Executive Summary / Key Takeaways

• Copel ($ELPC) is undergoing a significant corporate transformation, shifting from a state-controlled entity to a corporation without a defined controller, aiming to unlock substantial value through portfolio optimization, operational efficiency, and enhanced governance, including a planned migration to the Novo Mercado.
• The company demonstrates robust financial performance, with Q2 2025 recurring EBITDA growing 4.2% to BRL 1.3 billion and recurring net income exceeding BRL 450 million, driven by strong Generation and Transmission results and disciplined cost management.
• Strategic investments, notably over BRL 3 billion in CapEx projected for 2025, are focused on modernizing the distribution network and expanding the remuneration base, underpinned by technological advancements like the smart grid program.
• Copel is committed to a 20% cost reduction by the end of 2025 and anticipates deleveraging to 2.9x net debt over EBITDA post-Baixo Iguacu divestment, supported by tariff reviews and improved energy prices, while maintaining an attractive dividend policy.
• Despite facing regulatory uncertainties and market volatility, Copel's integrated business model, regional market strength, and focus on long-term, sustainable growth position it favorably within the competitive Brazilian energy sector.

A New Dawn for Copel: Integrated Powerhouse Forges Ahead

Companhia Paranaense de Energia (Copel), a cornerstone of Brazil's energy sector since its founding in 1954, is charting an ambitious course as it embraces its new identity as a corporation without a defined controller. This strategic evolution, particularly pronounced since 2024, positions Copel as an integrated energy player with diversified operations spanning generation, transmission, distribution, and trading. The company's core business revolves around supplying electricity to industrial, residential, commercial, and rural customers, primarily across the State of Paraná and in Porto União, Santa Catarina. This regional focus, coupled with a comprehensive service offering, forms the bedrock of Copel's market positioning.

The company's overarching strategy is to optimize its asset portfolio, enhance operational efficiency, and strengthen corporate governance to unlock long-term shareholder value. This journey has been marked by a series of decisive actions, including the decarbonization of its matrix through divestments like Compagas and UEGA, and the strategic recycling of assets such as small hydropower plants and its stake in Baixo Iguacu. These moves, alongside the asset swap with Eletrobras that consolidated HPP Maua and Mata de Santa Genebra, underscore a disciplined approach to capital allocation and a clear focus on its core electricity business.

Technological Edge: Powering Efficiency and Customer Service

A critical differentiator for Copel, particularly within its distribution segment, is its advanced technological integration. The company has implemented one of Brazil's largest smart grid programs, achieving 1.5 million smart meters in the first half of 2025. This core technology provides tangible and quantifiable benefits, enabling the remote shutdown of energy and near-instantaneous reconnection upon payment. This capability significantly enhances operational efficiency, reduces the Allowance for Doubtful Accounts (ADA) below tariff coverage, and dramatically improves customer service quality. For investors, this technological advantage translates directly into lower operational costs, improved cash flow predictability, and a stronger competitive moat in its concession areas.

Beyond the smart grid, Copel is actively pursuing broader digital transformation initiatives. Management highlights ongoing efforts in restructuring, migrating to new systems, and exploring the potential of artificial intelligence. These R&D-like endeavors are aimed at further streamlining internal processes, supporting organizational restructuring, and ultimately driving a "digitalization shock" across the company. The stated goal is to leverage these technologies to not only reduce costs but also to enhance service provision and maintain a competitive edge in an evolving energy landscape.

Financial Resilience and Strategic Capital Allocation

Copel's financial performance reflects the effectiveness of its strategic initiatives and operational discipline. In Q2 2025, the company reported a recurring EBITDA of BRL 1.3 billion, marking a 4.2% increase compared to the same period last year. Recurring net income also remained robust, exceeding BRL 450 million. This growth was primarily fueled by the Generation and Transmission (GeT) segment, which saw its recurring EBITDA climb by 12.6% to BRL 761.4 million. This improvement was largely attributed to favorable short-term market transactions, reduced generation deviation in wind complexes, and the consolidation of Mata de Santa Genebra's transmission revenue.

