Equatorial Energia SA

BOVESPA:EQTL3

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, everyone. Welcome to Equatorial Energia conference call to discuss results regarding the first quarter of 2024. Here with us today are the company's CEO, Mr. Augusto Miranda, the Vice President, Leonardo Lucas, the Regulation Director, Mr. Cristiano Logrado, Mr. Liu Aquino, President of Echoenergia and Director of Financial Strategy and IR, Ms. Tatiana Queiroga Vasques, who will be available for the Q&A session at the end. [Operator Instructions] This conference is being recorded and will be available on the company's Investor Relations website www.ir.equitoriaenergia.com.br as well as the presentation. [Operator Instructions]Before proceeding, we would like to clarify that, any forward-looking statements are based on the beliefs and assumptions of Equatorial Energia management and current information available to the company. These statements may involve risks, and uncertainties as they relate to future events, and therefore depend on circumstances that may or may not occur.Investors, analysts and journalists must understand that events, related to the macroeconomic environment, industry and other factors could cause results to differ materially from those expressed in the respective forward-looking statements. We will now begin the presentation, by giving the floor to Mr. Augusto Miranda.Mr. Miranda, you may proceed.

[Augusto da Paz Júnior, executive]

Good afternoon everyone. Thank you for attending this event. I'd like to begin our Q1, '24 results call by acknowledging the devastating climate situation unfolding in the state of Rio Grande do Sul. This unprecedented catastrophe will require the support of all Brazilians to help the impacted populations and the state government to overcome it.Before beginning the presentation, I'd like to provide some information about Rio Grande do Sul, which is being impacted by heavy rains causing floods, never seen before in the state, disrupting public services, including energy supplies within the concession of the area of [ CEEE-D ]. The most affected regions in our concession areas were Porto Alegre, Guaiba, Alvorada, Viamao El Dorado do Sul.Our contingency plan has been in place, since the first weather forecasts. The entire team is currently mobilized to assist those affected. This is a time of intense work and careful action. We are coordinating closely with the governments and civil defense and we have the support of several distributors nationwide to reestablish energy supply for consumers. I would like to express my special thanks to all of them.So we have currently 112,000 interrupted customers, out of which 108,000 are disconnected on the recommendation of civil defense and the fire department, or are in areas with restricted access. Three of our substations or headquarters and call centers are flooded. We are currently waiting for the water to recede, so that we can assess the extent of the damage.We are still estimating the impacts. So we are working with operational initiatives, to support our consumers and employees, such as temporarily suspending collections and power cuts. Additionally, we are donating the state's relief efforts, and deploying two mobile substations. We are also taking specific actions to assist our affected employees. All our employees are mobilized, to provide the necessary services to restore the energy to normal levels for our customers, as well as being very attentive to the need of our employees in society.Shall we move on to Slide 4? Starting from the operational highlights, we report the evolution of distributed energy, which on a consolidated basis presented another quarter of significant growth of 11.2% in the annual comparison, with emphasis on the distribution of Amapa, Goias, Piaui, Para, Maranhao and Alagoas, which had a growth above 10% resulting from the economic growth in the regions where we operate, the reduction of unemployment levels and high temperatures.We continue to reduce the loss trends and highlight Equatorial Goias inclusion in regulatory losses, a major milestones in the turnaround of this concession. In just one year, we reached R$2.5 billion of adjusted EBITDA in the quarter, a performance 11% higher than that in the same quarter last year, led by the significant performance of the distribution sector. This view already excludes the non-cash effects of VNR, IFRS and MtM.We invested around R$1.7 billion in the quarter, 32% less in the first quarter of 2023. Driven by the Distribution segment. We ended the quarter, with a net debt to EBITDA ratio of 3.3x in line with the previous quarter. We remain dedicated to improving the quality of energy supply for our customers, with emphasis on the reduction of 10.5 hours in the DEC of Amapa and 6.6 hours in the DEC of Maranhao, and the reduction of the effect across all distributors.Finally, in April, we saw the energization of the Ribeiro Goncalves solar plant, which is scheduled to enter into commercial operation in May. And we had the approval of the tariff review of Equatorial Alagoas also in May.Now I'll give the floor to Leo on Slide 6 where we will start discussing the consolidated view of the Group's economic financial performance.

