Equatorial Energia SA

BOVESPA:EQTL3

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, everyone, and thank you for holding. Welcome to Equatorial Energia S.A. First Quarter 2023 Results Conference Call. With us here today, we have Mr. Augusto Miranda, the CEO; Leonardo Lucas, CFO; Cristiano Logrado, Executive Director; Tatiana Vasques, Investor Relations Superintendent; and Tinn Freire Amado, CEO of Echoenergia. This event is being recorded. [Operator Instructions]

This event is also being broadcast live via webcast and may be accessed through Equatorial Energia website www.equatorialenergia.com.br where the presentation is also available. Participants may move the slides in any order they wish. The replay will be available shortly after the event has concluded. Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished.

Before proceeding, please bear in mind that forward-looking statements made herein 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 as they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that general macroeconomic conditions, industry conditions and other operating factors could also cause results to differ materially from those expressed in these forward-looking statements.

I will now turn the conference over to Mr. Augusto Miranda, who will begin the presentation. Mr. Miranda, you have the floor.

[Augusto da Paz Júnior, executive]

Good afternoon to all of you, and thank you for your attendance. This afternoon, we're going to present the results for the first quarter of 2023 for the Equatorial Energia Group. We began 2023 with structured actions to move forward successfully in the tariff processes of our distributors that happened during the year, for the operational enhancement of the recently acquired companies and for a continuous improvement in the quality indicators of the company, especially Equatorial Maranhão and for the deleveraging of the Equatorial Group.

We made great strides in operational performance in the quarter. And despite the economic scenario, our concessions continue presenting strong growth in the market above the average. In Goiás, we concluded the first 100 days of operation, advancing in the company turnaround with a highlight for the strengthening of our relationship with society, where we began to implement the Equatorial culture along with the customers and the public powers. We reinforced and broadened the service channels and held more than BRL 900 million in investment in the quarter. We are moving forward successfully in the integration and turnaround process. Please recall that in this quarter, we began to consolidate the results of Equatorial Goiás.

We're going to go on to Slide #3. We begin with the operational highlights. With a consolidated growth of 5% vis-à-vis last year, this growth is on adjusted basis, already considering the pro forma for the first quarter '22 with the data of Equatorial Goiás. Observing the quality indicators and the accrued vision of the month, we had an improvement in 6 of the 7 distributors in our portfolio compared to the fourth quarter '22. We highlight Equatorial Maranhão that reduced the DEC by almost 9 hours compared to the first quarter of last year.

In the renewable generation segment, highlight is for the volume of energy generated 15% higher than in the same period last year, reflecting not only the greater speed of wins but the coming into operation of the Serra do Mel 2 complex which took place during this first quarter. We reached BRL 2.3 billion in adjusted EBITDA in the quarter, 58% higher than in the first quarter '22, reflecting the consolidation of the new assets and the strong performance of the distribution sector. Besides the strides in the turnaround of recent acquisitions, this vision does not include VNR and IFRS. We invested BRL 2.5 billion in the period, a highlight was to the investments in distribution with a focus on enhancing quality indicators and losses that totaled BRL 2.3 billion, BRL 1.9 billion in the assets with a cutoff date on the remuneration date of this year. And we ended with a reduction of 0.2x in the net debt EBITDA this quarter, totaling 3.9x and reflecting the results of the operation carried out in distribution and the greater EBITDA in the quarter.

I will now go to #5 and the floor to Leo, where we will begin a consolidated vision of the economic and financial performance of the group.

[Leonardo da Silva Lucas Tavares de Lima, executive]

Thank you very much, Augusto, and a good afternoon to all of you. Very quickly, I'll speak about the economic and financial performance of the group in a consolidated vision. Here, the numbers are adjusted for nonrecurring events and for noncash effects, such as VNR and the distributors, IFRS and transmission and MTM in commercialization. Our gross margin consolidated grew 58% vis-à-vis the first quarter '22. This growth is linked mainly to the good performance of the distribution segment that was given thrust to by the growth in the tariff mix and market along with a reduction of losses.

Besides the effect of consolidating the new assets, especially the renewable segment that began only in the month of March of last year, Equatorial Goiás has added BRL 668 million to the margin in the quarter. The organic growth of our gross margin not considering these assets was of 21%. The consolidated PMSO presented a growth of 11% in the comparison between quarters. Once again, not taking into account the consolidation of the new assets, this growth happens mainly because of the intensification of initiatives in distribution to enhance quality and reduce losses. And we can see the results of this in the last quarters and also due to the growth of 4.4% in the number of customers, not considering Equatorial Goiás that has added 3.3 million customers to our base.

