Echoenergia Participações S.A. (EQTL3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Equatorial Energia's webcast to discuss the Echoenergia's acquisition. Today with us, we have Mr. Augusto Miranda, CEO; Leonardo Lucas, CFO; Tinn Amado, Regulation and New Business Director; Tatiana Vasques, Investor Relations Superintendent; Luciane Domingues, New Business Superintendent; and [indiscernible] Sales Superintendent. We would like to inform you that this event is being recorded and has simultaneous translation into English. [Operator Instructions] Before proceeding, let me mention that forward-looking statements that may be made during this presentation regarding the company's business prospects, operating and financial projections and goals are based on beliefs and assumptions of Equatorial Energia's management as well as on information currently available to the company. Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions as they relate to future events and therefore, depend on circumstances that may or may not occur. General economic conditions, industry conditions and other operating factors may affect the company's future results and lead to results that differ materially from those expressed in such forward-looking statements. Now I would like to turn the conference over to Mr. Augusto Miranda. Mr. Miranda, you may proceed.

Hello. Good morning, everyone. First, I would like to apologize for technical problems. However, I would like to remind you that the presentation is at the download center at Equatorial's website. So today is a very important day for Equatorial Group, and we're happy to be able to present to you our most recent movement towards the growth and the diversification path that we have tracked since 2021 -- in this year, 2021. Today, we have the segmentation of renewable energy through the acquisition of Echoenergia Participações SA as announced. It's the largest acquisition ever made by Equatorial. Here with us, in addition to those mentioned, I would like to also say that Cristiano Logrado, Superintendent of Corporate Regulation of Equatorial, is here with us. This step opens one more chapter that we -- of so many we opened this year that represents the transformation of Equatorial Group in an integrated energy player. As we are going to show in the next slides, this movement is an important opportunity to generate value based on our competencies and our efficiency, both in performance of investments as well as operational performance of our assets. I would like to emphasize to our investors that the identification of opportunities for growth is based always on our commitment with financial discipline, and this is no different as we will see further. Now moving on to Slide #3. Before we go into the details of the deal and the characteristics of Echoenergia and its assets, I would like to take this moment to reinforce the solid and proven historical moment of value generation in this 15 years since our IPO in 2006. As you may know, Equatorial was born from energy distribution based on a culture of efficiency, always paying close attention to creating value for our shareholders and clients while applying with whose applications go beyond the distribution business. And using our culture a basis to identify and make the most of growth investment opportunities, we made a success story. This is what happened with the entering the distribution business as well as transmission and more recently in sanitation and it will certainly be no different in this segment. In this sense, this year of 2021 is the landmark because, as the group gains more muscle, more opportunities are presented to us. We increased our operations and distribution then in generation with the acquisition of Enova, and now we opened a new avenue for growth with sanitation in Amapá. And more recently, the acquisition of all shares of our trading company, Sol Energias. I take this opportunity to highlight the advances in a turnaround process in CCEE, where in less than 4 months, we renegotiated agreements with suppliers, concluded the refinancing of our liabilities and also presented a quality report on the process of tariff review and completed a voluntary dismissal program with 46% of employees adopting. Now we opened a new vertical for our history with the acquisition of Echoenergia, this time, starting in the segment of renewable energy with a consolidated platform. Since 2004, the annual growth of our EBITDA is around 30%, a significant result that would not be possible if we had not adopted an active posture of identifying opportunities and commitment with growth in value generation. In summary, our financial discipline has allowed us a solid growth in distribution, transmission, entering the sanitation business and also repurchasing securities all in this last 9 years, making use of our cash generation and leverage. We are confident that the chapters that we opened this year will not be different, and we will significantly contribute to continuing our success story. Now moving on to Slide #4. I would like to call your attention in a summarized way to the importance of this movement and the positioning of Equatorial in terms of the energy generation segment, and most importantly, to make it clear that getting close to the renewables energy sector is not something recent. The strategic plan of the group has contemplated a long-term review for the segment, repositioning the company in a significant way. In 2021, we started to implement this plan in a more clear way. First, entering the distributed generation business by acquiring Enova in June and more recently, with the acquisition of 100% of shares of our trading company, allowing us to do -- to have