Equatorial Energia SA

BOVESPA:EQTL3

Earnings Call Analysis

Equatorial's Q3 2024: Strong EBITDA Growth and Strategic Acquisitions Drive Performance

In Q3 2024, Equatorial reported a robust adjusted EBITDA of BRL 2.9 billion, a 16% increase year-over-year, driven by a 12.6% growth in gross margin. The company continues to manage costs effectively, maintaining a net debt to EBITDA ratio at 3.2x. The acquisition of a 15% stake in SABESP led to an increase in net debt, but they prepaid BRL 2.5 billion, leaving BRL 3.5 billion due in 2026. Revenue from distributed energy grew by 6.7%, while adjusted net profit rose by 25.4% compared to last year. The capital increase of BRL 2.5 billion is aimed at enhancing growth opportunities.

Strong Financial Performance in Q3 2024

Equatorial achieved notable growth in its financial performance for Q3 2024. The adjusted net profit surged by 25.4% compared to Q3 2023, reflecting the company's effective management and optimized operational strategies. The adjusted EBITDA for the quarter reached BRL 2.9 billion, a 16% increase year-over-year. This growth was largely driven by the Distribution segment, where the gross margin grew by 12.6%, contributing BRL 494 million to the margin.

Market Position and Tariff Strategy

The company continues to capitalize on favorable market conditions, positioning itself well within the competitive landscape. Improvements in tariff structure—resulting from a recent review—have bolstered profitability, especially following a significant tariff adjustment in the Goias region. The overall market growth and enhancements in efficiency have allowed Equatorial to maintain regulatory loss metrics below the mandated limits for four consecutive quarters, underpinning its strong operational discipline.

Acquisition and Debt Management

Equatorial's recent acquisition of a 15% stake in SABESP significantly impacted its financial structure, resulting in an increase in net debt to about BRL 4.4 billion compared to Q2 2024. However, the net debt to EBITDA ratio remains compliant with covenants at 3.2x, reflecting the company's careful management in leveraging its assets. The company successfully issued BRL 5.6 billion in commercial notes to fund this acquisition and has already prepaid BRL 2.5 billion.

Cost Discipline and Growth Initiatives

Despite expanded operations and investments, Equatorial has upheld robust cost discipline with a mere 2.9% increase in adjusted costs and expenses. The company also reduced capital expenditures by 20% due to operational efficiency gains from its new solar parks. This reduction in investment is indicative of effective capital allocation strategies and the strategic focus on maximizing existing assets.

Future Outlook and Guidance

Looking ahead, Equatorial plans to maintain its commitment to disciplined capital management while actively pursuing growth opportunities. The company is set to accelerate investments in line with quality objectives that respond to market demand. Expectations suggest continued positive momentum with revenue anticipated to grow, supported by efficient cost control measures and strategic asset management.

Engagement with Regulatory Changes

Equatorial is attentive to the changing regulatory landscape, particularly regarding upcoming tariff reviews and compliance requirements. The company's proactive engagement with regulatory bodies ensures that it remains in a favorable position amid potential changes, which could positively influence future revenue streams.

Focus on Environmental and Technological Developments

The Renewables segment of Equatorial has witnessed significant progress, with adjusted EBITDA increasing by 11.7%, aided by the commencement of new solar and wind projects. However, operational constraints due to revisions in national energy management procedures are being addressed through strategic enhancements in the energy portfolio, setting a course for improved future performance.

Commitment to Stakeholder Value

Management reaffirmed a strong commitment to delivering value to stakeholders, emphasizing consistent operational results and financial performance. As Equatorial continues to navigate its growth trajectory, effective stakeholder engagement remains pivotal in fostering long-term relationships and business sustainability.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, everyone, and welcome to the conference call to discuss results for Equatorial relative to Q3 2024. Joining us here today, we have Mr. Augusto Miranda, CEO; Vice President, Leonardo Lucas; Regulation Officer, Mr. Cristiano Logrado; Strategy, Financial Strategy and IR Officer, Ms. Tatiana Queiroga Vasques; and Mr. Liu Aquino, President of Echoenergia, who at the end will be available to answer questions you may have.

We'd like to say that the simultaneous interpretation tool is available on the platform. Just click on the interpretation button, on the bottom part of this zoom screen and choose the language. This conference is being recorded and will be available on the company's IR website at www.ir.equitoriaenergia.com.br, just is the respective slide deck. [Operator Instructions].