The reported EBITDA for the quarter reached BRL 2.5 billion, 55% higher than the same period last year. If we make adjustments for nonrecurring efforts and noncash effects the EBITDA reached BRL 2.3 billion, 58% higher than in the first quarter '22, that is to say BRL 830 million. The growth has a strong influence of the consolidation of Equatorial Goiás in the quarter that added BRL 291 million besides the growth of renewables and distribution. The last one with a highlight for the performance of Pará that grew BRL 162 million.

We go on to the next slide. Here on Slide #6, we bring you information on the investments and indebtedness of the company. In the quarter, we had an expressive amount of investment totaling BRL 2.5 billion, driven by the investments focused on the strengthening of the network, improvement of quality, reduction of losses and the proximity of the tariff events, above all because of the beginning of consolidation of Goiás that totaled BRL 902 million. The total CapEx carried out in the quarter meant we invested more than BRL 1.9 billion in assets with a cutoff date in the remuneration of this year. Additionally, as you can see, the volume invested captures the beginning of development of the pipeline that will be detailed further ahead.

To the right, we show you the indebtedness profile of the company. We see in the graph that we maintain a net debt of BRL 33 billion. Even with the strong volumes invested in the quarter, leverage measured by covenants shows a reduction of 0.2x, ending the quarter at 3.9x, benefited by the expressive growth in EBITDA. With the issuance of preferred shares in Equatorial Distribuicao and the lengthening of the debt profile of Equatorial Goiás that was carried out in January with the issuance of BRL 7 billion, it was possible to increase the liquidity of the company and improve the cash over debt relationship by 2.2x, additionally continuing with our plan to refund our liabilities, strengthen the liquidity of Equatorial Goiás, on May 8, we concluded the issuing of BRL 1 billion in incentivated debentures with an average term of 7 years. This has reopened the debenture market for high-grade issuers and has enabled the lengthening of our debt profile in enhancing liquidity.

We will now speak about the distribution sector. Let's go on to Slide #8, where we bring you a general vision of the operational performance and the commercial performance of our DisCos. Here, for comparison purposes this quarter, the operational data are shown in a first quarter '22 adjusted with the data of Equatorial Goiás. As you can see in the graph, distributed energy grew more than 5% in the first quarter '23, while the energy in check grew 4% between quarters. This result was partially due to the reduction of losses at our concessions, which in a consolidated way had a reduction of 1.2 percentage points.

It is important to note that with the stress of our initiatives to fight against losses, we ended the quarter with 1 percentage point of the consolidated regulatory level. Regarding the commercial performance, we ended the quarter with a consolidated collection of 97.8%. This number reflects the impressive increase of the market and a mathematical effect of the increase of ICMS in the light bill. Now we have the process of reading, which contributed to a reduction of the financial cycle, raising the concentration of bills during the period. In PECLD, the consolidated level continues to be reasonable.

The adjusted PMSO with a growth of 69% between quarters is due to the consolidation of Equatorial Goiás, which is highlighted in the graph to ease the comparison. If we don't consider this effect the adjusted PMSO grew 10.8% due to the intensification of initiatives geared to enhancing the quality and reducing losses and the expansion of the customer base. In the comparison of adjusted EBITDA, we had a strong growth of 61%, affected by the improvement in gross margin, influenced by the higher tariff in the period, the market growth and reduction of losses.

A special highlight for the contributions of Pará, BRL 162 million; Maranhão, another BRL 85 million; and for the strong growth of Alagoas, 48%; and Rio Grande do Sul, 35%, these adding BRL 112 million to EBITDA besides the consolidation of Equatorial Goiás. At the bottom of the slide, I would like to highlight the excellent evolution of quality indicators of our distributing companies. For the third consecutive quarter, they have presented a consistent reduction in DEC and FEC. The main highlight is for the expressive reduction of Maranhão of 4.3 hours vis-à-vis the fourth quarter '22, almost 9 hours vis-à-vis the previous year. Besides Amapá with 3.4 hours of reduction when compared to the fourth quarter '22 and below the regulatory limit.

