference are Mr. Daniel Slaviero, CEO of COPEL; Mr. Adriano Rudek de Moura, CFO of the company; as well as officers from the subsidiaries who will be available during the Q&A session.

I will now turn the floor to Mr. Daniel who will initiate the presentation. Mr. Slaviero, you may proceed, please.

Daniel Slaviero

Good morning. Thank you all very much for joining us in our video conference. We had another quarter with solid results, BRL1.4 billion of adjusted EBITDA, which is equivalent to a 27% growth vis-à-vis the same period of last year. Moura will go into more details, giving you a few more numbers of our third quarter. But I would like to focus on presenting the status of the execution of our strategy. And also, I will talk about what we promised to the market during our offering.

In our last call, I presented the pillars of this new COPEL, which involves people, the review of the holding role, operating efficiency and discipline in capital allocation. Therefore, I would like to briefly present the evolution of each of these pillars for the last 90 days. Our priority is people. We have completed the certification phase of the voluntary redundancy program, or PDV, with 1,437 people having signed up and a total estimated severance cost of BRL610 million. The annual estimated savings is BRL428 million from the layoffs, which will take place during a transition period until August 24, bearing exceptions that will be assessed by the company in order to guarantee the organization’s knowledge management, rendering of services to our customers related to the transaction.

The selection criteria for endorsing the sign-ups was based on a descending ranking of the sum of age and length of time with the company until the financial and operating limit was reached. This whole process, including the assessment of the level of replacement needed is being carried out by the company’s management area, with close monitoring by the Board of Directors, especially through its People Committee. Moreover, we already have two internationally renowned consulting companies, one that will help us build a long-term incentives plan aligned with COPEL’s value generation and the other that we’ll do a broad assessment work to create a personal development plan for the talents in the company.

In terms of our long-term incentive plan, this process will be presented at the general assembly in April 2024. In parallel, we are working on enhancing our organizational culture with the aim of developing a new way of being a COPEL. This involves identifying which behaviors we want to keep, others that we want to incorporate and which behaviors should be discontinued in this new phase of the company.

We believe that what differentiates companies that generate long-term value is the way they allocate capital. The current market situation does not show in our view, great opportunities in this sector given the low prices of energy. That’s why our focus will continue to be on increasing the regulatory remuneration base of the distribution company. Next week, we will approve the investment plan for 2024, which will be detailed during our COPEL Day. Certainly, our investment plan involves recurring investment to enhance and improve our assets. But the major priority remains the investment at the base of the Distribuidora, even because we have only the year of ‘24 and ‘25 to conclude this next tariff cycle.

As for the divestment plan, I think that we are being very agile and the two processes that are already on the market. In relation to UEGA, we are already at the stage of biding proposals with the number of companies that move to this phase, which is even higher than we initially anticipated. In terms of Compagas, the nonbinding proposals will be presented yet in December of this year. We intend to complete both processes by the end of the first quarter of 2024.

To conclude this topic related to investments. We continue with our ongoing innovation agenda, our corporate venture capital, CVC, with a gradual investment of BRL150 million, through our open innovation program, which is called COPEL Volt and also through finding new companies that can be added to our ecosystem, adding more knowledge in terms of our modernization, innovation and digital transformation agenda. We are very excited, even though the amounts are much lower than COPEL’s reality, but I think this breeds new air into the company. And we should be announcing some good news soon with the new – the first investment from the fund.

And finally, another strategic move initiated by the company’s management after the transformation into a corporation is just like I said the review of the role of the holding company and the opportunities for maximizing operating efficiency. The aim is for us to have a very lean holding company that defines strategies, sets policies and controls the business. And as a consequence, the business will generate wealth, but with great accountability and responsibility in each of our business units.

In regards to operating efficiency, we have concluded the first list of actions to optimize costs, then we have started the first phase of zero-based budget. We will present a summary of these initiatives, and the main results already projected for the cycle between 1 to 3 years during our COPEL Day.

