Equatorial Energia SA

BOVESPA:EQTL3

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon, and thank you for waiting. You're welcome to Equatorial Energia teleconference for the results of the first quarter of 2021. We have here today with us, Mr. Augusto Miranda, Chief Executive Officer; and Mr. Leonardo Lucas, CFO and Investor Relations Officer. This event is being recorded. [Operator Instructions]

This event is also being broadcast live via webcast. It may be accessed through Equatorial Energia website at www.equatorialenergia.com.br The presentation will be available. Participants may view the slides in order they wish. The replay will be available shortly after the event is concluded. Webcast participants can post questions on our website, and they will be answered after the conference is finished by the RR team.

Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Equatorial Energia S.A. management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur.

Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Augusto Miranda. He will start his presentation. Mr. Miranda, you may begin.

[Augusto da Paz Júnior, executive]

Thank you very much. Good afternoon, everyone. I thank you for your presence. I'm very pleased to present the company's results for the first quarter 2021. In the beginning of the year, it's important to acknowledge that the challenges of the pandemic were seen again. And even though the situation is more critical, the context is different from previous ones, be it because of the positive perspectives of the vaccination and other results. We are more prepared, as a company, have advanced with the digitalization initiatives with consumers, talent work in addition to the safety protocols. Our values have been essential for us to be successful in facing this scenario or based on discipline and our results for this quarter reflect this. We have had advances in the creation of value, expansion of energy consumption despite the adverse scenario of the pandemic. I would like to highlight that we were very active in analyzing business opportunities, not only in the electric sector, but also in the sanitation segment. We also had an auction that was carried out in March '21, and I would like to highlight that.

In Slide 3, I will share the highlights. I will start with the financial and economic highlights. The recurring consolidated EBITDA reached BRL 1.1 billion in the first quarter of 2021. The performance was gradual in our different areas. We can see the impacts of the reduction of the effects, the cash and cash equivalents, and I will get into details later on.

I also wanted to highlight that we invested BRL 613 million in this quarter. The volume was 22% greater than the results we had in 2020 despite the challenges of the pandemic. In the transmission area, we had a 23% decrease. We have a robust consolidated cash position of BRL 6.9 billion, and we have 28,000 shares in the rebuy program. That allows us to keep the current investments. And at the same time, we are competitive to allocate capital. In terms of leverage, we have remained stable when compared to the previous quarter. We have 2.2x debt to EBITDA ratio.

Regarding the performance of our distributors, I'd like to highlight the growth in the sales of energy. We had a 4% increase. We have had an expansion of 5.4% for Maranhão Piauí in addition to increases in Equatorial Pará. This is excellent in face of our current situation. We remain having restrictions in different sectors. The operating results will be commented in the next slides.

Another important highlight was the improvement of our annual readjustment. We have an average of 8.87%, and this result was obtained because the company worked hard along with the regulation to mitigate the impacts of the activities in this period on the tariffs. We reached BRL 737 million, and we will talk about this in the end of our presentation. In transmission, we reached 100% of our construction works. We have an expectation that depends on a conclusion segment, which is going to be auctioned and is under the responsibility of Equatorial under the concession contract. 7 lots are already operational. Only lot 3 is not operating. We are working with another consultant, which hasn't delivered the activity yet. And finally, we have another auction by CEEE-D, expanding their group to RS.

Another highlight is our participation in CEEE-D auction. We were very competitive, keeping our discipline. We got close and are looking forward to more opportunities in this segment.

And now I turn over to my colleague, who will talk about the operating performance. Leo, now I turn over to you.

[Leonardo da Silva Lucas Tavares de Lima, executive]

Well, thank you very much, Augusto. Good afternoon. Good afternoon, everyone. I hope that you are all doing well.

We're now going to talk about injected energy evolution in Slide #5. The volume of injected energy, which was invoiced, continues evolving, and we had a 3.5% increase and 4% increase, respectively, in the first quarter of 2021.

