Companhia Paranaense de Energia – COPEL (NYSE:ELP) Q4 2022 Earnings Call Transcript

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Companhia Paranaense de Energia – COPEL (NYSE:ELP) Q4 2022 Earnings Call Transcript March 22, 2023

Operator: Good morning, ladies and gentlemen and welcome to Companhia Paranaense de Energia – COPEL’s Video Conference Call to discuss the earnings of the Fourth Quarter of 2022. This video conference is being recorded, and the replay may be accessed at the company’s IR website, ri.copel.com. The presentation is also available for download. We inform you that all participants will be only watching the video conference during the presentation and we will later begin the questions-and-answer session when further instructions will be provided. Before proceeding, we inform that forward-looking statements are based on belief and assumptions of COPEL’s management and on information currently available to the company. They 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, industry conditions, and other factors may lead to results to differ materially from those expressed in such forward-looking statements. This video conference is presented by Mr. Daniel Slaviero, CEO of COPEL and Mr. Adriano Rudek de Moura, COPEL’s CFO as well as the Directors of the subsidiaries that will be available for the question-and-answer session. I would like to now turn the floor to Mr. Daniel Slaviero, who will begin the presentation. Please Daniel, you may begin.

Daniel Slaviero: Hello, good morning. I thank you all for participating on our video conference. To begin, I’d like to update you on the transformation process of COPEL into a corporation. And a brief retrospect, in November last year, the State of Paraná announced the Controller’s intention to transform COPEL into a dispersed capital company, dispersed ownership without a defined controller, a true corporation, but in November, the legislative powers of Paraná approved the law that authorized this transformation. One of the main benefits of this change in COPEL’s legal nature is the possibility to renew three main plants. In particular, the largest one, Foz do Areia with the concession maturing in the next few months.

With that in December of last year the company began studies for the full renewal, not only of Foz do Areia, but also Caxias and Segredo which correspond to 60% of our generation capacity. In December still, the Controller requested that COPEL hired advisors considering that the joint running of a possible secondary and primary offer brings savings and benefits to the process. Now moving to the month of January of this year, the company announced hiring the main advisors responsible to assist this process. We have already started working and has also approved its new collective work agreement considering this new reality. For this month of March, at the latest the beginning of April, we expect the definition of the grant bonus from Ministry of Mines and Energy and the next steps are the conclusion of the valuation, calculation and the due diligence work being carried out by independent companies which will be evaluated and assessed by Paraná’s Court of Accounts.

Our expectation is to run the offer in the second half of the year with the numbers of the second quarter. Even considering we have a threshold date for the renewal of Foz do Areia which is December of 2023, the company is focused on this process following all of its governance rights as the Controller has been following their own procedures. Of course, we will maintain the marketing forms of any material fact in this journey. I reinforce our conviction that COPEL’s transformation into a corporation will be very beneficial for the company, its employees, customers and society in general. Now, starting to talk specifically about our earnings, we closed the quarter with an adjusted EBITDA that is consistent exceeding BRL1.400 billion in the total of 2022.

The amount is of BRL5.5 billion representing an increase of more than 10% compared to the previous year. In addition, there is also strong cash generation of nearly BRL1 billion in the quarter, closing with a leverage of 2x EBITDA, which is very comfortable for the company. This is a result of a disciplined mature management and capital allocation. The great results of the quarter were partially affected by known recurring events, such as the impairment of UEGA and the provision for the arbitration procedures that began in 2015 and run under secrecy.

Compagas: Now on the next slide, I also pointed some advances of the last quarter, conclusion and beginning of operation of a 100% of Jandaíra Wind Complex, adding an additional 900 megawatts in our wind power generation park. Since the beginning I’ve said that one of the priorities of this management is the impeccable execution of our business plan. This asset was entirely conceived, planned and executed in our tenure since the auction on 18th of October, 2019, and to delivery more than two years ahead of schedule compared to our business plan.

Distribuição: We’re making progress in our transformation plan and the Board has approved the investment plan for 2023 in the amount of BRL2.2 billion and COPEL debts will have approximately BRL1.8 billion. All of these investments within our policy have the objective very clearly, three objectives actually, to improve services provided to our customers, producing costs and to increase our base of regulatory assets. As for UEGA, as was already mentioned, we began the non-bindings type of the proposals to divest in this asset.