In regards to improving the commercialization strategy, we are progressively evolving and increasingly focusing on opening up the market where we can capture better prices than the current PLD or spot price. I can assure you that this phase has been one of a lot of hard work for all of us here at COPEL.

Finally, I would like to inform you that all the topics I have briefly covered in this call and the company’s other priorities will be presented in further details at our COPEL Day on November 22, just 2 weeks from now. Therefore, I would like to invite everyone to take part either through the online broadcast or even in person here in Curitiba starting at 9 a.m. on November 22.

But I would like to conclude this first part of the presentation by saying that we are experiencing a very unique moment in the company. And we are firmly convinced that COPEL – with this new phase of COPEL represents a unique opportunity so that the company can move on and become a major reference in the power sector in the coming years.

And now I turn the floor over to Moura, who will talk about the results of the third quarter. Thank you.

Adriano Rudek de Moura

Good morning, everyone. Thank you, Daniel, and thank you, everyone. I would like to thank each one of you for joining us this morning. Can you please move to the next slide?

Well, before I get into the details of the figures and talking about the highlights of the quarter, it’s important to highlight this important growth of BRL300 million in adjusted EBITDA when compared to the same quarter of last year. In 9 months, this represents a 2.2% growth, which reverses what we had last year. This is a very robust growth. And this result also includes the provision of BRL611 million of the voluntary redundancy program. This affected EBITDA. And considering the effect from taxes, the net income was affected in the amount of BRL400 million. The cash effect has – will only – this cash will only take effect after the departure of the employees in August of ‘24.

Still talking about the figures, it’s important to say that both divestments of UEGA and Compagas are being reclassified, like assets that have been discontinued. In the case of UEGA, this is a reduction in cost in a comparison base. In the case of Compagas, we are reducing EBITDA of BRL160 million that was Compagas’ numbers 9 months to date. So, this is a reduction when compared to previous years.

The other highlight is the reduction in leverage, net debt-to-EBITDA from 2.5x in the last quarter to 2.3x, basically due to the primary share offering which exceeded BRL2 billion. And this amount remains in our cash. The proceeds will be used to pay the grant in the amount of BRL3.7 billion for the renewal of the plant, which will only be made in 2024. We are still waiting for the government officials to set the date for signing the new contracts. And that the final amount to be paid 20 days after signing will be updated by the Selic rate as of January 1, 2024. Also, we have the distribution of interest on capital in the amount of BRL958 million, the first payment to be made on November 30 and the remainder by the end of June 2024 with the resolution of the General Shareholders’ Meeting.

And before I get into more details, I have another important comment. COPEL’s distributes regulatory efficiency reached almost 20% in the last 12 months, adjusted to the last quarter, which was 12.4%. That means that we had a significant improvement in EBITDA of more than 11% in that comparison.

Moving on, here, we have the financial KPIs, EBITDA and adjusted net income and cash generation. And here, for the sake of comparability, we are keeping the results of the operations that were discontinued due to the divestment process I’ve already mentioned, meaning that they include the results of Compagas and UEGA.

This EBITDA growth of BRL300 million that exceeded BRL1.4 billion, comes mainly from GeT, an improvement of almost 50% in relation to the third quarter of ‘22, reaching an EBITDA of BRL850 million in the third quarter of this year. This also had an important growth of 7% in the quarter, surpassing BRL560 million in operating results. We will go into more detail about these improvements in a moment.

But before we go further, I would like to comment on adjusted net income, which almost doubled in relation to the third quarter of ‘22, an increase of more than BRL400 million. Part of this improvement comes from the BRL300 million EBITDA. And another significant part comes from the impact of interest on equity in relation to income tax and social contribution, which last year was only recognized in the last quarter or the fourth quarter of ‘22. This impact was approximately BRL250 million. This more than offset the small increase in net financial expenses, which rose by around BRL100 million when compared to second quarter ‘22, reaching close to BRL320 million in the third quarter of this year.