The highlights are the advances in Maranhão Pará and, in general, we have different lots in the concession area that have enabled us to expand consumption partially because of a greater exposure to the residential class, which suffered less impacts within the current context of the pandemic. And also, we had increases in other areas. In Maranhão, we had a 5.9% increase in Maranhão for injected energy. Also, this is the result of the economic resumption and also the impact of residential rates. In Pará, injected had an increase of 3.7%, and that was also favored by the climate conditions in the state. And also, energy had a 3.7% increase. I would like to highlight an increase of distributed energy of 5.4% in Piauí, not only because of climate conditions, but also because of a gradual reopening economic activities in the state. In Alagoas, I'd like to highlight that even though we had a decrease of 1%, especially because there was less rain and then temperatures were cooler, we had an increase in the number of clients and also the measures to combat -- to fight these losses were very successful.

And then in the next slide, we can see that residential consumption continues as the main responsible for our results, but we can already see improvements in the industrial areas, especially in the state of Maranhão. And then finally, I would like to highlight that we continue growing stronger in terms the number of consumers considered as being low income. We have clients who were added in the last few months. We are growing. Even though [ANEEL] implemented resolution I of the 5 companies in Brazil that have most advanced towards the potential low-income portfolio. We own 4 and POE is in the leading position.

And I now move on to the next slide, Slide #6. Here, you can see the performance regarding the default of -- you can see the percentage rates, which demonstrate an evolution when compared to the first quarter of 2020 despite the additional challenges we had in the beginning of the year because of the changes we had in local administration changes. With these results, the proactive actions promoted by the company to encourage and facilitate the fulfilling of the obligations of our clients. Among them, I highlight the promotion of the energy campaign, who encourages clients to be update with their payments. That also generates improvement in the quality of our portfolio.

As a result of this initiative, more than 1.4 million clients have joined and that means an increase of 5.3 percentage points. It is worthwhile mentioning that on March 26, [ANEEL] approved Resolution 928 of 2021. And among other things, it prohibits the discontinuation of energy supply to low-income clients until June 30, 2021, as a temporary measure to help with the pandemic effects.

In Slide 7, we can see the total losses in our distributors. Here, we can see the state of Piauí and Alagoas. They continue advancing consistently in their turnaround processes. And here, I have a highlight for the reduction of 0.5 percentage point in the quarter in Alagoas.

Result of the gains in productivity of the teams that are working in this area includes a mobilization of the whole team. And as a result, we have observed a decrease in the lost percentage in Alagoas for the sixth quarter and the fourth quarter in Piauí, which enables us to be above the regulatory threshold.

And in Maranhão, we had a mild increase because of the more adverse scenario of the pandemic. In Pará, the level of losses had a mild decrease when compared to the previous quarter, indicating a more challenging environment on one hand, and on the other hand, the actions implemented during the period, such as network typology, among others, and consolidated because we had a reduction of consolidated losses in the quarter in our distribution. And then finally, I would like to highlight that the return of the field teams to fight these losses only took place in the third quarter of 2020. And because these losses are taken into account for the last 12 months, the actions we had last year also have an impact on our current results.

And then I move on to Slide #8. Slide 8, we can see the quality indicators. Maranhão suffered strong impact, which had an impact on FEC and DEC. Here I would like to highlight the failure that generated a discontinuation of supply for 4.5 hours in the whole state of Maranhão, affecting over 0.5 million clients of the distributor, corresponding to approximately 20% of the total. We had 3 interruptions in a single month in another distributor for about 9 hours. Another adverse effect was the expressive increase of 174% in remote and rural areas this quarter. This is the result of adverse climate conditions in this region.

I'd like to highlight that to face this, we have reviewed maintenance plans in Maranhão and have also made investments related to these actions. All of this is in line with our commitment to provide quality service in Piauí. Our quality indicators were impacted by the storm, for example, where we had trees falling on our network, which made it very difficult for us to resume the provision of energy immediately.

