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Companhia Paranaense de Energia-COPEL (NYSE:ELP)
Q1 2021 Earnings Call
May 6, 2021, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and thank you for waiting. Welcome to Companhia Paranaense de Energia Copel earnings call to discuss the results of the first quarter of 2021. [Operator Instructions] Before proceeding, we inform that forward-looking statements that might be made during this conference call related to Copel business outlooks, projections, operating and financial projections, our goals and they are all based on beliefs and assumptions of the company's management and on information currently available to the company. Forward-looking statements are no guarantee of performance.

They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur. General economic conditions, industry conditions and other operating factors may also affect the future results of Copel and could cause results to differ materially from those expressed in such forward-looking statements. With us today, Mr. Daniel Slaviero, CEO of the company; and Mr. Adriano, CFO and IR Officer. Copel's presentation is available at the company's website. www.iri.copel.com.

Now we turn the floor to Mr. Daniel Slaviero, CEO of the company.

Daniel Pimentel Slaviero -- Chief Executive Officer

Good afternoon, everyone. Thank you very much for participating in this conference. I hope that all of you and your families are doing well and are healthy. And despite of facing a very challenging environment, we are very pleased to bring to you the results of this first quarter, which once again superceded our expectations and have a sound and consistent growth. In this quarter, as broadly published in our notices to the market, specifically in our last call, we dedicated great efforts in our agenda to improve the governance in the company.

In addition, to the new committees to have the board in April 29, we had our annual Shareholders meeting, which increased the number of minority representatives going from two to three seats. They are Leila Larian, Marco Antonio Bologna and Andre Weber, which are here with us in this call today. I would like to welcome them and to say that we'll keep on moving on in the path of Copel. The Board of Directors Chair is still Marcel Malczewski, I already know him. He's a great businessman and a great entrepreneur. Here, we have our EBITDA.

We reached BRL1.4 billion, a 13% increase and net income of almost BRL800 million, 50% up. As we have been saying these results are thanks to a seamless execution of our business plan with focus in core business of energy efficiency improvement and discipline and capital allocation always aiming to generate more value to the company. Moura is going to go into the details about the performance of our business units. But I want to stress the extraordinary work of Copel generation and transmission.

There was a growth of 41% in its EBITDA compared to the first quarter of 2020. This is mainly thanks to generation, but also, we had efficiency in cost management and the strategy of energy commercialization and also a result of our equity income coming from our transmission companies, Mata de Santa Genebra, with relevant shares here yesterday.

And the committee for electric sector monitoring lifted limits for TPP dispatches therefore, we can expect good results for UEGA over the year. Something else, the market is following up. It's reprofiling of the RBSE of the transmission companies when it was extended by the regulatory walk of 7.71. This is going to bring compeller return at present value, over BRL80 million and also the primary calculations of CCEE for GSF will point to a figure that is closed to BRL1.3 billion that probably will be posted in the second quarter.

This is still pending the reassessment by the court of accounts. And this figure could even go up, reaching around BRL1.5 billion. I also would like to highlight in our the conclusion of the last section of adding almost BRL40 million in our AEP. In total, this project has added BRL120 million of annual RAP for the company. We also concluded the filling of the reservoir for Bela Vista PCH, therefore, we are closed to the operations for the first turbine.

And both of these projects have been concluded in the budget that we had. And as far as Bela Vista is concerned, we slightly delivered it earlier. So the beginning of supply will happen in January of '24 and until then, we will commercialize the energy in the free market. The execution of the projects on time and budget of all these business plans is a commitment of our management. So congratulations for all and the whole transmission -- the whole team of Copel generation and transmission on that result. But the main topic right now is the unit program.

We concluded successfully the minimum percentage of enrollment and formation of the program. We have over BRL248 million of and Parana government as the majority of shareholders converted another BRL29 million that is equivalent to 5.3% of its capital. State now has 31% of the total capital of the company. And an important piece of data that you can see on the slide is that our book value is at BRL7.14. Now about a possible offer that shareholders might have.

I would like to say that the information that we have are the ones published on the notice 16, 2021. And the last week, we would like to say that in a possible offering, Copel has no intention of bringing in any type of primary offer. Next slide now. Now to conclude, I would like to highlight the main topics of our investment policy, as we have brought to you in our Copel Day, as we can see on the slide, our priority is concentrated on Copel distribution investments.

