Neoenergia SA

BOVESPA:NEOE3

Earnings Call Analysis

Neoenergia's Strong Performance and Growth in 2023

In 2023, Neoenergia's injected energy climbed over 10% in Q4 due to rising temperatures and economic activity resurgence, contributing to a record cash EBITDA of BRL 3 billion for the quarter, a 21% rise leading to BRL 10.6 billion annually, marking a 10% year-over-year increase. Net income reached BRL 973 million in Q4 and totaled BRL 4.5 billion for the year. Share appreciation was notable with over a 47% increase, reflecting market confidence. Strategic moves included a 50% asset sale of 8 transmission assets to GIC. The company invested almost BRL 5 billion in its five concession areas, gaining over 314,000 consumer units and expanding renewable energy capacity to 1.6 gigawatts, doubling its Regulatory Asset Base to BRL 1.2 billion expected by December 2024.

Expanding Operations and Record EBITDA

In a period characterized by economic recovery and higher temperatures, Neoenergia observed a significant growth in energy demand, leading to a substantial operational performance. Injected energy grew over 10% for the quarter and 5% for the year. The expanded market, tariff revisions, and adjustments contributed to a record cash EBITDA of BRL 3 billion in the fourth quarter, marking a 21% growth. Similarly, the annual figure rose to BRL 10.6 billion, a 10% hike compared to the previous year. These developments reflect prudent cost discipline and effective asset management, propelling net income in the quarter to BRL 973 million and BRL 4.5 billion for the entirety of 2023.

Strategic Asset Management and Growth Investments

Neoenergia's strategic initiatives, such as the asset swap with Eletrobras Group and collaboration with GIC, have fortified its transmission business. The sale of 50% stakes in eight transmission assets generated a BRL 1.1 billion cash inflow. Two more offers for transmission lots Itabapoana and Guanabara are expected to materialize in additional liquidity. The company has also made nearly BRL 5 billion in investments across its five concession areas, adding over 314,000 consumer units in 2023. Reinforcing its commitment to renewable energy, Neoenergia brought the Oitis Wind Complex and Luzia Solar Complex online, boosting wind and solar capacity to 1.6 gigawatts in its portfolio for future revenue streams.

Financial Strength and Market Confidence

The company has demonstrated robust financial growth from 2017 to 2023, with the gross margin outpacing operating expenses significantly during this period. With a focus on operating efficiency, the operating expense to gross margin ratio has halved from 44% to 22%, despite significant economic inflation. EBITDA and net income have skyrocketed by 237% and an outstanding 743%, respectively. This financial robustness is acknowledged by a 47% growth in Neoenergia's share price over 2023, showing strong investor confidence and market recognition of the company's strategic actions.

Looking Ahead: The 2024 Outlook

Neoenergia projects the continuation of its strong performance into 2024, expecting to maintain a net debt to EBITDA ratio at around 3x. This forecast is supported by the planned capital expenditures in distribution and the conclusion of ongoing transmission projects. The company aims to double its operational RAP (Revenue Allowance for the Period) for transmission activities, from BRL 650 million at the end of 2023 to BRL 1.2 billion by December 2024. This ambitious but measured growth strategy is designed to strengthen Neoenergia's financial position and deliver value to its shareholders.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning to all, and welcome to the Q4 2023 Results -- Earnings Call for Neoenergia. If you wish to hear the interpretation, please click on the globe icon at the bottom of your screen and choose your language of preference, English or Portuguese. If you wish to hear only English, do not use the original audio in the background. This call is being recorded and will be made available on our website, ir.neoenergia.com, where the complete material of the earnings release is available. You may also download the presentation of the link in the chat, also in English, during the presentation. [Operator Instructions] Information contained in this presentation and any statements that may be made during the conference relating to Neoenergia's business projects, projections and operational and financial goals are beliefs and assumptions of the company's management as well as information currently available.

Future considerations are not guarantees of performance. They involve risk, certainties and assumptions and they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors may affect Neoenergia's future performance leading to results that differ from these forecast presentation will be led by Mr. Eduardo Capelastegui Saiz, CEO of the company and Leonardo Gadelha, CFO of the company.

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

[Eduardo Capelastegui Saiz, executive]

Thank you very much, operator. Good morning everyone. I would like to thank all of you for joining our fourth quarter earnings result for 2023. I should begin by apologizing for changing in the dates, I had to attend an institutional meeting with the Ministry of Energy in Belo Horizonte. I am Eduardo Capelastegui Saiz, CEO of Neoenergia. Once again, we are very proud of what we will be sharing. Here today with me are; Solange Ribeiro, the Regulatory Institutional and Innovation VP; Leonardo Gadelha, CFO; Giancarlo Vassao, COO; Juliano Pansanato, Equity Control & Planning Officer; Fulvio Machado, the Executive Directors Networks; and Renato Rocha, our IR Officer.

