Companhia Paranaense de Energia - Copel (NYSE:ELP) Q2 2023 Results Conference Call August 15, 2023 1:00 PM ET

Company Participants

Daniel Slaviero - CEO

Adriano Rudek de Moura - CFO

Conference Call Participants

Daniel Travitzky - Banco Safra

Marcelo Sá - Itau BBA

Francisco Navarrete - Bradesco BBI

Operator

Good day, ladies and gentlemen. Welcome to Companhia Paranaense de Energia, Copel Video Conference to Discuss Second Quarter 2023 Results. This video conference is being recorded, and the replay can be accessed on the company's Web site at ri.copel.com. The presentation is also available for download [Operator Instructions].

Before proceeding, I'd like to mention that forward-looking statements are based on the beliefs and assumptions of Copel's management and on information currently available to the company. Forward-looking statements may involve risks and uncertainties as they relate to future events, and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should understand that events related to the macroeconomic environment, the segment and other factors could cause results to differ materially from those expressed in such forward-looking statements.

Presenting this video conference are Mr. Daniel Slaviero, CEO of Copel; Mr. Adriano Rudek de Moura, CFO; as well as officers of the subsidiaries who will be available for the question-and-answer session. I would now like to give the floor to Mr. Slaviero, who will start the presentation. Mr. Slaviero, you may proceed.

Daniel Slaviero

Hello, good afternoon. I would like to thank all of you for participating in our video conference call. It is with great satisfaction that I start the first earnings conference call of Copel as a private company. And I believe that the government of Paraná led this process in an even approachable manner from the presentation of the bill of law in the State Council of Paraná on November 21st of last year until today, it has been exactly 38 weeks. In this period, we have overcome numerous challenges but we have always been clear in our minds that this model that have a cooperation without a defined controlling shareholder with the State of Paraná having a golden share that guarantees minimum investments in distribution and the consequent renewal of its three largest plants was indeed the best path for the future of Copel. I would like to deeply thank everyone who participated in this process. The Board of Directors, the management, Copel employees involved in the matter, all the legal and financial advisers and Ernst & Young who coordinated the entire process. The result was the pricing of the offering in the amount of BRL8.25 per share, 0.5% discount from the screen price on August 8th, the day of the closing.

If we consider the performance of the shares, since the launch of the offering on July 24, performance was 5.7%. The shares were in higher demand. We have even seen in the financial volume after the deal after the offering with investors from Brazil and abroad participating. I would like to highlight some numbers so we can understand the size of this process. This was the largest utilities and energy offering in 2023, the second largest offering in Brazil so far and the third largest offering in the electricity industry around the world. In addition to being obviously the first state company to be privatized through a model of public offering of shares. Along the whole process, what guided us was a deep sense of responsibility and purpose towards the company towards our state of butane also towards the country. We know that what we did here will be an example for other companies belonging to states that want to follow the same path, just like Eletrobras was an inspiration for us.

Next slide. But now that the transformation process into a corporation is completed, our absolute focus now lies in the execution. We have clear in our mind what the priorities are and the action plan for each one of these priorities. And I will now list the main verticals, the main items in our short term agenda, and let's start with our biggest asset, the people, our people. It has been included in the collective bargaining agreement with employees and the union side in January, the launch of a voluntary dismissal program so that employees who do not want -- or do not wish to continue with the company in this new phase, have the right to leave in the best way possible. This program will be launched next week and until the end of September, we'll know exactly the amount of people who will join the program. Still on the topic of people, our people, we have a second point in mind, which is to retain, attract and develop talent. Our priorities is that the current talent that are with the company, that are part of our history, not leave Copel. We want to show that we are part of a winning company and that we'll play a leading role in the electricity sector.

Momentarily -- well, after that, we'll need to structure process to attract and develop new competencies, which will be necessary for us to face the challenges of the industry. All of that will lead us to develop a new Copel culture. In other words, we'll get what is good in our current culture, and we'll improve it. Copel does not need any revolution, but it needs constant and perennial evolutions. And we will certainly seek the best and follow the best market practices in terms of long term incentives and we will deploy this in the right time. A second strategic movement that we will start tomorrow is to revisit the role of the holding. We don't want just to have a financial holding, let alone an operational one, but we want to have a streamlined and strategic holding that will set the guidelines and control of the businesses. This work will be followed by a large external consulting firm to help us analyze the best market practices, both in terms of structure and fiscal efficiency.