Finally, in terms of adjusted net income, it was BRL829 million, which consider the impact of the voluntary redundancy program of BRL611 million, which I have already mentioned, which the effect of deferred tax, we reported net income of BRL441 million. Cash generation was BRL1.2 billion in the quarter, basically in line with the same quarter of ‘22. Year-to-date, we are close to BRL3.8 million. And when compared to 9 months of 2022, there was a reduction that is basically represented by two impacts.

First, the indemnity of BRL140 million paid in January of ‘23 as part of the labor collective bargaining agreement to eliminate one-third vacation of all COPEL employees, and this ended in January ‘23 with the payment of that indemnification. And the second impact relates to the tariff ceiling that remained until April of ‘22 that injected a relevant additional cash mainly in the first quarter of ‘22, which did not affect the result by CVA. That affected this comparability of the cash. So apart from these two effects, there was an improvement in cash generation when compared to 2022.

Now moving on. Here – I mean, the next slide, please? Here, we see nonrecurring items. We already talked about the voluntary redundancy of BRL610 million. We also have BRL16 million related essentially to the reversal of the impairment of Figueira TPP due to the completion of the modernization work. We also have ACT of BRL138 million.

Moving on. By business, I’ve already pointed out, GeT made the biggest contribution this quarter. This comparability between the third quarter of ‘22 and the third quarter of ‘23, I mean, EBITDA adjusted by business. A large part of this improvement comes from the result of the purchase and sale of energy, more than BRL200 million with a greater volume sold, mainly on the regulated market with the effect of the validity of the 400 megawatt average contract, which was extended by the renegotiation of the GSF at a very interesting price above BRL250 per mega. And also due to the improvement in the hydrological scenario with an average GSF of 8.5%, which is much better when compared to last year which had low energy prices.

And also, we now see the impact of the acquisition of the Aventura and Santa Rosa & Mundo Novo wind farms in terms of generation and transmission. We also had a tariff review of the transmission contracts. They were adjusted by a higher IPCA when compared to the third quarter of ‘22 because, in fact, back then there was deflation, but which adjusted for IFRS 15, the increase was 16%, reaching a regulatory revenue of approximately BRL270 million in the third quarter. So we are accumulating more than 727 in the period.

On the negative side, in this quarter, we recognized a regulatory dispute involving the methodology for calculating the Surplus and Deficit Compensation Mechanism, which we are questioning administratively before ANEEL. The probable risk is approximately BRL70 million. And also, there was an impact caused by the restrictions imposed by ONS on the wind farms in the Northeast, which affected GeT’s revenue in the amount of approximately BRL20 million. At this, we had a tariff adjustment of approximately 6.32 in TUSD and 1% growth in the billed grid market already eliminating the impact of MMGD as well as an increase of more than BRL40 million in other operating revenues from leases and rentals of equipment and structures and post sharing. That was an investment of an increment of over 40%.

And finally, there is also a contribution of BRL31 million due to the improvement in UEGA’s costs compared to third quarter of ‘22. In ‘22, UEGA needed additional maintenance after some dispatches that were made in previous quarters. And as this did not occur this year, the maintenance cost last year was slightly higher. That’s why we show an improvement in cost once we run that comparison.

Now, moving on to PMSO. In terms of P, we already talked about the BRL610 million represented in this column that you see on the slide. We had a small impact from the recognition of the profit-sharing program and performance bonus for the higher result in 2023. But I would like to recall that in 2022, the base result for PLR and PPD was affected by the reversal of PIS/Cofins of BRL1.2 billion, and this was reversed in the second quarter of 2022. But excluding the effect of the provisions related to PDI, PPD and PLR, the increase was just over BRL2 less than the inflation in the period and the salary readjustment of more than 7% at the end of last year according to the labor agreement.