In the comparison, another important highlight is the evolution of Piauí and Alagoas with a reduction of 7.5 hours. In fact, we would like to highlight that presently, 5 of our 7 concessions operate within the regulatory limits. This result is due to the greater robustness of our regional structures, the strengthening of initiatives and the enhancement of processes implemented through the last quarters in combination with the strong investments carried out.

We now go on to Slide #9. Before we go on to the other segment, I would like to present a quick update on our most recent acquisition, Equatorial Goiás. After the first 100 days, we have attained important strides in the company and we are advancing broadly in terms of generating value for this asset. As part of the actions geared to the company turnaround, we began a strong advance in our relationship with society where we began to implement the culture of the Equatorial Group with the customers and the public powers, advancing in the process of registering clients in the social tariff and also seeking other improvements. We're seeking to enhance quality. That is something that is so desired by population so we have renewed our fleet with the acquisition of an addition of 200 vehicles for the operation.

Now we are facilitating the interactions with the customers and allowing our collection offices to become ever more efficient, which can be perceived by the high level of collection of this concession this quarter. Now we have a code for payment and they can inform us on interruptions. Besides the arrival of Clara we have also reinforced our digital channels with a site and application, service stores and radio campaign, TV, social network and the local press. We are moving forward successfully in the process of integration and company turnaround.

Additionally, another fundamental process was the intensification of investments in the first quarter. We invested more than BRL 900 million that have reached BRL 7.5 billion in CapEx as part of our tariff cycle. With this, we have already concluded 2 new substations in the concession.

We go on to the next Slide #11, where we show you the performance of the transmission sector. Jointly, our portfolio presently has a rev that is higher than BRL 1.3 billion for the '22/'23 cycle. We reached 300-and-some levels. And as you can see in the slide, we had a consolidated EBITDA higher than 93% as you can see.

We advance to Slide #13. Now let's look at the operation of renewable energy, Echoenergia. We bring you the historical performance of Echo for comparison purposes. The volume generated grew 15.5% favored by the increase of average wins in the comparison between periods. In the quarter, the total net energy generated higher than the P90 [ estimated ] the higher win allied with the coming into operation of the Serra do Mel 2 complex throughout last year has contributed to an expressive increase in EBITDA and 33% of the adjusted basis totaling BRL 149 million in the period.

We now go on to Slide #14, where we have more details about the development of our pipeline in solar project. As we presented in our results release, we are at the initial stages of development of the Ribeiro Gonçalves and Barreiras 1 solar parks. Located in Piauí and Bahia, respectively, at beginning of quarter, we're going to follow up on the evolution of these projects. In the graph to the left, we present the schedule of the main development stages of this pipeline. For the time being, we are moving ahead in vegetable suppression of both projects. And in Ribeiro Gonçalves, we have had an evolution of 62% of this stage, while in Barreiras 1, the advance has been 27%. Attached to this presentation, we'll be able to follow through some images that we have included to show you the size of this project.

Now to speak about civil works, we have some contractors that are already acting in our work site since the beginning of the first quarter. We're speaking about a physical event of approximately 10% in Ribeiro and 2% in Barreiras. This project will progress during this year and the beginning of 2024. As with this, we will have the installation of solar panels that are already in international transit. I also highlight the work that we carried out on the connection with substations, especially the one of Barreiras. Finally and not less important, we are moving forward in the commercialization of the energy of the pipeline. A way of showing this evolution is a positive result of the mark-to-market of the energy contracts that had a net impact in our result of BRL 96 million in this quarter. This result was strongly driven by the sales to the end customers carried out during the first quarter, and they are adding more than BRL 122 million of book value following the mark-to-market methodology of the market.

We now go on to Slide #16. We ended the first quarter with approximately 86,000 savings invoiced in the water supply. These are customers connected to the network. This figure is very important as it corresponds to a number 11% higher than the total amount foreseen in the EVTE for the end of the first year of operation. Reminding you that in the first quarter '23, we completed 9 months of concession. When it comes to sewage almost 10,000 links have been done, and we have begun our invoicing service since the first quarter of operation. Altogether, the coverage index of water and sewage is equivalent to 41% and 7%, respectively. I will now return the floor to Mr. Miranda for his closing remarks.

[Augusto da Paz Júnior, executive]

Well, thank you, Leo. To close, I would like to reinforce some of our recent achievements and outlooks. First of all, I draw your attention to the significant performance of the company, reflecting the evolution of the present day assets and the consolidation of new assets that have ended up with an EBITDA growth of 58%. The main highlight of the period is definitely the consolidation of Equatorial Goiás. We have moved forward with speed in the integration of this company in our portfolio, with a focus on the enhancement of indicators, a relationship with society as a whole and a tariff review, and we invested more than BRL 900 million in the quarter.

