Equatorial Energia SA

BOVESPA:EQTL3

Earnings Call Transcript 2023-Q2

[Operator]

[Interpreted] Good morning, and thank you for standing by. Welcome to the conference call of Equatorial Energia S.A. to announce the results of the second quarter of 2023. Today with us, we have Mr. Augusto Miranda, CEO; Leonardo Lucas, CFO; Cristiano Logrado, Regulations Officer; Tatiana Vasques, Superintendent of Investor Relations; and Tinn Freire Amado, CEO of Echoenergia. This conference call is being recorded. [Operator Instructions]

This conference call is also being simultaneously transmitted on the Internet through a webcast and may be accessed at the address www.equatorialenergia.com.br where the slide deck is also available. Slide selection should be controlled by you. A replay of this conference call will be available right after its end. As a reminder, participants of the webcast may ask questions through the website to Equatorial Energia S.A., which will be answered after the end of the conference call.

Before continuing, we would like to say that statements made during this conference call relative to Equatorial Energia business prospects, operational and financial projections and goals are beliefs and assumptions of the company's management and are based on information currently available to Equatorial Energia S.A. Forward-looking statements are not guarantee of performance and involve risks, uncertainties and assumptions because they refer to future events and therefore, depend on circumstances that may or may not occur.

Investors and analysts should understand that general economic conditions, industry-specific conditions and other operational factors may affect the future results of Equatorial Energia S.A. and may lead to results that will be materially different from those expressed in such forward-looking statements.

Now I would like to give the floor to Mr. Augusto Miranda, who's going to start the presentation. Mr. Miranda, please, you may start.

[Augusto da Paz Júnior, executive]

[Interpreted] Good morning, everyone. Thank you very much for your attendance. This morning, we'll be presenting the results of the second quarter of 2023 of the group, Equatorial Energia. We started the second quarter with strong performance in the distribution segment. Combining the evolution of our operational and loss fighting indicators, this performance reinforces the continuous turnaround process in addition to the advancement of the renewables segment from the construction of the solar generation pipeline. In addition to the operational improvement of the quarter, it is important to note that we continue on a deleveraging trajectory in the group, demonstrating the results of the capital discipline present in our D&A.

It's worth remembering that since the first quarter this year, we have been consolidating the results of Equatorial Goias and therefore, and they are not considered in the economic and financial figures of last year, Q2 '22.

Now I will start on Slide 3. So starting from the operational highlights, I would like to talk about the growth of distributed energy, which in a consolidated way, presented a growth of 7% in the annual comparison. This growth is on adjusted basis, already considering the pro forma data of Q2 2022 from Equatorial Goias. Part of this growth is due to the significant results that we have obtained in the execution of our strategy to fight losses, which registered a consolidated level of 18.6%, a reduction of 1.4 percentage points in the annual comparison. Another factor that has also contributed positively to this market expansion is a quality improvement.

Looking at the accumulated numbers for the last 12 months, we present improvement in all the distribution companies of our portfolio if we compare Q1 '23 to Q2 '22. In the highlight that Equatorial Maranhao, this is another highlight. It reduced its SAIDI by 12.5 hours compared to the second quarter last year, demonstrating our ability to deliver results in face of the challenges.

In the renewable generation segment, the highlight is the volume of energy generated 6% higher than the same period last year, mainly due to better wins. We have achieved BRL 2.2 billion in adjusted EBITDA in the quarter, 44% higher than in Q2 '22, capturing the consolidation of new assets and the strong performance of the distribution segment as well as the turnaround advancing recent acquisitions. This already excludes the noncash effects of VNR, IFRS and MTM. We invested about BRL 2.7 billion in the period.

Here, the highlight goes to investments in the distribution and renewables focused on this year's tariff revisions and investment of Echoenergia solar pipeline. Despite that, we ended the quarter with a 0.1x reduction in the net debt over EBITDA ratio in this quarter, totaling 3.8x in the covenants view. And this is the second consecutive quarter of reduction since the consolidation of Equatorial Goias. Now I would like to give the floor to Leo, on Slide 5 to start with a consolidated view of the economic and financial performance of the group. Leo, please, the floor is yours.

