Neoenergia SA

BOVESPA:NEOE3

Earnings Call Analysis

Neoenergia Reports Strong Q3 with Effective Capital Management and Growth Initiatives.

In Q3 2024, Neoenergia demonstrated a robust performance, achieving a 6.2% growth in distributed energy and a cash EBITDA of nearly BRL 2.5 billion. Operating expenses rose only 3%, below inflation, showcasing operational efficiency. The anticipated Termopernambuco capacity contract was brought forward to October 2024, adding significant value. With a CapEx of BRL 2.6 billion this quarter, Neoenergia remains on track to meet its annual target of BRL 9 billion. Despite a net income decline of 7% to BRL 841 million due to reduced EBITDA, overall growth strategies and capital discipline position Neoenergia well for future stability and expansion.

Strong Performance in a Challenging Market

In the third quarter of 2024, Neoenergia showcased robust operational results, achieving a 6.2% growth in distributed energy within its concession areas, driven primarily by better market outcomes and reductions in losses across its five distributors. This performance illustrates the company’s resilience, especially as it managed to control operational expenses, which grew only 3%—lower than the inflation rate—while improving service quality across the board.

Solid Financial Results with Strategic Investments

The consolidated cash EBITDA for Neoenergia reached nearly BRL 2.5 billion, representing a slight decrease of 5% year-over-year. This was largely attributed to a decline in the gross cash margin, which was negatively impacted by the conclusion of the Termopernambuco contract. Net income for the quarter amounted to BRL 841 million, reflecting a 7% drop compared to the previous year due to the same factors. Despite these challenges, the company’s financial discipline is evident in its controlled growth in operating expenses and continued investments.

Capital Expenditure in Line with Expectations

During the quarter, Neoenergia executed substantial capital expenditures, totaling BRL 2.6 billion, bringing the nine-month total to BRL 6.7 billion. This is in line with their annual plan of approximately BRL 9 billion. The investments were primarily allocated to network expansions and enhancements, indicating the company’s commitment to strengthening its infrastructure to support future growth.

Progress in Transmission Projects

Neoenergia continues to make headway in its transmission projects, with significant developments announced during the call. The company reported substantial financial returns associated with the release of its regulated annual revenue (RAP), projected to reach BRL 1.1 billion by the end of the year, following an additional BRL 100 million in the fourth quarter. This is a critical step as it nears the conclusion of its transmission investment cycle by 2025.

Positive Impact from the Anticipation of the Termopernambuco Contract

A noteworthy highlight from the earnings call was Neoenergia’s successful anticipation of the Termopernambuco capacity reserve contract, which is now set to begin in October 2024, instead of June 2026 as originally planned. This strategic maneuver allows the company to convert what would have been a negative EBITDA situation into a potential value-generating asset, demonstrating their proactive management approach. Depending on dispatch levels, this change could add between BRL 200 million to BRL 500 million in EBITDA over a 22-month period.

Capital Structure and Financial Stability

As of the end of the third quarter, Neoenergia’s net debt stood at BRL 42.1 billion, reflecting an increase of roughly BRL 1 billion since the previous quarter, primarily due to accelerated capital expenditures. The company's net debt-to-EBITDA ratio remains stable at 3x, in line with expectations. Furthermore, Neoenergia has diversified its debt sources, ensuring a healthy financial foundation for future growth.

Outlook and Future Guidance

Looking ahead, Neoenergia expressed confidence in its operational strategies and continued focus on sustainable growth. The forecast remains optimistic with guidance suggesting ongoing expansion efforts in both distribution and transmission segments. The anticipated revenue from transmission projects is set to enhance the overall financial stability of the company, positioning it well for the challenges and opportunities in the energy sector ahead.

Commitment to Shareholders

Eduardo Capelastegui, CEO of Neoenergia, reaffirmed the company’s commitment to all its stakeholders, emphasizing the disciplined approach to capital allocation and enhancing shareholder value. The cash EBITDA has grown significantly since the company's IPO, marking a 97% increase, showcasing effective growth strategies that resonate positively with investors.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning to all. Welcome to Neoenergia's Third Quarter 2024 Earnings Release Call.

