Equatorial Energia SA

BOVESPA:EQTL3

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, and thank you for standing by.

Welcome to Equatorial Energia S.A. Results Conference Call for the Third Quarter '22. With us today, we have Mr. Augusto Miranda, CEO; Leonardo Lucas, CFO; and Tatiana Vasques Investor Relations Superintended and Tinn Frerio 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 the website www.equatorialenergia.com.br, where the presentation is available. Participants may view the slides at their own convenience. The replay will be available shortly after the event is concluded. Those following the presentation via website may pose their questions directly on the website. They will be answered by the IR team once the conference is finished.

As a reminder, let me mention that forward statements are based on the beliefs and assumptions of Equatorial Energia S.A. and on information currently available to the company. They involve risks and uncertainties as they relate to future events and therefore, depend on circumstances, which may or may not occur. Investors and analyst should understand that general conditions, sectoral conditions and other operating factors could also impact the results of Equatorial Energia S.A. and lead to results that differ materially from those expressed in the forward-looking statements.

I will now turn the conference over to Mr. Augusto Miranda, who will begin the presentation. You may proceed, sir.

[Augusto da Paz Júnior, executive]

Well, thank you. And good afternoon to all of you. Thank you for participating, and thank you for your time. We're going to present the results for the third quarter '22 for the Equatorial Group. In this highlight and in the consolidation of sanitation, the operations began in July, and we continue to advance in our operations and in quality enhancement. The results of this quarter reflect this evolution and activities of our group.

Let us go on to Slide #3, and we begin with the financial highlights. We have a highlight on a consolidated basis. The EBITDA for the quarter with ex-VNR and IFRS is BRL 1.9 billion, 56% higher than the third quarter '21, thanks to the distribution segment and the consolidation of our assets, especially Echoenergia and CEA. We invested approximately BRL 1.7 billion during the period, 109% higher than in the third quarter of '21.

Now these investments are enhancing losses and quality. We ended the quarter with a sound cash position of BRL 8.3 billion, 1.8x our short-term obligations. Our leverage has remained stable at 3.3x net debt over EBITDA, showing our financial soundness. When it comes to the operating highlights, the volume of distributed energy was 8.785 gigawatts with a highlight for Pará, Maranhão and Rio Grande do Sul. These results were obtained, thanks to our initiatives to combat losses, we have been consistently working in our DisCos, ending the third quarter with 22.5% of losses for the last 12 months, a reduction of 1.5 percentage points vis-a-vis the third quarter '21.

In the renewable sector, the energy generated was 1.432 gigawatts, 13% higher than what was recorded in the third quarter '21. With the coming into operation of our complex in our growth agenda, perhaps our greatest highlight is the announcement of our most recent acquisition of CELG. This shows our capacity to make the most unique opportunities to generate value with CELG, we have expanded our operations to the Midwest region, adding more than 3 million customers.

Additionally, the distribution sector had a rating upgraded in Alagoas to AAA by standards and for showing the robust and financial soundness of the company. We no longer need to count on the backing of Equatorial Energia to access the market. In CEA, we paid an ARD payment through an agreement with our suppliers. And this enabled us to generate savings of BRL 200 million.

I would now like to give the floor to Leo on Slide 5, where we will speak about the consolidated economic and financial performance. Leo, you have the floor.

[Leonardo da Silva Lucas Tavares de Lima, executive]

Thank you, Augusto, and good afternoon to all of you I will quickly refer to the economic and financial performance with a consolidated view. Here, we have adjusted the figures excluding the BNR figures, which were negative. Our gross margin, consolidated margin grew 41%. And this is mainly linked to the good performance of the Distribution segment that was given thrust to by the expressive growth in the market, along with the strong reduction of losses besides the segment of renewables.

If we don't take into account the new assets, with Energia and CEA -- CSA, the consolidated gross margin would be 21% PMSO adjusted led to a growth of only 7% in the annual comparison. If we put aside the new assets, the growth of the PMSO in line with the inflation of the period showed us that we had an increase in cost, especially when we're strengthening our initiatives and enhancing quality.

As you can observe at the bottom of the slide, here, we show you very clearly the effect of the VNR during this quarter. As a result of the deflation during the period If we disconsider this effects the adjusted EBITDA, excluding VNR and IFRS, reached BRL 9 million in the third quarter, a growth of 56%. And with a strong impact on the distribution sector. Additionally, with the EBITDA of our assets that jointly added up to BRL 255 million.

We go on to the next slide, in Slide 6. We share with you the information on investments and the company's indebtedness. The total investment increased 109% and vis-a-vis the investments made in '21. This investment is due to a higher CapEx in distribution and a strengthening of the network enhancement of quality and reduction of loss. It's always important to readjust and the coming year, we will have a completely different base of remuneration because of Pará, Piauí and Amapá cases.