We also had higher expenses with third-party services due to increase in expenses with maintenance of the power system. We also had expenses related to the process of transforming the company into a corporation, including the waiver fee for 21 million consents. And as we already mentioned, the recognition of regulatory litigation of approximately BRL70 million due to ANEEL’s questioning of the MCSD calculation methodology.

And to conclude, as Daniel has already pointed out, we are committed to reducing the PMSO. That means that efficiency is in the agenda, and we are making some very detailed work, and we will give you more information with all of the details. And all of that will be incorporated in our budget, not only of 2024 as we usually do, but also for 2025 and ‘26. It’s the first time that we are putting together, drawing up a budget with a – going forward a few more years. So, we will give you more details about this work during our COPEL Day on November 22.

Now speaking about CapEx, the main message here is that we will continue to focus on prudent disinvestments, as Daniel has already mentioned, taking advantage of this final stretch of the tariff review that ends in 2025. It starts in June but – it starts on June ‘26, but the investments will have to be unitized by December ‘25. So, we’re doing everything we can right now. And as a reminder, we are not including the acquisitions of Aventura and Santa Rosa & Mundo Novo wind farms concluded in general. This is not contemplated in the BRL2.2 billion plan for 2023. And next week, we will approve the CapEx for 2024, and we will present there in more details, talking about what we expect for 2024.

Now moving on to the final stretch of my presentation. Here, I would just like to highlight leverage, as I mentioned, a reduction from 2.5x in the last quarter to 2.3x, mainly due to the excess cash from the BRL2 billion primary offer, which will be available to partially pay the grant for the renewal scheduled for 2024.

And finally, I would like to invite you all to join us on November 22 when we will give you more details about our evolution plan of the new company. So, thank you very much. And now I’ll turn the floor over to the operator to initiate the Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Mr. Fillipe Andrade from Itau BBA. Fillipe, your microphone is on.

Fillipe Andrade

Good morning and thank you for taking my question. I would like to hear your opinion about this vocational debate. We’ve seen that the Congress has been trying to reverse that decision from the regulated agency of giving a heavier weight to the demand coming from the generating unit. And as a consequence, this could have a relevant impact in the concessions – the generating concessions that you have renewed. So what is your view about that debate? Do you have any kind of strategy already mapped out that could probably involve the review of the grant bonus that was paid or whether you had some discussions with the government concerning that review? And whether you already mapped out what would be a possible NPB level in terms of what this could represent for the company? We have a view close to BRL600 million. We just want to know whether this is aligned with COPEL’s perception as well.

Adriano Rudek de Moura

Hi, Felipe. I would say that this is one of the most relevant points in the company. First of all, we have a very critical view in relation to this SPL, both in terms of its essence and also in terms of its form. First of all, because this is an interference that we consider that to be not legitimate, this brings a lot of legal insecurity. And ANEEL, amongst one of the regulating agencies is a reference. This is another factor that can generate instability in view of an already complex environment that COPEL is experiencing. We have a very critical view. We believe that the work they did, it was a law – involved a long-term public hearing. It’s been going on for over 4 years. I’m not going to repeat myself.

But having said that, what we’ve been doing, I mean, not only in terms of our movements, but this subject has been the sole topic of a consult meeting between governors from the South and Southeast where the General Manager of ANEEL presented the situation, and they all understood the companies that in its majority are present in these regions will be harmed. And not only that, but that makes no sense because this change increases the tariffs for consumers in the North and Northeast. But anyway, given this reality and with so many contrary arguments, people that are against this change, we’ve seen this moving from the infrastructure committee, even though due to the number of senators from these regions that would be allegedly benefited, this was probably an expected move. But not only that, this has to be discussed by CCJ. So if by any reason whatever happens, this still has to be debated in the Congress. Therefore, the chances that this will be approved are not very big. At least this is what we’ve depicted from different sources from the Senate or Congress.

