Companhia Paranaense de Energia - COPEL (NYSE:ELP) Q4 2023 Earnings Call Transcript March 1, 2024

Companhia Paranaense de Energia - COPEL beats earnings expectations. Reported EPS is $0.26, expectations were $0.13. Companhia Paranaense de Energia - COPEL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, welcome the video conference of Companhia Paranaense de Energia - COPEL to discuss the results referring to the fourth quarter of 2023. This video conference is being recorded, and the replay can be accessed in the company's website, ri.copel.com. The presentation is also available for download. We inform that all participants will be in listen-only mode during the company's presentation. And then, we will begin the question-and-answer session when further instructions to participate will be provided. Before proceeding, I want to stress that forward-looking statements are based on the beliefs and assumptions of the management of Copel and on information currently available to the company. Forward-looking statements may involve risks and uncertainties as they refer to future events and therefore, depend on circumstances that may or may not occur.

Investors, analysts, and journalists should take into account that events related to the macroeconomic environment, the sector, and other factors may cause the results to differ materially from those expressed in such forward-looking statements. Today with us are Mr. Daniel Slaviero, CEO of Copel, Mr. Adriano Rudek de Moura, CFO of Copel, as well as the officers of the subsidiaries. They will all be available for the Q&A session. Now, I would like to turn the floor to Mr. Slaviero, who will begin the presentation. Mr. Slaviero, please go ahead.

Daniel Slaviero: Good morning to all. I'd like to thank all of you for joining us in our video conference call. On the eve of celebrating 70 years of existence, the results of Copel in 2023 reinforce some of the perennial hallmarks of our work since its inception. Innovation, sustainability, financial robustness, and the permanent commitment to our customers. I have the honor to share with you the results of a historical year from both the institutional standpoint and the financial standpoint. Our EBITDA totaled for the very first time the amount of BRL5.8 billion in one year, considering recurring items and discontinued operations. This achievement underpins our strong position in the market and the effectiveness of our actions for Copel's sustainable growth.

This also reflects the relentless focus on the excellence of all of our operations and on continuous improvement in the servicing of our clients. This is the beginning of a new era. With the appreciation of our shares in recent months, we have reached a market cap of BRL30 billion. The operation to transform Copel into a corporation was the second largest utilities offer in the western world in 2023, raising more than $1 billion which led us to be recognized by LatinFinance as Deal of the Year in one of its categories. I would like to highlight some of the relevant data from our operating performance. 28% regulatory efficiency at Copel distribution, adjusted EBITDA of BRL3.5 billion at G&T and Copel Mercado Livre remaining among the largest traders in the country.

In line with our prudent capital allocation strategy, in 2023, we made the largest investment in Copel Distribuicao’s history with an investment of BRL2 billion to modernize, expand, and automate Parana's electricity infrastructure. There are also two points that we were very proud of as regards to innovation. Our Corporate Venture Capital fund made its first contribution to the Move company, an electromobility startup in a round led by Intelbras and Copel. I would remind you that we are committed to investing a BRL150 million over the next 10 years in our CDC and open innovation with this ecosystem. In the ESG agenda, we have moved up to the A minus category in the carbon disclosure project, CDP. We remain steadfast in the execution of our strategic plan to create value.

In this regard, I would like to update you on the progress of the main initiatives of Copel Corporation. In terms of people, the priority is to align executive compensation with the company's long term objectives. All this work is being supported by an internationally renowned consulting firm and will be presented for shareholders' approval at the AGM or the ordinary shareholders meeting on April 22nd. This will be fundamental for retaining and mainly attracting the new talent that the company needs at this time. We are also working hard to create a new culture at Copel. In the operating efficiency vertical, we are in the process of implementing our plan, and we will begin the second phase now, next Monday, on March 4th, with the ZBB, zero based budget work, in search for more optimization opportunities.