And of course, we will increase the pace of investments during that period to the right, the company's indebtedness profile. We had a slight increase in the debt reaching almost BRL 24 billion. Now this increase was influenced by the prepayment of the liabilities in Amapá because of the higher CapEx. And in terms of leverage, it has been stable vis-a-vis the previous quarter and 3.4x. It's always important to recall that the leverage does not include the EBITDA of the recently acquired assets differently from other covenants in the view of covenants, the leverage was 3.1x within the limit of 4.5%.

We now go on to Slide #8. And where we will begin to speak in detail of our segments of distribution. We are now on Slide #8, where you have an overview of the operational and commercial performance of our DisCos here for comparative purposes between quarters, we show you the operating data with an adjusted vision. All of these were consolidated in November of last year. As you can observe in the graph Distributed energy grew more than 5% in the third quarter '22, thanks to the expansion in Rio Grande do Sul, Pará that grew more than 7%. This also includes Maranhão. This result can be attributed to the success of our combat of losses reaching 22.2%. The highlight here is Equatorial that is beginning to operate within regulatory levels.

Piauí and Alagoas are already operating within those methods and within that methodology, when it comes to our commercial performance of our DisCos, we continue to maintain a good level of collection 98.6%, in line with the previous quarter. And the highlight is for the more recent acquisition CEA and CA collected more than 100%. In PDA, the levels are reasonable in terms of commercial activity. And the variation is due to reversals carried out in the third quarter '22. Thus, we're able to demonstrate the cycle of our revenues, and we have obtained good results in the compound of losses allied with a good performance and collection, the PMSO readjusted was below the inflation.

Now if we look at the variation of our assets and the operation Amapá, the PMSO was 4%. The economic and financial performance of this segment is based on these effects. And it shows very clearly, the enhancement and the good performance of our distribution companies during the period. If we consider only the new assets, EBITDA grew 38% and if we compare the periods.

At the bottom of the slide, we give you an overall view of the operational performance compared with the previous quarter. Here, the highlight is for the evolution of the technical quality indicator, which has a great deal of impact on the more regular performance of our assets. Also, we have the investments carried out in distribution the generalized enhancement of this indicator is in Rio Grande do Sul, and it shows that the recent initiatives are very positive, and we hope to continue on with this evolution in the coming quarters. All of our distributors have reduced their supply and are operating at very good levels.

On Slide #10, very quickly, we would like to show you the performance of the transmission segment. Our portfolio has BRL 1.3 million in terms of RAP. This quarter, the regulatory EBITDA of the segment grew 25%, reaching BRL 305 million, as you can see to the left, our transmission operation has a consolidated EBITDA that is higher than 33%. There's a variation of 13% and due to a reduction in the third quarter due to a calculation error of one of our partners.

This effect was adjusted retroactively with the regulator. Therefore, it will not have an impact on the current figures, but it's evident in this comparative vision. The EBITDA during this period was benefited by this adjustment, reaching 94.5%.

We're now going to look at the Echoenergia operations. Here, we bring you the historical performance of Echoenergia. The volume generated grew 13% and thanks to the coming into operation of the Serra do Mel complex 2 contributing with gigawatts during the quarter, offsetting a lower volume of sales with a 2% reduction. Now in the scenario of transmission, it was a growth of 17%, totaling BRL 224 million during the period.

We now go on to the next slide, before closing here, we have an initial picture of CSA our first sanitation company. We ended the third quarter with more than 71 active economies during the period. These are the clients that are connected to the network. Now this is very important as a figure because it represents 94% of the total of active economies foreseen for the end of the first year of operation. When it comes to the sewage operation, we have more than 10,000 connections that have begun their billing in the first quarter. And this should only happen in the second year of operation as a whole, the coverage index of this service is equivalent to 35% and 7% for water and sewage in terms of the grid extension.

The EBITDA reflects the initial stage of the operation, and this will enable us to work with the universalization of this service. Now the goal is to reach an index of 99% in water coverage and 90% for sewage coverage in the period of 11 and 17 years. We are extremely satisfied with the strides made in this first quarter, and we're going to continue to take large steps to generate value in this company.

I would now like to return the floor to Augusto for his final remarks or considerations.

[Augusto da Paz Júnior, executive]

Well, thank you very much. And I would like to close by speaking about our achievements and outlooks. The main highlight, of course, is the acquisition of CELG-D. Perhaps this is the greatest acquisition in our history, adding more than 3 million clients to the group inaugurating our presence in the Midwestern region. The expectation is to conclude this at the end of the year. We have already been approved by the Antitrust agency. I highlight the evolution of our quality indicators in our operations, especially those of Maranhão.

