Companhia Paranaense de Energia (COPEL) (ELP) Q2 2021 Earnings Call Transcript

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Companhia Paranaense de Energia (COPEL) (ELP -0.42%)
Q2 2021 Earnings Call
Aug 12, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and good afternoon and thank you for waiting. Welcome to Companhia Paranaense de Energia-COPEL Conference Call to present the Results of the Second Quarter 2021. [Operator Instructions]

Before proceeding, we would like to clarify that forward-looking statements that might be made during this call in relation to COPEL's business outlook, operating and financial projections and targets, our beliefs and assumptions of the Company's management as well as information currently available to the Company.

Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. General economic conditions, industry conditions and other operating factors may affect the future performance of COPEL and may lead to results that differ materially from those expressed in such forward-looking statements.

Today with us, we have Mr. Daniel Slaviero, CEO of the Company; and Mr. Adriano Rudek de Moura, CFO and Investor Relations Officer. The presentation that will be made by COPEL's management to be followed at the Company's website, ir.copel.com.

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

Daniel Pimentel Slaviero -- Chief Executive Officer

Good afternoon, everybody. Thank you very much for participating in our call. And I would like to start by saying that although we are facing a very challenging environment here mainly because of the consequences still of the COVID, but especially due to the hybrid crisis, it is with great joy that I start this call.

Presenting another quarter of very strong results, adjusted EBITDA of over BRL1.4 billion, growth of almost 50% in the half year. We are getting close to BRL3 billion. But in the last 10 days, we have three news that had a very good impact on the Company and that will show the consequences in the third quarter, receiving BRL1.4 billion on the CRC of the Parana government, the completion of the renegotiation of GSF that will break an additional results of BRL1.4 billion and the conclusion of one of the most relevant factor in our history, the conclusion of the divestment process of Copel Telecom and thereby receiving BRL2.5 billion.

Next slide. As you can see on the slide and as we have mentioned quite a few times, the process is part of our strategic plan of focus on our core business. All the major figures comes from a very well trusted process, that's an earning process and the impact by the proposed agencies. I would like to highlight our expectation that the operations might bring an additional result of BRL1.2 billion in the third quarter as I said. And now our priority is focused on the divestment process of Compagas. Two new facts in the last few weeks, and I would like to share with you all. We have received an official letter of Gaspetro giving us the preferred right for the acquisition of the 24.5% in the process of sale of Gaspetro and Petrobras. And we will have until the beginning of September to accept it or not -- exercise it or not. And we are analyzing the position.

But as we have the strategy to sell Compagas if the price is according to the market conditions, our trend is not to exercise the preferred right or the present right and continuing with the process of sale. And another fact is even more relevant is that the State of Parana has also the public consultations -- a public hearing until the 22 of August for the condition for the review of the concession. This is a great effort of assurance so that we may have an added book value and this is renewed for the next 30 years, and we are evaluating the general conditions and we will be submitting our suggestion. But overall, in preliminary fashion, we see that the conditions are in line with the best market practices. Our expectation is to renew the concession by the end of this year and have the auction at the Q3 until the end of the first half of 2022, the latest.

On the next slide, we see that beside the strong results that I mentioned, I would like to mention something unprecedented that we have already communicated to the market. COPEL reached the best credit score, AAA, and in one of the Fitch's scale is the reflect of the fact that COPEL is an integrated company with a strong financial profile as a competent operating management for this quarter [Phonetic].

And I would like to remind you that our capital intensive -- we are in an intensive capital sector. And this was one of the first process [Phonetic] to be competitive in our processes of acquisitions and investments and auctions, etc. So this is extremely relevant for our business. And in Copel GeT, we achieved highest data on the BRL12 billion [Phonetic] in the quarter.

I would like to highlight the results of UEGA, Araucaria reporting the importance of complementarity of again thermal power plant entering our portfolio of generation in order to cope with the hydro prices. And besides the acquisition of the Vilas wind farm at the beginning of March, reinforces one of the most important point in our strategy, which is discipline in capital allocation. And we have also brought forward the schedule of Bela Vista SHP and saying that the execution and the bringing forward of the timeline will be one of the most important track of this management.

And in order to include the highlights of the quarter, I would like to mention the results of the fifth tariff revision of COPEL distribution was increase in the RAB by 70%, totaling over BRL8.3 billion. I'd like to remind you that once again, the investment of Copel DIS versus approval by ANEEL. In the last 12 months, we see an efficiency of 15% vis-a-vis the regulatory EBITDA. And in Copel Mercado Livre, for the third consecutive month, it is a bigger trader in the country. And if we take the adjusted EBITDA of the top year COPEL issued last year, we see a growth of over 500%. Congratulations to all officers of our Company, our colleague, our colleagues from subsidiary for these outstanding results.