The central objective, of course, is to be more efficient and improve the quality of the services provided by Copel. In the capital allocation pillar, we will invest this year BRL6.5 billion, in 2024 alone, of which BRL4 billion will be used to pay the grant bonus and BRL2.1 billion in distribution. Considering that 2025 is the -- 2025 will be the last year of this tariff cycle, the distribution company, this will probably maintain this level of investment or even slightly increase it. This will be deliberated over the course of the year with our Board of Directors. On the divestments front, Petrobras' decision to exercise the tag along in the sale of UEGA was made public. We are awaiting approval from CADE to close the deal. As already mentioned in our Copel Day in November of 2023, it is our intention to recycle SHB and CGH assets in the coming months in addition to the possible derisking of assets that we still have in our portfolio.

Lastly, with regard to Compagas, first of all, it should be noted that it is a gas distributor with a concession renewed until 2054. In a state that has, among other characteristics, very low default rates and grew last year alone by 9.1%, according to data from the central bank. We saw the growth of the country 2.9%. And Parana is currently Brazil's fourth largest economy. In other words, we are talking about a super-premium asset here. That said, we still intend to make the sale in the first half of the year, but the priority is not the time frame, but rather maximizing the value of this asset. Because if we don't reach a value that we consider appropriate for the company, we just won't sell Compagas. It's as simple as that. To conclude, Copel is a vibrant company with top, top talent and very much open to evolution.

We are excited about our future prospects, and we are convinced that Copel will be one of the main benchmarks of the electricity sector in the coming years. And I'll invite Moura to speak about the results of the third quarter.

Adriano Rudek de Moura: Thank you, Daniel. I would also like to thank each and every one of you for your participation in this 2023 earnings call, which is emblematic for all of us for all the reasons that Danielle has already highlighted. And indeed, delivering yet another quarter with solid results, which consolidates the best year in our history, means to close this exceptional year for Copel and for all of us with a golden key. Now we're fully focused on executing the value creation agenda, which, by the way, is in full swing within the framework of the pillars that were presented in detail at the last Copel Day and highlighted again by Daniel. Considering the financial KPIs, here we see growth in the quarter and in the year in adjusted EBITDA, net income, and cash generation.

Adjusted EBITDA includes the discontinued operations of UEGA and Compagas already mentioned by Daniel, which for financial statements purposes have been reclassified as discontinued operations, both on the balance sheet and in the income statement. Once again, I'd like to highlight this record result of BRL5.8 billion, almost 6% up over 2022. In the quarter, in the same vein, BRL1.5 billion, almost 5% growth. I'll detail this result by business later. Cash generation of almost BRL1.5 billion in Q4, accumulating BRL5.2 billion in the year, an increase of approximately 3% over the previous year. And this is -- and then also a record in cash generation. Net income doubles in the year compared to the previous year, BRL2.3 billion in the quarter, BRL943 million, 51% growth.

And I'd like to remind you that in 2022, among other non-recurring items, we recorded in Q2 the PIS, COFINS provision on the ICMS, [indeed] (ph), of BRL1.2 billion, which significantly affected the result for that year. Moving on, on recurring items. Here we have a summary of the impact in the quarters and in the years 2023 and 2022, including separating adjusted EBITDA of the discontinued operations of UEGA and Compagas. In a nutshell, the main impacts in the last quarters of ‘23 and ‘22 were the reversal of the impairment of G&T assets of a BRL123 million in Q4 ‘23. Just give me a moment, please. So the reversal of the impairment of G&T assets of BRL123 million and the additional provision for litigation in the arbitration process of BRL51 million in Q4 ‘23.

In Q4 ‘22, we had added BRL452 million. It should be remembered that UEGA’s reversal of BRL258 million was also recorded in Q4 ‘23 due to the signing of the CCVA in December ‘23. But in this case, the adjustment is in the discontinued operations line item, but within the consolidated results. Moving on, we present the contribution of each business to adjusted EBITDA. Basically, the EBITDA of BRL1.5 billion in Q4 ‘23 is represented by GeT adjusted EBITDA of BRL900 million, BRL3.5 billion in the year, very much aligned with the year of 2022. EBITDA of this BRL600 million, up 36% compared to Q4 ‘22. And in the year, this broke the barrier of BRL2 billion barrier in the year, up 24% over 2022, a very relevant result. In this quarter, consequently, this had the biggest contribution to the consolidated result.