[Leonardo da Silva Lucas Tavares de Lima, executive]

[Interpreted] Thank you, Augusto. Good morning to everyone attending our conference call. I will talk briefly about the economic and financial performance of the group from a consolidated view. Here, the numbers are adjusted for nonrecurring effect and for noncash effects, such as VNR and distribution companies, IFRS for transmission and MTM in terms of marketing. Our consolidated gross margin grew 46% as compared to Q2 '22. This growth is mainly due to the good performance of the distribution segment driven by the growth of the tariff and market mix along with reduction in losses.

In addition to the consolidation effect of new assets, especially Equatorial Goias, which added BRL 561 million to the margin of the quarter. The organic growth of the gross margin, excluding new assets, was 17% in the same concept. That is disregarding the new assets. The adjusted PMSO presented a reduction of about 3% quarter-on-quarter. This reduction reflects our cost discipline, especially in the distribution segment, which grew below the accumulated inflation.

The reported EBITDA for this quarter has reached BRL 2.4 billion, 44% higher than the same period in the previous year. Adjusting for nonrecurring and noncash effects, EBITDA reached BRL 2.2 billion, again 44% higher than Q2 2022, which is equivalent to BRL 663 million. This growth is strongly influenced by distribution assets. And in ex Goias vision, added BRL 423 million to the quarter, reflecting the advance in terms of our loss fighting initiatives. In addition, the consolidation of Equatorial Goias in the quarter added BRL 213 million.

Now moving to the next slide. Here on Slide 6, we are showing information about the company's investments and debt. In the quarter, we had a significant volume of investments totaling BRL 2.7 billion. And this amount is driven by the proximity of the closeness of tariff events. And for the focus on strengthening the network, improving the quality, reducing losses in addition to the progress in the execution of Echoenergia pipeline, which this quarter reached the amount of BRL 642 million in the development of 2 solar complexes in the States of Bahia and Piaui.

Now you can see the debt profile of the company. So here, you can see the group's net debt level at BRL 34 billion despite the strong volume invested in the quarter. Leverage is measured by covenants was down by 0.1x and closing the quarter at 3.8x, which characterizes the second quarter in a row of reduction and reinforces our gradual capacity to deleverage even with a higher volume of investments. We have a robust cash position of BRL 10.2 billion consolidated, which corresponds to 1.8x our short-term liabilities.

It's worth mentioning that in this quarter, we exceeded cut rates in 3 tariff revisions in Goias, Piaui, and Amapa and now only Alagoas left with a cut date in November. As a result, the volume of investments in distribution is likely to go down. And as we go through tariff revisions, we will be able to record the investments made in the last cycle in our regulatory EBITDA, which will provide a positive contribution to the group's deleveraging trajectory.

Now moving to Slide #8. We are going to give you details about the distribution segment. Here on Slide #8, where you can have an overview of the operation and commercial performance of our distribution companies. Here for comparison purposes between quarters, operational data are shown in an adjusted view of the Q2 '22 with the data from Equatorial Goias, as you can see in the graph.

The injected energy grew 5% between quarters, while distributed energy grew 7%, with the contribution of the generalized reduction of losses in our concessions, which in a consolidated way, went down 1.4 percentage points with a highlight for the states of Rio Grande do Sul and Amapa, which went down by more than 4 percentage points year-to-year. It is important to note that with the success of our anti-loss initiatives, we closed the quarter at about 0.6 percentage points above the regulatory level.

As to the commercial performance, we ended the quarter with a consolidated revenue of 99.3% plus or rather say another strong quarter with high levels and close to 100%. So the PECLD, the consolidated level remains within the levels we consider reasonable, especially for our highly complex business operations.

I would like to highlight the excellent performance of our distribution companies, which for the fourth consecutive quarter has been presenting consistent reductions in SAIFI and SAIDI. Here, the main highlight goes to the significant reduction in Maranhao, up 12.5 hours compared to the previous year.