Moving to the third vertical that of operating efficiency, I would say that this is where we're going to devote most of our time in the short term, in the next weeks and months because a private company, without the ties of a state owned company, can be a lot more efficient, and we will seek opportunities to reduce cost. This will be followed by a zero based budget program that will be conducted by Moura as CFO with the involvement of all of the officers of [GeT], Copel Dis, Copel Trading Company and the Holding. As regards to improvement of our trading strategy, here, I believe that we have good opportunities. In March of this year, already, with the mindset of a corporation, we unified our energy planning areas of generation, distribution and trading, which used to operate in an autonomous fashion. And we can already feel the benefits of this integrated operation, which is being led by Moacir Bertol, our colleague here in the Board.

Now the moment is to evolve how we trade energy, increasing our sales force, improving customer service with personalized products and adding services, aiming to increase loyalty and profitability, all of that, so we can prepare for the inexorable market opening. When you're going to have low power prices, which, in our view, is momentaneous, but this is what we have been dealing with in recent years. And in terms of 2024, this is the reality that we will need to face. But this opening on the preparation of Copel to serve customers will not happen without a digitization shock in our processes, customer service and particularly to serve the customers who will migrate to a free environment. This is our vision for this area.

To end, what sets apart companies that generate value in perennial and long term fashion is the way in which they allocate capital. This is undeniable. And I would like to stress for everyone that we, at Copel, the management, the Board of Directors, we will be very, very disciplined in this area, seeking only investments that will add value to the company. Growing for the sake of growing is not a strategic objective of this company. What we need is to create value. Having said that, once we renew the concession of our three largest plants, our priority continues to be investments in distribution. We will make relevant investments to end this cycle with great growth in our BRR. In the current market moment -- another thing to point out, the current market moment does not show great opportunities in the sector, but our team continues to be attentive in perfectioning our process to identify and analyze opportunities, not only through our investment policy, not only through processes, but also with our dividend payout policy, which is a relevant part in terms of the value creation structure, and Moura will speak more about that.

Moving towards the end of my part, in parallel, we'll follow a divestment plan of Compagas and Araucaria planned, both for strategic reasons, either due to a focus on energy or due to the decarbonization plan of the generation metrics, which is our 2030 vision. We intend to complete such divestments until the first quarter of 2024. And to end this part on capital allocation, I'd like to stress, as mentioned before in our calls and advisories to the market, that Copel launched a corporate venture capital of BRL150 million. This, coupled with our open innovation programs, Copel Vault, will be a relevant source of contact with start-ups will be opened to innovations and new opportunities and value creation, and this will boost our relationship with an innovation, which permeates all of our businesses. On my part, just one last slide, I just want to mention the ownership structure post the offering here, considering the supplementary lot the greenshoe. We can see here the share of the State of Paraná and the share of BNDES. And what I would like to point out here is that we're absolutely certain that the new shareholders, both Brazilian and international shareholders that joined the current investor base of Copel, they will have a wide knowledge of the electricity sector. And in our view, they have a long term view. So they will help us take Copel to a whole new level, a level of efficiency among all companies in the sector. I would like to underscore here my feeling and the feeling of our team that mission was accomplished in terms of finalizing the offering. But like I said in the beginning, we did this with the great responsibility of delivering value creation in a consistent and perennial way for our employees, investors and all Copel stakeholders. This earnings conference call marks the beginning of a new era for our Copel. Moura, over to you.

Adriano Rudek de Moura

Thank you, Daniel. Good day, everyone. I would also like to thank all of you for participating in this historical earnings call, which indeed marks the beginning of a new cycle where all of us here and the Copel team have the responsibility and the commitment with an impeccable execution as Daniel mentioned in this very positive agenda. Just to highlight the four pillars, we spoke about people first, the role of the holding, operating efficiency and capital allocation. Our priority as of now is to deliver gradually and consistently quarter-after-quarter the results that we promised. And as regards to specifically second quarter earnings, I'd like to highlight the relevant cash generation of BRL1.5 billion, up 3.1% over Q2 '22 of BRL50 million more we had EBITDA efficiency of Copel Dis of 16% in the last 12 months. On the other hand, in terms of IFRS, we had a relevant negative impact in correcting the base of GeT transmission contracts and the controlled companies jointly through equity income. This effect was BRL260 million due to the reduction of IPCA index in the comparison of Q2 '22 and Q2 '23. So it's good news that ended up impacting the base of transmission contracts. And this is just an accounting effect with no cash impact. I also highlight the adjustments of APR of transmission companies to BRL1.6 billion, up almost 14%, and that starts having an impact on the integral cash as of Q3. And considering the hydrology scenario and the lack of expectations of Araucaria plant dispatching, we recognized an impairment adjustment in the order of BRL150 million.