In Piauí, we have a network that does not have a lot of redundance and requires investments so that we can improve DEC and FEC. The positive highlight here is on the performance of Pará and Alagoas. In Pará, we can see a decrease of 3.5% in DEC going from 22 hours to 19.5 hours when compared to the previous quarter. And I'd like to remind that when we got there, Pará had 101 hours of DEC. In Equatorial Alagoas, the indicator presented a reduction of 9.7%, going from 19.3 hours to 17.4 hours when compared to the previous quarter. Also, we had a 35% reduction within a year and that led Alagoas to report the lowest DEC in our group. I'd like to reinforce the turnaround process of our assets in the recent past, continue evolving, and we are surprised with how fast they are improving. This has been possible because our processes have been consolidated.

Moving on to FEC in Slide #9. The main highlight here is that we have all 4 distributors below within the regulatory limit. Another point to be highlight has to do with Equatorial Alagoas, which had an increase of 2% in the first quarter of '21 when compared to the fourth quarter of 2020 and 24% when compared to the first quarter of 2020. This indicates that investments in the network in Maranhão and Piauí, FEC increases result from the effects that I have already shared with you.

And we now move on to Slide 11 with our economic and financial performance. We can see the evolution of our managed expenses consolidated as well. In the pursuit for efficiency, Equatorial has implemented one further step of its development. Now with regional resources aiming at improvement of operating results with a highlight to regional managers and superintendents that were hired in the first quarter. As you can see, Maranhão had an increase of 4.8% when you compare the different periods, and this is below the accrued inflation rate measured by IPCA. In Pará, this increase results from greater expenses with personnel and also the purchase of the 8-hour working at Equatorial Pará. Also, we had more expenses with services resulting from the number of services that were performed. Also we had emergency actions when compared to the same period in 2020.

In Piauí, we can see an impact of emergency services as detailed in the operating session in addition to a higher volume of expenses because of the intensification of our billing strategy. Still in distribution, as demonstrated in the previous quarter, it's important to reinforce how fast the turnaround has been in Piauí and Alagoas. This is shown by the levels of PMSO for the consumers, which are at similar levels to our more mature concessions. I would also like to highlight the transmission segment with a recurring increase in [indiscernible] 1, 2, 3, 4, 5, 7 and 8. In last -- until last year, they were included in the corporate contract.

And we are now moving on to Slide #12. The adjusted EBITDA on the first quarter reached BRL 1.081 billion with an increase when compared to the first quarter of 2020. If we remove the noncash events and the adjustments that we made, the growth of this quarter would have been of 55.5% or BRL 364 million, growing from BRL 687 million to BRL 1.062 billion. This is a result of the transmission segment, which started operating the new assets and had an increase of BRL 137 million, and we also had an increase in the EBITDA observed in the 4 distributors, and I will show you in the next slide.

In Slide 13, we can see the contribution by the different areas, and we had strong EBITDA increase in all distributors. They contributed with an increment of BRL 330 million when compared to the same period in 2020. In Maranhão, the increase of 47% is explained by the increase in the gross margin, the market increased, and also because of the update of the financial asset, resulting from the investments made in this period. So the -- in Pará, the adjusted EBITDA reached BRL 402 million with an increase of 29%, and this is a result above all of the gains we had with tariffs and also the update of the financial assets.

In the case of Piauí, the EBITDA reached BRL 231 billion, with an increase of 146%, capturing an expensive increase of the tariffs is a result of RTE that took place in December, and it is also influenced by the reduction of losses and improvement in the market. In Alagoas, the EBITDA reached BRL 109 million, and this is a result of the increment in the tariffs according to the extraordinary tariff review, in addition to a positive effect of the reduction of losses, resulting in an increase of 101%. In terms of transmission, it follows CapEx, leading to decreases are resulting from IFRS. And then in the graph below, we can see the adjusted EBITDA to ex-VNR and IFRS. We had almost all of the assets operating.