all the gains of the earnings coming from growth in this segment for us. Now to advance in this agenda, we have several opportunities to analyze the renewable energy segment in greenfield and brownfield projects and identifying value generation opportunities. Altogether, the assets analyzed by the group in the last 12 months totaled more than 6 gigawatts in capacity. All that, seeking to attain our long-term goal, which is to occupate relevant position in the segments of trading and renewable energy, opening a new path for growth and diversification in key avenue considering the development of the energy sector in the current moment of transition. Acting -- being a player in renewable energies will allow Equatorial of the future to be positioned in a competitive way. In addition, entering the renewable energy segment, we will now operate as an integrated energy player, operating in all steps of the chain. And that will allow us to create -- add value to sanitation business, a sector in which energy is one of the main inputs, and that boosts opportunities that exist because we now have 10 million clients in the distribution segment. Equatorial of the future starts now. Slide 5. As said before, the acquisition of Echoenergia is the largest acquisition in our history. In a nutshell, I bring the summary of this operation and mainly what it means for the group to acquire a significant player in the renewable energy sector. Echoenergia is currently one of the main players in renewable energy, with more than 1.2 gigawatts of installed capacity and a wide portfolio of development projects. And that will place us in a very important position in the industry, which has a large potential for growth. A net debt of BRL 2.9 billion of the company, the transaction considers the enterprise value of approximately BRL 9.6 billion on the base date of December 2020. The disbursement will be of approximately BRL 6.7 billion. And as a result, 100% of the shares of Echoenergia will be directly purchased by holding Equatorial Energia. This amount will be updated according to CDI from the base date to the completion of the transaction, in addition to price adjustments practice in the market for this type of transaction, as detailed in the material fact. It's worth pointing out that the projection of EBITDA made by the seller of BRL 830 million dates to June, and therefore, didn't capture the recent increase in IPCA inflation index, which has an impact on the contracted energy and on the spot price. If we adjust the EBITDA of 2022, plus inflation goes on spot price, it would reach BRL 900 million. This compared to enterprise value that we're paying on the base date of 2020 would result in a multiple of 10.6x. Echoenergia is characterized by having a quality asset portfolio and experienced and qualified management. It's worth pointing out that according to the transaction conditions, the acquisition of Echoenergia provides important upsides for value generation and paves a great way for growth of the group based on the integrated operation [Technical Difficulty] platform. In addition, the diversification in the renewable energy industry positions Equatorial as a multi-utility company present in the segments of larger social and environmental impact. We separated opportunities that compose the rationale for this transaction in 4 main groups: first, the upside of the transaction. We're speaking of aspects such as opening of the free energy market for customers in the next few years, direct access to consumers with incentive energy supply and energy whose offer will be limited as of 2022. Self production, the possibility of implementing hybrid complex -- energy complexes with no connection or transmission costs, in addition to many synergies between the business of the group that could be explored, both in more traditional segments such as distribution as to new ones such as sanitation and mainly trading assets. In terms of growth in the next years, more than 20 giga of installed capacity will be added to the matrix in addition to -- with wind and solar projects. The acquisition also accounts for the diversification of our projects, providing more visibility in terms of cash generation, because in the short term, 25% to 30% of the EBITDA should come from generation and transmission activities. Finally, I call your attention to the advancement in the ESG topics, which made it possible by entering areas, such as sanitation. Renewable energy sectors contribute importantly for the climate agenda, and also in the social area, Echoenergia has worked very closely with the communities in which it operates. In addition, the segment of renewable energies will all allow Equatorial to access financing sources that are larger and at lower costs. Before moving on to -- or turning the floor to Leo, I would like to say that we're very enthusiastic about this opportunity. We paid an attractive price for the platform with the actual return for the equity of 2 digits. One important assumptions and very down-to-earth assumptions and many upside possibilities. And these optionalities are exclusive to integrated players such as Equatorial that serves millions of customers in the retail as well as sanitation. I also say that the quality of the platform, especially of the people that are part of Equatorial's staff, will allow us to grow in this segment that will be the basis for the energy matrix. So diversification will reduce the risk of our portfolio as a significant part of the EBITDA will come from generation and transmission. Now I turn the floor to Leo to talk about the main characteristics of the platform we're acquiring as well as the benefits of the transaction. The floor is yours, Leo.