[Leonardo da Silva Lucas Tavares de Lima, executive]

Thank you, Augusto. Good afternoon everyone. I'll quickly discuss the Group's economic financial performance in a consolidated view. Here the numbers are adjusted for non-recurring and no cash effects such as VNR in the DisCos, IFRs in transmission and MtM in sales.Our consolidated gross margin increased 11.9%, with growth mainly linked to the Distribution segment, which added R$422 million to the margin in the quarter. As a result of the market growth, distribution FIOB tariffs and reduced losses.Even with market growth and quality improvement, we remain disciplined in managing the Group's adjusted costs and expenses, increasing only 2.6%, when compared to the first quarter of 2023, lower than the inflation over the last 12 months. With these results, we reached adjusted EBITDA -- in the quarter of R$2.5 billion, 11.3% higher than the same period of last year.We are continuing our disciplined approach to managing our debt levels. The net debt over EBITDA ratio remained at 3.3x. In April, we announced a private capital increase using the dividends declared by Equatorial for the fiscal year of 2023. This initiative aims to further reduce the company's leverage ratio.We were also able to take advantage of the good moment in the capital market, to extend a portion of Equatorial Goias debt, with a cost reduction and completed the issuance of Barreiras 1 debentures.We also improved the company's maturity profile with the early redemption of the fifth series of the fifth issue of debentures in January, which contributed to reducing the holding gross debt from R$4.1 billion in the fourth quarter of 2023, to R$2.1 billion in the first quarter of 2024. Finally, we would like to highlight the 32% reduction in investments, driven by the Distribution segment.Let's now move to Slide 8, where we bring an overview of the operational and commercial performance of our DisCos in addition to the highlights of the quarter. On the left side, we briefly present the consolidated performance of our energy distributors, where we highlight the strong volumes of injected and distributed energy.The reduction in losses in the quarter, this being the second consecutive quarter below the regulatory level of losses in the consolidated results. This quarter we had a collection of 96.6% and a PDA of 1.7%. The level of collection was impacted, by the mathematical effect of volume growth.The reduction in collection actions, due to the teams that were temporarily relocated to emergency services, and a reduction in collection from the public authorities and high voltage. With this last effect already fully recovered in April, the increase in the provisions for doubtful, provisions was influenced by revenue in addition to the reversals that occurred in Goias and Amapa in the first quarter of 2023.On the right side of the slide, we show the evolution of the gross margin in the Distribution segment, which grew by 14%. The major highlight here is the addition of R$290 million from Equatorial Goias as a result of market growth, the increase of the distribution tariff called FIOB. Given the tariff review and the reduction in losses.PMSO adjusted per consumer in the 12 months in the pro forma view, decreased by 2.5%, demonstrating the company's cost discipline and improved operational performance. These movements reflected an increase in adjusted EBITDA of 14.9%.Now, let's move on to Slide 9. Here we present our operating quality of our DisCos. There was an improvement in FEC across all DisCos. In DEC, there was an improvement in 4 of the 7 distributors and in 2 of the DEC was in line, when compared to Q1, 2023, reinforcing the commitment to operational quality in the Group's concessions.The highlights of the quarter, are the reductions of 10.5 hours and 6.6 hours in Amapa and in Maranhao respectively. When compared to the same period of the previous year in Rio Grande do Sul, the DEC was influenced by the cyclones observed in the months of January and March.Now on Slide 11, we are going to look at the other segments of the Group. In transmission without Incertezas. We reported a regulatory EBITDA of R$284 million, a growth of 8.2% between quarters with a margin of 94%, an EBITDA margin. It's worth recalling that, we stopped consolidating Incertezas' debt in December and the results will no longer be consolidated from April onwards, due to the sale of the asset on March 21.Sanitation segment data still reflects the early stages of operation, and its performance continues to show volatility. In the Renewable segment, we presented an EBITDA of R$114.6 million, a reduction of 23% between periods, due to the reduction in generation resulting from the reduction in wind resources. Generation was 374 average megawatt and had a low curtailment impact in the quarter.Now I turn the floor back to Augusto.