I would like to highlight the simultaneous interpretation feature available on the platform. By simply clicking on the interpretation icon or the globe icon at the bottom of your screen, you may choose your preferred language, Portuguese or English.

For those listening to the conference in English, there is an option to mute the original audio in Portuguese by clicking on mute original audio.

This call is being recorded and will be available on the company's IR website, ri.neoenergia.com, where the complete earnings release material is available.

You may also download the presentation using the link sent via chat, including in English. [Operator Instructions].

The information contained in this presentation and statements that may be made during the call relating to Neoenergia's business prospects, projections and operating and financial goals are beliefs and assumptions of the company's management as well as information currently available. Future considerations are no guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events, and therefore, depend on circumstances that may or may not occur.

Investors should understand the general economic conditions, market conditions and other operating factors may affect Neoenergia's future performance and lead to results that differ materially from those expressed in such forward-looking statements.

The presentation will be made by Mr. Eduardo Capelastegui, CEO of the company; and Leonardo Gadelha, CFO of the company.

I will now give the floor to Mr. Eduardo Capelastegui.

[Eduardo Capelastegui Saiz, executive]

Thank you very much, operator. Good morning. I would like to thank you all for joining our earnings release call today for the third quarter and 9 cumulative months presentation of 2024. I'm Eduardo Capelastegui, and I'm very proud of what we'll be sharing with you.

We have built one more quarter with robust results. I'm here today with Solange Ribeiro, Regulatory Institutional Sustainability VP; Leonardo Gadelha, CFO; Giancarlo Vassao, COO; Juliano Pensanato, Executive Director of Asset Control & Planning; Fulvio Machado, Executive Director of Networks; and Renato Rocha, our CIRO.

As usual, I will make a brief presentation going through the main highlights of the period and will then turn it over to Leonardo who will present the results in more detail. In the end, we'll have the Q&A answer and my closing remarks.

To begin on Slide #3, we have the highlights of the third quarter results. In distributed energy, we had a very good performance in our concession areas with a 6.2% growth mainly due to higher market results and improved losses in our 5 distributors.

Regarding OpEx, Neoenergia once again confirmed the efficiency of its own operating model with a 3% growth in expenses below the inflation, and at the same time, improving quality indicators in all of our distributors.

The group's cash EBITDA reached almost BRL 2.5 billion. And in our distributors, it reached the amount of BRL 2.1 billion with a 4% growth. This growth in distribution is explained mainly by the increase in the market and the efficient operating performance, which more than offset the impact of the negative adjustments of portion B -- Parcel B we had in Neoenergia Coelba, Cosern and Pernambuco resulting from the negative IGPM in last April's adjustment still in distribution in the third quarter.

We concluded the registration of the bid for the conversion of Neoenergia Cosern takeover, owning now 100% of the distributor's share. The transaction was valuated at 1.3x the RAB, which in addition to streamlining our corporate structure, ownership structure underscores our mindful capital allocation strategy.

Another great achievement in this quarter was the anticipation of the Termopernambuco capacity reserve contract. As you are aware, the plant got the contract in December 2021 reserve auction, which would only enter into effect in June '26. However, we were able to bring it forward under the same conditions to October 1 2024.

On the growth front, it is worth highlighting our execution capacity reflected in realized CapEx of BRL 2.6 billion in the quarter, which leads us to a significant net base of distribution assets of BRL 38.4 billion.

Additionally, we are making progress with the deliveries of transmission projects in this quarter. We had the release of almost BRL 80 million with new RAP related to the delivery of the Estreito lot and a section of the Vale do Itajaí lot.

All of these points confirm the robust results delivered by Neoenergia this quarter.

Now turning to Slide 4, we can see the evolution of our transmission projects. In transmission, beginning with the 2018 -- December 2018 lots, we already have 93% of physical progress in Guanabara, which will have the total release of its RAP of BRL 160 million in the first quarter of 2025. We already have concluded 1 section with the -- and have obtained the operating permit and the other section is under implementation.

