Neoenergia SA

BOVESPA:NEOE3

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, and welcome to the Earnings Call for the Earnings for the Second Quarter 2023 of Neoenergia. This presentation will be conducted by Mr. Eduardo Capelastegui, the company's CEO; and Leonardo Gadelha, CFO of the company. This conference call is being broadcast simultaneously over the Internet via webcast. It can be accessed at ri.neoenergia.com, where the presentation slides are also available. [Operator Instructions] The conference call is being delivered in Portuguese and simultaneously translated into English. [Operator Instructions] In addition, this event is being recorded. It will be available later on Neoenergia's Investor Relations website.

I'd like to mention that forward-looking statements that may be made during this call regarding Neoenergia's business prospects as well as projections, operating and financial targets are based on the management's expectations and assumptions about the future of the company as well as information that is currently available to Neoenergia. Future considerations are not an assurance of performance, and they involve risks, uncertainties and premises as they refer to future events, and therefore, they depend on circumstances that may or may not occur. Investors should understand that general conditions, sector conditions and other operating factors may affect future results and earnings of the company and may lead to earnings that by materially differ from those expressed in these future considerations.

I'd now like to give the floor to Mr. Eduardo Capelastegui. Over to you, Mr. Capelastegui.

[Eduardo Capelastegui Saiz, executive]

Thank you, operator. Good morning. I'd like to thank everyone for being joined here today in this conference call to present the earnings of our second quarter and the first semester of 2023. I am Eduardo Capelastegui and I'm really proud of what we will share with you today. We had another quarter with great results.

I have Solange Ribeiro, Vice President, Leonardo Gadelha, CFO; Giancarlo Vassao, who is Executive Director for Operations; Juliano Pansanato, Executive Director of Property Control and Planning; Fulvio Machado, Executive Director of Networks; and Renato Rocha, IR Director. I'll give you a brief presentation with the major highlights of the quarter. Leonardo will give you further details, and then we will move on to the Q&A session. And as usual, at the end, I'll give you my final remarks.

So starting the presentation on Slide 4, we have the highlights of the second quarter. The EBITDA cash reached in the second quarter, BRL 2.4 billion. This was a growth of 5% when compared to the quarter 2 2022. This growth is a consequence of good tariff reviews that we have with Coelba and Cosern in April as well as good operating management of our assets and OpEx control. The result of Termopernambuco is positive, but it has a negative contribution in this quarterly growth of 5%. As last year, this plant had a record EBITDA in the dispatch regimen.

As for OpEx in the quarter, the OpEx was BRL 1 billion, up 4.6% year-over-year. This confirms again that there is steady cost control in Neoenergia. We had a CapEx of about BRL 2.2 billion in quarter 2 2023, and this was a result of our ability to execute. And this includes organic growth of our 5 distributors and also in the progress of our transmission projects. In terms of growth, we announced the completion of our Oitis wind complex in the state of Bahia and Piaui in Brazil. Oitis is our largest wind complex with 5, 6, 6.5 megawatts of installed power distributed in 103 turbines of 5.5 megawatts each.

Finally, I should also highlight that our participation in the last transmission auction that was held by ANEEL on June 30. This was the first auction we participated in partnership with our partner, GIC. And although we haven't acquired any lot, we were convinced that we -- our bids were perfectly adjusted our perception of risk and return on investment. We studied the lots carefully during 4 months to know exactly how far we could go in each of them, and we believe that the market acknowledged our attitude and discipline in allocating capital by Neoenergia.

Now on Slide 5, we now can see the status of our growth projects in renewables. As we just said, we completed the construction of 103 turbines in our complex, complex Oitis, and we have over 70% of traded energy up to 2027, with average prices above BRL 195 per megawatt hour that makes us really comfortable in this tight price horizon with good return on investment.

In terms of transmission, we have now put in place RAP in the amount with millions in 2023. And although we had continued delivering our lots until September 2018. We completed and released 65% (sic) [ 45% ] of RAP of Lagoa dos Patos lot until September and the delivery of Guanabara and Itabapoana are expected to be done between the end of this year and the first quarter 2024. The Morro do Chapeu lot in the December 2020 auction is already 30% completed, and it is expected to be delivered in the at least the first parts at the end of the year.