Petrobras: And finally, it’s with great pleasure that for another year we remain on the ISE portfolio and ICO2 portfolio of B3 reflecting our permanent commitment to the ESP area. In addition, this week we made another important step for improving our index for investors, which is MSCI ESG, where we went from a BBB classification to an A rating. This is something that gives us great satisfaction. So now I’ll turn the floor to Moura, who will talk about more details of our earnings and we will be of course open and available for any doubts and questions. Thank you.

Petrobras: And finally, it’s with great pleasure that for another year we remain on the ISE portfolio and ICO2 portfolio of B3 reflecting our permanent commitment to the ESP area. In addition, this week we made another important step for improving our index for investors, which is MSCI ESG, where we went from a BBB classification to an A rating. This is something that gives us great satisfaction. So now I’ll turn the floor to Moura, who will talk about more details of our earnings and we will be of course open and available for any doubts and questions. Thank you.

Petrobras: And finally, it’s with great pleasure that for another year we remain on the ISE portfolio and ICO2 portfolio of B3 reflecting our permanent commitment to the ESP area. In addition, this week we made another important step for improving our index for investors, which is MSCI ESG, where we went from a BBB classification to an A rating. This is something that gives us great satisfaction. So now I’ll turn the floor to Moura, who will talk about more details of our earnings and we will be of course open and available for any doubts and questions. Thank you.

Adriano Rudek de Moura: Good morning, Daniel. Good morning everyone. I thank you all for attending as well. I’d like to begin by highlighting the details of the main financial indicators of the fourth quarter with significant increase of EBITDA, adjusted EBITDA compared to the fourth quarter of 2021 of more than 37%, basically supported by the improvement in the hydrological scenario with an average GSF that’s more favorable in 2022, almost 10 percentage points more than 2021, close to 78%. And only this factor already had a contribution of more than BRL300 million to the earnings of the quarter and the purchase and sale of electricity. We also had a significant reduction in our costs with personnel in the quarter in the same comparison basis.

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Photo by Matthew Henry on Unsplash

So here excluding the effects of the indemnity of the voluntary redundancy program at the end of 2021, that’s approximately BRL136 million and part of it resulted in the reduction of almost 508 employees in this period. A little later I’ll talk more about the MSO, but year-to-date EBITDA, adjusted EBITDA exceeded BRL5.5 billion, an increase of 10% compared to 2021, very expressive growth considering all of the challenges that we faced in 2022. Adjusted net income has more than doubled, exceeding for the first time the mark of BRL1 billion in a quarter. In addition to the improvement in EBITDA, there’s a positive effect of the tax benefit of approximately BRL330 million of the interest on equity. In the year, adjusted net income of BRL2.8 is in line with the previous year, that despite EBITDA improvement and the positive tax impact of the interest on equity, the financial result was negatively affected by the increase on interest rates and inflation that in the bottom line the values ended up offsetting each other.

Operating cash generation has also increased despite the reduction of this consumption and including the increase of MMGD of 930 million, the 10% increase compared to last year. In the year cash generation already exceeded BRL5.3 billion, 17% higher than 2021. So this level of cash generation is a result of the combination of multiple factors. One of the main components is the improvement in the national hydrological scenario with a lower need for energy purchase, as I said, in addition of course to other positive impacts such as the tariff adjustment at this reduction of that we’ll see in detail a little later. So with that, we ended the year with a consolidated cash balance of BRL2.7 billion, noting that in November we made a payment a part of the interest on equity of BRL600 million.

So we remain with a sound financial position. Next page. Here we see the conciliation of adjusted EBITDA versus reported EBITDA with the non-reoccurring items recorded in this quarter and in the year. For the year the highlight is the provision for PIS and COFINS of BRL810 million as a result of 13,385 of 2022. This provision was recognized in the second quarter of 2022. And in this quarter we had two non-reoccurring adjustments. The largest one refers to the arbitration that Daniel mentioned that began in 2015. It’s a civil arbitration and due to the evolution of the procedures and the beginning of the certain liquidation phase, based on the opinions of specialized advisors, both external and internal, we made a compliment to this provision of BRL453 million.