But regardless or considering an extreme scenario or if this is eventually approved, I believe that the fact that this payment has been postponed by the request of the government in terms of the grant bonus it has been postponed to 2024. I mean, this is good because we can – with that, we buy time. Our numbers, Felipe, according to our preliminary calculations, we’ve been leading that with motto. This is precisely around the numbers that you mentioned, around BRL600 million. And we, as a company, we do not want to make a payment considering that there is a lot of legal insecurity. So, the more time we have, the better it is because things may be clearer. I mean, the ministry did not want to move forward with this debate because they are still working with the scenario where this is not approved. And this is the information that we are getting from the ministry and the regulatory agencies. But in what concerns the company, we will only make that payment once we see that there is better legal security because we don’t want to pay and that having to claim that money back because I think this is very harmful to all of us. I don’t know whether Daniel wants to add anything else.

Daniel Slaviero

Yes. Good morning. I would also like to reinstate that COPEL has already voiced, has already talked to the Ministry of Mines and Energy, what the impact would be. We submitted a formal letter stating all of the impacts this will have for the calculation of the grant bonus, assuming all of the assumptions that were used. And as it was said, we are confident that it will not be approved and the resolution from the regulatory agency will be maintained in terms of the vocational signal.

Adriano Rudek de Moura

And as Daniel was saying, the payment has been postponed of that grant bonus. And we do not believe that this PDL will be approved. And Daniel, I would also like to emphasize the great acceptancy from the Ministry of Mines and Energy and the regulating agency. The assumption is that the resolution and the impacts are in the calculation of the grant bonus are very clear and well established. But to conclude, I mean, the calculation was contemplating a vocational cost. And if this cost has changed by any measure, it is just reasonable that if this happens, we should request a reassessment. We can’t just accept it and just think that this, yes, in abnormal.

Fillipe Andrade

Perfect. Yes. Thank you. I just wanted to understand what was the company’s view in relation to the approval or non-approval of this topic and whether you have already envisioned what would be the day after in terms of the company’s protecting its interest?

Daniel Slaviero

Just to conclude, there is an institutional thing on our side because we look at it every week. But apparently from everything we’ve seen and read through the press, it seems to us that the political debate has gone to a different level because we are seeing also, I mean, as we see governors from here or there through [indiscernible] or debating the subject. I think that even in the political sphere, this debate is gaining a different dimension. Okay, thank you. Thank you very much.

Operator

Our next question comes from Mr. Gustavo Faria from Bank of America. Your microphone is on. You may proceed.

Gustavo Faria

Thank you for taking my question. I would just like to understand a bit more about that savings of about BRL400 million of that voluntary redundancy program. And after all the layoffs, what do you expect in terms of outsourcing people or rehiring people? I just want to understand whether that BRL400 million savings could be offset by hiring third parties?

Daniel Slaviero

That is an excellent point, Gustavo, because that BRL428 million means total savings. It will certainly be offset. I mean a small portion with a minimum number of hiring of people and some hiring of services. All the details will be presented during our COPEL Day, and that’s when we will have the opportunity to show you the percentages that we have in mind. But in general terms, there will be a small portion that will be reduced or offset from the total amount. But certainly, as the criteria was very clear because it involves time of service in the company and age, you are letting go the – all these employees with higher salaries. And even this small portion will be under different conditions. And I also think that there is a major advantage on our side because, I mean, one of the benefits from this privatization is that now we can do what we call the transposition of career or we can relocate people internally.