Moreover, the state of Amapa, with 9 hours of reduction as compared to Q2 2022, below the regulatory limit. It's also worth mentioning Alagoas, which reduced 7.4 hours. Overall, we see a significant result across our portfolio. It's worth noting that in Goias, historical indicators were reprocessed at the request of the regulator.

In SAIFI, it's worth mentioning that currently 5 out of our 7 concessions operate within the regulatory limit. This result is a consequence of greater robustness of regional instructions and then strengthening of initiatives and process improvements implemented over the last quarters in combination with strong investments.

And the adjusted PMSO, the growth of 45% is a result many of the consolidation of the Equatorial Goias, highlighted in the chart to facilitate comparison. Disregarding this effect, adjusted PMSO will grow only 1.8%, reinforcing our management capacity and cost discipline and delivering a PMSO expansion lower than cumulated inflation between periods despite the ex Goias customer base that expanded more than 4% between quarters.

In the comparison with adjusted EBITDA, we had a strong growth of 56% affected by the improvement in the gross margin, influenced by the higher tariff in a period market growth and also by the consistent reduction of losses.

Now moving to the next Slide #10. Here on Slide 10, we quickly show the performance of the transmission segment. Altogether, our portfolio currently has an RAP of more than BRL 1.3 billion for the '23, '24 cycle. In this quarter, the regulatory EBITDA for the transmission segment grew 14%, reaching BRL 316 million with the benefit mainly for -- from the last tariff adjustment as you can see on the slide, our transmission operation recorded a consolidated EBITDA in excess of 93%.

It is worth mentioning that since July this year, the '23 '24 cycle, Intesa asset has had a 50% reduction in the original RAP, an amount that is already demonstrated in the buildup chart. It's important to note that this reduction only impacts the original RAP and therefore, does not affect the reinforcement.

Now let's take a look at our renewable energy operation. The volume of energy generated grew 6% this quarter as compared to the year before. This performance is due to better availability of wind assets as demonstrated in the part showing the average speed of winds. In the quarter, the EBITDA grew 9%, total BRL 125 million in the period, reflecting better winds. It's important to note that in this quarter, if we compare to last year, we are including the operation of Serra do Mel 2 complex, which started operating in March 2022.

Now we are going to talk about details of the development of our pipeline of solar projects. As you can see, we have advancement in development of Ribeiro Goncalves and Barreiras 1 complexes located in the states of Piauí and Bahia respectively. In the chart on the left, you can see the timeline of the main stages of the development of this pipeline. Right now, we are advancing in the line of civil and electrical works and the 2 complexes in addition to the transmission lines and connection to the substations in line with the construction schedule approved for the project.

I remind you that the parks are scheduled to start operating during 2024 for the development of the pipeline, we reached in this first half of the year, the CapEx of BRL 798 million with BRL 705 million of funding from the 4 Ribeiro Gonçalves complex already contracted from BNDES of the total funding contracted, BRL 510 million refers to sub credit A at an IPCA rate plus 7.45% per annum.

Lastly, I would like to reinforce that we are advancing in the marketing of energy of the pipeline. In the graph on the right side, you can see the evolution of the number of customers for future energy in the quarter, a very significant number, which demonstrates our ability to execute the marketing strategy. Today, most of Ribeiro Gonçalves energy is already commercialized. Another way to demonstrate this evolution is the positive mark-to-market result of energy contracts, which had a net impact in our result of BRL 37 million. And this result was driven by sales to end customers, which took place in the second quarter, which added more than BRL 55 million to the book value following the mark-to-market methodology of our operations.

Now moving to Slide #15. At CSA, we completed the 12 months of management of Equatorial in the Sanitation segment. And in this quarter, we show you a comparison of the expected EVTE where we see the positive results of the operation. We ended Q2 '23 with approximately 80,000 invoice savings in water supply and advances in the water coverage index of 42% and losses of 62%.

[indiscernible] estimated for the first year of operation in the BNDES modeling and demonstrate evolution compared to the previous quarter. This demonstrates the company's good operational performance at this early stage and reinforces our confidence in the opportunities for the segment.

Now I give the floor back to Augusto for his closing remarks. Thank you, Leo.