[Augusto da Paz Júnior, executive]

Thank you. So let's move on to Slide 12. We present an update on Echoenergia's pipeline. Ribeiro Goncalves solar plant was energized on April 24, and is scheduled to enter commercial operation in May. Located in the municipality of Ribeiro Goncalves in the state of Piaui, it has more than 370 hectares, 460,000 solar panels, and installed capacity to generate up to 283 megawatt peak of energy, enough to supply around 335,000 households.The energization of Ribeiro Goncalves solar farm is an important step for Equatorial in its journey to diversify its portfolio in the Renewable Generation segment. Until the first quarter of 2024, R$967 million was invested in this project.On Slide 14, we had a very good quarter from both financial and operational point of view, but we are aware of the importance of our role in continuing to deliver consistent and growing results, to benefit all of our stakeholders. The situation in Rio Grande do Sul is challenging, but we are committed to helping the state to recover.We will work tirelessly to reconnect affected customers, and find solutions that balance the economic and financial health of the concession, while maintaining reasonable tariffs. In this spirit of solidarity, we invite you all to contribute with donations to the state. For details on how to donate, please refer to Slide 15 of this presentation.We will continue to advance with evolution of the turnaround in Goias, focusing on strengthening the grid, and improving operational quality. In the Group's other DisCos, we will continue advancing the quality of operations, in addition to improving the revenue cycle. We will take another step in the growth of the renewables portfolio, with the completion of the construction of Barreiras I, bringing diversification to our generation portfolio and further cash generation.In the field of capital structure, we will continue to seek an improvement in leverage levels, both through financial performance and inorganic actions to assist in this process, allowing greater competitiveness in the assessment of possible future opportunities, for capital allocation and value generation.Now we'll hand over the floor to the operator to open the Q &A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Maria Carolina Carneiro with Safra.

[Maria Carolina Carneiro, analyst]

I have 2 questions on my side. First question is I understand that it's difficult to estimate the impacts from what happened in Rio Grande do Sul and how it's going to affect the concession. But if you could provide some light in terms of volume, revenue and what we could expect in the line of CapEx, if you have any initial number? And also considering that the situation continues to be very fragile, and considering that ANEEL provided some flexibilization. And can we expect the 100% of the surfaces to be recovered, both in terms of the physical aspect and as to the regulations in terms of invoicing. So customers will not be charged, will not be able to send the invoices. So these are my questions in relation to Rio Grande do Sul. And the second question is related to what we saw in terms to [ CP-62 ] annual decision in relation to regulatory cost?

[Augusto da Paz Júnior, executive]

I would like to provide you with a context. Last year, we had 16 events in Rio Grande do Sul. And this event was a bit different from the other ones where we didn't. We did not have the wind, but we received a lot of water. We have grids underwater, so there are many clients with no electricity. And we disconnected for safety and security reasons.And as we mentioned in the beginning, we are relocating some teams from other areas, from Piaui, Maranhao, and we are relocating them so that they can provide support to us. But we have to wait for the water to recede. We have 3 substations which are disconnected now. And we also have an underground system that is underwater. And so, the underground system was designed, to work underwater, but the others were not.So, we still have to wait in order, to have the proper quantification and start to develop actions. We have already reduced the number of 114,000 clients, and we have seen fluctuations of 10% or 13% that were affected. There was no wind, but the water needs to recede, so that we can make a proper assessment, a clearer, clearer idea of the impacts. So we estimate that -- the numbers will be 40,000 households, but all the numbers we have are preliminary numbers.The focus is to reconnect with safety, all the connections. And we want to be very close to the people, to the society, for providing all the support we can possibly offer. And Cristiano could make some comments about the regulation and your regulation.

[Cristiano de Lima Logrado, executive]

In fact, CP-62 came out last week. It's a technical note, and only on Friday we got information about the database. So we are still evaluating the situation, but we understand that we will include consumers, urban and rural grids. And I believe the decision was very positive in some aspects, and ANEEL established its position. But the average sectorial average was very interesting.There were 2 new elements that had not been present in discussion, and these are the points that are still being discussed with ANEEL. So we had a one week of discussion together with ANEEL, and so that we can better evaluate the two points -- the new points that it brought forward. One is a ceiling for the PMSO, and the other is the sharing with the consumers. So these are the 2 points that are being discussed with ANEEL and we haven't made progress yet. So there were some corrections and adjustments and there were also some points that had not been discussed properly yet, and they had not been put forward for public consultation. So we are working so that we can perfect all those points.

[Operator]

Our next question comes from Daniel Travitzky with Safra.