I will make a brief presentation going through the highlights of the period and Leonardo will then present the remaining results. We will then proceed to the Q&A session and conclude with the closing remarks.

Beginning on Slide 3 we have the highlights of 4Q 2023 result and the year 2023. Injected energy grew by over 10% of the quarter and 5% of the year, mainly due to higher temperatures and the resumption of economic activity. Our cash EBITDA reached a record value of BRL 3 billion in the quarter, presenting a 21% growth amounting to BRL 10.6 billion in 2023, a 10% increase over the previous year. These significant increases are a reflection of a larger market, the tariff revisions and tariff adjustments of our distributors, the sustained cost discipline and the sound operating management of our assets.

Our net income in quarter was BRL 973 million and about to an annual BRL 4.5 billion in 2023. Regarding our asset rotation initiatives, we concluded the asset swap with the Eletrobras Group and announced and concluded the strategic collaboration operation with GIC in the transmission business. As a result of this operation, we have already sold this year to 50% of our 8 of our transmission assets, which provided us with a cash inflow of BRL 1.1 billion. And in Q4 '23, we received from GIC a non-binding offer for the purchase of 2 additional transmission lots, Itabapoana and Guanabara, which are now coming into operation and which represent more the BRL 250 million in Europe.

On the growth front and distribution, we ended 2023 with regulatory remuneration of BRL 36 billion as a result of almost BRL 5 billion in recurring investments in our 5 concession areas. This investment of volume confirms our dedication to providing quality service and managing the robust organic growth we experience every year. It is worth mentioning that we gain over 314,000 consumer units in 2023. Still on the growth front, we continue investing in the construction of transmission lots, one in auctions and residues close 2023 with BRL 650 million of RAP in operation and we expect close June, '24 with BRL 1 billion in operation by December, 2024 with BRL 1.2 billion of operating RAP. In 2024, therefore, we will double our closing RAP of 2023.

Another front that deserves to be highlighted in growth, the growth dimension was the delivery of the Oitis Wind Complex with 566 megawatts and the Luzia Solar Complex with 145 megawatts, which complete a cycle of investments in renewable energy, allowing the Neoenergia to have 1.6 gigawatts of wind and solar energy in its portfolio and operation very well sold that guaranteeing good returns to our shareholders.

Finally, I would also highlight the significant appreciation we had now our shares throughout 2023 with over a 47% growth and indicates a clear recognition by the market of the decisions that have been adopted by the Neoenergia throughout 2023.

On Slide number 4, we can see the status of our growth projects. Regarding the December, 2018 auction lots, we recently had lot Itabapoana into operation with a BRL 90 million RAP and as a previously mentioned, we have already received a non-binding offer from GIC to purchase 50% of this lot. We continue to advance towards the completion of the Guanabara lot which will release BRL 150 billion RAP, 1/3 of this lot will come into operation in the first half this year, 2024, and the remainder at the beginning of the third quarter of 2024. In the case of Guanabara, we have also received an NBO from GIC to purchase 50% of the slot.

In Lagoa dos Patos, we already have a 100% of the rapid operation, which represents almost a BRL 100 million in this lot, which one, as previously mentioned, is paralyzed because the layout of the tender did not obtain a prior license from an environmental agency in '23, meaning it could not be built as it was auctioned. We are already in contact with NAL, the regulator to find a solution for the section where we are not incurring CapEx. Vale do Itajai, last of the 4 lots, one in 2018, we already have BRL 22 million of rapid operation and we'll have other releases throughout 2024 completing 100% of the RAP in the first quarter of 2025.

In the Morro do Chapeu lot from the December, 2024, we have already released BRL 33 million in the RAP and the remaining BRL 159 will come into operation throughout 2024 quickly aligned with its business plan. Business plan that was approved in the auction.

In the Estreito lot, which we won in the December, 2021 auction, the construction is advancing and delivery is planned for the first half, 2024 with BRL 40 million in your RAP and also in accordance with the business plan regarding the lots won in June 2022 auction, the Alto Paranaiba lot, the largest of the 2, we have already obtained the environmental license without any conditions by Ibama, we await the state license from Minas Gerais by the end of the month to begin the constructions according to our business plan.