Thanks to our prudent use history of funds and also to the regulatory work. We are executing a consistent investment plan, and this is already showing in our tariff review, preliminary data from a new 0.2 RAB of BRL8.5 billion, up 70%. Right. Mark, you were ahead of the process and Copel distribution. So right after that, our priority points to renewable assets, wind and solar, preferably brownfield. And that presents any synergy with our current structure. So it's important to say that we are aiming a minimum size for each size, each type of source.

Therefore, the competition is going to be among companies of the same size. In addition to that, we are paying attention to opportunities of auctions of transmission that will be carried out by specifically by the end of the year. And obviously, these will be greenfield. It is also crucial to say that we will have a strict discipline and capital allocation. That is, we will only be doing businesses with the right returns and that generate value for the company and its shareholders. Recent changes in our bylaws are to stress to reinforce that governance process.

And also with the creation of this Investment Committee that we had. And finally, we have the perspective of commercialize, whether energy in long-term auctions. Therefore, we will have the right profitability to this asset in any matter. While we do not have that happening, as I mentioned before, we are very happy about the operating financial performance of the plant, which is also a good perspective that we see in the capacity auctions that MME and NL intend to do by the end of the year. So after my initial remarks, I will turn the floor now to Moura. And later on, we'll come back to take your questions.

And Moura going to go into the details now of this quarter.

Adriano Rudek de Moura -- Chief Financial and Investor Relations Officer

Thank you, Daniel. Good afternoon, everyone. I also thank you very much for being here with us for this conference call. It is with great pleasure that we bring to you another quarter with sound and consistent financial results. We ended 2020 with historical results. And we started 2021 and very well at the same pace with EBITDA and net income that are unprecedented for the first quarter. And this is thanks to an execution of sustainable growth, capital allocation discipline and also efficiency improvement in all our businesses.

The EBITDA of BRL1.4 billion and a net income of most of BRL800 million growth of 19% and 56%, respectively. There are some factors that have contributed to these better results. One of them is the growth of over 30% in the electric energy supply, specifically because of the commercialization of UEGA of 609 gigawatt hour in the quarter. Also, we had a growth of almost 80% and the sale of energy by Copel delivery or free market, reaching 5,199 gigawatt hour and the availability of the electrical network grid, we had an increase of almost 8%.

This was affected by the growth of 2.6% in the grid market and the the periodic a review of transmission and the tariff adjustment applied to the other transmission contracts were also very positive. Another highlight is the increase in the results in our equity income over BRL60 million, specifically because of the commercial -- full commercial operation of Mata de Santa Genebra in mid of last year. And also and also Matrincha, which also started its operation in the second half of 2020.

These are joint controlled companies for Mata de Santa Genebra, it's jointly controlled with Furnas. Further on, we are going to talk about PMSO details, but I can tell you that we had a reduction of BRL55 million in provisions. Basically, these were impairments and litigation, and they have offset higher costs with the electric grid maintenance. And also, we had their performance incentive program amounts being paid. And here, the results are being -- that are being presented include the discontinued operation of Copel Telecom.

Moving forward, here, we have some nonrecurring items. As we can see, we had a few adjustments in the first quarter of 2021, just BRL four million net but in the prior quarter, these amounts were more significant, around BRL64 million, basically impairment generation assets and the impact of an arbitration of GeT of BRL16 million. That's not going to be recurring on the next page. We also have some of the highlights of this period with a sound cash position. We ended the quarter with BRL3.2 billion and also a positive cash generation of BRL760 million.

That was specifically affected in January and February because of higher tariff costs, which are transitory with parcel A on Copel Dis because of higher thermal dispatches and also because of an increase in the FX exchange. In terms of capex, we are in budget, financial budgets and real fiscal budget, we have invested BRL445 million in the first quarter, and we believe we are going to reach BRL1.9 billion that has been approved by our Board of Directors.

We already talked about the growth of the grid market. But I can tell you that there is a trend here to recover the demand of the energy gradually, specifically in the industrial sector that had a good recovery in March here in Parana. I should also say that we concluded the works, and Daniel mentioned that a lot, BRL39 million of are at Copel GeT and also another reference here is a payout of BRL2.5 billion in dividends for 2020.

And we have already paid in April on April 30 BRL1.250 billion, and the remaining amount will happen by the end of the year, and the date is going to be defined by our Board of Directors. And Copel has not posed the impacts of the renegotiation, as Daniel mentioned, probably this is going to happen in the second half of the year, and we are just waiting for approval. And the other highlights here in this page have been already mentioned, and you can go to the next page.