This is thanks to the DEC plan that was implemented in the last year. And we're going to continue on with this evolution. In the commercial front, the highlight is the loss reduction in all of our DisCos, the evolution of quality and loss reduction we'll also point to an evolution of our more recent companies. Other highlights are the beginning of the sanitation company that began a short time ago. And of course, we're adding value to this asset, we're going to focus on the operation of this asset, making the necessary investments to recover infrastructure and performance. Additionally, in attempting to generate value. We're looking at market opportunities to strengthen our portfolio.

And finally, I would like to highlight a recent achievement, which is the Women on Board seal. This is an important recognition pointing to the advance we have in a more diverse environment. We have 2 women in our Board, and we continue to make slides in our ESG agenda, we're also carrying out an inventory in greenhouse gas inventory, and we're making institutional changes in terms of environmental policy and inclusion of more diversity. This, of course, will be only part of the diversity that encompasses ESG.

I would like to return the floor to the operator for the question-and-answer period.

[Operator]

[Operator Instructions] Our first question is from Guilherme Lima from Santander.

[Guilherme Lima, analyst]

If you could remark on the evolution of the transfer of control of CELG with ANEEL is there a benefit that you're negotiating an immediate tariff benefit for the consumers. And if yes, which would be the amount. The second question refers to the funding strategy. If you're thinking of selling off minority stakes in which segment and which would be the timing of this process?

[Augusto da Paz Júnior, executive]

Well, thank you, Guilherme for the questions. Guilherme me when it comes to the process. I think we're doing very well. The work at the antitrust agency proceeded very positively. And well, we have to work -- wait in terms of the deadline and the discussions. What we can say about this is that we expect to conclude this process until the end of December or beginning of January. The second part of the question, I'm sorry, I did not capture this positively. If you could repeat it.

[Guilherme Lima, analyst]

Yes, of course. It refers to the sale of minority stakes. If you're considering selling of minority stakes as a funding strategy and which would be the segments in which subsidiaries would this happen?

[Augusto da Paz Júnior, executive]

We have no minority stakes, Guilherme. The only one we had was sold off last year, and it has been completely or fully concluded and paid off.

[Operator]

Our next question is from Carolina Carneiro from Credit Suisse.

[Carolina Carneiro, analyst]

We have 2 questions. The first -- you mentioned in the call regarding CSA, the active economies, if you could refer to what you had in the plan as compared to the initial survey, it seems that we're at a much more interesting operational plan, one that is much more interesting. And if you have begun installing hydrometers as part of your plan.

Now when it comes to Amapá vis-a-vis what you had in the plan, and in Goiás, it wasn't clear for me. Apparently, this will extend until the end of the year when it comes to the regulatory part the flexibilization of the DEC and FEC, if I'm not mistaken. And the possibility of a regulatory penalty for the coming year. We would like to have greater visibility of what you're going to do as you have a very tight calendar with the regulator, and you would have to address this before the cutoff point for these indicators, DEC and FEC.

[Augusto da Paz Júnior, executive]

Carolina, thank you for the question. I'm going to speak. Leo, and then somebody will add to this. When it comes to sanitation, we took this company on in July. It's very recent through an assisted operation. We -- to gain scale. The first thing you have to do is carry out a survey of the customers, the commercial customers had been built as residential customers. And what we would like to highlight was our expeditiousness setting up a very good team with a very experienced Director, we also brought about an Engineering Director with broad experience. The Commercial Director was already from the group.

So all of this has enabled us to make strides in this new laboratory. We're very enthusiastic. It's a new experience for us. And of course, there are plenty of opportunities, Carolina. We're still learning about everything, optimizing everything and when you begin operating the day-to-day problems is begin to appear. Now the team that we have contracted is doing very well, and we're quite satisfied with this. Leo, I don't know if you would like to add something.

Now in Goiás, where in a process that is being analyzed. We have already defined a [indiscernible] and they're holding meetings with [ Enel ] and [ sell officers ] separate meetings. And these are cases that we are discussing very broadly. It's a broad concession. And of course, there are challenges involved in this. When the regulator has knowledge of the concession, this can speed up the dialogue, we can have a discussion based on real facts but this concession does have its own characteristics. Leo?

[Leonardo da Silva Lucas Tavares de Lima, executive]

Well, thank you, Augusto. Yes, and thank you for the question, Carolina. I would like to highlight some points in Sanitation. We have implemented 3.1 kilometers in this concession. And we have identified in stock, 30,000 hydrometers, which, of course, will have to undergo test to see if they can be used. And from the point of view of registry, we have been able to update 55,000 registers in that region. And in some of these registers, there is a change from a commercial to a residential registry and vice versa.