Still referring to the performance of distribution, I highlight the evolution of our quality indicators in general, resulting from more intense actions on the debt structure implemented in the last quarter, besides the loss reduction that show an evolution in the turnaround processes and also in the more mature assets. Another highlight is the opening of the CP and the review of Pará on May 9. The first of these 4 reviews that we will have this year include the reviews of Goiás and other areas. And the cutoff date will be for 7 of -- 5 of our 7 distributors.

I also draw your attention to our most recent issuance of BRL 1 billion of incentivated debentures in Equatorial Goiás, making it possible to lengthen our debt profile and increasing the liquidity concession. Regarding the outlook for 2023, we continue moving forward in quality enhancements and loss reductions of our distributing companies with a special attention to the turnaround evolution in Goiás.

Another point is leveraging. We have made strides in all of this process. We're very attentive to opportunities in the management of our debt. I would now like to return the floor to the operator so that we can go on to the question-and-answer session. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Andre Sampaio from Santander Bank.

[Andre Sampaio, analyst]

I have 2 questions. My first question. I would like to refer to your strategy for the reduction of losses and the enhancement of quality. Now is this pressuring your costs? The doubt here is when can we see the OpEx becoming more normal? And after the normalization, will it be more difficult to account for the losses? That's the first question. The second question refers to the -- so this is something that is very positive. And of course, the regulatory process is still under review at this point. What can you tell us additionally about this revision?

[Augusto da Paz Júnior, executive]

Thank you, Andre. Regarding the PMSO, what we produced last year was something additional for the measurement of quality and this cycle gained traction more in the second quarter. So this is what you see in our expenses and much more. It's what happened in the first quarter of 2023, and all of this began in the second quarter of 2023. And of course, the coming quarter will have even better results because of this impact. Now regarding the process in Pará, it is moving ahead. We're advancing. We hope that the outcome of the process will take place somewhat further ahead. And it's just about waiting and hoping that we will reach a good outcome in this process.

[Operator]

Our next question comes from Marcelo Sá from Itaú Bank.

[Marcelo Sá, analyst]

We have 2 questions. I would like to further explore the role of concessions. The proposal that is on the table with the government is to be able to use sectoral resources as of the fourth quarter in social activities, and other companies could also carry out investments. What is it that is being discussed? And which is your idea, in this case? Will you be participating on your own or will there be a partnership to generate more value? And if the development bank the BNDES has manifested itself in any way about this process.

[Augusto da Paz Júnior, executive]

Well, thank you for the question. We have participated in the process, and we have debated this with the minister, and we have discussed this with the CEOs of the companies. It has been a very participative process. And of course, everything will depend on the sources. Several others have participated with us giving us their contribution.

[Unknown Executive]

When it comes to the concessions, we have held conversations with the ministry. And publicly, the minister has stated that the postponement will not bear a price. Now this is one of the components of the discussion. As Augusto has mentioned, this is a broad discussion, and we're simply waiting to see which will be the end result. About transmission, we're referring to approximately BRL 50 billion from an auction. And of course, we need to carefully analyze this. There may be opportunities. But we're dealing with this at Board level to define if we will be participating or not.

[Marcelo Sá, analyst]

Now if you allow me to understand your expectations about this concession, there will be an open hearing, I believe. And will you participate in that with a well-defined proposal or are you simply going to be sending in your contributions?

[Unknown Executive]

Well, it is a ministry that is responsible for that part of the process. And perhaps we will come up with a proposal or end up with several options that can be submitted to debate. Once again, we depend on which will be the intention of the ministry.

[Operator]

[Operator Instructions] As there are no further questions, we will conclude our question-and-answer session. I will now return the floor to Mr. Augusto Miranda for the closing remarks. Mr. Miranda, you may proceed.

[Augusto da Paz Júnior, executive]

Thank you all very much. In closing, I would like to once again reinforce our continuous generation of value based on the consistent delivery of results in the different segments in which we act, always working with a very disciplined financial management. Our IR team is always at your disposal to give you any support should you have any further doubts. Thank you once again for your attendance in the call.

[Operator]

The conference call for Equatorial Energia S.A. ends here. We would like to thank all of you for your participation. Have a good afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]