Before moving on, I would like to reinforce that forward-looking statements have a spaces beliefs and assumptions are part of the company's management. And also on information currently available to the company. Such status might involve risks and uncertainties as they refer to future events and therefore, depend on circumstances that may or may not materialize.

Investors, analysts and journalists should have in mind that events related to the microenvironment space to the industry and other operating factors might lead to the results to be significantly different from those expressed in these forward-looking statements.

We will now start the presentation. I'll turn the conference over to Mr. Augusto Miranda. Please, Mr. Miranda, you may proceed.

[Augusto da Paz Júnior, executive]

Good afternoon, everyone. Thank you for joining us. This quarter was marked by the beginning of the implementation of the new governance model of Equatorial as SABESP reference shareholders with the beginning of the management of Executive Director in the company. On a Equatorial side, we made several progresses on the operating and financial fronts including optimizing the capital structure of the SABESP acquisition and improving the company's debt profile.

Starting with the general highlights on October 15, we approved the capital increase via private subscription in the amount of BRL 2.5 billion with a value of BRL 32.50 per share. The process was successfully completed with 100% of the subscription in the first round of oversubscription. With the funds from its operation, we made a partial repayment of the commercial notes for the acquisition of [indiscernible]. Another milestone in the quarter was to take advantage of the market momentum to issue, incentivized debentures in the A4 of the group's distributors. On the total amount of BRL 2.07 billion, we decided to take advantage of the moment of high real interest rate [indiscernible] and long debt to swap the operations to CDI. With the amount in swap costs between CDI and [ 73% ] and 0.97% a year below the marginal funding cost for CDI linked debt.

Now for the operating and financial highlights of the quarter. We would highlight the evolution of the distributed energy, which showed significant consolidated growth in yet another quarter, up 6.7% above Q3 '23, which was a quarter marked by high volumes as a result of rising incomes and high temperatures, even with a strong momentum of growth in distribution volumes still remain for the fourth consecutive quarter, below the regulatory loss limit, maintaining good collection levels and cost discipline and costs. We achieved an adjusted EBITDA of BRL 2.9 billion in the quarter, up 16% when compared to the same quarter of last year due to the performance of the Distribution segment. This view already excludes the noncash effects of IFRS, MTM and -- [ VNR]. With regard to Q3 '24 results, we'd like to point out that we did not consolidate the equivalents of the best in this quarter, which will be consolidated as of the next quarter. Nevertheless, we presented a positive result in the company's adjusted net profit up 25.4% when compared to Q3 2023.

I'll now turn the floor over to Leo on Slide #5, where we'll start with the consolidated of the group's economic and financial performance over to you, Leo.

[Leonardo da Silva Lucas Tavares de Lima, executive]

Thank you, Augusto, and good afternoon, everyone. I'm going to talk briefly about the group's consolidated performance here. We have the figures, which are adjusted for nonrecurring and noncash effects. Our consolidated gross margin grew by 12.6%, where we highlight the distribution segment which added BRL 494 million to the margin for the quarter as a result of market growth, a reduction in losses and tariff increases. Even with the market growth and the consolidated loss index remaining below the regulatory level, we remain disciplined in relation to the group's adjusted costs and expenses, which grew by 2.9% in the view X new assets. With these results, we achieved an adjusted EBITDA in the quarter of BRL 2.9 billion, 16% higher than in the same period of last year. We'd like to point out that in this quarter, we maintain our net debt EBITDA ratio under the covenants at 3.2x which will be explained on the next slide. We ended the quarter with BRL 10.8 billion in cash and cash equivalents and a ratio of cash to short-term debt of 2x. Finally, we'd like to highlight the reduction in investments by 20% due to the start-up of the solar parks.

Now on Slide#6, we take a look at the company's debt and leverage level after the acquisition of the 15% stake in SABESP. In Q3 '24, we had an increase of about BRL 4.4 billion when compared to Q2 '24 in the company's net debt line mainly impacted by the issuance of the commercial note of BRL 5.6 billion for the acquisition of the stake in SABESP, which we have already prepaid BRL 2.5 billion in 2024, resulting in a remaining balance of BRL 3.5 billion due in 2026 between interest and principal.

Due to the effects of the SABESP acquisition at 15% and the calculation methodology, we thought it important to open up the behavior of the covenants. As you can see on the right-hand side of the slide, if you were to exclude the impacts of the acquisition of that stake, better words, that's capital increase a 15% of SABESP's net profit in the last 12 months. The covenant would be around 3.2x, in line with indicator for Q3 2024.