Good morning. Thank you, Augusto. Good morning, everyone. Before we start with Slide 7, I would like to reinforce my -- I'm very enthusiastic about this acquisition. It represents an important step for growth. In this slide, we show that. Echoenergia has assets concentrated in the Northeast of Brazil, where we have a strong presence through the activities of distribution and transmission and more than 40 wind complexes with the potential to be the largest generation company of renewable energy in Brazil. Currently, its installed capacity is 1.2 gigawatts, considering assets in operation and that are in final construction phase, in addition to 1.1 gigawatts in projects that are in development pipeline. Such projects once implemented will result in the capacity above 2.3 gigawatts of renewable energy in a balanced matrix with projects of wind and solar energy. I highlight that the operating projects and projects that are in the final construction stage. According to the seller's projections updated by for inflation as well as spot price, will bring an estimated EBITDA of BRL 900 million, which represents a growth when compared to 2020 of 83%. These BRL 900 million estimated for 2022 because we will have the operation of wind parks, Echo 6 and 7, in the last quarter of 2020 and Echo 8, 9, and 10 scheduled for the beginning of 2022. In addition, energy sales agreements, there are currently 15 years, in turn allow for predictable revenue streams. In the next slides, I will present in more detail the characteristics of the main assets of the company. On Slide 8, we have the detailed portfolio of Echoenergia. The company has its headquarters in Sao Paulo. And as I mentioned, its assets are located in the Northeast of the country. Altogether, there are 9 operating assets, all in wind generation and 3 that are in final construction state -- stage expected to become operational in the beginning of 2022. The projects were started in the capital markets with issue of debentures, use subsidized lines for development banks and -- such as BND 1/3 and BNDES indexed to TJLP, the other 1/3. The average leveraging is of 60% to 70% at the level of the projects and 80%, including the holding company. I highlight that the assets of Echoenergia have Tier 1 turbine providers, that is the first level, which translates into a technical performance above the market average. In addition, the company has ready-to-build projects, mostly solar ones. 90% of their matrix are solar and to be developed in the states of Rio Grande do Norte, Bahia and Piauí that we will detail in the next slide. As for the PPAs, the contracts that are in the ACL are with solid players and with an excellent risk profile. And the prevailing contracts in the ACR are terms that have a remaining term of 15 years corrected according to IPCA inflation rate. Here on Slide 9, we have the characteristics of ready-to-build projects. These projects are an important driver for growth of the portfolio of Echoenergia and will allow us to add 1.1 gigawatts in capacity when completed. In this slide, we have the main information of these projects, and you may notice that the first ones are to be completed in less than 2 years in the second half of 2023. I am also calling your attention to the fact that all projects, except for Project V in Bahia have the important benefit of discount on wire. Finally, it's important to highlight that adding solar generation to the company strengthens the portfolio effect with the energy matrix that's highly complementary to wind. Moving to the next slide. On Slide 10, I bring details about the generation study of Echoenergia's assets. The certification work was made in a robust way, involving certifying companies with a large track record in Brazil. We show the estimates for solar and wind generation of P50 of the seller that is with scenarios or 50% of likelihood. I highlight that the assumptions adopted by Equatorial consider a more conservative position when compared to the likelihood of generation. In a consolidated way, assets of Echoenergia account for 90% of technical availability assessed at the complexes combined to a capacity factor higher than 55% and a very high performance, and that's higher to the market average, which proves the accurate technical management of assets and the excellent generation profile of the regions where they are located. In addition, operating and maintenance contracts for wind turbines cover the next 7 to 15 years depending on the asset are made with global suppliers of the first tier, which includes a guarantee of availability. As a result, Echoenergia parks have occupied in the last years, one of the first rankings in the Brazilian of net generation of the national system operator. Now Slide 11. Let's speak about another important topic, and whose the acquisition of Echoenergia will allow us to advance more in, which is our ESG agenda. Echoenergia is a company that adopts the best environmental management practices as well as in health and safety, and it has a solid structure for governance. Through it's social branch Echo Social, the company promotes interaction with benefited communities, promoting activities for education, solidarity economy and [indiscernible] balance