Let’s say, you have a technician, a guy that is a technician today. Until we became a corporation, he could only be an engineer if they had applied for a job once again. But now we can do that transition or the relocation and as any other company does. So first of all, we will try to unify our processes, technologies, and we will gain efficiencies what we can use internally as services. We can unify contracts, we can have gains of scale. And the third aspect is that once you can relocate people internally because they are already here, they are already familiar with the culture of the company. They are prepared. So, if we can do that, you won’t need to replace too many people. And bearing some strategic things, we’ve been saying that despite the excellent work being done by [indiscernible] and Bertol and by the entire team working in the commercialization area. We also see here great opportunities to improve our commercialization. And also, it’s an opportunity for us to have a better structured sales force in other markets closer to customers, meaning that we can open new markets. COPEL is amongst the three major companies in terms of commercializing energy. But again, in terms of commercialization, this relationship with the market and the fact that we can now have a better view of what the retail market needs, gives us great opportunities for the company. In terms of energy planning, organization and in terms of having this more integrated view today with the teams that we have, we are well served, and we are, no doubt, one of the major references in this industry.

Gustavo Faria

Perfect. Thank you very much.

Operator

Our next question is from Giuliano Ajeje from UBS. Giuliano, your microphone is on.

Giuliano Ajeje

Great, thanks. Good morning. It’s always a pleasure to talk to you. I have a few questions. And Daniel, I don’t want to jump again in terms of your COPEL Day, but I have two questions. First of all, what do you think would be a leverage limit where you wouldn’t have your grades downgraded? What will be the cap of this leverage? Could we work with the scenario where you would pay out more dividends? And my second question refers to something quite interesting, since the last power outage, is the PLD intraday which is reflecting into mid-term prices. Are you feeling that increase in prices and then probably this could impact [indiscernible] further on?

Daniel Slaviero

Okay. Perfect. Well, certainly, we will give you more details during our COPEL Day. But let me start with the second part of your question, which is what happened here in August, September and this volatility. Be it due to the increase in temperature or be it through restrictions and distribution, this makes us remember something of you as low prices have been around for quite some time, people forget the energy prices are very volatile, and prices will not remain low for many years to come. This is unthinkable. And this intraday volatility also shows that the intermittent forces, even though they are very important for the interconnected system has some fragilities. And since we have a very strong base as it happens with other companies, and we do believe in this feature, we believe that this should be valid in the mid and long range. If your role is to generate power, provide power in a uniform way throughout the day, I mean, the TPPs also have that function, but it’s cheaper. They will be recognized.

And in our view, I mean, it’s exactly what you said. Throughout the day, if you have self-consumption and high load at the end of the day, and there is no sunshine that will be difficult, if the wind blows faster at dawn. These are all things that should have been happening since 2021 when we due to the hourly price. And I think we should have priced that better in a contract. But as there was a water crisis, the price hit the ceiling and there was a perfect storm of rainfall load at the end of the subsidy and it went to the floor. Now we are beginning to see the first signs of what is happening. And just to conclude, and I’ll link that to your question, and then I’ll turn the floor to you and Moura to talk about price variation and PLD by price variation. I mean, all that shows that there will be a lot of volatility. The trend is towards price volatility, not in the long run, but if you have this intraday. So having a safer leverage, leaving some room available, this has proven to be something quite interesting.

What we’ve been saying to the market, I mean, that 2.5x leverage is what we believe to be adequate to date. And I would say that even in the short run, maybe just the end of next year and early 2025, this is pretty much what we have seen in terms of our leverage because our covenant is 3.5. But now we are a private company. And with excellent execution, great efficiency and technical capacity and our capacity to generate cash, some eventual debate about what would be the ideal leverage, this is something for the midrange. This involves a more complex debate that has to be discussed at length. And also, this would have to be negotiated according to the covenant limit, which today fall at 3.5.

Regardless of this reality and the fact that it may not change in the short run, our dividend policy is very clear. We have always focused on a payout aiming at 50%. But if there is no investment perspective, if there is nothing that comes along, we could also have a higher payout. We had last year, 80% payout. As you know, this is something that we will have to discuss at length during the next cycle. That was a long answer. But let me see if anyone has another additional comment.