With the acquisition of SABESP and without the nonrecurring event, of the constitution of the financial asset in SABESP's results, the indicator would reach 3.4x. Naturally, this positive nonrecur impact of BRL 800 million had a positive effect on the indicator and therefore, even after the acquisition, the net debt EBITDA ratio in a proforma term for covenants was in line with Q2 2024.

Let's move on to Slide #8, where we give an overview of the operating and financial performance of the segment. On the left-hand side, we present the consolidated performance of our distribution companies, where we highlight the significant volumes of energy injected and distributed even with a strong comparative basis.

Seen in Q3 2023 related to the heat waves in the period. In addition, we reduced losses in the quarter. And for the fourth consecutive quarter, we remained below the regulatory loss level in the consolidated amounts. Despite the strong injection, we managed to maintain the high level of collection and the PELCD over ROB at 99.6% and 1.36%, respectively.

In terms of quality, when we compare to the same period of last year, we were able to see advances in Goias and Piaui and the maintenance of 3 distributors at the regulatory level. On the right-hand side of the slide, we show the progress of the segment's gross margin, which grew by 15.3%. The highlight here is the addition of BRL 308 million [indiscernible] Goias. As a result, of market growth, increasing the wire-B tariff, reflecting in the tariff review, which happened last year.

The adjusted PMSO per consumer in the year-to-date numbers fell by 1.5%, while the adjusted PMSO in nominal terms for the quarter grew more than inflation. That reflects the cost discipline the company has adopted one of the most daring values for Equatorial. And even with the growth in market for several quarters in a row, we have maintained our cost discipline and taking advantage of opportunities to obtain gains in scale. These moves resulted in an increase in distributions adjusted EBITDA of 20.8%, as can be seen on the slide.

Now I turn to Slide #10. Here, we look at the other segments of the group. In transmission, adjusted regulatory EBITDA fell by 2.6%. But adjusting for the effect of the complementary AVC received in Q3 '23. Transmission EBITDA would have grown by 2.4%.

In the sanitation segment, we have a positive EBITDA of BRL 1.3 million, and we highlight the increase in the number of billed sewage savings, which grew 8.7% versus Q3 '23 as well as the increase in the water coverage index, which rose to 58.9% in Q3 '24 vis-a-vis 42% in Q3 '23, an improvement of 16.9 percentage points.

In the Renewables segment, adjusted EBITDA grew by 11.7% due to the start-up of the Barreiras 1 and Ribeiro Goncalves solar farms and the surplus generation from the wind farms relation to generation in the quarter. There was a constraint of impact of 318-megawatt average, 36.2% of total generation with the greatest impact on the Serra do Mel wind farm complex due to the restrictions imposed by the national system operators, which were revised in September '24 and which have brought less impact since then.

Still on the subject of the constraint off, it's important to note that the [ ONS ] changed its methodology for energy cuts on September 17. And also that new transmission lines went into operation on October 16 to help with the flow of energy. These initiatives have already reduced the level of curtailment to 16% in EchoEnergia's portfolio during October. Those effects have not being totally perceived. In addition, the delivery of RAP requirements by agents is expected to help reduce the impact of system outage. We have been working actively in collaboration with industry associations to minimize the impact of the constraint of the portfolio.

I'll now turn the floor back over to Augusto.

[Augusto da Paz Júnior, executive]

Thank you, Leo. Moving on. We had an excellent quarter both from the financial and operating point of view, but we are aware of the importance of our role in continuing to deliver consistent and growing results. Add more benefits to our stakeholders. We'll continue with our plan to accelerate investments to meet all the quality indicators and in response to strong market growth. We will maintain our commitment to operating costs discipline as well as we'll be active to continue to improve our revenue cycle of the companies we operate.

In the field of capital structure, we will continue to look for opportunities to improve our leverage, both through financial performance and also through inorganic actions to help this process. such as asset recycling. With regard to funding, we continue to seek to diversify instruments. The concentrate maturities, reduced costs and [indiscernible] terms, taking advantage of the best market windows to refinance that's arising from recent acquisitions as well as to financing CapEx and improving the profile of the company's other debts. And lastly, we remain assessing potential opportunities to allocate capital and general value.

Now I'd like to turn the floor back to the operator to start the Q&A session.

[Operator]

[Operator Instructions]. Our first question comes from Bruno Amorim from Goldman Sachs.