of such communities. The projects promoted by Echoenergia reach more than 51,000 people and 125 schools in the regions it operates. In the operational side, I highlight the quality of the company's management with a very state-of-the-art technology and operation centers that's cloud-based with direct communications with local teams, which allows to prevent failures and a better response time as well as excellence in operational management. As Augusto mentioned, this transaction has some upsides. In the next slides, we'll share these benefits with you. Now Slide #13. Here, I highlight that this acquisition with the recent also acquisition of 100% of our trading unit, Equatorial Energia, becomes an integrated and complete platform of energy investments that support even more the growth and opening of the market. The addition of a renewable energy segment reduces the risk profile of portfolio, diversifying revenue coming from other businesses in addition to distribution. We expect that about 30% of the future EBITDA will come from lower risk businesses, such as the transmission and renewable energy sectors. Speaking now of the contracts profile of Echoenergia assets, I would like to highlight the diversified strategy and how this complements the vision of Equatorial Group. As shown on the chart, the pace of energy sales contracts of the company is quite balanced among the free -- in the regulated and free markets and has a wide average price. As said, the decontracted -- the amount that has no contracts increases as we advance in time and have entry of new projects, which serves as the strategy to mitigate risks and represents an opportunity to capture premium in the short price in addition to being complementary to the opening movement of the market, as we'll detail further. Next slide, please. On Slide 14, we'll talk about the prospects of this industry and advantages provided by the acquisition of Echoenergia. First, the opening aftermarket with the reduction of the load limits for the free market will allow opportunity for clients that purchase energy with a wire discount from our renewable sources. This movement can be even more representative with the PL 14 -- 04/14/2021, that opens the market to low tension customers. And it's important to reinforce that we serve approximately 10 million customers in the concession area of our distributors -- distributing companies. In addition, many consumers have environmental commitments in their local and global goals in their loads of the renewable energy, and consumers tend to prevent -- present a preference for this type of source. The second point, it is a decontracting strategy. As we mentioned, although the average term of our contracts is -- brings predictable revenue for the next 15 years, the decontracted volume is dimensioned to increase as the market is opened, positioning us in a competitive way for this opportunity. Finally, the end of the wire discount. In the last chart, we bring the average dewire of our distributor companies, which is, on average, approximately 200 megawatts hour, BRL 200 per megawatt hour. With the opening of the market, our consumers will be able to benefit from this discount. And the consumers -- for low tension consumers, this is very significant. This reinforces our trust that the portfolio of assets and the energy offered will position Equatorial in a very positive and competitive way towards the future in development of the energy market. Slide 15, the acquisition of Echoenergia will allow Equatorial to actually enter the renewable energy generation segment, and therefore, will open an important avenue for growth, as we have done recently entering in the sanitation segment. Considering PDE data, the 10-year plan for growth of energy of EPE in the next 10 years, more than 20 gigawatts of installed capacity will be added to the matrix through photovoltaic plants and wind centrals, creating one of the main pillars for growing the energy matrix in the next 10 years. We estimate more than BRL 116 billion of investments. This acquisition movement positions us in a very competitive way in a segment that grows significantly. And that I am sure will account for an important front for generating value for our shareholders. Slide 16. Before developing or rather turning the floor over to Augusto, I take this opportunity to speak quickly about the current movement of energy prices. We would like to highlight that our figures used are based on specialized consulting work that refer to energy prices in the long term, and there are more conservative and well behaved, than the scenario presented now whose figures are in no way a benchmark for the assumptions considered and are mainly an upside. Considering the average dispatch in the last 5 years, there was 11.5 average gigawatts. And combining that with the current dispatch of thermal plants, we would have a CVU around BRL 326 per megawatt hour, which is very similar if we consider the worst year dispatch of the historical series, which was 2020. This cost of stabilization of the system is high. And in any scenario of hydrological risk, such as the recent one, tends to increase CMO and the spot price. Now I turn the floor over to Augusto for his final remarks.