The second lot Paraiso has already advanced its construction works that is expected to be delivered in this first half 2024 with BRL 38 million in Europe anticipating our business plan. Therefore, as you can see, all of our lots are progressing at a good pace and according to plan with the expectation as mentioned of doubling the operating RAP in 2024, going from BRL 650 million of the operating RAP by the end of 2023 to BRL 1.2 billion in the operating RAP by the end by December, 2024.

And in Slide 5, as we always do at the end of each year since 2017, the year Elektro was incorporated into Neoenergia and when Iberdrola became the controller of the company the Neoenergia, we have presented a performance that deserves to be highlighted. Our growth margin from 2017 to 2023 grew significantly reaching 121%, which represents an average growth of around 14% as reflects of the organic growth of our distributors and more recently our expansion in transmission and renewables.

In regards to operating efficiency, there is no doubt about our commitment to cost discipline and our daily search for efficiency. Throughout this period, we've presented an average growth of only 4% absorbing accumulated IPCA of 42% and an accumulated IGPM almost 70%.

Besides the OpEx increased derived from new projects in operation, in transmission and renewables and because of this focus on efficiency, the ratio or operating expenses to growth margin, the ratio has already declined in this period, going from 44% in 2017 to 22% by the end of 2023 and we are convinced that over the next years we will continue to deliver a positive evolution in terms of operating efficiency. Our EBITDA has grown 237% since 2017 with an average growth of 22% per year. While our net income has grown a significant 743% above BRL 500 million of that income quite above the BRL 4 billion in 2023. This growth shows once again the enormous value creation over the period making Neoenergia one of the key players in the sector.

Now, I will head the floor over to our CFO, Leonardo Gadelha who will provide more details on our results for the fourth quarter and the year 2023. Leonardo, please.

[Leonardo Gadelha, executive]

Thank you Eduardo. As pointed out, we are very pleased with the results for 2023. We've closed the year with an operating performance that was very strong in the quarter as we will see. Going forward, I will begin by analyzing the results on Slide 6 where we see the consolidated results, the evolution of growth cash margin in the quarter, but now considering the impact of IFRS 15 and VNR was 12% compared to for Q2, reaching BRL 4.1 billion and this growth was driven by a strong demand, a larger customer base, tariff revisions and adjustments, compensating offsetting the lower margin in Termopernambuco over the year, the increase was 8%. This quarter we presented excellent cost discipline with a decline excluding non-recurring IMS of 2% and operating expenses. In the year, we had a 3% growth compared to 2022, thus below inflation in the period absorbing growth in the number of clients and new projects.

On the next slide, we see on Slide 8, the cash EBITDA reached BRL 3 billion at the quarter, representing a growth of 21% impacted by the higher growth margin and control of expenses as I explained the previous slide in '23, the growth was 10% reaching a cash EBITDA of BRL 10.6 billion, therefore surpassing the forecast we had in our business plan. Neoenergia's net income in the quarter was BRL 973 million, 4% above for Q2 and the amounted to BRL 4,461 million in a year. This worth remembering that in 2022, this result was positively affected by the incorporation of the premium from the acquisition of CB of around BRL 700 million.

Moving on to Slide 9, we have our CapEx. In the quarter, we achieved a total BRL 2.4 billion in light with the previous quarters. The highlights were BRL 1 billion in distribution and another BRL 1 billion in the advancement of our transmission works. Through the year, our CapEx reached BRL 8.9 billion. Therefore, a significant volume aligned with the business plan.

On Slide 11, our network business. Our operating performance, we can see the variation of injected energy and our 5 distributors as already announced, showed the very strong growth and the quarter driven mainly by the higher temperatures and the recovery of the economy with highlights recoil by Elektro Brasilia, consolidated growth was 10.1% at 5% of the year.

On Slide 12, we see yes, distributed energy in our distributors and is also shared with the market. The number total of consumers amounted to reached 16.5 million, an increase of 314,000 customers in 2023 in the fourth quarter. Distributors had a 7.9% growth and in the year 3.9%, bearing in mind, Coelba, Cosern and Elektro underwent tariff revisions in '23 and have their markets adjusted once again with DG migrations.

I will now choose Slide 13, talk about losses and performance. We had a controlled loss rate in all of our distributors and Coelba losses were impacted at the end of the year by non-build energy to 154 gigawatts hour. Also rivet as mentioned earlier by the higher temperatures and we can also see in this chart, without considering this what is effect of non-build energy, we have met the regulatory limit and we can say that we have 4 and 5 distributors within the regulatory limit complying and this was the effect we had for the first quarter now, we expect to once again comply.

And as far as default and Slide 14, we see the fourth quarter PCLD, which presented an increase in the first quarters of 2023, went back to the normal levels reaching BRL 139 million per quarter as we had already signaled, indicated we had boarded advances in collection in our distributors. In this particular quarter, we were under a negative impact of the mismatch of one month between the collected amounts and the higher demand affecting this denominator.