[Bruno Amorim, analyst]

Congratulations on the results, I have a question about the execution of the CapEx. For the distribution business, you have a very robust plan around CapEx for the coming years. And we've seen a slightly tight supply chain in the segment of equipment for transmission and distribution. There is a global demand, which is quite strong right now. So the question is, what do you see going forward in terms of availability for equipment of what you'll need in the coming years, price trends. That's the question. Thank you.

[Leonardo da Silva Lucas Tavares de Lima, executive]

Thank you for your question. It's only natural that as you've seen, the market has been growing, and you have to meet that demand with quality and we've been planning. And within our planning, we have been talking with suppliers, we have suppliers which are well established and have been serving us for some time now. And what I can tell you is that we've been for some time, as I said, in negotiations with suppliers so that you will become as preferred clients to meet their CapEx demand we intend to execute.

[Operator]

Our next question comes from Daniel Travitzky from Safra. Mr. Travitzky, you may carry on.

[Daniel Travitzky, analyst]

I'd like to ask you to please share a bit of your view about curtailment going forward after the measures adopted by the [indiscernible]. How much of that of those new measures will address the issue, the problem. And what's your estimate in the long run for that level of curtailment in the EchoEnergia parks?

[Augusto da Paz Júnior, executive]

Thank you, Daniel, for your question. I'll turn it over to Leo, EchoEnergia's President. Leo, over to you.

[Leonardo da Silva Lucas Tavares de Lima, executive]

Good afternoon. Daniel several measures being implemented, and we see results materializing already in October. Going forward, the expectation is that with new additional lines coming on board, especially increasing exports in the Northeast, we'll see an impact in reduction. We cannot still quantify that reduction and the impact on our portfolio. Another measure that will impact the system. And that's the most important perception we have is that the mathematical modeling, which were requested by the ONS. They are being discussed right now. And as soon as that discussion is completed, we expect to see a more significant reduction for next year. That's what we can tell you right now.

[Operator]

Our next question comes from Marcelo Sá from Itau BBA. Mr. Sá, you may carry on.

[Marcelo Sá, analyst]

Hello, everyone. I have two questions. Number one, about the concession renewal process. I know, put out a new public consultation. The specific class saying that concession areas would have to waive legal litigations to be able to participate in the process. How do you see that? And is there any other relevant modification you expect to see in the new contract, which is now under public consultation? That's my first question.

And the second one about future growth in sanitation. You have a very big pipeline for next year. You may even have Para in the first half of the year and you bought strategic stake at SABESP as well. I'd like to understand how you see those opportunities in terms of potential joint ventures or if you're only looking at the assets at the states where you have distribution concessions. Are you also panel looking at assets in other states? Thank you.

[Augusto da Paz Júnior, executive]

Thank you, Marcelo. We have been following up on that very closely. If you look at the interactions before the decree was passed, we interacted via a broad international association because it's quite relevant for the whole distribution segment. And I thought the results came out very much in line with what I expected slightly above actually. And about the regulation, I'd like to turn it over to Cristiano, our Regulation Officer. He may have other points to add. Cristiano. Please, over to you.

[Cristiano de Lima Logrado, executive]

Good afternoon, everyone. As for the extension of concessions, I'd say that the new contract is in line with our expectations overall. Some points are still pending. Still need some more definitions, but meeting our expectations. Overall, in terms of that question about the litigation, or judicial conflicts, we're going to question that, of course, that was not anticipated, not contemplated. We are going to be questioning ANEEL about that. We need to better understand and work on it in the next few months after the public constitution period.

As for the other contract clauses, there are couple of questions we need to work along with the national operator, improve some of the deadlines, some of the terms that still need to be reviewed. But overall, I'd say that the legal litigation should not change significantly.

[Augusto da Paz Júnior, executive]

As for the second question, Marcelo. About the sanitation front and potential opportunities. I'll turn it over to Leo, our M&A officer.

[Leonardo da Silva Lucas Tavares de Lima, executive]

Thank you, Marcelo. It's a priority sector for us, sanitation. We have had two major waves on that front. Now the second one with SABESP as you know, it is a sector where we intend to continue to assess new potential opportunities. And of course, we will meet all the requisites contemplated in the investment agreement for the SABESP deal. We haven't had a more detailed negotiation as it is, but we remain attentive and at the right moment, those conversations will take place. But the main objective is that we are able to expand in the sector as per the previous agreement.

[Operator]

Our next question comes from Vladimir Pinto from [indiscernible].

