Energy Co Of Parana Q2 FY2025 Earnings Call

Good morning, ladies and gentlemen. Welcome to Companhia Paranaense de Energia, Copel's video conference to discuss the earnings for the second quarter of 2025. This video conference is being recorded and will be available on the company's website, ri.copel.com. The presentation is also available for download. Please be advised that all participants will only be watching the video conference during the presentation, and then we will begin the Q&A session, and further instructions will be provided. Before proceeding, I would like to note that the forward-looking statements are based on the beliefs and assumptions of Copel's management, and the information currently available to the company. These 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 consider that events related to the macroeconomic environment, industry and other factors could lead results to differ materially from those expressed in such forward-looking statements. This video conference will be presented by Mr. Daniel Slaviero, CEO of Copel; Mr. Felipe Gutterres, CFO of Copel; as well as Directors of the subsidiaries who will be available for the Q&A session. I would now like to turn the floor to Copel's CEO, who will start the presentation. Please, Daniel, you may begin.

Hello, good morning, and thank you all for joining our video conference. We are pleased to present another quarter of strong business results, with EBITDA of BRL 1.3 billion, reflecting a growth of 4.2% compared to the same quarter last year, and recurring net income exceeding BRL 450 million. Our capital expenditures during this period were around BRL 1 billion, specifically BRL 975 million, which aligns with our forecast of more than BRL 3 billion by the end of 2025. We are closely monitoring the execution of our investment plan each week, particularly in the distribution company, as this is the final year of the tariff cycle. Our leverage ratio closed at 3.1x, primarily due to the temporary acquisition of Baixo Iguacu. We plan to complete the second stage of this operation, which involves the sale of the entire asset, in the third quarter. When factoring in this process, our leverage stands at 2.9x net debt over EBITDA, consistent with our dividend policy and projections, noting that we have a deleveraging plan in place for the upcoming years, especially due to tariff reviews, cost reductions that Copel is implementing, market commitments, and improvements in the selling price of our energy. Regarding divestments, we completed the sale of small hydro assets as part of Copel's divestment strategy in July, with the final element, the Figueira plant, expected to finalize in the third quarter. Additionally, in the second quarter, we concluded asset swap transactions with Eletrobras, enhancing our portfolio through the consolidation of HPP Maua and the transmission company Mata de Santa Genebra. We also received notable recognition for our commitment to excellence and sustainability, being awarded the best ESG Award in the Electrical sector by Exame Magazine, and achieving first place in Aneel's Ombudsman Award for the third consecutive year. I want to commend everyone at the distribution company for this achievement and thank all our collaborators at Copel for their dedication and professionalism, as these accomplishments would not be possible without their support. Now we will discuss the migration of Copel to Novo Mercado. This transition aims to unify our share classes, enhancing liquidity for the company and our shareholders. The terms approved by the Board of Directors include the unification of two classes of preferred shares without affecting any rights of the classes involved. The next phase will be a migration to common shares at a 1:1 ratio without diluting any shareholder, along with equalizing dividends, featuring a premium payment of BRL 0.7749 for preferred shares. This stage will depend on the approval of the majority of preferred shareholders at a special meeting, which the company will schedule at the appropriate time. Besides ensuring equity between share classes, the proposal involves moving all preferred shares to common shares, providing the same voting rights and alignment among shareholders. We believe this move will create substantial value for the company by increasing share liquidity and attracting new investors, particularly from abroad. However, on August 1, we were surprised by the CVM's decision to defer a request to pause the General Meeting for up to two weeks, made by a single Class A preferred shareholder. It's worth noting that this class represents only about 3 million shares out of nearly 3 billion total shares, or slightly over 0.1% of the company's capital. Even with this small representation, our proposal offers significant liquidity benefits to Class A preferred shares. We are confident that our proposal adheres to legal standards and protects shareholders' interests. We are committed to addressing all points raised at CVM transparently and responsibly, aiming for this process to resume promptly and proceed naturally in consultation with our shareholders. We trust that CVM will not allow any minority shareholder's actions to negatively impact the company and our more than 360,000 minority shareholders at Copel. We will keep the market updated on all relevant developments in this process. I will now hand it over to Felipe, who will provide details on our quarterly results. Felipe, please go ahead.