And here, Daniel also mentioned our unit program. I just would like to stress that 277 million units that are already being negotiated or traded at B3 with and in the U.S., they are being negotiated under the Code ELT since 29th of April. So the units, the ADRs that were in the past CPLE6 preferred shares. Now they represent one unit. That is one ADR is one unit. Considering the shares conversion that happened when we created the units. Our final shareholder structure has changed.

Now preferred shares represent 61.5% of total capital and common shares represent 38.5% of total capital and the state of Parana is our majority of the shareholders, and they have 69.7% of shares with right to vote. Finally, it's important to mention that BNDES has formed 131 million units. That represents all its stake of 24% in the capital stock of the company. And as I mentioned, Parana state has 29 million of units, and those represent 5.3% of total capital of the company. And BNDES and the state of Parana have over 160 million units. That is 58% of total units.

Now on next page. We have this information, an exceptional result of Copel GeT that has grown 30% vis-a-vis the fourth quarter. These are adjusted numbers and the contribution for at dispatch in the EBITDA was up BRL34 million when compared to the first quarter of 2020. Another important highlight in GeT was a 4% higher energy sold reaching 5,111 gigawatt hour specifically because the optimization of the strategy to contract energy that has allowed us to have a higher contracting level of 85% in the first quarter of last year, and now we have 91% in this quarter.

In addition to that because of the improvement of the hydrological situation, our HPPs, we have a much better situation of 1,049 gigawatts average gigawatts, we have over 2,000 this quarter, and that has reverted the optimization from minus BRL34 million BRL six positive million in the first quarter of 2021 of variation. There are of BRL40 million.

Finally, we have already mentioned, but we have an increase of transmission and remuneration an increase, and that has contributed to better results at get in addition to the positive impacts of the conclusions of Matrincha and Mata de Santa Genebra works. Now in we still have efficiency higher than regulatory standards. We ended the quarter at almost 9%. But in this quarter, the increase in the grade market was not totally tapped into in this revenue.

And in addition to that, we had higher maintenance costs in the electric network to reduce the impact in the DC and FC as well as an increase in the provision of our profit sharing program and performance incentive program. We are paying attention to this negative impact. And to work on that in the future. About the profit sharing program, we expect that in this year, we have a relevant reduction compared to last year. Once we are not going to have a negative impact of paying dividends, which was in our calculation base. And that was this rule in 2020.

And now this negative impact it's probably going to be fully offset in the first quarter, and I believe we will have a reversal -- have reversion here in the last quarter. So we are very happy about this. We believe we are going to have a great year. We are having efficiency improvement. We are reducing costs. And we also have the fifth tariff cycle that will start now on June 24. Telecom the sale process is already advanced in final stages, I would say, but we are still consolidating the results up to the final conclusion and to transfer the everything that needs to be done by the end -- the mid of this year, and then we'll post the results of the transaction and also the cash of BRL2.5 billion.

Anyway, the results are consistent, and they are improving vis-a-vis last year, specifically because of the reduction of the third-party costs and services. And that is based on revision of contracts and also renegotiations with suppliers. For Copel Meca delivery, our Copel free market, in addition to an increase in energy sale, we are already seeing improvement in results, and they are thanks to prior negotiations from past years with sustainable better margins, and that is in line with best market references. Remember that this month, we are celebrating five years of Copel Mercado Livre.

And we are some of the largest energy commercial organization companies in the country, congratulations to all involved. And Copel commercialization and Mercado Livre has -- in this quarter, just in this quarter, the adjusted EBITDA of BRL22 million, BRL23 million is the whole EBITDA for the past year. So just in one quarter, they had that. So now on the next page, we have PMSO in the first, you have the comparison for first Q '21 on P line, you see a reduction in 2% with personnel because of the voluntary redundancy program of 427 employees in 2020. So that was -- that represented a 6% reduction in our head count.

And here, we already have around 2,000 people less, over 22% in the whole period of the program. The salaries were adjusted last year in almost 4%. So this reduction was more than 6% because if we were to discount inflation, we have this math of 2% that you've seen in the presentation, as we always say, P today is our highest manageable costs, and we are always focused on improving efficiency, reviewing process, investing in technology, and in our 2021 plan, we already have several opportunities included there.

About the profit sharing program and performance incentive program, where we see better results when we compare that to the prior quarter. And once again, I say that we expect a relevant reduction for the profit sharing program for 2021 when compared to 2020. Talking about dividends here starting in this quarter, there was an increase that we will not see again considering the change that was regulating that up to 2020. So starting 2020, '21, dividends will not be part of the calculation base. And in the last quarter of last year, we recognized over BRL170 million because of this link with the dividends.