In Vale do Itajaí from the 2018 auction as well with 80% of physical progress, construction progress, we have BRL 34 million of additional RAP released in this quarter amounting to BRL 58 million or 22% of the total RAP of the project. We will conclude the project in 2025 when we will release another -- an additional BRL 206 million amounting to a total RAP for this lot of BRL 264 million.

The Morro do Chapéu lot with progress of 96% in construction has BRL 1 million that's been released, 47% of the total. We will also release an additional BRL 57 million in RAP in the last quarter 2024. And only BRL 15 million are to be released by the end of 2025 remainder. Therefore, the Morro do Chapéu lot will be in full operation with a RAP of around BRL 200 million, as mentioned.

The Estreito lot, which we won in the December 2021 auction, was delivered fully this third quarter, releasing BRL 43 million in RAP.

On the lot we won in June 2022 auction, we still are to deliver the Alto Paranaíba lot, the largest of all of the lots. And the licensing has been completed, been obtained and all the construction works are in progress at a good pace.

These deliverables have lead us to a RAP of around BRL 1 billion. In the fourth quarter, we will release an additional BRL 100 million, closing the year with a relevant mark of BRL 1.1 billion in released RAP, getting ever closer to the end of the cycle of investments in transmission, which, as you all know, will be concluded throughout 2025.

I will now turn the floor to our CFO, Leonardo, who will share more information on our third quarter 2024 results.

[Leonardo Gadelha, executive]

Thank you, Eduardo. Good morning, everyone. I will begin with the analysis.

Turning to Slide 6 with the consolidated result, the evolution of the gross cash margin in the quarter. Therefore, without considering the IFRS 15 and VNR, was minus 4% over the third quarter of 2023, reaching BRL 3.498 billion (sic) [ BRL 3.598 billion ]. This reduction is basically explained by the end of the Termopernambuco contract in May, which caused the plant to remain without a contract throughout the quarter since we anticipated the new contracts starting in October, which will go in effect in October this month. We maintained a good cost discipline with a 3% growth in the quarter below the inflation.

EBITDA had a 8% decrease in the quarter. And cash EBITDA minus 5%, reaching BRL 2.485 billion, reflecting the lower gross margin.

As in the previous quarter, Networks EBITDA represented 87% of the consolidated EBITDA and the Generation and Customers EBITDA at 13%.

Neoenergia's net income in the quarter was BRL 841 million. Adjusting this profit by the nonrecurring events of operations, such as asset swap with Eletrobras and the transmission operation, we closed the quarter with a 7% decline over 3Q '23 explained by the lower EBITDA, mainly by the Termopernambuco operation in the quarter, as mentioned.

Turning to the next slide. On CapEx, in the quarter, as Eduardo mentioned, we attained BRL 2.6 billion totaling BRL 6.7 billion over the 9 months in 2024, therefore, in line with the plan for the year, which is of approximately BRL 9 billion.

As in the recent quarters, CapEx was practically mostly with Networks. Highlights were BRL 1.3 billion in distribution, expansion and improvements of the network. BRL 1.2 billion in the advancement of transmission works.

And now on Slide 9, Networks. And the operating performance in the Networks segment, we see the variation of injected energy in our 5 distributors as disclosed to the market, still maintains good growth in the quarter mainly driven by higher temperatures even when compared to the third quarter '23, which had been a good quarter. The consolidated period growth was 4.1% compared to 3Q '23 and 7% over the 9 months, including GD (sic) [ DG ] -- total number of DG.

Total number of consumers amounted to 16.6 million, an increase of 12,000 customers over the last 12 months.

Moving on to loss performance. We had a quarter with a good evolution in the loss index. All distributors presented a loss reduction compared to the previous quarter. We also have maintained well-controlled losses in all distributors in relation to the regulatory limit.

Turning to Slide 11. We can see that in the third quarter in 2024, the PECLD reached BRL 125 million, also a reduction over the previous quarters. And loan loss provision as we can see in the chart below, a sound trajectory in relation to the previous quarter.