Adriano Rudek de Moura

Well, that was fine. This has to do with the hourly PLD. I mean before 2021, we had a ceiling of PLD, and after we had ACD. And after the fourth quarter of ‘21, the PLD ceiling we wouldn’t feel that much of a difference, I mean, intraday. But in terms of oscillations due to frequency, load, localized demand – a strong localized demand and the need of this generation that provides power to the system in parallel with renewable energies, which are not yet centralized, I mean, we already built a positive effect. The difference or the surplus we have was so that – I mean, the prices went up and the impact was higher in relation to what we have now. So, we hope that early next year in view of load estimates and climate and temperature. So, in the beginning of the first quarter of next year, there will be oscillations. So PLD prices should increase, and this reflects the sale of the surplus that we have in the period.

Daniel Slaviero

I would just like to add a little bit. That level of 2.5x is an evolving process. Some years ago, we had 1x leverage. We said that our plan was to reach 2.5x. Considering the investment level and dividend, we were very competitive. We paid good dividends in that period. And now we reached a level that we believe to be reasonable for now. But, obviously, we are flexible enough to review that further on, considering the scenarios to be evaluated by 2024 and ‘25. But we will certainly inform the market as soon as we have something different.

Adriano Rudek de Moura

And just to add this small variation from 2.5x to 2.3x in terms of our quarter leverage, by no means this is something that we want to pursue, right? This or even something below that number for us is almost like an inadequate leverage, given our capital structure because it’s important that we have ROE and our ROIC metrics that are important. So, what brought us this far with this. But from now on, we have new possibilities.

And just to conclude, I have something important to say. For us here, being AAA, it is really significant. We are in capital investment company and having a low cost of capital is one of the critical success factors. And we see private companies operating at a – with a higher leverage level, but at the same time, they maintain a AAA. That means that we see some room for further improvements, meaning that there will not be any limitation in terms of that 2.5x to have a AAA rating. As Daniel was saying, there is some flexibility.

Giuliano Ajeje

That is very good. Thank you very much.

Operator

Our next question is from Mr. Antonio Junqueira from Citi. Antonio, your microphone is on.

Antonio Junqueira

Good morning. My question is more related to quality. The company is going through a re-dimensioning process involving its people and employees. And now you’re a private company. So, I’m not referring to people now. I’m talking about internal restructuring, in terms of responsibilities and functions in the company. Do you, Daniel, see the need to restructure the functions of the company? Do you believe that the company should review its size. And the second question is, I understand that you will also adjust the compensation of the officers. How is that moving along? And when do you intend to present that plan? I understand that this will also include stock options, right? So these are my questions.

Daniel Slaviero

Well, Antonio, those are very interesting points. First of all, with this PDV program or voluntary redundancy, we are saying that 23% of the people will leave the company. And this percent will naturally change things. I mean, to operate with 23% of our capacity, you need to unify, you have to improve your processes, you have to improve the structure of the company, you have to make some investments in technology, things that we’ve been doing. We are talking about 23% of a company. I mean, at this, there is a 20% regulatory, I mean, efficiency.

So, we’ve been doing our homework for quite some time. So, it is initial challenge and that’s why I’ve given that 1 year time frame because we want to do everything very comfortably while we have to mind customer service, we have to be mindful of several things so that the transaction occurs in a very smooth way. We are very confident because we are seeing many opportunities. Some of the things were duplicated. There are things that could be discontinued. I mean, our relationship with the controlling agents and the bidding processes. There were things that we needed to do before, but they are totally inefficient in a private world.

Having said that, I mean also during our COPEL Day, this review of the role of the holding does not only contemplates our structure and size. There are things that we need to do. And one of them, and I will just give you a spoiler is that the regulatory aspect of the company that was more related to the particular businesses that there was some logic in there. But now we are seeing lots of advantages. Be it because the benchmark of the sector is operating like that, but also because with this – in this new phase of the company, we want to be protagonists in regulatory debate.