This arbitration litigation was already part of our expectations in the financial statements of previous years as a contingent liability, but there are no more details as we have the protection of secrecy and confidentiality. If you’re curious, this note, 28.2 bring to more detail due to the movement of this litigation. The other adjustment pertains to the impairment of BRL144 million at UEGA, considering the scenario of low likelihood of dispatch, partially offset by the reversion of other generation assets.

PIS: Next page, we have a bridge with the contribution of each business. Fourth quarter of 2021 versus fourth quarter of 2022, it’s visually clearer to see the impact of the better scenario for purchase and sale of energy at GeT as I mentioned, there was also an increase of BRL60 million and equity equivalency due to the periodical tariff review applied to transmission contracts and also monetary traction on contract assets, and a significant reduction in PMSO of BRL60 million. Another factor that also contributed to the good result at GeT was the entry of the Vilas Wind Hub in the generation portfolio. This asset was acquired in November of 2021 as well as the beginning of operation at the Jandaira wind hub that was already mentioned by Daniel.

This result clearly reflects our strategy of continuous improvement of efficiency, that in addition to the cost reduction plan includes the conclusion of works and newer positions which already start to contribute to results and will be increased with the acquisition of wind hubs of Aventura and Santa Rosa & Mundo Novo was of 2023, as of January 30th of 2023. At this, we saw an increase of 10% getting to an adjusted EBITDA in the quarter of BRL442 million, a robust result even considering the drop in the grid market in the quarter, including the impact of MMGD, especially in November and December. This decrease was completely offset by the cost reduction or the reduction in manageable costs, especially in personnel with the reductions of the voluntary redundancy program at the end of 2021.

Then it was also the increase of 16% at since June of last year. And the accumulated the year, this reached BRL1.7 billion of adjusted EBITDA, a historical landmark for the company and with that regulatory efficiency remains at a double digit rate at around 12%.

COFINS: Next page, we have a bridge with the contribution of each business. Fourth quarter of 2021 versus fourth quarter of 2022, it’s visually clearer to see the impact of the better scenario for purchase and sale of energy at GeT as I mentioned, there was also an increase of BRL60 million and equity equivalency due to the periodical tariff review applied to transmission contracts and also monetary traction on contract assets, and a significant reduction in PMSO of BRL60 million. Another factor that also contributed to the good result at GeT was the entry of the Vilas Wind Hub in the generation portfolio. This asset was acquired in November of 2021 as well as the beginning of operation at the Jandaira wind hub that was already mentioned by Daniel.

This result clearly reflects our strategy of continuous improvement of efficiency, that in addition to the cost reduction plan includes the conclusion of works and newer positions which already start to contribute to results and will be increased with the acquisition of wind hubs of Aventura and Santa Rosa & Mundo Novo was of 2023, as of January 30th of 2023. At this, we saw an increase of 10% getting to an adjusted EBITDA in the quarter of BRL442 million, a robust result even considering the drop in the grid market in the quarter, including the impact of MMGD, especially in November and December. This decrease was completely offset by the cost reduction or the reduction in manageable costs, especially in personnel with the reductions of the voluntary redundancy program at the end of 2021.

Then it was also the increase of 16% at since June of last year. And the accumulated the year, this reached BRL1.7 billion of adjusted EBITDA, a historical landmark for the company and with that regulatory efficiency remains at a double digit rate at around 12%.

PIS: Next page, we have a bridge with the contribution of each business. Fourth quarter of 2021 versus fourth quarter of 2022, it’s visually clearer to see the impact of the better scenario for purchase and sale of energy at GeT as I mentioned, there was also an increase of BRL60 million and equity equivalency due to the periodical tariff review applied to transmission contracts and also monetary traction on contract assets, and a significant reduction in PMSO of BRL60 million. Another factor that also contributed to the good result at GeT was the entry of the Vilas Wind Hub in the generation portfolio. This asset was acquired in November of 2021 as well as the beginning of operation at the Jandaira wind hub that was already mentioned by Daniel.