The Distribution segment, Copel Distribuicao, contributed BRL 569.3 million to recurring EBITDA in Q2 2025, a modest 0.6% increase year-over-year. This performance was supported by tariff adjustments in June 2024, which introduced an average 2.7% increase on TUSD, although a 2.6% drop in the billed grid market partially offset this gain. Notably, Copel Distribution consistently operates with high efficiency, achieving a regulatory EBITDA 42.8% higher than the regulatory level. The Trading segment experienced a 21% increase in sales in Q2 2025 but saw its margin drop by BRL 15.3 million due to macroeconomic factors and operational adjustments.

Despite an increase of BRL 126.3 million in energy purchased for resale, which pressured distribution results, consolidated PMSO (personnel, material, services, and other) expenses saw a 3.7% reduction to BRL 708.3 million. This was largely due to a nearly 15% drop in personnel and administrative expenses and a 13% reduction in pension and assistance plan costs, stemming from the voluntary severance program. However, recurring net income decreased by 9.5% in Q2 2025, primarily due to a 38.7% rise in financial expenses linked to increased debt for concession renewals, investments, and acquisitions, alongside a higher CDI rate.

Copel's commitment to strategic capital allocation is evident in its CapEx program. For Q2 2025, consolidated CapEx totaled BRL 975.3 million, contributing to BRL 1.6 billion in the first half of the year, in line with the projected BRL 3 billion+ by year-end 2025. These investments are strategically concentrated on assets that expand the remuneration base, enhance service quality, improve operational efficiency, and modernize infrastructure. The company's leverage closed at 3.1x net debt over EBITDA in Q2 2025, but is expected to normalize to 2.9x after the conclusion of the Baixo Iguacu divestment in Q3 2025, aligning with its dividend policy and projections. Copel's financial soundness is further reinforced by its reconfirmed AAA rating.

Competitive Landscape and Strategic Positioning

Copel operates within a dynamic and competitive Brazilian energy market, where it strategically positions itself as an integrated regional leader. Its primary competitive advantages, or "moats," stem from its robust regulatory licenses and integrated operational model. These licenses provide exclusive rights in its core regions, ensuring stable revenue streams and fostering strong customer loyalty through reliable service delivery. This regional dominance helps Copel counter the national scale of larger competitors like Eletrobras , potentially leading to improved margins through reduced competition.

The integrated nature of Copel's operations, combining generation, distribution, and trading, offers comprehensive solutions that differentiate it from more segmented players. This model fosters recurring revenue and can facilitate faster innovation cycles in bundled offerings. While Eletrobras (EBR), as Brazil's largest power generation and transmission company, benefits from national scale and broader reach, Copel's localized focus allows for stronger regional ties and potentially more agile responses to local market demands. Compared to Energisa (ENGI11), a diversified energy provider, Copel's integrated services, including gas distribution, offer a one-stop solution that can enhance customer convenience. Against CPFL Energia (CPL), a leading electricity distributor with a strong urban focus, Copel's hydroelectric-centric generation provides stable energy output, potentially offering an edge in reliability during peak demands.

However, Copel faces certain competitive disadvantages. Its regional concentration, while a strength, also limits revenue diversification and exposes the company to localized economic downturns. Furthermore, its dependency on hydroelectric sources, while providing clean energy, introduces operational risks during periods of drought, potentially impacting costs and cash flow. In response to these vulnerabilities, Copel emphasizes its operational excellence, disciplined capital allocation, and continuous efficiency improvements, aiming to maintain its competitive edge.

Industry trends, such as the growing electricity demand from data centers and the broader push for utility infrastructure investments and electrification, present significant opportunities for Copel. Its expertise in grid management and ongoing modernization efforts, including the smart grid program, position it favorably to capitalize on these trends.