And the next slide, my last one. I would like to mention that COPEL built a headquarter in Curitiba where we have been for over 50 years in the central region of the city. We sold the building. We centralized the activities. And it has no economic free [Phonetic] as a way to reduce cost, but mainly to increase collaboration of work and synergies between and among the businesses and the team. And this is a very important change in the Company.

And I am also proud to receive the news that we continue -- included in the FTSE4Good Index which shows our commitment with the ESG agenda. This is a permanent agenda on the part of COPEL. No other company in the market will be as relevant for the next two years. All companies that need to be relevant or wish to be relevant, they need to be there. And I would like to say that we created the statutory committee that will be dealing with all ESG things as well as people.

And we also announced in the first quarter our carbon utility plan up to 2030 and all the executives of the Company as of next year will have a very short-term incentive once climate [Phonetic] target. And in order to end my part of the presentation, I would like to highlight that all the funds available in our cash at a low leverage have the objective of strengthening our strategic plan and generating value for our shareholders. We will continue with the impactable execution of our strategy. We focus on the core business, and obviously looking for good investments for the Company to grow in distribution, sales generation and transmission. This is our priority. But undoubtedly, our dividend policy is one of the drivers of our value generation.

And Moura will be talking in detail how we are addressing this internally and with the Board of Directors. Now our CFO, Adriano Moura has the floor.

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

Thank you, Daniel. Good afternoon, everybody. Thank you very much for your participation in our call. Now let's go to page number 8. It is a great pleasure that we published another quarter with challenges as the results coming from our focus on obsession [Phonetic] in the execution of a very well defined strategy with a clear objective to deliver more and more value to our shareholder and also to all the stakeholders of the Company.

The growth that we see here, 47% and the adjusted EBITDA and over 70% in adjusted net income reflects an improvement in all the COPEL businesses, and we will see details afterwards. We have the cash generation of the quarter of higher than BRL750 million, BRL1.5 billion year-to-date, already reflecting the negative impact of the higher cost of purchase of energy and sectoral charges of this, maybe in the first quarter in the half year, the adjusted EBITDA has exceeded BRL2.8 billion, 28% higher than the same period last year, and adjusted net income higher than BRL1.6 billion, 52% higher than last year.

On page 9, I highlight some non-recurring items. As you can see the main adjustments is 2Q '21 and this was reversal of the impairment of assets of generation assets of BRL125 million net. And the main asset here was UEGA, Araucaria and that reported almost total balance of the previous year amounted to BRL139 million. Considering the expectation of a better dispatching scenario, both for the current year, until the number we will continue to dispatch and as well as the next few years. So there is no more impairment in UEGA. And we are also including here the positive impact of BRL18 million more or less or the adjusted fair value in the purchase and sale of energy for [Indecipherable] within this.

I would like to remind you that last year in the second quarter, we recognized the credits of PIS and COFINS in terms of credit amounted to over BRL1.1 billion of which BRL809 million had a positive impact on the EBITDA in the quarter. And this is one of the advancements of last year. Including the non-recurrent items and facilities, we continue operation, that is to say, net of the results of Copel Telecom. EBITDA would have been BRL1.514 billion in the second quarter '21 and BRL2.817 billion in the year-to-date for the half year.

Now on page 10. In addition to the highlights already mentioned and the operating results improvement of all businesses, I also should highlight our investment plan. It is as planned, both financially as well as in the physical plants, both in the GeT and DIS.

In the second quarter of 2021, we invested BRL518 million and we are close to BRL1 billion in the first half of 2021. This is around 22% higher than what we spent in the first half of last year in the comparison base. And of course, the focus here is DIS in conclusion of GeT work, the PCH, Bela Vista and Jandaira that should end in 2022. And in the DIS, the largest investments are Parana Trifasico [Phonetic] and the Smart Grid, which in addition to increasing the remuneration base and the next tariff cycle and significantly improve the quality of Copel's grade all over the state. It also will allow us to have a good cost reduction for the next few years.

In addition to capex, I also highlight the very successful conclusion of the sixth -- the ventures issuance of DIS of BRL1.5 billion with an excellent Tier 1 [Phonetic]. Here, we already see reflected the rating for Copel, the AAA by Fitch. And in addition to the improvement of the working capital for DIS, it will also be priority used for investment, as I have mentioned before.

The first installment of dividends were paid by the end of April, and the second installment of dividends was paid yesterday for shareholders totaling over BRL2.5 billion in terms of results of 2020, the highest amount of dividends already paid by Copel, an yield of over 13%. And now we were already discussing dividends for 2021. I'll talk more about that shortly.