Thank you, Daniel. Good morning, everyone. I want to express my gratitude to all of you for participating in our earnings conference call. To begin, I would like to point out the 4.2% increase in recurring EBITDA, which amounted to BRL 1.3 billion for the period, with GeT and Com accounting for 58.4% of this outcome and the remaining 42.6% coming from the distribution company. This variation was primarily due to improved results from GeT, mainly driven by better performance in short-term market transactions, reduced generation deviation in wind complexes despite increased curtailment, and higher revenue from electricity availability related to the incorporation of Mata de Santa Genebra. These are the three main highlights. However, we also saw an increase of BRL 126.3 million in the cost of energy purchased for resale, which put some pressure on results, particularly in the distribution segment. Nonetheless, the overall performance reflects the consistency of our strategy and the company's ability to sustainably create value even in a challenging environment, as well as the strength of our integrated operations. At Copel GeT, on the next slide, we reported recurring EBITDA of BRL 761.4 million, representing a 12.6% increase compared to the second quarter of 2024. Notably, there was a positive outcome in the short-term market, with an additional BRL 45 million from time modulation and over BRL 18.9 million contributed by lower generation deviation in wind complexes. Despite the rise in energy purchase costs, we maintained consistency in our operating results. In transmission, we saw an increase of BRL 16.9 million due to results consolidation at MSG. In terms of sales, we encountered liquidity in the price market at levels we deemed satisfactory, enabling us to finalize contracts and reduce our portfolio's average exposure by approximately 50 megawatts between 2027 and 2030. This outcome underscores the robustness of our operations and Copel GeT's disciplined and technically proficient value generation capabilities. On Slide 9, we will provide more details on distribution. Copel distribution recorded recurring EBITDA of BRL 569.3 million, up 0.6% compared to the same period last year. This growth was mainly driven by tariff adjustments in June 2024, which resulted in an average increase of 2.7% on TUSD. However, this quarter, the effect was nearly offset by a 2.6% decline in the billed grid market. Despite these challenges, Copel Distribution achieved solid results, reflecting operational discipline, with regulatory EBITDA increasing by 42.8%. Additionally, I would like to point out that the new tariff is expected to have an average impact of 2.02% on consumers' results starting from the third quarter of 2025. In the second quarter of 2025, our trading strategy advanced, with sales up 21% compared to the second quarter of 2024, indicating a more dynamic and efficient market activity. However, we did experience a decrease of BRL 15.3 million in margins affected by macroeconomic factors and adjustments in our operational structure. We also faced a 40.2% rise in expenses with PMSO as we prepared our units for a new growth cycle. We are optimistic that our strategic shift at Copel trading has reinforced the trading company's position and solidified our significance in the free energy market. We reported a 3.7% reduction in PMSO expenses, totaling BRL 708.3 million compared to BRL 735.9 million in the same period last year. This improvement was mainly driven by an almost 15% decrease in personnel and administrative expenses, alongside a 13% reduction in costs associated with pension and assistance plans, largely due to the voluntary severance program, which was partially offset by salary adjustments during the period. We have successfully reduced costs, enhanced efficiency, and simultaneously improved operational safety and service quality, which is a critical point in this series of actions. Moving on to net income, we reported recurring net income of BRL 452.4 million, down 9.5% from the second quarter of 2024. While EBITDA rose 4.2% compared to the same period last year, we faced a 38.7% increase in financial expenses due to increased debt needed for concession renewals, investments, and acquisitions aligned with our corporate strategy, as well as the impact of a higher CDI compared to last year’s quarter. Copel's performance remains solid, reflecting disciplined strategic management. Now, regarding investments, our consolidated CapEx reached BRL 975.3 million for the quarter and BRL 1.6 billion for the first half of the year, keeping pace with our plans. These investments are focused on assets that broaden the remuneration base, enhancing service quality, operational efficiency, and infrastructure modernization, along with strategic one-off investments. On our last slide, for the second quarter of 2025, the company's leverage ratio stood at 2.9x net debt relative to recurring EBITDA, excluding the impact of the Baixo Iguacu acquisition, which will conclude in the third quarter. This level aligns with our optimal capital structure. The total net debt was BRL 16.6 billion, with a well-diversified composition across financial institutions, market instruments, debentures, and securities. Our rating remains at AAA, emphasizing confidence in Copel's financial stability. Despite an increase in the nominal cost of debt, the equivalence to CDI has decreased, showcasing our funding efficiency. We continue to monitor market dynamics closely and are committed to maintaining a disciplined approach to our capital structure, enabling Copel to invest safely and generate value for our shareholders. This wraps up our presentation, and we can now proceed to the Q&A session.