On the next page, we have the three financial KPIs. EBITDA adjusted, net income and cash generation, which reflect basically the highlights I've just mentioned. An accounting impact on the transmission assets of BRL260 million explaining basically the whole EBITDA reduction in Q2 of 1.5 down to BRL280 million, a reduction of BRL120 million, which was partially offset by other positive results. Adjusted net income of BRL485 million in Q2 '23 without the impact of the Araucaria plant impairment of BRL150 million, which I mentioned, and the reported net income will be BRL308 million. Let's remind you that in Q2 '22, as you can see, we reported a consolidated loss of BRL522 million given the reversal of PIS/COFINS amounting to BRL1.2 billion. Without this impact, net income would have been BRL667 million in Q2 '22. Cash generation, I mentioned BRL1.5 billion, almost BRL15 million lower than last year. Year-to-date, BRL2.6 billion. Comparing with the second quarter, there was a negative impact of about BRL200 million. Given the ACT, the collective bargaining agreement was completed in January, including an indemnification of almost BRL140 million, given the extinction of the benefit of another one third of vacation that was granted to all employees of Copel in addition to the already constitutional one third. Cash balance in the quarter was BRL4.5 billion already considering the funding of 1.6 billion for investments in the Copel Dis concluded in the month of June '23. Here, we have nonrecurring items. As I highlighted, the main one was the impairment of BRL150 million of Araucaria plant. In the second quarter of 2022, we had BRL810 million of PIS/COFINS. I'd like to remind you that in the net income, the impact was BRL1.2 billion considering the financial component, which is included in the calculation base.

Next slide. Here, we see the contribution of each business highlighting once again Dis with a relevant improvement of over 30% in EBITDA, BRL100 million of contribution. I highlight the growth of Parcel B due to the growth of 2%. The grid market and the readjustment of 16.5% in TUSD, we're considering energy compensated of MMGT. In the GeT of the BRL307 million dropped BRL160 million, an effect of the remuneration of transmission assets, as I highlighted. The positive side as a result of the acquisitions of Aventura and Santa Rosa & Mundo Novo Complexes acquired on January 1st of this year and the start of operation of the Jandaira Complex in October of 2022. And also, we had greater generation in other wind farms of around 8% to 9% compared to Q2 '22. At Copel Mercado Livre, an increase of 11.3% in EBITDA compared to last year, essentially given the better trading margin. We also had a mark-to-market adjustment of BRL22 million, which were excluded from this adjusted EBITDA. And to end this part and moving to the next topic, I would just like to stress what Daniel has mentioned. Copel Mercado Livre has a relevant strategic importance in the trading of energy for the Copel Group and it has a great potential of growth with the opening of the free market.

Moving to PMSO. Here, I would like to highlight three impacts. First, the increase in variable compensation, PLR and PPD. In Q2 '22, they were practically zero given the reversal of the provision for PIS and COFINS amounting to BRL1.2 billion in that quarter. So the increase here is BRL63 million. Second highlight, growth of BRL165 million in provisions basically due to impairment of BRL150 million of Araucaria plant as mentioned. And there's also a provision for regulatory litigation referring to MCSD calculation, around BRL17 million. Thirdly, an increase of almost BRL40 million in third party services. And that this is a part of this BRL21 million referring to maintenance of the electricity system and the difference in GeT is due to increased maintenance costs given the new acquisitions, Aventura and Santa Rosa & Mundo Novo wind complexes. Another highlight in the personnel line item. Neutralizing the effects of provisions and reversals of PPD and PLR and considering accumulated inflation by INPC of 3% between Q2 '22 and Q2 '23, there was a reduction in real terms of 1% despite salary adjustment of around 7% applied in October of 2022. So there was improved efficiency and/or improving efficiency, and cost reduction will continue to be strategic pillars with clear and objective targets for the whole group, particularly starting now, as Daniel mentioned, we have an action plan underway, which will be part of next year's budget.

Now talking about CapEx. Until June, we have invested BRL1.1 billion of the BRL2.2 billion approved totally in keeping with the physical and financial schedule. In this, the focus continues to be Paraná Tri-phase smart grid, which will bring benefits in terms of reduced OpEx. At the GeT investment focus are to reinforce and improve transmission lines. And here, just one additional comment. I'd like to remind you that the acquisition of wind complexes in the beginning of the year are not included in this expected BRL2.2 billion, not even the concession bonus of BRL3.7 billion, which were paid by year end given the renewal of concessions of FDA, Salto Caxias and Segredo. Now moving to the final stress of my presentation. Leverage remained at 2.5 times despite the acquisition of wind complexes in January '23, including the respective funding for the acquisition of these complexes, as well as consolidation of the indebtedness of these assets. Level of leverage will certainly be reassessed in this new post cooperation scenario by the Board of Directors already representing the new shareholders. In terms of amortization, annual amortization of our debt, this is totally in keeping with our ability to generate cash. No issues here. Even this concentration in 2025 is totally addressed with our economic and financial planning. Lastly, with the closing of the second quarter '23, in the next meeting of the Board of Directors in September, we will submit a proposal for dividend payout referring to the first half of 2023, which will follow the dividend payout policy of the company with payment expected still in 2023. Thank you very much for your participation, and we can move now to the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mr. Daniel Travitzky with Safra. And he says, could you speak more about BLR, the profit sharing program this quarter, because the levels seem to be relatively high for the quarter?