In terms of leverage, we ended the second quarter with 1.6 times, which is an increase vis-a-vis the last quarter and that had the impact of the first installment of dividend payment, BRL1.2 billion in dividends paid in April. Also, there is the impact of capex 22% higher, so we are demanding more cash. And also in the comparison with the other quarters, we have the credit for PIS and COFINS that entered in that comparison base in the last 12 months in the prior quarters. This ends up affecting our leverage. But certainly, our expectation is that the leverage will come down by the end of the year, considering the proceeds from telecom, BRL2.5 billion. Also, the prepayment that is already in our cash from CRC of BRL1.4 billion. In addition to the respect of extraordinary results such as telecom sale, the results of sales, not only the cash effect, but also the results of the sale, also the renegotiation of GSF that Daniel already mentioned.

Final highlight before we move on to the other topic is the qualification by the Federal Revenue Service in Brazil of the COFINS and PIS credit, which start to be offset with payment of federal taxes starting in June. And we estimate an average monthly offset of around BRL100 million a month. That's a significant amount every month.

Remember that the process of the last tariff review for Copel DIS now that happened in June 24, and now already included as a financial component around BRL700 million, which is part of the credit already recognized by Copel, that's going to be returned to consumers. There was a transfer of these amounts between liabilities, bringing down liabilities to refund consumers and increasing sectorial financial liability once this already benefited consumers by tariff reduction. And remember that these financial components may be reviewed by Aneel in the next tariff adjustment.

Now turning to the next page, page 11. Very briefly, we highlight our results -- adjusted operating results for each subsidiary, a wonderful growth in Copel GeT, Daniel mentioned that. And then despite of the negative impact of the water crisis and it has affected partially the second quarter were the results of purchase and sale of energy was reducing BRL100 million, especially because of the need of -- a higher need of purchase energy because of GSF. In fact the good news is that the negative impact was totally offset by some positive factors.

Weather I already mentioned had an EBITDA of BRL113 million compared to a negative result last year in mix. So there's a variation of BRL120 million, over 500 megawatt hour generated in the quarter. Also, there is an increase of almost 80% in revenue for the transmission network availability of almost BRL400 million compared to EUR220 million in 2Q '20. And this was because of the increase of asset remuneration, mainly because of tariff review affecting GeT's result in over BRL170 million.

And there is also a positive impact coming from transmission works conclusion Mata de Santa Genebra [Phoetic] especially. And the last part in the transmission line of Lot E increasing RAB in BRL39 million. And these results here, we are not including the non-recurring items, such as the impairment reversal which was a significant variation, and we'll talk more about that shortly. Well, in DIS, the growth of 12% in the grid market was very significant. And that already shows a good recovery in the state's economy, especially in the hydro business and in the industrial sectors.

And even comparing growth of 2Q '19, that is the pre-pandemic period, the growth would be around 5%. In addition to that, the result was a significant improvement in the PMSO, mainly in costs with personnel, and that already shows a reduction, 341 employees. In the Dis, there was an increase in services of 12%, but that's because of the electrical system maintenance. And we expect that there is a reduction of these costs by the end of the year.

And finally, I highlight the regulatory efficiency of Dis, which reached 15%, as already mentioned in the last 12 months. Finally, it's still important Copel -- free market Copel Mercado Livre results, we are maintaining our leadership in the third consecutive month with a significant growth in energy sale. We have a positive EBITDA of BRL19 million compared to negative in 2020. We are growing with profitability since lower profitability when compared to other Copel's business such as GeT and DIS, but it is in line with the market.

Turning to slide 12, talking about PMSO. What is important to mention is that we have several initiatives to cut costs that are included in the business plan for each subsidiary, and all of them are linked to performance bonuses for our executives. And we are following these targets very closely, and these are very aggressive market targets. And we are seeing results out of this plan. Efficiency improvement and cost reduction are pillars of our strategy, and this is always going to be part of our agenda.

As you can see in the summary, in general, and despite of contract adjustments because of inflation and the collective bargaining agreement from last year, costs are coming down on line fee from our personnel. This is our highest manageable cost, almost BRL320 million in the quarter. The amount was down 4.3% because of a reduction of 462 employees in our headcount, thanks to the voluntary redundancy program.

So in the last 3.5 years, the reduction of personnel was over 20%. Here, also profit sharing program, a significant reduction year-on-year comparing 2021 and '22, considering that the change in the Decree that was regulating the topic decoupled dividend from the calculation base. Therefore, we estimate that we are going to reduce that from 400 in half -- with a BRL400 million result in 2020. And in service line, what we talk about, we worked with maintenance. And the other good news is that our [Indecipherable], which was also down contributed to the result of the quarter, reducing 31% from BRL57 million to BRL39 million, almost BRL18 million. In summary, a relevant drop above 29%.