This result clearly reflects our strategy of continuous improvement of efficiency, that in addition to the cost reduction plan includes the conclusion of works and newer positions which already start to contribute to results and will be increased with the acquisition of wind hubs of Aventura and Santa Rosa & Mundo Novo was of 2023, as of January 30th of 2023. At this, we saw an increase of 10% getting to an adjusted EBITDA in the quarter of BRL442 million, a robust result even considering the drop in the grid market in the quarter, including the impact of MMGD, especially in November and December. This decrease was completely offset by the cost reduction or the reduction in manageable costs, especially in personnel with the reductions of the voluntary redundancy program at the end of 2021.

Then it was also the increase of 16% at since June of last year. And the accumulated the year, this reached BRL1.7 billion of adjusted EBITDA, a historical landmark for the company and with that regulatory efficiency remains at a double digit rate at around 12%.

COFINS: Next page, we have a bridge with the contribution of each business. Fourth quarter of 2021 versus fourth quarter of 2022, it’s visually clearer to see the impact of the better scenario for purchase and sale of energy at GeT as I mentioned, there was also an increase of BRL60 million and equity equivalency due to the periodical tariff review applied to transmission contracts and also monetary traction on contract assets, and a significant reduction in PMSO of BRL60 million. Another factor that also contributed to the good result at GeT was the entry of the Vilas Wind Hub in the generation portfolio. This asset was acquired in November of 2021 as well as the beginning of operation at the Jandaira wind hub that was already mentioned by Daniel.

This result clearly reflects our strategy of continuous improvement of efficiency, that in addition to the cost reduction plan includes the conclusion of works and newer positions which already start to contribute to results and will be increased with the acquisition of wind hubs of Aventura and Santa Rosa & Mundo Novo was of 2023, as of January 30th of 2023. At this, we saw an increase of 10% getting to an adjusted EBITDA in the quarter of BRL442 million, a robust result even considering the drop in the grid market in the quarter, including the impact of MMGD, especially in November and December. This decrease was completely offset by the cost reduction or the reduction in manageable costs, especially in personnel with the reductions of the voluntary redundancy program at the end of 2021.

Then it was also the increase of 16% at since June of last year. And the accumulated the year, this reached BRL1.7 billion of adjusted EBITDA, a historical landmark for the company and with that regulatory efficiency remains at a double digit rate at around 12%.

Mercado Livre: Now getting into PMSO, the red column here, the main impact was the compliment for the arbitration litigation provision and excluding this impact and all known recurrent items, the reduction is close to 24% of 981 to 747. The cost with personnel and administrators had a significant reduction, including the reduction of the number of employees that I mentioned, 508 at the end of 2021 due to the reduction of reported results. There was a relevant impact here in the award for performance and profit sharing. There was a reduction of this values that you can see in the chart, but even without these effects, you still see a reduction of almost 11% or above 11% quarter-on-quarter, considering an accumulated inflation measured by INPC of close to 6% between those two quarters there was a reduction in real terms of almost 16% in the cost of personnel and administration.

Quickly about the investment program, BRL2.3 billion in 2022, more than BRL600 million in the last quarter, especially at this focusing on the continuity of the transformation program contemplating Paraná Trifásico and Smart Grid Parak and Smart Grid, we’re making great progress in the execution of these two initiatives and we already start to see results. At GeT, the focus with the conclusion of Jandaíra Wind Hub with entry of operation was advanced in two years. For 2023 we already have the approval of budget for investments over BRL2.2 billion. The continuity focus of investments at this prudent investments at this noting that this base or rather should go to the end of 2025. Noting that the acquisition of the hubs Aventura and Santa Rosa & Mundo Novo concluded in January is not included in this BRL2.2 billion that were approved, nor the potential payments of grant bonus linked to the renewals of the FDA, Caxias and Segredo concessions.