[Unknown Analyst]

We saw during the week, ANEEL discussing the need to investing in some distribution companies due to noncompliance to some financial indicators. In the case of Equatorial, there is no distributing company that fell into that category, but we know that there are some companies now going to a turnaround process And if not, by the waivers, they could be undergoing some of those processes. How do you see those things unfolding in the mid-run when the waivers are over? Would they need some kind of investments or raise some funds? And if that's the case, what would you be ready to do if that's the case?

[Augusto da Paz Júnior, executive]

Thank you, Vladimir. Over to Leo here now.

[Leonardo da Silva Lucas Tavares de Lima, executive]

Hi, Vladimir. As you said, none of our companies as you said were affected by that requirement to increase capital. And that, of course, goes to illustrate our well-balanced financial situation, albeit the waivers, the turnaround, but we are keeping a close eye on those processes. We are quite reassured on that front. And there were no questioning not coming our way. And we do not expect to see anything happening on that front going forward in the next few months.

[Operator]

Our next question comes from Guilherme Lima from Santander. Mr. Lima, you may proceed.

[Guilherme Lima, analyst]

My question is a brief one. Do you have any update to give us about the [indiscernible], in terms of regulatory costs or an expectation of seeing that coming back this year or only next year?

[Augusto da Paz Júnior, executive]

Hi. Cristiano, over to you, please.

[Cristiano de Lima Logrado, executive]

Good afternoon, Guilherme. No major news on that front. It is still under ANEEL's umbrella. That should have been completed, but maybe it's no longer a priority, but still it should be over before the tariff reviews of 2025. But no major changes as is I could share with you right now.

[Operator]

Our next question from [indiscernible].

[Unknown Analyst]

Good afternoon. Congratulations on the results. I'd like the management to comment on the level of leverage vis-a-vis new investments. What does the company see as opportunities going forward?

[Augusto da Paz Júnior, executive]

Good afternoon. We've been doing some major moves to expand the last acquisition, as you know, was this stake as a reference shareholder, SABESP, private capital and same level leverage rates. We've talked about it during the presentation. Before that, we did the Goias transaction. So we have more assets going through a turnaround process now, which brings us a very robust result as the quarter has expressed growing margins, growing EBITDA, growing profits. All of the result of those turnaround moves we've been pursuing. So our leverage level has been the object of a lot of dedicated work. And we've been seeing an organic, if you will, deleveraging. But given our nature of being always attentive to new opportunities, we have also resorted to some recycling of some assets to speed up that delevering trends and expanding the existing space to capture new interesting opportunities that might arise.

[Operator]

Our next question comes in writing from [ Arlindo Suza ] from Levante Corp.

The question is the following. Good afternoon, can you give us an update on the tariff situation of the CEA vis-a-vis the result of the tariff review, which took place last year?

[Augusto da Paz Júnior, executive]

Cristiano, over to you, please.

[Cristiano de Lima Logrado, executive]

So as for the CEA tariff review, that review was concluded in March or April. When ANEEL conducted the process and maintained the tariff at 0%. In the meantime, we received resources from the Amazon fund. And more recently, we settled some of the previous accounts. So we expect a new adjustment for 2024 to be normal vis-a-vis those effects. And on December, that we expect to see the approval as ANEEL has its last Board meeting.

[Operator]

Our next question comes from writing from Gabriel Francisco From [ Truist ] Capital. With the result expanding across distributors. Does it make sense to accelerate the amortization of preferred shares of Equatorial [indiscernible] to flow more cash to the holding.

[Augusto da Paz Júnior, executive]

Thank you, Gabriel. We are always paying close attention to the opportunities to manage liabilities. I think in the highlights presented in this call, Augusto did mention, when he mentioned our debentures issuance for infrastructure. That's something like I said, we're always paying close attention to whenever it makes sense. Whenever we see value generation opportunities, we'll try to pursue those opportunities. Thank you for your question.

[Operator]

[Operator Instructions]. The Q&A session is now over. I'd like to turn the floor back over to the management of the company for their final remarks.

[Augusto da Paz Júnior, executive]

Well, thank you all for joining us today at our earnings call. And to wrap this up, I'd like to reinforce once again our commitment to our continued value generation that we're always pursuing for our investors with consistent results delivery across all segments, always with an eye on a disciplined financial performance. Thank you once again for participating, and have a nice day, everyone. Thank you.

[Operator]

The conference is now over. Thank you all for joining. And have a nice day, everyone.

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