We won't have that again. In material line, we had a reduction of BRL five million in expenses, specifically with fuel and in the third-party services, there was an increase of BRL31 million. Like I said, this is basically this is maintenance of our grid, DC and FC and the provision line, there was a reduction of BRL55 million, and that is specifically for litigation and impairment, and there was an increase of BRL15 million because of additional maintenance costs in and that's nonrecurring.

Before I move forward, improving efficiency and cost reduction more than ever are in our agenda. And just like last year, we will have aggressive targets to reduce costs related to the compensation of also all our top management. On slide 13, we see the history of our investments. There's nothing new Year. We talked about our investments in the quarter, and we will focus on this and including GeT works which are ahead. They are very advanced work.

Our goal is to fulfill the approved budget, and the approved budget is of BRL1.9 billion. Finally, our leverage reduction. It is at 1.2. Our target for the right capital structure is to be close to 2.7 without going over that limit, and we'll move toward that goal, that target, as we have already said, combining the investments and dividend policy so that we can reinvest in the long term. So I thank you all very much for your participation.

And now we can open for the Q&A session. Thank you.

Questions and Answers:

Operator

[Operator Instructions] First question from Marcelo Sa, Itau.

Marcelo Sa -- Itau. -- Analyst

Good afternoon, everyone. Congratulations on the results. I have two questions. First, I would like to understand what is your expectation about the revisions -- the preliminary revision. Is there anything that you are trying to address there? And another question is, your leverage is very low. You do not -- you still have the dividend cash there. So it will increase a little bit, right?

So -- but then in any way, it's low. And I understand that now the company probably will start looking at growth. I remember that the few times that we have talked, it looks like I wanted to focus in M&A and brownfield. I would like to understand your expectation about growth. If that's really what you want to focus on or if you have anything relevant to happen this year?

Daniel Pimentel Slaviero -- Chief Executive Officer

Marcelo. Thank you very much. About the reviews or the revisions, both in the remuneration base of 8.3. We don't expect to have any seeing major changing, we should be in the same level, and we would like to maintain the 100% compliance there with ANEEL. We are doing everything to follow-on those lines. We are very cautious me, Max, we're very cautious about the subject. So that all investments can comment on the space and be remunerated for us and the company. About the tariff adjustment. Also, there was a preliminary figure of 9.67%.

And we see a huge effort on an ANEEL's side to use several instruments in order to have a low impact for consumers right now. I think this is a right measure to be taken. Right now, we already have a part of that is posting. But recently, we have the degree of Itaipu, this could be a deferred amount. And we believe ANEEL might use it. But I don't think there is going to be a significant variation in the process. But that could vary a little bit more. But within that error margin, just remember that as approved in the bylaws, this will be implemented right after ANEEL confirms the date of June 24. Anything else?

Marcelo Sa -- Itau. -- Analyst

Yes, that's it.

Daniel Pimentel Slaviero -- Chief Executive Officer

Now about leverage, yes, it is very long. And according to all the proteins, and we already mentioned both GSF and telecom deal are not posted to our balance sheet yet. We are moving toward the second quarter now, and everything points to a very low leverage. And in our policy, this shows that we are at that level, that our policy determines up 65%. That's a very good perspective. That's adequate for our investors profile.

But I mentioned in the call and Compel day and also in the policies filed at that we have the assumptions and the guidelines and our team there, the team of new businesses, Casio and his team. We are working on it. We are analyzing the options. Always considering a lot of discipline, but we are working hard in the last few months to analyze the opportunity. So we believe that in the next few months, we can have something if that really moves forward and works out. But what our policies stated, and I don't want to be repetitive here.

After Copel distribution, we have the renewable assets, wind and solar and we have a preference for brownfield. And that have synergy with us, of course. So we see ourselves with an average size of assets for each source, we have a minimum size so that we can look at them and dive into them. And also not only the ANEEL transmission auctions that will happen ahead. There is a lot that has a lot of synergy with our structure here in Parana. And also in the countryside of Sao Paulo, but we also have C3 that will open the data room of theirs in the next week. So we will keep on looking at that, but all is working on governance and guarantee the right returns for the company and for our shareholders.