Daniel Slaviero

I think Moura can give you more detail, but this is in keeping with what Copel was already executing for the years prior to 2022. In 2022, as Moura mentioned, PIS and COFINS led us to zero the PLR and the PPD or any type of performance based compensation. So we are just going back to the same level that we had in 2021. I think that there was a year 2021 that it was kind of very high at the time, but we are basically returning to the average that Copel had from 2019 to 2021. Moura, any thing to add?

Adriano Rudek de Moura

And to answer the question by Daniel, there was no change in the methodology on the contrary. We are maintaining exactly the same indicators and always working with the base of 100 final assessment at the end of the year. The only impact was regarding net income. Last year, it was practically zero with the provision for PIS and COFINS and now we are resuming normal levels.

Operator

[Operator Instructions] Your next question is from Mr. Marcelo Sá with Itau.

Marcelo Sá

I'd like to ask about Araucaria plant and to understand the selling process. I know you were totally focused on the privatization so this was on hold. So my question is, how to make this kind of operation feasible, because there is a difficulty in supplying gas when the project is not dispatching, it generates a negative EBITDA of about BRL80 million. Do you think that the alternative would be perhaps to try to hire in a capacity auction, perhaps that would be the way to go or possible interested party could think about making a move even before the auction? Because in a way, they could make the whole structure viable.

Daniel Slaviero

Marcelo, your point is excellent. Araucaria plant unlike Compagas, which had the concession renewed, which has an investment plan and some investors interested. Araucaria plant is a more challenging topic. It had every thing retrofit and it enjoys a position in the market close to gas well. But I would just like to go back and say that this was a divestment process initially led by Petrobras, and then Copel joined. We even have a financial adviser. Araucaria was in the process of receiving unbinding proposals that was around March and April of this year. And then you will remember that Petrobras itself asked to suspend all divestments for a 90-day period to reassess things. This period of time is over. And like you said it yourself, Marcelo, we were very much focused on the transformation process into a corporation so we didn't focus on that either. But idea is to open a consultation so that Petrobras wants by the end of August, whether they intend with their divestment program. 18% of Petrobras stake in an onset of [484] mega, it's like the grain of sand at Petrobras. So the first question is to them, will you continue the process initiated by you? If so, which I believe is the best way, great. If not, Copel will continue on its own. With its 82% share will or stake will continue so that we can have a taste in the water to assess the level of investment. We have received not many a few consultations about this asset and some parties are interested even without being contracted. And of course, if we joined an auction, if we contracted, the return for the company would be better. But this is an uncertain scenario, because the auction was supposed to be held in October but then postponed to March. But this excessive supply, I wouldn't be surprised if it's postponed one more time because the whole system is not in need of that. So we cannot wait for that because, as you said it yourself, it's BRL80 million per annum. So of course, we are not going to be selling this at just any cost just like separate turbine pieces, but our goal is to continue with the process so that our target, which I mentioned in the beginning that by the end of first quarter 2024, this process will be concluded, unless we have an offensive support and then we'll reevaluate. Bertol?

Unidentified Company Representative

Well, our goal is to make that Araucária plant business viable that will be attractive for Copel that will give us a return in terms of the ability of this thermal power plant. It is a unit with 486 megawatts combined cycle to gas units and one steam with an active transmission contract with connections to the basic grid. So it's -- a TPP that is very efficient. But given the market scenario, the energy scenario and the supply and demand balance with a surplus energy, the distribution companies are overcontracted with a surplus of energy. The perspective of dispatching from this plant is not -- does not lie in the short term. So for Copel's 2030 vision, we will try and I believe we will be successful in divesting from this plant and focusing on our renewable assets, particularly generation and transmission as well as in distribution, as Daniel mentioned. We have good expectations. We also have a gas contract with Petrobras. This is an intermittent contract. It is evaluated on a monthly basis considering exchange variation. As you could see, our price is high with an expectation of generation. This is our goal to sell it but it is an operational asset in good conditions with good maintenance done. If we have order from ONS, this plant can start operating.