On the next slide, bring to the quality indicators DEC and FEC and our distributors maintaining high performance, all of them applying with the regulatory limits. And as for the network results, on Slide 16, we observed that in fourth quarter, we had a 12% evolution in the gross margin cash driven by better market, the readjustments and reviews and the growing customer base and this adjustment was 11%. Operating expenses as seen in the consolidated results had a 1% growth only taking out a non-recurring effects and we had a reversion in the health plan of Coelba and also the litigation in Brasilia. Therefore, our performance remains strong in operating expenses and the expense growth in the year was 3% below inflation absorbing the customer base growth.

On Slide 17, the EBITDA, cash and network through 21% in the fourth quarter amounted to BRL 2,565 million driven by higher margins and well-controlled expenses. In the year, the EBITDA cash growth was 15% networks reaching BRL 9 billion.

And now on Slide 19, we have a summary of results in the renewables and liberalized segments. The Q4, the EBITDA renewables ruling out the operations with Eletrobras brand was BRL 366 million, which represents a 21% growth and the annual EBITDA growth in renewables was 15% amounted to BRL 1,325 million. In the liberalized segment to the right-head side, the EBITDA in fourth quarter was BRL 143 million, a decline of 12% compared to for Q '22, this is explained by the lower cost in Termopernambuco in the year in 2022 as a result of the non-gas supply that was a one off. Our customers business also had an EBITDA BRL 7 million in the quarter. In this liberalized segment, EBITDA was BRL 609 million.

And now on Slide 21, we will look at our capital structure, our year '23 and debt, with the BRL 39.1 billion debt has slightly above the previous quarter, which is explained by the CapEx execution pace. Our net debt EBITDA ratio closed at 3.7x according to levels that were presented in the previous quarters.

Forecast for 2024 is for this to be maintained at 3x resulting from the CapEx and distribution and conclusion of transmission works. The debt structure has a comfortable structure and plan well distributed over the next years. As we can see attaining an average deadline of 5 years are diversified debts in terms of sources and [ indexes ] that have competitive costs. 2023 started out with challenges, especially the credit market crisis that lasted for the first half. Still in 2023, we disbursed BRL 11.5 billion in total in new funding for ensuring the CapEx for the business. For 2024, our funding plan is at the same levels as 2023 and we can certain that in February now we have addressed half of the plan, which will benefit an increase, promote an increase in the credit market and macroeconomic conditions.

I will now turn the floor back to the operator so we can begin our Q&A.

[Operator]

[Operator Instructions] Our first question is from Julia Zaniolo from Santander.

[Julia Zaniolo, analyst]

I have a few questions. One in relation to your expectations to the new sell of assets to GIC in transmissions. If you have updates on the discussion of the renewal of constructions and the timing and the delays in decision-making, if that has increased the risks on your side?

[Eduardo Capelastegui Saiz, executive]

And answer to your first question. As I've mentioned in my presentation, we received last December, the non-bidding offer of GIC for 2 assets, GU 2 assets Itabapoana and Guanabara, 2 assets that are now getting into operations. Itabapoana already almost Guanabara over this next half and we expect to do the closing of these 2 operations likely by the beginning of the second half. There's a due diligence process, the final due diligence. It is important to say that well the interest has been shown and we measured the providing offers. This model is similar and the 8 lots that we sold last year and well, yes, this will continue to operate as expected just as the other lots.

As I mentioned, many lots are beginning their operations now in 2024 [indiscernible] set it up and we will once again present this address to GIC, G-I-C and the process will move forward as it is now with the other first lots. So yes, it'll be a busy 2024 because as I said, many lots beginning their operation, therefore this relationship is the sound relationship and the same applies to the new auctions in March while we're analyzing also the participation with the GIC, this agreement with them is being fulfilled and executed a 100% as initially conceived.

And for the concession renewal question, we all know this is a complex process and it's important to mention that we are advancing that the CU has provided an opinion, acknowledging also referring their opinion to the ministry, the energy. And over the next week, the ministry will probably also issue a decree everything is being carried out transparently with of course the deadlines and conditions. We are optimistic. We believe the process will continue throughout the year and be concluded in 2024.

[Operator]

Daniel Travitzky, analyst from Bank of Safra.

[Daniel Travitzky, analyst]

I would begin by just adding something to Julia's question and beyond the discussion on the session renewals, we have also seen this expectation from the ministry to also pass other resolutions, a decree in fact to address tariffs and the sector systems. I would just like to better understand what this communication has consisted of between the ministry and Neoenergia?