Now the quality systems, of course, are under discussion in this process of expansion for the approval of the transfer. And there are some precedent issues associated to this. But everything is moving forward positively as expected.

If you allow me, Carolina to add something in terms of sanitation for you to see that we're really moving ahead well. 94% of the active economies of water forecast for the first year -- well, the economies foreseen have already been carried out. During the first year, in these 90 days, we have already attained 94%. So we are already able to replicate this segment when we take the sanitation Director and the Commercial Director, she wears both hats. She is able to achieve this and the closeness with our energy assets -- facilitates this. And following the Equatorial model will bring us positive fruits in sanitation as well.

[Operator]

We will now continue with a question from the web.

Which will be the CapEx for wind energy in Brazil. Is it higher? Or is it beginning to decrease. And prices of PPA and ACL have they increased? Now is your resource, improving in this quarter?

[Tinn Amado, executive]

Tinn is answering the question regarding the CapEx. We still perceive stability differently from the CapEx where we had a reduction in wind production, this is not happening. It is more stable. And the OpEx perhaps is somewhat higher.

Now to speak a bit about prices. We have perceived in terms of the migration prices. That is to say captive customers have become free customers and self-production with an increase in the open market differently from what we thought at the point of acquisition.

And the last question refers to the third quarter generation or fourth quarter. October was somewhat better, but we are better than in previous quarters, but not considerably better compared to our historical series or production.

[Operator]

[Operator Instructions] Our next question is from Felipe Andrioli from Verde Assets.

[Felipe Andrioli, analyst]

In the last few days, we have seen news that Amazonas Energia is selling. You have recently acquired CELG. And last year, you had 3 other acquisitions or 4, if we count the sanitation company, which is the possibility of Equatorial acquiring this asset of Amazonas in terms of people if you have the arms to work with another asset and your capacity to invest in this asset.

[Leonardo da Silva Lucas Tavares de Lima, executive]

This is Leo. Thank you for the question, Andrioli. And I would like to say the following because of the size that we have and because of the importance of this segment, we're looking at all opportunities in distribution. However, we don't particularly want this specific asset.

[Operator]

[Operator Instructions] A question coming through the web regarding the DEC and FEC. The FEC in this quarter decreases vis-a-vis the previous quarter, but DEC is above the limit in several states yet, which is your projection for coming quarters? And if the company has done something to improve these indicators.

[Augusto da Paz Júnior, executive]

That's a question on quality. If you look at the origin of Equatorial, it has stood out because of its indicators and distribution. This is something that we truly know how to work with in the growth of Equatorial since 2018, we had considerable growth, and we preserve our culture as part of this growth, our people. And yesterday, we were in Alagoas, along with the board, looking at the performance of the company. So -- we're in the same environment as if we were in Maranhão or Pará. So that idea of growing based on consistency is very positive. I would like to remind you Equatorial has a characteristics whenever we have a problem or we're able to resolve a problem, our capacity becomes ever larger.

In 2016, I remember the collection was very difficult at that point, we rolled up our sleeves, we created a plan of action, and we reverted to the problem. So we work with very close management. Now if you look at the reduction we already had in Alagoas, it is very expressive. The same holds true for Pará. All of this is based in a plan. In Maranhão, during the pandemic, we had a problem with some companies. We also had problems with mobilization.

And when there is a change of range, it's not easy to resolve. Sometimes a range does not work, and we had difficulty in mobilizing our partners to do this, we had to create partnerships with providers in the south of the country. We have good teams. And now we are controlling our results month after month. We have a monthly vision and annual vision, and we see a strong trend for a drop in these indicators.

And we generate results cumulatively. And this is what we truly know how to do well, and we're focusing on that. Now this indicator has received special attention from the entire company and from our technical group, and we're trying to find a constant and consistent trend for a drop in this. So you can feel very calm in terms of the evolution of these indicators.

[Operator]

At this point, we would like to conclude the question-and-answer session. I will now turn the floor back to Mr. Augusto Miranda for the final remarks. You may proceed, sir.

[Augusto da Paz Júnior, executive]

Once again, thank you very much for your time, for your participation, and I would like to reinforce once more our commitment with constant value generation and value for our shareholders by delivering consistent results, always focusing on a very disciplined financial management. Our IR team is at your entire disposal to give you support should you have any doubt.

Once again, thank you for your interest in the company and for your participation in our conference call. The Equator Energia S.A. conference call ends here. We would like to thank everybody for their participation. Have a good afternoon.

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