First question, Luiza Candiota of Itau BBA.

I have 2 questions. First, I'd like you to, if possible, give more color about the trading strategy for the quarter, since there were some movements of asset swaps and the comparison with the first quarter is a little bit more difficult. But apparently, you focused on selling more on longer vertices like '28, '29. So if you can give more color on the trading front. And the second question about the migration to Novo Mercado, as you mentioned in the beginning of the presentation, just to understand if in your mind it is still feasible to conclude this migration by the end of the year to have a little bit of a perspective of your timeline.

Luiza, I'll start from your second question, and then we will complement. But since this interruption was for 15 days, Luiza, and this will be next Saturday, we are doing, as I said, providing all the clarification and all the additional information. And if this is resolved in this period, which is what we believe will happen with a favorable decision to the company, it will be feasible for us to maintain our timeline to get this all concluded by the end of 2025. So despite this slight delay, depending on the decision, we will have to resummon the general meeting, and this fits into our timeline. We had some excess time planned and then things will be a little bit tighter, but the other issues that do not depend on CVM continue to be prepared and continue to advance waiting for this point that will be solved by the 16th. Any comment about this, Felipe?

No, that's it.

Rodolfo, so if you can give a little bit color about the trading strategy, please.

Excellent. I think the first point referring to the M&A and this asset swap strategy, since the beginning when we outlined our long-term trading strategy, we already had a plan for this type of operation. So irrespective of what happened, there were slight adjustments. But at no time did we have to buy energy or reduce the price. That's the first important point. With that said, we also saw during this quarter, great opportunity, especially for the long-term. This is a movement that's been unfolding since the end of last year with a change of perception and the complexity of the system operation. In September of last year, when we saw the need for dispatch from thermal power plants to cover that, the market started to see our levels, and this materialized this quarter. So we made the most to sell BRL 27, BRL 28, BRL 29, almost BRL 40 above what was sold in the past. We don't see the same for '25, '26. So there was space for some portfolio adjustment, but we focused a lot more on these longer sales. The price is very contained, waiting for a better window.

Just to add, Luiza and everyone, these volumes, these percentages here are still very small considering the amount of energy that the company has for these medium-term periods. And this is within our strategy and dilutions between a plus 4 plus 3 plus 2. So that's in line and showing this volatility of the market, either from the price parameters, the complexity of the operation, the need for power has been showing opportunities in the trend of continued improvement in our view in the PLD price.

Our next question, Bruno Amorim from Goldman Sachs.

I would like to get an update on the strategic outlook moving forward. You have recently implemented significant value-creation initiatives, including a new dividend policy and the transition to Novo Mercado. You have built a strong team of directors in recent months. My question is regarding your preparations for the next cycle. Could you comment on this upcoming cycle and the areas of interest? Besides the auction of the capacity reserve, what do you think will be appealing for the company? Should we anticipate any substantial M&A activity this year or next, or is that more likely to happen from 2027 onwards? An update on the strategic aspects of capital allocation and your vision for the company's future would be appreciated.

I believe you highlighted something significant. Reflecting on the promises we've made since our follow-on, we've been fully delivering on them, often even quicker and with better outcomes. To start, we've renewed the grant bonus and concessions as previously discussed. We've also achieved a notable reduction in PMSO costs thanks to the first voluntary dismissal program, and we're observing positive results concerning inflation, particularly in the EPE line. Additionally, we've advanced the decarbonization of our matrix with the sales of Compagas and UEGA. We've restructured our portfolios, including small PCAs and asset swaps with Eletrobras, which will conclude this half-year. Moreover, we reorganized the company and attracted new talent, impacting not only the executive level but also strategic leadership areas across various units. In hindsight, this helps maintain our optimal capital structure, which is a key promise. We updated our dividend policy and aim to close this cycle of commitments with three major initiatives set for completion by the end of 2026: the migration to Novo Mercado, a tariff review in 2026 involving a comprehensive team, and the final reduction of our commitment to cut 20% of costs based on the 2023 nominal LTM, scheduled for completion by the end of 2025. In summary, this reflects Copel's commitment to excellence and reliability in fulfilling its commitments. Looking ahead, we have significant initiatives underway in digital transformation, restructuring, and technology upgrades beyond these three commitments. We are committed to enhancing value without rushing into M&As or capital allocations, as we have plenty of opportunities for value generation. During Copel Day on November 19, we will share our growth perspectives up to 2035, underscoring our long-term commitment to value creation. We're focused on strengthening Copel's corporate culture, including our ambition, purpose, and values, as these are critical to our management approach. Many partners, especially Marcia Baena, our Management VP, are deeply engaged in this area. I apologize for the lengthy response, but I am passionate about discussing our long-term value generation trajectory, and we have considerable tasks ahead of us that don’t require immediate transformational changes, targeting a strategic view for 2027 and beyond. However, we don't have any short-term plans to share right now.