On the next slide, we'll move on to quality indicators, DEC and FEC in our distributors, which have maintained a downward trajectory and they're all perfectly within the regulatory levels.

And now turning to results on Slide 13, we see an evolution of minus 1% in gross cash margin in the third quarter, explained by the negative adjustments in Portion B (sic) [ Parcel B ] impacted by the IGPM and [ Sun ] distributors with readjustment in April and the deconsolidation of transmission assets after the sale to GIC, although it was compensated by a better market.

Operating expenses in the quarter grew by only 2%, so a very good performance.

Networks EBITDA grew 112% due to nonrecurring effects in transmission over 3Q '23 and Networks cash EBITDA reached BRL 2.168 billion, in line with 3Q '23 reflecting the lower margin and well-controlled expenses, as mentioned.

In the table below, we see the gap between distribution and transmission where the distribution cash EBITDA grew to 4% and transmission showed a reduction of 39%. The pro forma transmission EBITDA, that is without the sale of lots to GIC, would have grown 37% and the Networks EBITDA 6% in the quarter.

On Generation and Customers on Slide 15, which consolidates the Renewables and Liberalized segments, we reached an EBITDA of BRL 386 million in this quarter. In 3Q '23, our hydro EBITDA was positively impacted by BRL 1.5 billion due to the exchange asset swap with Eletrobras. Therefore, excluding this one-off, in 2023, the segment's variation was negative by 27%.

On the right-hand side, we have the opening -- the breakdown by business lines and hydraulic (sic) [ hydro ] EBITDA in 3Q '24 was BRL 127 million. The variation is explained by the one-off last year.

Wind EBITDA in the third quarter was BRL 277 million, a 13% growth compared to 3Q '23, which rose as explained by the higher wind power.

Solar EBITDA in 3Q was BRL 8 million, a BRL 3 million reduction due to higher energy purchase costs in the quarter in the Luzia complex.

And the Termope EBITDA, which explains the consolidated variation, was negative at BRL 36 million, reflecting the end of the plant's contract in May, and therefore, the plant was left without a contract throughout the third quarter. And now once again, in October, with the anticipation of the capacity auction, it has the contract.

Finally, [ Customers ] business reported EBITDA in the quarter of BRL 11 million, a growth of 10% compared to the previous quarter. And we suffered about 5% with curtailment, something that bothers us clearly, but it's still lower than what we have seen among our peers in the market.

Moving on to Slide 17. I will talk about our Neoenergia's capital structure. And here, we can see that we closed 3Q 24 with a net debt of BRL 42.1 billion. Therefore, roughly BRL 1 billion above the previous quarter, which is explained by the accelerated CapEx paid.

Our net debt-EBITDA ratio closed at 3x, slightly above the previous quarter, in line with the expected levels for this year.

Our debt structure remains comfortable levels with an average maturity of 5.6 years and highly diversified in terms of sources and indexes. In addition to competitive spreads, the credit market remains very liquid and we have almost completed the funding plan -- debt funding plan for the year. We have already disbursed more than BRL 10 billion in new debt and now addressing our needs for 2025.

Having said that, I will now turn it back to the operator for the Q&A session.

[Operator]

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

[Guilherme Lima, analyst]

I have 2 questions I'd like to ask. Could you please talk about the renewal process in the distributors and the public bid process, the technical note in regards to this public consultation rather, public call, especially in regards to regulatory flexibility that is being proposed. Can you please comment if you have conducted a positive and negative aspects assessment, what you're considering in terms of contribution?

And one more question in regards to the Termopernambuco contract. Can you further explain the structure of this contract to purchase fuel contracts you entered into with Eneva in regards to transportation shipment and what you have observed in terms of the construction of the terminal that will supply the contract as of 2026. Would there be a risk of maybe having delays in the terminal, how you can protect the company in such a scenario?

[Unknown Executive]

Thank you very much for your questions. Well, to answer your question in relation to the concessions, in our opinion, this process is making progress as planned. After many discussions, this executive order was passed in June. Now we're taking the next step. We are now writing -- drafting the document for public consultation. This is positive because it shows the process is making progress, going through all the different steps that are defined in the executive order.