[Augusto da Paz Júnior, executive]

[Interpreted] I would like to close by summarizing the main messages of our conference call and reinforcing our recent achievements and prospects. First, I would like to draw your attention to the significant performance of the company, reflecting an evolution of current assets and consolidation of new assets, which led to a growth in the adjusted EBITDA of 44%. In this sense, the main highlights of the period are related to the contribution of Equatorial Goias and the consolidated results increase in gross margin of other distribution companies or group combined with an efficient management of operating expenses.

I would like to take this opportunity to highlight the evolution of quality indicators in general operations as a result of the intensification of improvement actions in addition to loss reduction, which demonstrates the evolution in turnaround processes and also in more immature assets. Investments totaled BRL 2.7 billion in Q2 '23 with emphasis to distribution companies with the tariff revisions this year in addition to the BRL 642 million meant for the development of Echoenergia solar generation project pipeline.

These investments are in line with the company's constant focus on value generation. Another highlight was the capital increase realized from the capitalization of declared dividends with the amount of BRL 385 million, one of the initiatives mapped out in the menu of shares for leverage management.

In the sense, we recently approved the 18-month treasury share disposal program or share sale program and then we hold approximately 29 million in treasury shares acquiring during the buyback program approved at the end of 2020. With regard to the prospects for 2023, we continue to advance in improving the quality and reducing losses of our distribution companies with special attention to the evolution of the turnaround in Goias. Another point is the focus for 2023 in leverage.

In addition, the strong result of the quarter as perceived by the EBITDA growth, we see a reduction in the future leverage through the tariff review process in advances in turnaround processes in addition to remaining attentive to opportunities for debt management using the tools available, such as the sale of operations as recently approved.

Now I would like to open for questions and answers. Thank you very much.

[Operator]

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

[Andre Sampaio, analyst]

[Interpreted] So just a confirmation as to provisions, so this is related to '23, but did not impact consolidated numbers. But anything reversed to equalize it. So this is the first question. And the second question is related to the sale of shares in treasury. To understand why we are launching these movements right now? Do you see any opportunity coming up? And these are my 2 questions.

[Augusto da Paz Júnior, executive]

[Interpreted] Thank you very much. So first, I'm going to answer now. So this is one of the options that we have, considering the tool to and talk about this. But this is -- does not oblige us to do it over again. So that we can assess better. The first question, an elevation of provisions, what exactly are you asking?

[Andre Sampaio, analyst]

[Interpreted] I mean an increase of provisions in the first quarter.

[Augusto da Paz Júnior, executive]

[Interpreted] We see the numbers going up from the first to the second quarter. But if we look at consolidated numbers, this doesn't seem to be true. Can you understand better. There is a PPA. There are some impacts of processes that had already been mapped acquisition in the consolidation process with Equatorial and this is due to the contingency that we had that had already been set forth in the PPA. This is nonrecurring for Goias and likewise with the consolidation of Equatorial, this had been included in PPA.

[Operator]

Our next question comes from Rafael Nagano from Credit Suisse.

[Rafael Nagano, analyst]

[Interpreted] I have 2 questions. The first one is a follow-up on Andre's question about the opportunity of leverage in terms of sale and in terms of what was presented. So you had said that you were analyzing closely this process. So there was this process. And the second process regards Echoenergia considering that Ribeiro Goncalves is already fully contracted almost. Can you tell us more about average prices and the term of those contracts in terms of time?

[Augusto da Paz Júnior, executive]

[Interpreted] Rafael, thank you for your question. Obviously, Rafael, the assets that we have in Sierra, but for this special asset, we don't -- we wouldn't like to talk about it. And about Echo, Tinn is going to talk about it.

[Tinn Amado, executive]

[Interpreted] Thank you, Augusto. Well Rafael, as to the consumers that we are trying to find 4 contract portfolios for Ribeiro Goncalves. It's basically [indiscernible] that could migrate as of January 2024, and average time depending on the type of product between 4 and 5 years.

[Operator]

Ladies and gentlemen, I will wait for Mr. August Mirandas connection [Technical Difficulty] Our next question comes from Marcelo Sa -- sorry, our next question is from Marcelo Sa from Itau.