As you can see here, BRL157 million over Q4 ‘22. And here, I highlight the main events. The 8% increase in the grid market already eliminating some impacts. The June readjustment of ‘23 with average increase above 6%. In the test, we also had a 42% increase, almost BRL43 million with other operating revenues, basically leases and rentals of equipment and structures and sharing of poles. And the negative was the increase in the expenses of third party services. One part to meet the emergencies of climate events that intensified a lot in the last months of last year. At, G&T, the main highlights were improved results from the purchase and sale of energy, BRL51 million. GSF in the quarter of around 83% compared to 77% last year, results of the new wind complexes, Santa Rosa, Mundo Novo, and Aventura already included in this result almost BRL30 million.

These assets were acquired in January. We had the full impact of them in 2023. We also had this positive the reversal of BRL83 million of a regulatory litigation given the annual resolution in December, which addresses the methodology to calculate MCSD, surplus and deficit compensation mechanism. This was reversed in December. And the negative was the impact of the curtailment of BRL30 million in the wind complexes. In the IFRS concept, in other words, in accrual basis, and the remuneration of transmission assets in the order of BRL21 million, given or due to the reduction in the contract correction indices. In addition to these specific impacts that we saw, now we're going to see in PMSO that all businesses were impacted in this quarter by the increase in profit sharing, PLR, and performance bonuses in BRL64 million basically due to the increase in net income which doubled in 2023, as we have already seen.

Moving on. PMSO in more detail. The P is people. As we mentioned, it was affected by BRL40 million, referring to performance bonuses and to PLR, profit share sharing given the net income growth compared to a reversal of BRL24 million in Q4 ‘22. Excluding the impact of this PPD and PLR, there was only a 1% increase quarter-on-quarter despite salary increases in January of more than 7%, and 4.5% in October of 2023 applied according to the collective labor agreement. So in real terms, there was a 2.5% reduction. In other words, a reduction of 71 employees. We spoke about the big expenses of third party services at this, basically, with the increased cost with maintenance of the electric system and facilities. We also have additional costs related to the acquisition of wind complexes Aventura, and Santa Rosa in Mundo Novo.

And as provisions and reversals, a good part of this reduction of BRL604 million was the provision for the litigation of the arbitration of BRL451 million in Q4 ’22, in addition to the partial reversal of the impairment of generation assets of BRL124 million due to the revaluation of the assumptions in the calculation as we have mentioned. Lastly, we have the reversal of BRL83 million of the regulatory litigation, which improved the G&T result as I have already mentioned. Now the operating costs and expenses basically in keeping with the previous year. And as Daniel has mentioned, and just to end the PMSO part, the second phase of the ZBB starts now. It is expected they will complete this work by October of this year. Possible additional reductions will be included in our budget in 2025.

Now speaking about investments, I think that this has been mentioned. We have the highest level of investments at the distribution company with a focus on the continuation of Parana Trifasico smart grid project. Like to remind you that prudent investments, unitized to prudent investments will be major in the year in 2025. They will be included in the remuneration base of these in 2026. In 2023, the CapEx of BRL2.2 billion does not include the acquisition of the wind farms of Aventura, Santa Joe, Mundo Novo. For 2024, in addition of the BRL2.4 billion already approved to have the payment of the grant bonus of BRL3.7 billion, which will be restated by select interest rate in January ‘24 until payment. BRL6.5 billion, given that it is the last cycle of the tariff review of the DIS.

And moving on, coming to the end of my presentation here, I would like to highlight the leverage of 1.9 time mainly due to the BRL2 billion of the primary offer, the BRL2 billion proceeds of the primary offer available for the partial payment of the grant bonus that we mentioned. Naturally, for the payment of the grant bonus and the high level of CapEx approved for 2024, the level of leverage should return to more adequate levels of our capital structure. And so considering our dividend payout policy, I'd like to inform that we submitted a proposal of additional declaration of IOC of BRL978 million in addition to BRL978 million in Q3 ‘23, a supplement of a BRL121 million. The first part was already paid in November. The remaining part, BRL632 million will be deliberated in the ordinary shareholders meeting in April 24 with a cutoff date for payment in June.

Again, thank you very much for your participation, and we can now start the Q&A session.

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