As for the content of the technical note. We are obviously going to participate in the public consultation. We have a positive outlook. The main guidelines of the executive order are contained in the technical note, mainly in regards to issues pertaining to the sector and the compensation, the proceeds of investment, which will also drive more investments from all the concessionaires, something that is much needed in the wind power sector to -- in the sector to improve the quality and the expansion of the network.

So this is also related to critical areas, which is accounted for in the technical note, things that will be regulated, and we were aware of these facts. So what matters is we have the technical note, and that is very positive.

There may be technical aspects that might arise that were not in the executive order, that we did not agree with, and we will make our contribution. We have 2 points -- 2 particular points, we -- in regards to paying penalties, this is something that we consider that will constrain, that will limit us from our defense, something all enterprises are entitled to. So this is something we're going to bring to the table as a contribution from our part.

Secondly, the technical note also makes reference to what is regulated or nonregulated something we have in #14 subsidies. We do not believe it should be in the technical note. We believe something that must be clarified for this sector going forward, but we don't believe it must be in the technical note.

These would be the 2 main points that once again are not in the decree. They arise here and they -- that we disagree with. We consider the technical note as very much aligned with the decree, with the executive order and seeks to drive investments to enhance the service quality provided to our customers. And we are, of course, agreed, fully present, with the aforementioned points. And once again, they're part of the decree -- before the decree -- the executive order is published.

As for the second question, Termope, well, celebrating the good news, not only for Neoenergia but for the sector. As a whole, the energy, the electrical sector, the electric systems and so very important to attain stability, right, at peak times. So this is excellent news.

In early October, as I mentioned, we had -- well, we've brought the contract forward. So we have seen that it was a very sound decision from the national system operator and the ministry because the system has resorted to the plant 4 times until now. Termopernambuco is fulfilling its role, therefore.

In terms of cost structures, as you're aware, there's a period, 22 months, from October '24 to July '26, we are in a contract -- we entered into a contract with Eneva. And starting in 2026, we will have the contract with Shell for a 15 years, which was signed earlier on.

Back to the Eneva contracts that we're entering now, it has a fixed cost, transportation; and variable costs for molecule usage. Meaning that once the plant is not operating, we pay a fixed cost, BRL 70 million per year. I think Renato can share a more accurate number afterwards, but roughly BRL 70 million. And we also have a margin per megawatt-hour, BRL 130, BRL 150. It would also depend on how we will move forward. But by and large, on how much we will generate, but this is the variable that is also part of our EBITDA. This is the cost actual within the fixed and variable cost structure.

As for Shell, we have heard -- we have positive news. Shell terminal, 10% to 15% of the gas is for Termope and the remainder for other customers. We are aware that sales are going well. We're selling gas to other customers. And this is an assurance that the terminal will be pretty much in line with the plan. Otherwise, we will -- we have our guarantees, our warranties, our contractual warranties and assurances in regards -- in case the contract is not fulfilled.

As Neoenergia Termopernambuco, we are comfortable with that. I once again would underscore, I believe this terminal will do well because we have seen positive results, but we are protected by contract in a very effective way. So these are my replies to you, Guilherme.

[Operator]

Now our next question is from Victor Cunha, analyst from Itaú BBA.

[Victor Cunha, analyst]

I have a question related to Termope. Looking at these points at the fixed EBITDA of roughly BRL 300 million per year because of the anticipation, what is your expectation in terms of shipment for the 22 months now from October to 2026, that was the previous date before the contract came into effect?

And what is the value generation excluding the fixed EBITDA, looking only at the additional shipments you expect to have?

And if you can also comment briefly on going back to the CP point, I think the audio was patchy. There are 2 points here related to Neoenergia. One is the legal judicial disputes and the other one, I could not hear in Portuguese. I would appreciate it if you can repeat that.

[Unknown Executive]

Okay, Victor. Thank you for your questions. As I mentioned, Termope -- well, let me share some figures with you that we should bear in mind. If the Termope plant, hadn't we anticipated -- brought this contract forward as we did in the period, October '24-July '26, over those 22 months, we would have a negative EBITDA of BRL 264 million.