Marcelo Sa -- Itau. -- Analyst

Great. Thank you very much, Daniel. In the beginning of the presentation, you said that you didn't have much information about what the shareholders of the company will do in this potential secondary offer. I remember, that the BNDES had stated that they expected to place this offer up to June, that would be their idea. Did they tell you anything about timing? About the size of the offering, if they're going to sell more or less share of it? What are they telling you? Or they are not telling you anything?

Daniel Pimentel Slaviero -- Chief Executive Officer

Marcelo, as I said, this is the main topic. The topic of the moment, but they have not said anything. What they always say is that this is part of a larger strategy, a broader strategy of the divestment of the been BNDES power portfolio. So -- but they don't have any indication in and anything that will depend on the market. We see that the utilities sector as a whole is having a hard time. And I'm sure this is under the radar as well so that they can understand that as the right condition.

What we know is what I mentioned. It's registered and instead, we are waiting on the side of shareholders, specifically BNDES, what they expect is the size and everything. But what we know is that they have a lot of experience on the market. And just to conclude, and I don't want to repeat myself once again. But Copel in case this offering happens Copel is not thinking about primary offers, neither leveraging business plan. This is not under our own radar.

Operator

[Operator Instructions] We just received a message via chat. This question comes from about the water crisis we are going through, how this is going to affect the company's results in 2021?

Daniel Pimentel Slaviero -- Chief Executive Officer

Okay. So let's talk about this, how this water crisis affecting Copel and the whole national electric system? Well, William, we have seen that the water crisis is worsening. Is getting worse. Considering September of '20 and April of '21. This is the world history of the national integrated system that we have seen since we started registering that figure in March of April 2021, which is considered the period was the fourth a worst one. And April of this year was the worst in history.

So we see it as a difficult situation because the level of the reservoir is low in the south region. We have it a little bit better. We have a favorable condition here. The mentioned our energy generation was good, it was qualified. So we did have a positive balance with the energy optimization tariffs of MRE. In terms of sales strategy, we developed seasonalization so that we could bring down our risk specifically for a low GSF in January and a high spot price. So we see -- we worked with a seasonalization to protect it.

And also, we have a strategy to buy energy throughout the year. In order to offset the exposure that we have in some months, considering energy prices that we found to be enough for the strategy. So really, this is a difficult environment with a lot of volatility, but we have a strategy we are very efficient there, and we are always moving toward mitigating this impact and to have a good assets generation and good results.

Operator

[Operator Instructions] There is another question coming via chat from Mr. Allison, how is delinquency and this because of the pandemic?

Daniel Pimentel Slaviero -- Chief Executive Officer

Max, can you answer that?

Adriano Rudek de Moura -- Chief Financial and Investor Relations Officer

Thank you very much for your question. This delinquency, both in 2020. Well, in 2020, it was very close and even a little bit lower than what we had in 2019. The first quarter now also, it was stable with no major changes. So we have a lot of actions being taken specifically to try to balance out of that and for consumers that are in difficulty, but we realized that there are no significant changes. Remember, right, that this is 1.5%. And so this is one of the lowest delinquency rates in Brazil.

And this also is thanks to the fact that we are in Parana at the state and because of the economic profile of our consumers as well. So as Max mentioned, we haven't seen major changes around -- and our historical base has been 1.5%, and there are -- we haven't seen major changes around it. So we'll be here for one more minute to see if there any additional questions, whether by via chat or here on this call. So if you don't have any questions, can I -- just a little more? And if there are no further questions, we can end the call.

Operator

[Operator Instructions]

Daniel Pimentel Slaviero -- Chief Executive Officer

If there are no further questions, I would like to thank you very much for your participation. I would like to say that we have here with us, Andre, with us, our new Board member, Andre, welcome, once again, on behalf of all the top executives here, I would like to say that we are very proud of this result. All the numbers we are able to achieve. We have a great expectation for 2021 for Copel. I think also, we have had a dividend yield over two digits.

That's a positive result, and we are continuing on this historical series of results. So in 2020, we had the best results in our history, and we believe that with all the future events, we'll keep on having these we believe that we'll continue generating value and growing this company, a company that is so relevant for Parana, for Brazil and the electrical system. Thank you very much. Have a nice afternoon and nice rest of the week.

Operator

Ladies and gentlemen, Copel's conference call for the results of the first quarter of 2021 has ended. Statements in English on this transcript were spoken by an interpreter present on the live call.

Duration: 41 minutes

Call participants:

Daniel Pimentel Slaviero -- Chief Executive Officer

Adriano Rudek de Moura -- Chief Financial and Investor Relations Officer

Marcelo Sa -- Itau. -- Analyst

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