Now turning to our investment program. Almost at the end of our presentation, we have the performance of our investment. We talked a little bit about DIS and GeT investments. And just an additional comment, the capex that we expect for 2021, in addition to our approved original expectations, last year that was approved by the Board of Directors of BRL1.9 billion, also will include the acquisition of the Vilas wind farm, and it should be included by the end of November, and the enterprise value was of approximately BRL1 billion growth of that. And of course, they will be updated and will be taken into consideration at the end of November.

The debt profile on page 14. Here, we already talked about this onetime of increase of our leverage. There is a downward trend after the accounting posting of nonrecurring events and also with the proceeds from telecom and CRC about the average cost of debt 5.75% that's very attractive, considering mainly the expectation of higher inflation basically because of the CDI contracts and long-term interest rates. About our maturities, no red flags here. It's very dilutive. It was a very good program. It's very much in line with our financial capacity.

And finally, before turning to the last topic of my presentation, remember that our target for leverage that is compatible with adequate capital structure that would be around 2.5x, and it cannot go over 2.7x. And this is one of the drivers to reach our target. It is the dividend policy in addition to the investment policy. So I would like to end my presentation with some comments on dividends for 2021.

Now let's turn to page 15 and my last slide. Here are the main message that I would like to convey to is that already in the next month in September, we will be submitting to our Board of Directors the proposal for the payment, the third dividend payment this year. So the first dividend being paid for the results of 2021. So the last 2 events from the April and the one yesterday were regarding the results of 2020. That is as the dividend policy stays, the policy that was approved in the beginning of the year, for the first time, Copel will pay part of the dividends on the year's result on that very same year.

That is the dividend for 2021 will be partially paid now by the end of 2021. So we will also submit to our Board of Directors in September, and starting for a possible partial prepayment of dividends in 2021 in December. We are taking into consideration here the investment plan, the water crisis, leverage and of course, the tax reform. Just as the three extraordinary events that have already been discussing here and that will be posted in the results of 2021.

In summary, this is a very positive scenario for a strong dividend yield. And I believe that it is among the best in the market. And to conclude, I would like to highlight that the Company continues to have an efficient execution of its business plan and we'll continue focusing on the capital allocation discipline and continuous improvement of all our businesses.

Thank you very much for your participation. And I'd like to turn the floor to the Q&A session.

Questions and Answers:

Operator

Thank you very much. Now moving to our Q&A session. [Operator Instructions] I think there are no questions. So [Indecipherable] explanatory.

Daniel Pimentel Slaviero -- Chief Executive Officer

I would like to thank you all very much for your presence and restating your enthusiasm and belief in the work that we are developing here -- everybody here, the holding Company as well, in our investment plan and all the things that have already been mentioned quite extensively.

And I would like to say something before we close about the process and the ongoing discussions. We believe that agency and mainly the Ministry of Mines and Energy or [Indecipherable] and all the other agencies, we believe that this has been adequate, and we will be going through this process with no with no major, threat unless we mentioned the one that we have already mentioned, the increase in cost impact the economy as a whole. But the risks are already being mitigated here in Parana and in the trends of Brazil [Phonetic]. We are following this very closely. And this is in our strategic method, but we may give our own contribution. Once again, I would like to thank you all very much.

Thank you my colleagues, my friends, all the members and employees of COPEL. And thank you very much for your participation in our conference call.

Operator

We did receive a question from Lilly [Phonetic] from HSBC.

Daniel Pimentel Slaviero -- Chief Executive Officer

Good afternoon, Lilly.

Lilly -- HSBC -- Analyst

How do you see the risk of rationing in 2022? And what measures could we expect in terms of limiting consumption?

Daniel Pimentel Slaviero -- Chief Executive Officer

Lilly, there will be a moment of rough period [Phonetic] ahead before 2022. So we believe that it is not under the control of anybody, but the forecasts are not as bad as they were for this current year. Together with the fact that all the terminal forecasts [Phonetic] will be operating at full steam. And we believe that will be enough for us to have at least a minimum level adequate but minimum.

And this will have severity and we have been -- we know that the ministry has created the provisional measure and the mediation chamber and one of the first topic is there are some sections [Phonetic] improvement of stimulus in order to reduce consumption of the major or large customers or any residential customers. This is something that we have been following very closely. But based on the information that we have, we believe that there will be no big of impact negatively in growth of the economy in our country this year and also next year. I would say that we are very confident and very comfortable with everything that is being done.

I think there are no more questions. So once again, I would like to thank you for the questions and our call comes to an end. We reinforce [Phonetic] once again our confidence in the future of this Company, COPEL. So important for Parana and for the whole energy sector in the country. Thank you very much, and have a very good end of the week.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Daniel Pimentel Slaviero -- Chief Executive Officer

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

Lilly -- HSBC -- Analyst

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