Why negative? Because I cannot turn down the plant in July '26, I would need the connection. This is the high fixed cost. And then when it's shut down, it still requires maintenance. This would produce a negative EBITDA, not annual, but accumulated or year-to-date that, well, would be this figure, yes.

We anticipated the contract with dispatch 0, the EBITDA would be going from minus BRL 274 million to 0 with a 0% dispatch. From there -- from then every 10% in dispatch, EBITDA would go up by BRL 100 million over 22 months.

Always looking at the 22-month period. Every 10% -- for every 10%, EBITDA goes up BRL 100 million.

[Victor Cunha, analyst]

What is our forecast for dispatch?

[Unknown Executive]

Good question because it's not easy to estimate what might happen, but we have data on 4 days of dispatch in the past 2 weeks. Therefore, we look at the forecast of around 10% to 20%. But it will highly depend on the hydro scenario. If we talk about 20%, the BRL 200 million EBITDA going from minus BRL 274 million, therefore, to over -- to more BRL 200 million with a 20% dispatch. We're generating a value of roughly BRL 500 million because we brought this contract to anticipation.

I hope I made it more clear to you, Victor, with these figures, the impact and the value that was added with this anticipation and the dispatch itself.

As for the technical note, we have 2 points we'll be renouncing. And then second point that you said you couldn't hear relates to there is provision, which states that ANEEL can limit distributors from operating in the free market. It can maybe set limitations, constraints in the current -- the existing concession areas.

In our opinion, this is not something that should be part of the technical note because it's something that is -- we're looking at the note #14 discussion, something now has to decide upon what will be the future for the free market in Brazil. But we do not think this has to be in the executive order. It might be, we're not saying yes or no, but it doesn't really fit with, well, the executive order.

It's something that should be discussed on the side, regulated on the side. And we're also actively involved in the process, bringing models from other countries, the Iberdrola experience. We're also presenting models from the U.K., from Europe to the regulators so as to how this matter is being regulated in different countries. But the technical note, once again, doesn't -- we don't fully agree with it. So we have 2 things, the renunciation and the second point I mentioned now.

[Operator]

The Q&A session is adjourned. We would now like to give the floor to Mr. Eduardo Capelastegui for his closing remarks.

[Eduardo Capelastegui Saiz, executive]

Thank you once again, operator. On Slide 19, I would like to, as I normally do, I would like to highlight once again our commitment with all of Neoenergia stakeholders. We are maintaining our focus on the appropriate capital allocation, efficiency and quality in our operations and delivering sustainable results. And one of the best ways to do that is the expressive growth of our cash EBITDA. Since the IPO in 2019, it has grown by 97% or doubled, reaching, as mentioned before, in this quarter BRL 2.5 billion EBITDA-cash ratio.

I would also like to point out our success in anticipating the Termopernambuco contract, something that requires the dedication of different areas in Neoenergia and adds value to all of our stakeholders.

We are investing in our 5 distributors continuously, meeting our organic growth and providing quality services to our almost 7 million customers, representing more than BRL 40 million.

We are focused on the delivery of transmission lots. Once again, we had important deliveries in this quarter, which brings us closer to the end of the investment cycle, and as I mentioned, will also happen throughout next year 2025.

Finally, as I mentioned several times before, we have not renounced our discipline in capital allocation, focusing on our profitability as shown in the recent transmission auction, in the successful partnership with GIC, with the asset renewal over the past few years and the last public takeover to attain 100% of Neoenergia Cosern ownership.

To our shareholders that trust in us, rely on us, I would like to reaffirm that we are fully engaged and committed to delivering the expected result.

And I will conclude, as usual, by thanking all of Neoenergia associates for fulfilling their roles, surpassing challenges, producing results and adding much value to our stakeholders.

Thank you, and I wish you all an excellent day.

[Operator]

The third quarter 2024 earnings call by Neoenergia is now adjourned. The Investor Relations department will be available to take additional questions. Thank you to all of the participants. We wish you an excellent day.

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