The [indiscernible] lot that was acquired in December 2021. We have now environmental licensing that was granted and that reduces the risk of execution, and it is expected to go live in the first half of 2024. As for the lots that were achieved in June 2022. We have over 92% of the CapEx that was hired, including hedge both currency and commodities, and that reduces its risk significantly. And also the price -- process of licensing is advancing as predicted as expected.

On Slide 6. Now I would like to talk about the status of our asset rotation plan, which is be really successful doing as expected. As we know, December last year, we signed with Eletrobras a asset swap, so we no longer have the matched participation. So we have 100% of the Dardanelos power plant and the Eletrobras had the Teles Pires and Baguari plants. This was a win-win operation without cash that simplifies our corporate structure and will give us greater value assets for Neoenergia. This swap is expected to be closed at the end of this quarter 3 after all the conditions are overcome.

In April this year, we announced the signing of a partnership with GIC for our transmission business. That started with a sale of 50% of 8 operating transmission assets and there was a right of first offer for the acquisition of the lots that are currently under construction. In addition, there was joint participation in new auctions at the last ANEEL auction.

We should remember that 50% of these 8 assets, the income or sale, represent an equity value of BRL 1.2 billion with an implicit multiple that was highly competitive, 12.9x the EV/EBITDA and a premium of over BRL 500 million of the capital that was invested by Neoenergia. So the closing as well as this cash of BRL 1.2 billion is expected to take place this September. So the impact of both the deconsolidation of debt and also this cash inflow will lead to a reduction of our leverage level -- consolidated level of 0.2x our net debt EBITDA ratio.

Our thermal power plant, we have made progress in the process of selling it in the last few months. However, the scenario is more challenging in terms of market and macroeconomic conditions that has, of course, had an impact on our perception of the value of the asset. The operations of asset rotation must generate value for Neoenergia. Termopernambuco is a low-risk asset and also a great cash generator. So we will keep evaluating alternatives as the market scenario improves.

Our last front, which is our participation in 10% are in Belo Monte. We are convinced that we'll keep in our plan of selling it. But in this operation, of course, does not depend on us alone.

I'll now give you the floor -- give the floor to Leonardo Gadelha, who will provide further details about our earnings in the second quarter 2023. Leonardo, over to you.

[Leonardo Gadelha, executive]

Thank you, Eduardo. Good morning, everyone. So I'll start with Slide 8. As you can see, we had good performance in the 3 segments. I'll start analyzing the earnings of the slide. We have the consolidated result and the gross margin in the quarter was negative 8%. And this was explained by the negative variation of VNR because we had less inflation. So if we exclude both the effect of VNR in IFRS 15, so the margin -- the cash margin gross -- sorry, 6%, especially because of the effect of Part B of revisions and also tariff reviews, a larger client base and better results in renewables and that offset a lower margin from Termopernambuco, as Eduardo mentioned. This quarter, we still have good cost discipline with a growth of 5% in operating expenses year-over-year or 4.6% and so the new transmission lots and renewable projects were normalized in this, of course, in line with the inflation of this period.

On the next slide, Slide 9, we see that our cash EBITDA reached BRL 2.3 billion, up 5%, of course, with the impact of a greater gross margin and greater expense control. This quarter, growth was 6% in terms of EBITDA and this was BRL 4.9 billion. Net profit, BRL 728 million, was down 32% as a result of greater financial expenses with an increase in debt of BRL 1.4 billion and also increasing interest rates year-over-year and also the impact of VNR noncash effect that affects our profit as we have a lower IPCA rate.

Now CapEx on Slide 10. This quarter, we had a total of BRL 2.2 billion, aligned with quarter 1. We really having executing this CapEx at a goal a good pace, highlights BRL 1.1 billion in distribution, BRL 883 million in our transmission lines as they advanced and BRL 138 million in renewables, which refers to the completion of both Oitis and Luzia projects.

On Slide 12, we are now discussing networks and also injected energy and operating performance of our network segment. So we see variation of energy in the 4 distributors as already announced with a consolidated growth of 2.7% including distributed generation. So this quarter, we are now added both views with and without DG as these amounts are really significant.