Now moving towards the end of my presentation, leverage, as Danielle mentioned, is 2x adjusted by the effects of the provision for PIS and COFINS according to the clauses. We’ll continue focusing on improving a more balanced capital structure with the leverage for dividend policies and investment policies. We’re making good progress in this journey. As you can see, there’s no exposure to foreign exchange in our debt and the main indicators remain DI and IPCA. In terms of maturities 2023 and 2024, we have very low values, quite reasonable with a greater concentration for 2025, but completely within the company’s cash generation capacity and the indebtedness levels. And finally, I highlight once again the discussions in the Shareholders Meeting in November of last year of the equity period.

The interest on equity payment of BRL970 million equals to a yield of more than 5% in the year, maintaining a good level of competitiveness in terms of dividend payment, with this level of interest on equity, there’s no expected additional payment to be made based on the results of 2022. This proposal considered maximizing tax benefits of this modality of payment with results above BRL330 million, which already are reflecting in the earning results of the fourth quarter, that I extrapolated to you in November 2022 the total of BRL970 million, BRL600 million have already been paid at the end of November, and the balance of BRL370 million will be paid by June, 2023 in a date to be defined by the general meeting that will be held in April. That’s it.

Thank you once again for your participation and we can now move on to the question-and-answer session.

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Q&A Session

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Operator: Thank you. Our first question in writing from Daniel Travitzky from Safra.

Daniel Travitzky: So you consider to participate in the auction, transmission auctions at the middle of the year, should we expect movement of investments as what happens in Jandaíra before the process to conclude the transformation of the company into a corporation? Second question about the provisioning of BRL453 million, how much would you have to recognize that in this process from 2015? Thank you.

Adriano Rudek de Moura: Good morning, Daniel. Thank you. First to split this question in investment at the transmission auctions and the market opportunities that we have today and newspapers today in Brazil have a large story about assets that are in the market for business opportunities. Our priority here to Daniel and everyone is the corporation process. So any other plan at this time or throughout this year is outside of our primary preliminary strategy. So we do not intend to participate in this auction in the first half of the year. In the second half, we are evaluating one lot or another, but it’s also a secondary priority. Our focus at the company is the corporation process, as we already said and we have the threshold, the limit cutoff date for that, that’s the main effort of the company.

One third of the generation and its process must be concluded by December. So as we said, we are fully focused and we’re not looking at greenfield or brownfield opportunities for 2023.

Daniel Slaviero: Now about the compliment of the provision of the arbitration litigation, it’s already in the liquidation phase, as Moura mentioned, and with the opinion of our advisors, it is the best estimate we have today and we don’t foresee any additional value in this process, but we continue to follow this with our internal and external attorneys. And since it runs protected by confidentiality, this is the limit that we have in terms of information to provide to you at this time.

Operator: Next question, Marcelene Pelicin .

Unidentified Analyst: Good morning. For 2023 is there any expectation of share buyback due to the reduction in the price of the asset? Thank you.

Daniel Slaviero: Hello, Marcelene. We do not have any plan of share buyback at this time. As Moura mentioned we understand we have two major tools to have an increasingly better capital structure, a tier to detect sector, which is the investment policy and the dividend policy. In our view, we have been doing that and as we have been saying since 2019, 2020, balancing this and reorganizing the capital structure in a balanced and conservative way, always watching structure and dividend here as compared to the average of the industry. So in this context here Marcelene, it is not part of our schedule to have any share buyback program. And as was said, I think the company’s priority is to know the exact amount of the grant bonus, which will be an expressive figure, converging the three plans and we’ll be prepared.

We have to be prepared to make this payment and renew for another 30 years 60% of the company’s capacity. So this is the priority. And just linking it to the previous question from Daniel’s question, my name sake, we’ll probably not have a business opportunity any better than this, which is to maintain the assets that we know, that we are operating for 30 years, specifically, we had a recent retrofit made, so we don’t have plans of this size above one gig or 1.3, 1.4, 1.6 as false, yes that’s the best investment plan that we can have and also, of course, with all the other benefit that the corporation process will bring to the company, to its employees, to customers, and as I said, to the society in general.

Operator: Our next question, Andre Sampaio – Santander.

Andre de Mello Sampaio: Good morning. How is the process to vote for approval privatization process? Will the government be allowed to vote or only minority holders? Does BNDES also vote? Correct? Thank you.

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