[Daniel Travitzky, analyst]

Just to add to the questions already made by Carol, considering all the discussions that we have been having and the problems you have been facing, what about the regulatory agenda related to other topics such as renewal of concessions? So how have you been discussing with ANEEL? Considering that we have Rio Grande do Sul also in place. So how do you see the evolution of those? And I would also like to understand how what is the FEC and DEC quality limits. There has been a change in the demand by ANEEL moving to electrical sub-assemblies. So how do you see this new methodology of charging as a demand from ANEEL? And how are you getting ready to meet these new requirements by ANEEL?

[Augusto da Paz Júnior, executive]

It's very relevant. I would say that Rio Grande do Sul agenda has been still in the scene considering how relevant the topic is. But the other topics are, such as the renovation topic, are topics that are quite mature and they reach the level where the documents are about to be issued in order to get the validation.So of course there is a delay, because there was something much more important happening. But after this, we are going to continue with the operation as it is. As in relation to the regulations, there was an improvement of the products in relation to urban and rural grids, consumers. There was an improvement on those topics, but there were new items that were included and they had not been discussed yet.And [indiscernible] very wisely asked, does to have any space for us to discuss those 2 topics. So I understand that those items are likely to be improved as well. So the decision was very strategy and I believe that ANEEL will listen to us, and we'll understand the contributions that we can offer as to efficiency and innovation. We hadn't discussed it beforehand, but there are some adjustments that need to be made in terms of incentivized energy. And so it would be very interesting for those who are delivering results above the demand by ANEEL, so that they can consider that the quality is more robust and needs to take into consideration. And this is a topic that is going to be put to discussion with ANEEL.

[Operator]

Our next question comes from Gustavo Faria with Bank of America.

[Gustavo Faria, analyst]

I have a question related to a selling Goias that asset. And in relation to the cost, we saw that the flats were basically flat year-on-year. When we see the adjusted PMSO. But when we look at the previous quarter, we see some differences. You mentioned that there could be some volatility when the assets started operating. But I would like to understand why there was such an increase and what we could we consider as a recurrent cost in the [indiscernible] asset?

[Augusto da Paz Júnior, executive]

In fact, we are very enthusiastic about Goias' asset, which was an acquisition transformational. The focus is on quality. I believe that is worth mentioning. Of course, everybody knows it. But the tariff review, reposition the cash generation in comparison to the investments. In a very interesting way, we have been able to make the standard of CapEx.We made it more efficient, we are doing more with less. And basically, in one year we were classified within the regulatory limits. There was a renegotiation, initial reorganization of the agreements and new standardization. And we managed to have important savings. But at the same time, some of the savings were redirected for the great emergency situations.And with some more time, we will be able to see the benefits associated with the investments made. So especially this year, especially in this first quarter, we managed to anticipate part of the strategy this year. And this brings some of the volatility. But for sure, this was a big focus for us. As you know, we have been meeting all the -- we've been meeting all the requirements in relation to assemblies.And Goias will be included as of this year. So that was a very important focus and very thanks for the question. Now, complimenting Gustavo. When we started this asset, and when we look at the relevance of the EBITDA of this asset, we understand that this is a market that has been operating above the Brazilian level -- market level.And we already estimated that in the beginning we would have a higher OpEx in order to meet this demand. So this is when the investments start to make effects. So we are accelerating this and so that we can de-accelerate the OpEx later on. This is exactly what Daniel mentioned.

[Operator]

Our next question comes in writing by Mr. Daniel [indiscernible]. Could you make some contents on the sanitation operation? How have you been decreasing the losses and improving the efficiency of the concession?

[Augusto da Paz Júnior, executive]

We have been doing a making effort. In the beginning, we needed to make the necessary registrations and records. And it was a bit more -- a bit harder than we expected, but it's a Greenfield operation. We are still in the beginning and we have seen a lot of volatility until things start running -- with a more, clear trend. So we continue searching for, or generate an improvement in this asset.

[Operator]

[Operator Instructions] The Q&A session has come to an end. We'd like to turn the call over to the officers for their final remarks.

[Augusto da Paz Júnior, executive]

In closing, we want to reiterate once again our commitment to our agenda of continued value generation for our investors, based on consistent delivery of results in the different segments in which we operate, always based on disciplined financial management. I would also like to remind you that our Investor Relations team are available to support with any clarifications you may require after this call. Once again, thank you for your interest in the company, and for taking part in our earnings call. Have a good afternoon everyone.

[Operator]

Equatorial Energia conference call has come to an end. We would like to thank you for participating. And have a nice day.[Statements in English on this transcript were spoken by an interpreter present on the live call.]