[Marcelo Sá, analyst]

[Interpreted] I have 2 questions. The first 1 regarding CapEx. There was a CapEx peak this year. And the distribution CapEx would drop obviously related to deleveraging. And so what do you expect for next year? And about the energy and I would like to talk about the PPA for customers, but could you share with us the price range and anything else related to PPAs that would make sense.

[Augusto da Paz Júnior, executive]

[Interpreted] I am going to start speaking on behalf of Echoenergia. Well, Marcelo, I cannot give you this guidance because this is a price energy of Echo. It's our price strategy. It's something that is limited. All I can tell you that prices have surprised that especially with the guaranteed energy, which is the product offer a discount to the customer in terms of the tariff. So this price is detached from market prices and we are intensifying actions to leverage this type of product, okay?

[Leonardo da Silva Lucas Tavares de Lima, executive]

[Interpreted] Marcelo, thank you for your participation. Thank you for the question. We do not offer specific CapEx guidance. Just as a reminder, we worked in Fevereiro, and we come from the first to the second quarter in Para with a CapEx reduction. In the second quarter, we had 3 bases, Goias, Piauí and Amapa. There were extraordinary revisions. So we've been expecting an ordinary vision. We are keeping an eye at that. And in November, we are going to have a cut of the basis in Alagoas.

Obviously, our strategy aims to address CapEx needs as much as possible before the cut. And after the cut as we want to advance those needs. We are expecting a movement of reduction in the beginning of the cycle. Obviously, we also need to look at the market dynamics. The market is very strong. And CapEx is related to that. And also turnaround companies with issues related to quality improvement, such as the case of Goias and [indiscernible] Rio Grande do Sul, Amapa. So this is the dynamics, but we are not offering more specific guidance.

[Marcelo Sá, analyst]

[Interpreted] Well, this is great, Leo. Well, if you have any information about when you expect your leverage to go down towards the end of next year when it's closer to 3x or even less. What can you tell us about that?

[Leonardo da Silva Lucas Tavares de Lima, executive]

[Interpreted] Well, the dynamics, we expect to have better results in terms of turnaround with review. And this CapEx without a more specific guidance.

[Operator]

Our next question comes from Daniel Travitzky from Safra Bank.

[Daniel Travitzky, analyst]

[Interpreted] So I have a question a follow-up about the issue of leverage and deleverage. And I would like to understand which are the alternatives after you close some transactions such as the one with Itau. In terms of operational assets and now you did a sale in treasury. What other alternatives can we see in terms of funding looking into the future in terms of leverage of the company? Or alternatively, there's nothing else to be done. How do you see the deleverage process?

[Augusto da Paz Júnior, executive]

[Interpreted] So Marcelo and Daniel, thank you very much for the question. So Daniel, well, you mentioned a few and that there are many other options. As a reminder, there are some mature assets. So -- and this is an alternative.

[Unknown Executive]

[Interpreted] Thank you for your question, Daniel. In addition to the operational dynamics that we have just mentioned, there is a nonoperational and inorganic dynamics. We have the operation with dividends and this optionality or this option is now. And naturally, we receive provocations so that we might sell an operational asset or bringing some capital into the portfolio, especially in segments that are mature, that are not so capital intensive. So we remain very active thinking and considering the many alternatives that we may have in addition to the organic alternative of deleveraging. We are very active being close attention to all alternatives. Okay.

[Operator]

[Operator Instructions] We now close our questions and answers session. Now I would like to give the floor to Mr. Augusto Miranda for his closing remarks. Mr. Miranda, please.

[Augusto da Paz Júnior, executive]

[Interpreted] Well, in closing, I would like to reinforce once again our commitment to the agenda of continuous value generation that we seek for our investors, from the delivery of consistent results in the various segments where we operate, always based on disciplined financial management. I would also like to remind you that our Investor Relations team is available to support you and answer any questions you may have after this webcast. Once again, thank you very much for your interest in our company and for attending our conference call. Have a good afternoon.

[Operator]

Equatorial Energia S.A conference call has now ended. We thank you very much for your participation. Have a good day. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]