Thank you, Leo. I would like to end with the final comments, reinforcing one of the main messages we presented today. This transaction, as we said, is one more step towards growth and diversification path that we have tracked in the year 2021, always focusing on generating value for shareholders and clients. We acquired assets of excellent quality and efficiency. But more than that, Echoenergia represents a platform for growth in renewable energy, a new avenue of growth for Equatorial Group. This acquisition will allow the group to act as an integrated energy player, contributing positively to generate -- for generation in the other assets of the group, especially trading, in addition to distribution and sanitation. In addition, as we mentioned before, the track of growth has always been based on the commitment with financial responsibility, and this is no different. This is why I reinforce that the expected returns for this operation are compatible with our financial discipline and the risks, opportunities of the segment. And we expect the 2-digit actual return for the equity with conservative assumptions. I also highlight that entering the renewable energy segment reinforces the new positioning of Equatorial in terms of ESG. Now in sanitation, with sanitation and now renewable energy in 2021, we are in the areas of -- that have a great positive impact in social environmental topics. And that allows us to contribute more effectively for our agendas. Now I turn the floor to the operator for the Q&A session. We have Leo, [indiscernible] Rafael, the entire team with us to take part in this debate as well. Thank you.

[Operator Instructions] We received a question by [indiscernible] from webcast. I have a question about the adjustment of EBITDA according to IPCA effects used in the PPAs. Is FEM also based on December 2020? In this case, the equity value has to be adjusted according to the CDI until the end of 2021?

Thank you for the question. Yes, it is correct. It will be adjusted according to the CDI. If this was the question, this is it.

[indiscernible] from XP Investments asking through the webcast. What are the cost synergies and expense synergies more clear expected by the company after the acquisition? And how long will they take to materialize?

Good afternoon. The expected synergy is not very significant. As it was -- well, remember in the presentation, the team is very competent, and we intend to use that, especially in the second stage of growth after Echoenergia. I think the synergy here is much more related to Equatorial's capacity to operate in the retail market, either because the -- we have 10 million customers, we know how to deal with all these customers. So this is the greatest synergy that was highlighted in the presentation as a true upside.

Carolina Carneiro from Crédit Suisse is asking through the webcast. Construction projects of 200 megawatts, what's the percentage of CapEx that's ready? In the transfers -- and when it's time to transfer, how much would be completed and the debt is included?

Thank you for the question, Carolina. Up to '21, the realized is 77%. By closing time, we reach 99%, and all the debt of 200 meg has been captured. So they have BND end market credit lines, and it's now in the disbursement stage. So as CapEx happens, the amounts are being disbursed. And the COB scheduled is January and the turbines are in the commissioning stage now.

The second question by Carolina is, for the ready-to-build projects, what is the expected sales strategy for energy?

Carolina, this is Rafael. Thank you. Our strategy for contracting in the pipeline is based on contracting cycle for consumers in the free market with different supply terms with mix, shorter contracts with longer contracts. And it's important to highlight that we believe in this development of the free market because the opening is taking place already. And also the value of incentivized energy for consumers, both through in terms of reduced costs as well as because it is a renewable energy source. We also consider -- assess different modeling of the traditional PPA models, such as creating self-production models in partnership with consumers.

We have a question from Giuliano from UBS.

I have a few questions. First just to check if I understood it correctly. In your assumption, you consider selling the energy to the low tension market and the customer would pay a lower price. Is that correct? Does that refer only to new assets? You have identified here the acquisition of new assets. And in this acquisition, are you considering that solar plants problems from -- coming from China? Do you consider the possibility of a delay in the supply of solar panels coming from China? And if there is a possibility of having the opinion considering...

Well, let me try to address all the questions. This is Tinn speaking. First, our modeling does not include energy sales to the low-voltage market. We are operating only in the medium- and high-voltage markets. When the market of low voltage market opens, that would create an optional market. The second question is about the prices of panels. The prices, we have the higher -- the more stressed price for solar panels in our -- that we use in our projections, both including the price in dollars and the exchange rate. The last question about the access opinion. Three out of the five wind complexes already have that opinion ready. And the number -- one of them also has an information of access and the next step would have to have the opinion. And only 1 complex in Bahia, we don't model it because it would not be able to get the access opinion in time.