And then moving on to Slide #14. You can see that we have invested BRL 161 million in this quarter. The highlight has to do with the increase in investment in distribution with an impact of the tariff review process and also due to a carryover effect of investments that were not executed last year, resulting from the limitations imposed by the pandemic. For transmission, we had a peak in 2019, and we are now de-accelerating. There was a significant decrease in these values altogether. And since the first quarter of 2017, we have invested BRL 5.1 billion in our transmission projects.

And now in the next slide, we show that the net debt is basically stable when compared to the previous quarter, totaling BRL 0.3 billion and then we take into account the EBITDA values, which reached BRL 2.3 million. This gives us an opportunity to enjoy market opportunities regarding capital relocation. The group has a solid cash position. We closed the quarter with BRL 6.9 billion, which is enough to pay over 2 years of our debt. At the end of the first quarter, this was approximately 5.3 years. This position is very important so that we can continue having a comfortable position with opportunities for the rebuy programs of the company that was approved in December.

By March 31, over 28 million shares had been purchased in the scope of the program, totaling 2.3% of the total shares. In April, we captured 800 million in Equatorial Transmissao. Investments were made in infrastructure and enabled us to have an annual cost and the resources will be used. And in addition, with the purchase of CED, we have a further challenge for the other quarters. We will have to balance out the assets of this company, and they are being evaluated by our team. To mitigate risks in April, we hired hedging for exposure in foreign currency until August 2021, generating gains when compared to our business plan.

And then in Slide #16, we can see that 100% of the transmission projects have been concluded. Today, 87% of the ramp is already operational, representing a revenue of -- that you can see on the slide. All SPVs are 100% concluded. Even though this was done for March 5, 2021, 12 months before the contract deadline, it will be received in the second half of 2021. It's important to highlight our commitment to deliver all of these projects before due time adding more value to our shareholders.

And now I turn over the microphone.

[Augusto da Paz Júnior, executive]

Thank you, Leo. So we move on to Slide 18, where I share more details about the tariff adjustments in Alagoas before my final considerations. On April 27, we had an annual adjustment of Equatorial Alagoas with an average effect of 8.62%. The results were positive 7.5%. This was influenced by the IPCA period, which was 6.91% and also the x factor and also by the other regulatory adjustments. Including other revenues, the increment is even higher if we take into account the BRL 5 million resulting from the receipt of the constructions. And here, we have a total of 0.5% of readjustment. The readjustment counted on 2 measures to help us. Among them, we highlight the COVID account reversion, PIS/COFINS credit already contemplated by the company, cost profiling of RBSE. The deadline was expanded from 5 to 8 years. Also, the deferral of the basic grid. The amount will be received in the next tariff period updated according to the selling.

And now the final comments in Slide 19. I would like to wrap up by talking about our perspectives for 2021. We were able to conclude our transmission constructions before due time and currently, we have active revenue in our projects, reaching 87% of the revenues active. We also won CEEEs auction. We are confident that this is going to be another important chapter for the success of our history. I would also like to highlight that for the conclusion of the operation, we have to analyze preceding conditions. We also had tariff review in Alagoas. The results were positive. We had a mitigation of the tariff adjustment. The new distributors, Piauí and Alagoas, are in advanced processes with a consistent improvement of indicator in addition to the levels of PMSO to the consumer, which is similar to those of our more mature operations. The tariff review will take place in Maranhão in August and also in CEEE in November. For transmission, all transmission lines will be operating, strengthening cash generation and our EBITDA.

We have a strong growth agenda. We are participating in tender processes and continue pursuing opportunities to generate value, not only in the energy sector.

I now turn over to the operator for the Q&A session. Thank you very much.

[Operator]

[Operator Instructions] We have a question from Antonio Junqueira, Citibank.

[Antonio Rodrigues Dos Santos Junqueira, analyst]

I'd like to ask you a few things. Do you know when [indiscernible]? And then when -- or what are the other sanitation auctions you're taking into account? Do you know when this will happen? Number three, finally, I would like you to talk a little bit about the plans to improve losses in Pará. It seems to be an important challenge for the company.