Congratulations again for the deliveries so far.

Next question, Maria Carolina Carneiro from Safra.

Daniel, since you mentioned the improvements in costs, this marks another quarter of significant progress. You indicated you'll discuss this further at the Investor Day, but could you provide an overview of the measures and projects you're implementing in this next phase of efficiency? This would help us prepare for upcoming quarters where we anticipate continued strong performance. Additionally, it would be great if you could touch on the challenges posed by rising energy tariffs and how they are influencing public opinion and government actions. I'm interested in how this is affecting your trading policy and your management of ADA. Other companies have noted a trend towards closer collaboration in trading and addressing debt on PLD as well as the spot prices. If you could provide some insight on that, it would be appreciated.

It's a broad question, Carol, so I'll break it down and ask Felipe Villela to contribute as well. First, regarding the levers, Copel has been demonstrating strong management even before the transformation process began. We've shown good results, and the size of the company presents opportunities. We've made progress in key areas, especially with our people, and we've improved procurement and supply processes through strategic changes that allow for more agility and flexibility. We've seen positive impacts from these changes on GeT, along with ongoing advancements in digital transformation, project revisions, smart grid implementation, and technology investments. We're also recognizing the growing importance of artificial intelligence in our operations. Collectively, these consistent improvements aim to fulfill our commitment to a 20% target. On the tariff side, this is a concern not just in Parana but across Brazil. Our efforts to cut costs and enhance performance are intended to boost efficiency while focusing on improving customer service. This focus is important, particularly in areas where we've seen increased services. Ultimately, customer satisfaction is our priority, especially given the economic growth and rising quality demands. Regarding tariffs, there's a historical context with this year's moderate adjustments in Parana linked to subsidies. A significant portion of the adjustment stems from these subsidies rather than cost increases. As we consider market openings and other measures, it's crucial to keep the perspective of our customers in mind, as they're affected by rates and tariffs. This is a significant issue. Finally, Felipe, do you have anything to add about ADA or ZBB?

I have some comments. There are several important aspects in these strategies as we implemented the Zero-Based Budgeting exercise. Some units will become more diversified in 2026, particularly within the distribution company. The supply department is working on reviewing all contracts to simplify and unify them, which will enhance our negotiation capabilities and help us capture value. This effort is intensifying. Additionally, we are focused on reviewing and simplifying processes where technology plays a significant role. By combining all these efforts, we identify opportunities for cost efficiency. We prefer the concept of efficiency over merely reducing costs because it allows for better allocation of resources.

Just to add, this question, Carolina, is in line and connected to Bruno's previous question. And one thing that I've been saying repeatedly, internally and to the market. No company generates long-term value simply by reducing costs and selling assets. The company must make good capital allocation. So that's why the Phase 3 of the expansion is very relevant in the medium, long term for the company. Right now, I hear about ADA and cost. You see that we have that very controlled in the company. But if you can, Villela, give some color on the initiatives to address Carol's question.

We have a strong culture and a robust process for collection, including many negotiation channels and the option for payment in installments. In the first half of this year, we achieved 1.5 million smart meters, one of the largest smart grid programs in the country. This technology enables us to remotely shut down energy supply without needing to visit the customer's home. Once payment is received, the customer can be reconnected within seconds. Additionally, the culture in the state of Parana supports timely payments, and we have an ADA that is below the tariff coverage, which presents a significant advantage for Copel.

Next question, Andre Sampaio at Santander.

I have two quick questions that I believe will add to the discussion. First, regarding migration, I would like to know about the dividend dynamics and the strategy for this year's announcements. Are there any potential delays, or will new dividends be announced before the migration that could affect the numbers or lead to delayed dividends? My second question is about the provisional measures. Can you provide some insight into the implementation? Should we anticipate any positive or negative surprises during this process?