On Slide 13, we show distributed energy. That's the evolution of our 5 distributors as -- well, as anticipated, our market release document. In quarter 2, these distributors had a consolidated growth of 0.7%. The total number of consumers reached 16.2 million that 316,000 clients in 12 months and over 1.5 million in 5 years. This number is the number of concerned consumers. It's equivalent to the number of consumers of concerned to give you an idea.

On Slide 14, total losses, again, a good performance quarter with a really well controlled rates of loss in addition to the downward trend after the revision of Coelba in April. Now we have 4 of our 5 distributors are really in the regulatory limit.

Now default, that's on Slide 15. We can see that this quarter, we had a good level of collection from our distributors. And the PECLD was slightly above the threshold that we had in the previous quarters. And this is a consequence of one-off effects of default of large clients as well as greater ICMS rate or tax pressure on the composition of the tariff. But this quarter, we see that the monthly evolution of PECLD, as we can see on the chart, we see that it starts decreasing and going to the previous level, which is, of course, a result of our collection actions. So in April, we reached a peak in May and June, we were close to our regular level.

As for DEC and FEC on Slide 16, there's no great highlight. We see both good quality, both in DEC and FEC, with a good performance, decreasing trend. In Brasilia, we had a slight increase in our FEC, but we are still below the limit of our concession agreement, although we were expecting, of course, coverage. But in the concession agreement, we follow this indicator. We are still under the limit, below the limit.

As for Slide 17, network earnings. So in this quarter, we had an evolution of 10% of the cash margin -- gross cash margin, again, a result of use and tariff readjustment in 2023 in a greater client base. The network OpEx grew 4% this quarter in line with the inflation in this period and also taking in the growth of clients. EBITDA -- cash EBITDA for networks grew 10% in quarter 3 and reached BRL 2 billion, as we can see on the slide, and this was a consequence of a greater margin and also greater control of expenses. Now the network profit level reached BRL 733 million in quarter 3, and there was, again, a negative impact of a greater volume and a higher cost of debt in VNR that was lower, a significant variation in the previous quarter -- sorry, year-over-year and the impact of less inflation.

On Slide 20, we have a summary of the earnings, both renewables and also liberalized. So in quarter 2, the renewable EBITDA was BRL 298 million, in other words, up 14% as compared to year-over-year as a result of the EBITDA of all fronts, hydro, wind and solar power, especially wind, which grew 12%. So there's greater wind production and also the inclusion of both the Oitis and Luzia project. As for the liberalized segment, it reached BRL 149 million, so down year-over-year. And this variation can be explained because there was less cost last year because there was a one-off event nonprovision of gas that quarter. As a result, we had a record result last year. But this is really aligned with what was presented in the first quarter of this year, with great results for Termopernambuco this quarter. So we're expecting to follow this level throughout the year. Now then commercialization. And see the EBITDA was BRL 5 million compared to BRL 6 million in quarter 2 2022.

I'll now move on to capital structure on Slide 22. So we see the evolution both of our new cash and our net debt. So the net cash was BRL 38.2 billion. which is a consequence of our CapEx execution rate, our net debt EBITDA ratio increased 3.33x. That was a consequence in addition to a variation of the net debt also by a lower VNR with an impact on this indicator. As we had very low inflation this quarter, this indicator was affected. Our debt structure is still rather comfortable. It's really well distributed for the next few years.

As we can see in the bottom part of the slide, we have an average time line that is greater than 5 years, and our debt is significantly diversified as we see on the right-hand side in terms of sources, indexes at a very competitive cost. This quarter, we have already disbursed over -- we have about BRL 3.5 billion in contracts that have already been signed. And then we have both the capital markets at the beginning of the year with greater volatility.

So we have a really great return of liquidity in the capital market, local capital markets and also we have funding from many sources, IFC, JICA and ICO more recently, which is a development -- a Spanish development bank. And all the terms were very competitive. And this volume of about 10 billion almost, it really addressed, this meets our needs -- funding needs for 2023. Not to mention, as Eduardo said at the beginning, we're expecting to -- for all the -- we're getting more cash from the sale of transmission from GIC, which is BRL 1.2 billion, expecting for the end of December.