Moreover now, that COPEL wants to have a capacity option to improve the results at [indiscernible] there will be a cycle and by the end of the cycle in 2026, the condition will be totally different than what we experienced in the past because we were operating at a deficit. But then everything that was invested had to be incorporated in the base. It’s been 10 years that this has been the case. So, in regulatory terms, we at 3.0. I like this topic, and I think this is part of the evolution process of the company. And to conclude, this review, this compensation review process, we already have an international consulting company to help us with that. Nobody is here to reinvent them well. There are several good examples in the market. And we will present the results of that consultancy in our COPEL Day, or in April of next year because we want to be ready to deploy this plan to the main executives in the leadership. Our advantage is that our reference base is very clear. It’s BRL8.25 and that was on August 8. The value gen is BRL8.25. So the value generated from that is shared with people by means of long-term incentives.

Adriano Rudek de Moura

But what I would like to say, just to conclude my thoughts is that even without that, we are already doing everything we need to do and everything we were committed to do and everything that will generate further value. This just shows our mindset and our commitment and our engagement level, the engagement level of everyone involved. We are fully committed to do what is best for the company, even without having any particular benefit because we are just following the market practices. And this is something that will happen naturally. The important thing here is to generate value to deliver results, to take care of our people and to deliver excellent services to the domestic power system.

Antonio Junqueira

Great. Excellent, thank you.

Operator

Our next question came in writing. Mr. Daniel Travitzky from Safra Bank. He, says, good morning. Could you comment on the dynamics of energy sales? We’ve seen contracts being concluded at average price of BRL175 per megawatt hour. Could you comment on the details of the contracts? And how could that evolve going forward?

Daniel Slaviero

Hello, Daniel. I mean, I cannot give you a lot of details about that strategy because it involves some relevant commercial aspects. And this is a very sensitive market. I think our macro challenge and then – I mean, if my colleagues have some more details, they can go ahead. Our challenge, I would say, is having de-contracted energy when prices go up again. And on the other side, we don’t want to leave everything for PLD for the spot price. So it’s hard to buy a good balance. But in 2024, there is a small surplus of about 5% to 6% in 2026. I mean, removing GSF, right? In 2026, it will be around 10 to 11 – in ‘25, I’m sorry. And from 2026 onwards, we would have a bit more. Therefore, I would say that our view – in our view, we would probably have additional surpluses. We have three wet periods and two dry periods, and there is a whole debate about the attributes. I mean, there is still a lot to happen. A lot of things will happen. So maybe it’s too soon now to block all of that energy because it’s – the level is relatively low or very low.

So with that all, any additional comments?

Adriano Rudek de Moura

No. Perfect. 2024, 2023 is well in place and with good results, 2024 is already contracted. But it’s only after 2026 that we will decommission things. And looking at our sales strategy going forward load and the offers, I think that the prices will increase, and we want to experience this moment so that we can bring better results to the company. In terms of energy planning and commercialization, these two areas are very closely monitoring all of the moves. The important thing is to do the sale at an adequate timing and mindful of the current prices at the level of energy that COPEL has. We have good expectations, and we believe that prices will start to go up after the end of the wet season. And once the system is back to normal.

Operator

The Q&A session is now concluded. We would now like to turn the floor to Mr. Daniel Slaviero for his final remarks.

Daniel Slaviero

Once again, thank you so much for joining us today. We are experiencing a unique moment of our history. This is a very challenging moment, and this will require the best of each one of us here at COPEL. So rest assured that throughout this Q&A session, excellent questions that that referred to the main topics of the company. But I think also we had the opportunity to express our mindset and our commitment level, the commitment of all of the leaders of the company and the company in general. It has to do with me, the officers and everyone involved in the everyday run of the company. Our employees and managers are quite unique. Having said that, I would just like to once again invite you to join us during our COPEL Day. And thank you once again for your interest, for your enthusiast with our company. Thank you, and have a very good day.

Operator

COPEL’s video conference is now concluded. Thank you so much for participating, and have a great day.