Let's proceed, Felipe. I will start by discussing the migration and our approach to the dividend policy before addressing the legislative matters concerning 1,300 and 1,304. We are actively working on our migration program and plan to maintain dividend payments until the end of the year. Our dividend policy remains intact, setting parameters for payouts and establishing a minimum number of dividend payments. Currently, we aim for at least two annual payments, with the first half of the year's dividend typically announced in the fourth quarter. The goal is to sustain this practice, especially as we transition to Novo Mercado, as Felipe noted. Maintaining the two committed payment events in our policy and announcing them in the fourth quarter has been our consistent approach in recent years. Now, regarding the environment, it is evident that the political landscape in Brazil is quite turbulent and contentious, impacting various aspects, including the appointment of new directors in government agencies and the progression of bills and provisional measures in Congress. We are closely monitoring these developments, but it’s important to recognize that even top officials cannot predict exactly what will unfold since new decisions and changes occur weekly. In our baseline scenario, we anticipate that MP 1,300 and 1,304 will likely converge into a single tax, with one needing approval due to the already implemented social tariff. Therefore, at least a minimum acceptance of either measure is essential. We believe this point is plausible and creates an opportunity for meaningful discussions about market opening and the proposed timelines in relation to what is feasible, including discussions about subsidy reductions. We have a significant advantage with MP 1,300 due to the involvement of Congressman Fernando, who possesses extensive knowledge of the subject and previously served as a minister, instilling confidence among stakeholders. However, there remains a concern that the outcomes from Congress may not align with expectations, particularly if they introduce more subsidies. A past discussion regarding vetoes proved detrimental to our tariff environment and technical planning. As we engage with institutional entities or directly with Copel, we advocate for what we believe is fair in this political and institutional climate. This requires continuous oversight, given the current scenario, and we anticipate that something will be approved due to the social tariff aspect, which is a significant concern for both the population and the government.

Our next question is in writing from Mr. Renaldo Verissimo. He asks for an update on the intention to participate in the bid for two energy generators, mentioning that this was discussed at the conference last quarter. Is there anything new on this?

I believe you are referring to the capacity bid we have for two plants, Foz do Areia and Segredo, which are strong and competitive processes. I assume you mean there aren't any other opportunities to invest in plants in the short term other than these two. Unfortunately, since our last conference call about 90 days ago, the ministry has not published the necessary ordinance, which is critical for this process. This ordinance will provide guidelines since the bid was supposed to happen at the end of June, and it will also lead to some developments. The ONS has indicated there is an urgent need for power in the system due to increased demand during the day and a deficit of supply in the evenings, which is primarily being met by hydropower and thermal plants. This need for power is acknowledged by the government. We expect an announcement in the coming weeks that will allow the bid to take place in the first quarter of 2026, and I don't see any further delays as there are discussions about a significant bid, well above 12 gigawatts to meet future demand. The advantage of hydropower plants like Copel and others with over 5 gigawatts is that they provide a completely renewable energy source. It will undoubtedly be the most cost-effective option for consumers over time and will always utilize national technology and equipment. This offers clean, sustainable, and affordable energy, which also supports the Brazilian industry. We believe the best path is to prioritize these energy sources. We are actively preparing our projects, having completed most of our work while waiting for the finalization of the ordinance and the auction date for capacity.

Our question-and-answer session is concluded. I would like to turn the floor to Mr. Daniel for his final closing remarks.

So if there are no further questions, I would like to once again thank you all for your participation. I send my greetings to my partners at Copel, all Copellans for yet another quarter of consistent deliveries without hiccups, delivering what we had committed to not only during the last few years, but year-on-year in terms of efficiency, quality to our customers, and valuing and strengthening of our team and our Copellans. So we move forward with the execution of our strategy plan. And the priority now is the execution of the plan, and the deliberation to our shareholders. They will discuss and whatever they discuss will be the rule in our meetings, but so that we can, as soon as possible, continue on with the Novo Mercado process. Because in our view, this will unleash more value, as I said, and will generate value or benefits to all shareholders, every shareholder. And the biggest asset for valuing the company is what drives us forward, and what unites us. So I'd like to thank you and say that we remain committed to the delivery of excellence in execution, and the operation of our assets, our companies, the care for our people and complete, full discipline and capital allocation, so that with all of these elements, we can continue generating a lot of value to the company and to all our shareholders and stakeholders. Thank you very much. Have a great day.

Copel's video conference has come to an end. We appreciate your participation. Have a wonderful day.