Now I'll turn it over to the operator, who will now open the Q&A session.

[Operator]

[Operator Instructions] First question comes from Rafael Nagano Crédit Suisse.

[Rafael Nagano, analyst]

So I have one question about capital allocation. I need to understand what you're thinking about growth when you look at your scenario of project development -- power generation and other segments, your participation in auctions and also distribution. And question 2 about the public consultation of renewal of distributors. When you look at the proposals of the technical note. So what are you considering in terms of this?

[Leonardo Gadelha, executive]

Thank you so much for your questions. Let's start with our growth strategy. As we said many other times we want to grow organically. In distribution, we have investment of almost BRL 6 billion a year. In organic growth of our concessions, it's almost a new distributor every year. In transmission line, although we haven't achieved any lost this June, we will keep participating. In December, there will be a new auction, we will not participate in direct current. And in 2024, we will also participate. The important thing is to be clear that this, which you have seen in June -- in the June auction, we will follow the same criteria.

We evaluated all the possibilities of over lots and we might as far as we considered reasonable. So we will keep following the same criteria as for market conditions as long as they are the way they are, right, as they -- if things change, our cost, our activity will change too as a result of that. And we have 5 pipelines in renewables, wind and photovoltaic tech. And we also have grants and we're ready to sign transmission contracts and the problem that we have, you know what the problem is, a prediction of future prices that is significantly low and that makes it difficult to make all these projects happen. But we are working hard to achieve this. And we have also a very interesting line of energy transmission.

We have 2 large projects that will have a high renewable energy demand. So this might be away. We are evaluating them, still evaluating. We have projects, but we don't have all the return. And before we have that, we will not be investing BRL 2 billion, BRL 3 million. It doesn't make much sense. So this is our growth strategy for the next 12, 24 months.

As for the public hearing or consultation for concession renewal, we've been following up on that since the beginning of the year, we have following all the groups with a really good communication channel with the ministry to what we saw in the public consultation and all the contributions for 2024. So in principle, we have 2 major points. We agree with the point -- one of them was surplus.

We believe that this means -- I mean, there are things that don't work. And we need regulation with incentives, which is really successful in Brazil. So we really -- even the government continued surplus in -- this is some of the transfer to clients every year. So surplus is something that we need to consider. We made our contributions, our opinions, including the methodology that the ministry proposed. In our opinion, it didn't have a strong technical foundation, technical grounds. So we made our contributions to for that evaluation.

In terms of tax incentives, you know how that works, too. But we don't agree with that. And in our opinion, it's even illegal to do this whenever ANEEL try to pass on tariffs -- for me, this makes no sense. We always get that from the government, they want to encourage investment in the Northeast, but there's this situation in the public consultation. It doesn't mean much sense. We believe investment can be made in other areas or other levels. And then we also consider that this point doesn't make much sense. This is why we made our opinions really here. There are other topics that are a little less important. But we'd like to focus on these points. I've mentioned the surplus and also to preserve incentive legal incentive the idea -- this is, of course, to encourage investment, right, not to benefit distributors. So this is a summary of this public consultation.

[Operator]

Our next question comes from [ Mario Mello ], Banco Safra.

[Unknown Analyst]

Can you please explain, give us your views on default this quarter and whether these default effects of large consumers, in your opinion is this -- will this continue this year? Do you believe -- how do you see the situation from now on?

[Leonardo Gadelha, executive]

As mentioned before, we have noticed that in the last few months, May, June, there was improved default -- an improved default situation. At the beginning of the year, there was low growth and high financial costs, we felt the impact of this. But then we realized that the profile, this profile meant or this improvement had to do with greater trust. And again, the interest rates that started in August and the result of collection also affected it. So we have important conditions like the Desert program that's Phase 2 that had a great impact on us.

And this government program -- we have over 350,000 clients that are eligible to this program. So we're expecting almost 100,000 collection from the enroll project. So for quarters 3 and 4, we're expecting to come more stable, right? These numbers, the first 2 quarters that were more volatile or expected to stabilize. And this almost BRL 25 million a month, 250 per quarter, 140, 150 when you have a normal pace. So this is what we believe is the right way, and that's the trend expecting economic growth and lower interest rates. So we expect that this will contribute to a level closer to our historic levels.