[Augusto da Paz Júnior, executive]

Junqueira, [indiscernible] is anticipated for June, an offer for June, next June. This is the latest information we have.

Regarding sanitation, we're talking about sanitation in Amapá and [Costa]. So these are the things that we see in the near future, okay?

Now regarding losses in Pará, each concession has a different characteristics. We have been working there since 2002. We know what the opportunities are and also what the challenges are. In terms of losses, everything is very well mapped. According to [ANEEL's] rank, Pará is the more complex company, the more complex region to work for, but we have refined our work there based on our experience. We have centralized measurement, and the result has been fantastic. Today, 45% of the energy in the capital city is measured by a decentralized measurement system and also fiscal measurement. We have 16 spread throughout the state. We know exactly where the problems are so that we can treat them more specifically. Actually, we're also fighting losses looking at PSLD. These are important things.

[Leonardo da Silva Lucas Tavares de Lima, executive]

Junqueira, I would say that last year, we had a very successful program. It was delayed because of the pandemic. And you know that the effect is different depending on the time we do it. As mentioned during our presentation, we only started operating after the third quarter of 2020. It is only natural that in the first and second quarter had an impact when I disseminate in the market that I had 1% of losses. This is the net amount, the average amount. And when we had to stop without being able to act, we could not do anything. We have restarted this program. It is a daring program. We have 2 other areas in Pará that have been identified. Actually, there are 4. One, we have already solved. Another one is ongoing. We have intensified our work. We have 4 companies trying to solve this so that we can recover the lost time. We're very confident. And you will see that despite the pandemic, when you compare, you can see that we had a mild decrease. It is not what we wanted. But I've already told you why. You can see that the losses are well mapped. And I'm very confident, Junqueira, that we're going to have very successful results in Pará. I don't know whether I have answered your questions appropriately. But if not, I am available to answer.

[Operator]

The next question is from Marcelo Sá from Itaú.

[Marcelo Sá, analyst]

I wanted to take this opportunity to ask you about the CEEE-D auction where you participated. You obtained some lots. And so the first question to better understand the premium, I would like to -- you to explain what you were evaluating regarding PMTS? Would it be in terms of losses? Would it be CapEx, OpEx? Where did you think that there was more opportunity in the lots that you obtained at CEEE-D?

The next question is too about CEEE-D. It's about lot 3. Why did you think that lot 3 didn't make any sense? What were the main risks you saw in that lot?

[Augusto da Paz Júnior, executive]

Marcelo, we -- in this auction in Alagoas, what I can tell you is that we are very comfortable with our decisions and our premises. I would rather not advance in this discussion here. Other people want the auction as well. Lot 3, from the very beginning when we analyzed it, we could see that it would not present results. It wasn't efficient. We liked other ones better. We performed an assessment. There were different premises, number of clients. You have CapEx to take into account, OpEx. We had a very good consultancy of other people who operate there. And therefore, we were able to advance with our proposal with a lot of confident.

[Marcelo Sá, analyst]

Great. Moving on with Junqueira's question. You commented about your interest in Amapá. And the idea would be for the invitation for tender would come out in May with adjustments in tariffs, so that the auction had some economic financial balance. But in addition to that, are there any other attractions, for example, Porto Alegre that could make sense. I would like to know if you are evaluating this or only the participation by means of auctions.

[Augusto da Paz Júnior, executive]

I would say the following. Today, we have structured the M&A area. We are not only in reactive mode. When we see that there is some interest, we have a committee in the Board of Directors which evaluates the feasibility or not, and then we have a committee formed by Board members. This committee is very strong. And then if we decide to do it, we offer the proposal to the Board, and they decide whether we will move on or not. We analyze, we study and then we have a pathway to follow within the company before we make a decision.

[Operator]

The next question is from Maria Carolina Carneiro from Crédit Suisse.