Okay. Excellent. Let me just take this opportunity to ask one more question. You made major acquisitions during 2021. Also entering a new segment. But these acquisitions also bring a significant CapEx in coming years. Do you think about raising capital or increasing your capital?

First, we'd like to highlight that we always try to look for an adequate capital structure to make the most of growth opportunities. And these growth opportunities today are higher now that we enter the renewable energy segment as well as growth in the sanitation industry. We don't want to -- we still plan to buy more. And the current funding conditions are favorable to acquire assets with good returns, but we are studying several opportunities. For example, selling treasury stocks, issuing preferred shares with the minority shareholder entering the operation. As we have done before, that could be considered in terms of sourcing of funds. And also a follow-on, that could be studied all within the context of a need to adjust the capital structure. What we're saying is that the funding -- the most of the funds will come from that.

Yes, Augusto. From what Tati said, it's the good part of this composition. We're looking for the adequate capital structure to get new opportunities for growth. Also to complement, we intend to finance a significant part of that with debt, but we can give no further details about funding because we are in the silent period also. But traditionally, we are known for always accessing the bank market, credit market and as well as having a low funding cost and also development banks. So sanitation also allows us to have access to differentiated credit lines.

Okay. What is your target leverage today in terms of EBITDA that we could work with?

Okay. Who's speaking, Giuliano?

Yes, Giuliano.

Excellent question. We have recently completed one that was the only thing that was limiting us. We completed the lockdown of that debt this week. And today, we have a net debt over EBITDA covenant, it's 1.5x. So according to the limit of the debt, it would be 4.5x covenant. But of course, we want to work with a more comfortable situation in terms of leverage ratio in order to allow for growth because we want to continue to grow in the several segments we're entering. Okay. Just complementing, we have always had an important discipline. We try to negotiate covenants that give us flexibility. And because of our turnaround capacity, we acquire the assets. For example, as we did, we see distribution. We quickly -- we acquire and quickly transform assets. So this higher leverage is important for us to have time to make that turnaround. But traditionally, we operate with an additional safety margin so that we can continue to make the most of growth opportunities in general in more stress scenarios because good opportunities arise in periods like this. And also being able to maintain this tradition we have of obtaining funds with at differentiated cost and terms. So we have a history of being able to do that, and this will be true now, of course.

Great. Congratulations.

Thank you. Thank you very much for your questions, for your interest and for your congratulations.

[indiscernible] from has asked a question through webcast. I'm sorry, it was not clear. How will you pay for the transaction value?

[indiscernible], we just said that most of the funding will come from debt, but we are in a silent period, so we cannot comment on the characteristics of this debt. Yes, but a substantial part of it will come from that.

Marcelo from Itaú has a question from the webcast. How much will be the leverage for 2022? Will you need to do a follow-on for the acquisition?

This question has been answered already. We commented, we've always tried to work, and we have this limit of 4.5x. But looking at our history, you may see that we have always operated below that higher level, and that reflects a safety margin to manage some more higher leverage assets. But we don't provide guidance in terms of leverage rates. But our score shows that we have always operated in a good safety market -- margin so that we can continue to grow as well as to get that in a healthy way.

[Operator Instructions] Marcelo from Itaú asks, what is the average cost of debt? IPCA plus 5% and something around that?

Hello, Marcelo, thank you for your question. The average debt cost of [indiscernible] that we're acquiring IPCA plus 4.7 approximately.

[Operator Instructions] This ends the Q&A session. I would now like to turn the floor to Mr. Augusto for his final remarks.

Thank you all very much. Once again, I apologize for the technical problems we had, but the -- our I team remains available for any contacts. And thank you all again for attending this conference call. I have said that, and I reinforce that our I team is available to answer any questions you may have about this call, and have a good day and a good weekend. Thank you all very much.

The webcast of Equatorial Energia has now ended. Thank you all for attending, and have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]