[Operator]

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

[Andre Sampaio, analyst]

I have 2 questions. Number one, it's about transmission. I noticed that there's a value ratio for the right participation in the project. And the second question. Can you talk about cash management strategies? You said you want to keep your production strategies, a more conservative view on investment in general. So when you think about the midterm, what makes more sense to you? I know that what you can imagine to take place in the midterm? What are the most relevant expectations considering the trends?

[Leonardo Gadelha, executive]

Thank you, Andre, for your question or questions. First, as we have already announced well, you have this right selling. There's an interest with this partnership. As for valuation, there's no definite formula for valuation. What is clear though is that the methodology and the criteria that were used to value the first 8 lots will be replicated for the following lots. And we may change the discount rate, of course, but that over time throughout quarters. Of course, the cost of capital changes. We are still selling lots that are in operation. So there's no more the risk of construction. So there's a fixed cost for almost 30 years. And the level of risk and discount, of course, they have to be compatible, consistent with this flow.

So in answer to your question, there's no definite formula because, of course, things Indian expected may happen. But you need a criteria for evaluating these cash flows that are replicated that can be replicated. And what we're expecting, Andre is to get the first nonbinding offers before the end of the year for the plots that are in operation. Through the next 4, 5, 6 months, we're expecting to be in the situation with new lots that are under construction that will be go live, right, that we'll be operating.

Now for your second question, we're expecting to -- in the next 2, 3 years, we are expecting to have a high volume of investment. When you look at the investment in distribution, 6 million; and then transmission, 23 million, 24 million, 25 million. So our predictions, our forecast shows that we will have about 9 million or 10 million in investment in the next 3 years. And then, of course, recurring in distribution and then what we had interest mission, all added together. I don't see an increase in our pay-out policy. We have 38 million in net debt. It's under control 3, about 3. So the idea is to keep operating on this level and to achieve this, we need to consider debt and investment in the current sales policy.

[Operator]

We have now closed the Q&A session. I now like to give the floor to Mr. Eduardo Capelastegui for his final remarks. Mr. Capelastegui, you can continue.

[Eduardo Capelastegui Saiz, executive]

All right. Okay. Thank you again, operator. I'd like to give you a final message to stress our commitment to all Neoenergia stakeholders. As you know, in the last 5 years, Neoenergia’s decisions have been prioritized following efficiency criteria as well as value creation and capture earnings. Our EBITDA cash, for instance, has grown since the IPO, over 87%, well above all expectations at the time although, of course, we have faced many crises, including the pandemic and also the increasing price of commodities, high inflation rates, high interest rates. In spite of that, what we have delivered in these 5 years is well above what was expected at the IPO.

And this result is, of course, the result of excellent operations, but also we are really paying close attention to our financial health, ensuring the right capital structures, we have access to a wide range of funding sources, both national and international that can really come is down when we think about having liquidity. The progress of our projects in the deliveries also support these results in spite of all the challenges in a large project as the Oitis complex and also major deliveries that we're expecting in 2023, we are making progress in 2023. Also on the front of transmission lots.

Our asset rotation plan has also yielded positive results. We've been delivering the announced plan, generating value to our shareholders. It also contributing to our deleveraging. As for capital allocation, as I mentioned, I'd like to again insist on that. The recent transmission option showed that it was complete compliance or matching of our perception of risk and profitability in the current market conditions.

So I'd like to stress that we will pay close attention to market conditions that we will keep allocating funds for the growth projects for the shareholders that trust Neoenergia we have the right team that is highly engaged and committed to delivering the right earnings and results. And finally, I'd like to finish by thanking all Neoenergia employees who quarter after quarter have played their role competently overcoming challenges in delivering results and earnings and creating value. Thank you. Thank you very much. Have a great day.

[Operator]

Neoenergia’s conference call is now closed. Thank you, everyone, for joining. Have a great day, and thank you very much for calling Chorus Call.

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