Have you been called for meetings, discussions? Are there any consultations with the ministry? The ministry asking what the company's position is? And the second question relates to future opportunities. So going forward, is the company going to focus on transmission? Is the company considering other projects renewables? At this point in time, is it being considered just to have a clear understanding of the plans for 2024 going forward?

[Eduardo Capelastegui Saiz, executive]

Daniel had the answer as to concessions renewal. Well, the relationship of the businesses, the companies with the ministry are horrible. Yes, this is of course the government power and the government authority and we are doing all we can to contribute to with the ministry by sharing ideas. We are at ease in regards to the regulatory aspects and the contracts. It's not the first time we have had also relations in regards to the concessions in the past. And now we are looking at the conditions as to how things will happen.

We are all pay close attention to [Technical difficulty] aspects and these will be of course aspects that we will be looking at closely and consider that the first all will be in 2025 and the process is progressing well. As mentioned, the relationship between the private company and the ministry is sound one. It's constructive of collaboration of dialogue and thinking to read an agreement that is good for the company. Because we are long-term investments, we have to have our forecast and predictability of course at the ministry on its side is looking at of course the continued growth of the electric sector looking at the quality and for both the private and public sectors have interest in making things happen and we firmly believe that we will continue collaborating.

The second question is related to prospects and growth for 2024. As mentioned, oftentimes our main focus continues on distribution, organic growth and recurring investments of around BRL 5 billion per year annually. Our areas have a high demand, growing demand and by year we have our growth is of one distributor per year. 300,000 new customers, 5 million in remuneration base every year. On the other hand, strong focus on building the transmission lots in 2024. We will have a very busy year, many activities to, and we'll double the rabbit as mentioned. Our rapport double and we will have many projects being concluded. Operations, of course within our collaboration with GIC and these will be the things we'll be focusing on.

We'll also be in the auction for transmission. I want to make it clear, give a clear message that our objectives to participate will be exactly the same as we had in June's auction last year. We do not need to take risks or have lots with low revenues. We have high retiring and transmission distribution and we'll be focusing on these as we gain more value. This has to be very clear. In June last year, we presented-- well in December, we did not go to auction focusing on continuous recurring, and now we're considering studying a few lot and looking at what is happening in Bahia and close to other lots that are in operation already where we have synergies. It's important to mention that considering this criteria that is adding value, looking at realistic assumptions and building a portfolio that will have the appropriate returns.

[Operator]

The Q&A session is now closed and we will turn the floor back to Mr. Eduardo Capelastegui for the final considerations.

[Eduardo Capelastegui Saiz, executive]

Once again, thank you operator. I would like to leave a final message reinforcing our commitment to all Neoenergia's stakeholders as we have reached the end of one per year delivering solid results. At Neoenergia, we all continue attaining our focus on efficiency, creating value and maximizing results in an uninterrupted manner. One of the best ways to represent this is the significant growth of our cash EBITDA, which since the IPO has grown almost 140% exceeding expectations at the time, despite events such as the pandemic and all sorts of crisis that have challenged us over the past 3, 4 years, we closed the year '23 with major deliveries in our asset rotation plan, a plan that was announced at the end of 2022 and successfully executed throughout 2023. We are certain that we generated value for Neoenergia with these operations, both with the Eletrobras and also with the strategic partnership with GIC. In 2024, we'll continue advancing this plan to value Neoenergia's assets and also continue strengthening our balance sheet.

In terms of growth for 2024, we will continue having organic investments of our distributors as our main growth avenue with the same commitment, we'll maintain the focus on the delivery of transmission lots under construction and we'll have the same discipline, the same capital allocation demonstrated in the 2023 auction. This was a question that Daniel asked. Once again, I would like to educate how we will move forward in terms of growth in 2024. We never neglect the operating excellence which characterizes and represents us in all of our businesses. We have been prominent operators and will remain so and incurred in a sustainable business model guided by security and the best ESG practices.

The appreciation of over 47% of our shares in 2023 is maybe one of the best indicators that we are on the right track and aligned with the market, markets expectations.

To conclude my final consideration, I want to thank our shareholders for trusting in us. In 2023, we proved once again that we have the right team is engaged and committed to delivering the desired results. And again, I want to finish as usual by thanking all Neoenergia employees whom have quarter after quarter fulfilled their role, overcoming challenges, delivering quality energy and maximizing our results. Thank you all very much and have a good day.

[Operator]

The earnings release call for the fourth quarter 2023 of Neoenergia is now closed. The Investor Relation department will be at your disposal to answer further questions. Thank you to all of our participants and we wish you a good day.