[Carolina Carneiro, analyst]

I have 2 questions. First, regarding CEEE. Shortly after the auction, we were informed that SBA would maintain the rights of the employees. I would like to know whether there is an impact for you.

Number two, you mentioned participation in CEEE-D. And we really saw that it was more competitive. Was there any special reason for you not to be interested in lot 3? Would you reevaluate it if this lot is offered again?

[Augusto da Paz Júnior, executive]

Carolina, thank you very much for your question. It is important to get away from the decision made. The right -- the legal rights of the employees are being decided under 2 lawsuits. Right now, they protect the company. We understand that the decision made will be revoked. And you know that there will be a direct impact, and we have seen strong actions from the state and the governor in this regard. Also, the option is that benefits are not maintained, and everybody is working hard to revert the situation. We're very optimistic, taking into account how important this is for the state and even for the success of the 2 auctions that have already been announced.

[Operator]

[Operator Instructions] We have one question from [Renan Wurishi] from [indiscernible]

[Unknown Analyst]

How long will it take for the turnaround of CEEE? Are there any different challenges when compared to the prior acquisitions made by Equatorial?

[Augusto da Paz Júnior, executive]

[Renan] and Leo, please feel free to answer. You have seen Equatorial's background in Maranhão. And then Pará, Alagoas, Piauí, all the same. And then we had the transmission process, as Leo mentioned, and all of the lots were delivered before due time. It is a process where Equatorial organizes itself. We always try to align our interests with those of our employees in general and move on at the desired pace. And if you analyze Maranhão, Piauí and Alagoas, the results surprised you, but they also surprised us. We have internal communities, we have different ways to monitor. CEEE is the same. We're always pursuing opportunities. In Alagoas, we found excellent demand, extraordinary people in the organization.

Sometimes employees were not motivated but had a lot of potential. We reactivated this potential. And I'd like to highlight that in Maranhão, we have people from Piauí, people from Alagoas and Pará. It's a mix of people. People who really surprise us every day. We're doing the same thing. We are assembling a team with this vision in mind. We have people in Rio Grande, who have this potential. People who can dream with us so we can make a difference.

We have different actions that will be carried out before we start, and then we have actions for 100 days after. We are very confident. The culture of Equatorial along with CEEE's employees and we've already seen that the company has a very good infrastructure, and we expect that when we add our expertise and experience to that of Rio Grande and the current employees, we will be able to accelerate. I'm not going to get into the details and say that this will happen at an x amount of time because it varies. We have to respect the local culture. But I would say that we try to adjust, and we try to have peaceful agreements with a lot of transparency.

[Leonardo da Silva Lucas Tavares de Lima, executive]

I would add, Augusto. Thank you very much for the question, [Renan]. I would add to what Augusto commented that we usually have a combination of a local team and then our team and the fact that we have a corporate structure, the 100-day plan, detailing very well what should be done so that we have no distractions. But it is a region that has a different income profile than what we're used to. And then in terms of business processes, this may be a facilitator. In terms of costs, we go from a higher cost level. And as Augusto mentioned, situations vary. We are working in an effective manner very well aligned so that we can move forward at all times. What we see is that the region is less complex under different aspects. Taking into account all of the other concessions, we have a lower average revenue, and that will make it easier for us to progress. This is an expectation. In the preliminary contacts we had, this was reinforced. This concession has a different characteristic because of the level of complexity. And definitely, it will be very good for Equatorial's portfolio.

[Operator]

[Operator Instructions] We now conclude our Q&A session. I now turn over to Mr. Augusto Miranda for his final considerations. Please proceed, Mr. Miranda.

[Augusto da Paz Júnior, executive]

To wrap up, I'd like to reinforce our commitment to deliver differentiated values to our shareholders by means of operational and financial excellence and efficiency in the use of capital. I would also like to highlight our high level of corporate governance and assure you that our international relations team is available to support you. I wish you all a good afternoon.

[Operator]

Equatorial teleconference is now over. We thank you all for your participation, and wish you a good afternoon.