Outlook and Forward-Looking Initiatives

Copel's management has outlined a clear forward-looking strategy, underpinned by concrete guidance and assumptions. The company projects CapEx exceeding BRL 3 billion by the end of 2025, with a significant portion allocated to the distribution company to enhance service quality and prepare for the upcoming tariff review in 2026. This investment is crucial for expanding the regulatory remuneration base and ensuring long-term asset health.

A key strategic objective is the migration to the Novo Mercado, B3's highest level of corporate governance. This move aims to unify share classes, boost liquidity, and attract new investors, particularly foreign capital, thereby "unlocking a lot of value" for the company. Despite a temporary deferral from CVM due to a minority shareholder's request, management is confident in resolving the issues and concluding the migration by the end of 2025.

Copel is also committed to achieving a 20% reduction in costs based on its 2023 nominal LTM by the end of 2025. This efficiency drive, encompassing voluntary severance programs, contract reviews, and technological advancements, is expected to yield substantial benefits, with the full impact of the severance program becoming evident in Q4 2024 and throughout 2025.

In the energy trading segment, Copel anticipates increasing volatility for 2026 onwards, even with recent rainfall, as reservoir levels have not fully recovered. The company's strategy involves actively "locking energy" for sales during favorable market windows to mitigate risks and optimize its portfolio. For 2025, revenue is already "completely locked," and the company is strategically selling longer-term contracts (e.g., 2026-2030) at attractive prices.

Furthermore, Copel is preparing to participate in the capacity reserve auction, expected in Q1 2026. Management views this as a "very expressive bid" given the "urgent need of power for the system," with its Foz do Areia (840 MW) and Segredo (1.2 GW) hydropower plants positioned as highly competitive, offering clean, sustainable, and affordable energy.

The company's dividend policy remains robust, committing to at least two annual payments, with an anticipated announcement in Q4 covering the first half of the year. Management is also exploring a simplified dividend policy and an optimal capital structure, with details expected in May 2025. The goal is to maintain leverage around 2.5x net debt over EBITDA, utilizing dividends and share buybacks to prevent excessive deleveraging and ensure efficient capital allocation.

Risks and Challenges

Despite a compelling outlook, Copel faces several pertinent risks. The deferral of the Novo Mercado migration by CVM, though temporary, highlights potential delays and the influence of minority shareholders. The broader political and institutional environment in Brazil remains "highly contaminated" and "controversial," potentially impacting regulatory decisions, particularly concerning tariff adjustments and subsidies. Management expresses concern that legislative outcomes, such as the merging of MP 1,300 and 1,304, could introduce more subsidies, negatively affecting the tariff environment.

Curtailment in wind assets, a persistent industry issue, continues to impact Copel's wind generation, with a 13% curtailment in Q4 2023 and 23% in Q3 2024. While management expects lower levels and more balanced treatment from the ONS due to new transmission lines, it remains a factor affecting profitability. Credit risk in the energy trading market is another concern, with management maintaining a restrictive credit policy and focusing on large counterparties to mitigate potential financial difficulties. Finally, the Generation Scaling Factor (GSF) and hydrology remain critical, with reservoir levels in early 2025 still lower than the previous year, underscoring the ongoing volatility in short-term energy prices.

Conclusion

Copel stands at a pivotal juncture, transforming into a more agile, efficient, and shareholder-focused entity. Its core investment thesis is rooted in its integrated business model, strong regional presence, and a clear strategic roadmap for value creation through portfolio optimization, operational excellence, and technological innovation. The company's commitment to a significant CapEx program, ambitious cost reductions, and a strategic migration to the Novo Mercado underscores its dedication to long-term growth and enhanced shareholder returns.

While regulatory complexities, market volatility, and operational challenges like curtailment present ongoing risks, Copel's disciplined capital allocation, robust financial performance, and proactive management of these factors position it favorably. The company's technological leadership, particularly its smart grid initiatives, provides a distinct competitive advantage in improving efficiency and customer service. As Copel continues to execute its strategic plan, its ability to leverage these strengths and adapt to evolving market dynamics will be crucial in solidifying its position as a leading and attractive investment in the Brazilian electricity sector.