Daniel Slaviero

And let me just add to this, Marcelo. Investors who came to us, who approached us one way or another, they have access to the gas molecule in better conditions than Copel, because we are very much linked to gas ball from Petrobras via gas ball. So for other investors, there is a better competitive. Despite the very short term challenges, Copel's decision is to divest this asset. And this is based on our Copel 2030 plan, which thinks about complete decarbonization by 2030. So it makes sense to sell this asset. We have wind farms and solar power, so we want to have a generation matrix, which is totally renewable. This is going to have a lot of value for investors and for the market in the coming years.

Unidentified Company Representative

But Daniel, this does not exclude studying to participate in the capacity auction expected for March of next year.

Operator

Next question from Mr. Francisco Navarrete with Bradesco BBI.

Francisco Navarrete

Two questions. First, about the management team compensation plan and also to attract new executives, if necessary. When will it be implemented? And the second question, if we do not have opportunities for greenfield/brownfield expansion that will create value, what can we expect regarding payment of dividends?

Daniel Slaviero

I think you touched on two strategic points, which are part of those four main pillars or avenues. I will start with your question regarding compensation plan. We have advisers helping us with a macro view of these processes. They will help us understand how other companies in the market operate. Of course, when we align objectives with long term incentives, we create value. We have to be very careful to send the right signals. I believe that we have a big, big benchmark, which is BRL8.25 on August 8th. Based on that -- well, this is our benchmark and this is the reference for us to create value. And in the right timing, gradually, we will address these points, always taking into account our governance practices now. We have a people committee specifically to deal with this and we also have to take into account the best practices in the sector. And to your question, if we don't have greenfield/brownfield opportunities, considering the investments of Copel Dis, in spite of being robust and increasing in the final stretch of the cycle, they're still insufficient, they're still little compared to the company's cash generation. Right, Moura, this is the analysis if we don't have any opportunities.

And if the market, in general, with this power price is not pointing to anything very attractive that will give us every time that we understand is reasonable and adding value to the company I believe that the way to go is to pay dividends. We have a dividend policy, but we have flexibility so that if leverage starts decreasing, right, Moura, we have a leverage -- if we have a leverage way below or below what we have today 2.5 times up to 2.7 times. If there are no projects in the pipeline, the natural way is to pay dividends because dividends is also value creation. It's part of our value creation approach. And I think that we have a good track record regarding that. When we underleverage, we say, let's get to 2.5 times, we analyze investment. We had two very well evaluated acquisitions, but we also have to take into account the dividend payout policy. It will give us a return, a dividend yield that is very much in keeping with practices in this industry.

Operator

Our question from Mr. [Andre Silva].

Unidentified Analyst

Will dividend amounts be defined in September of 2023?

Adriano Rudek de Moura

Yes. As I said, we will be submitting in the next Board meeting, that will take place in September, a proposal to pay dividends, which will basically follow our dividend policy. No surprises there. It depends on the results of the first half of the year. And I believe we have all of the components ready to submit the proposal and definition of payment will be discussed in this meeting of the Board. But undoubtedly, this will take place still in 2023. Last year, we submitted this propose and we paid dividends referring to the first half of last year, in November of last year, and I believe we should follow the same path. And our policy includes two events per year, two dividend events. And the first event also refers to the first half, it's normally paid in November. And the second event is paid based on the result for the full year, the difference considering the approval of income statements after the General Shareholders Meeting.

Operator

[Operator Instructions] The Q&A session is over. I would like to turn the floor to Mr. Daniel Slaviero for his final statements.

Daniel Slaviero

Well, once again, I'd like to underscore this big event. This is the first earnings call with our investors after the transformation of Copel into a corporation. This is a milestone, not only for the company, not only for the state, but it is a reference for our country. And to us, it is very clear, we have to deliver. Now we have to execute our strategic plan that we talked about and that we presented today. And again that it's not just about the track record of this management, but the fact that we will continue the work that we have been developing so far. We have mapped the times when things will happen, the first steps, and I believe that this is going to give us a lot of agility and speed, our officers and all Copelians, all employees of the company know the company really well, and they know what the opportunities are. But on our behalf -- on behalf of the whole management team, I would like to acknowledge and thank the whole team for the work. And like I said, this marks the beginning of a new era of Copel now as a corporation recently established and the best moment of the market. And again, this is ground zero, ground zero is August 8th. From now on, we hope to generate and create more value for our employees, investors and for all the Copel stakeholders. Thank you very much.