Energisa S.A. (ENGI3) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Energisa's Second Quarter 2026 Earnings Conference Call. We inform you that this video conference is being recorded and will be made available on the company's IR website, where the corresponding presentation is also available. [Operator Instructions] We would like to emphasize that information contained in this presentation and any statements that may be made during the video conference regarding Energisa's business outlook, projections, operational and financial targets are based on the beliefs and assumptions of the company's management as well as on information currently available. Forward-looking statements are not guarantees 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. Investors should understand that general economic conditions, market conditions and other operating factors may affect Energisa's future performance and lead to results that differ materially from those expressed in such forward-looking statements. I would like now to turn the floor over to Mauricio Botelho, CFO of the company, so we can begin our presentation. Mauricio, go ahead.

Thank you, operator. Good morning, everyone. I'd like to thank you all for joining this results presentation for the second quarter of '26. Joining with me are our CEO, Ricardo Botelho; our Vice President, Executive Officers and the Investor Relations team. On the next slide here, please review the legal disclaimers at the beginning of the presentation. Please check them before making any investment decisions. Next slide, please. This quarter, I want to highlight two highly relevant nonrecurring events that are positive for Energisa's strategy and business conduct. Compared to previous events, prior periods, they deserve special attention for this quarter results. First was the judicial settlement reached between Energisa Rondonia and the State of Rondonia, which enabled the regularization of historic liabilities and the settlement of the debt owed by the state sanitation company, CAERD as well as the elimination of [indiscernible] tax liabilities. This is a matter that has been pending since the company's privatization in August 2018. At that time, [indiscernible] notice and financial statements included a letter from the State of Rondonia, the controlling shareholder of [indiscernible] Energisa Rondonia for [indiscernible] accounts between the State of Rondonia, Ceron, and CAERD, aimed at ending the legal disputes over ICMS tax on consumed fuel oil and the collection of overdue energy bills from CAERD. The legal instruments did not move for almost 8 years. And during this period, CAERD remained in default on its energy bill obligations, while Energisa Rondonia was forced to make judicial process related to the tax contingency disputes. The agreement now signed and settled and nearly 20 years of CAERD's default. It also allowed state-owned company to be classified as financially dependent on the state. And since January of this year, it has been current on its monthly energy consumption payments. On the liability side, the agreement reduced the condition balance by 60%. The transaction generated a positive EBITDA impact of BRL 489 million and net income of BRL 94 million as detailed in the earnings release. With the settlement finalized, we expect to withdraw the judicial deposit in the coming months. The difference that was paid on July 30 and withdraw deposits exceeds BRL 200 million. In summary, we turned a decade-long dispute into a negotiated solution where everyone wins. Predictability wins, legal strategy wins, investment capacity wins, and the society wins with better quality service. The second relevant model required intention and adjustments to the results relates to the sales of transmission assets announced a few months ago. Under IFAS criteria, once asset sale agreements are signed, the company must reclassify the assets in question as held for sale, you may say. And as you may know, under the AFS methodology, applicable to transmission assets, accounting results are recognized on assets under construction, that is before the operation. This raising the accounting and tax base of the assets. We saw in this case, the impact of BRL 596 million was recognized in the consolidated results. This is a purely accounting effect with no cash impact, restrict to the corporate financial statements, and [indiscernible] not generating capital gains tax effects. Summarizing the result of these extraordinary events mentioned. Once we exclude these effects, we can see that recurring adjusted EBITDA already including Norgás's equity income reached BRL 1.99 billion, up 1.4% year-over-year. And the recurring adjusted net income totaled BRL 88 million in the quarter, down 80% compared to the second quarter of '25, mainly reflecting higher financial expenses amid a still challenging environment of elevated interest rates. We're going to be talking this ahead. And even in this scenario, we maintained operational growth and continued with financial discipline aimed at differentiated results. It is a combination of growth, diversification, discipline that sustains our long-term value creation strategy. Next slide, please. And here, we can see the Energisa Group's net debt reached BRL 32.5 billion at the end of June, and I want to highlight the important reduction in the leverage ratio for our financing covenants, which fell from 3.5x in the first quarter of '26 to 3.1x. This reduction reflects the decisive measures adopted during the period to strengthen the capital structure and preserve the group's financial health. And among the main initiatives, highlight capital transaction represented BRL 2.3 billion, which concluded -- Denerge concluded in June, totaling BRL 1.4 billion. And we see a company of the debt profile and the debt term extending 6.7 years and the average lower than the inflation. And we ended the period of approximately BRL 13 billion between cash and financial investments, and this amount is sufficient to cover the maturities over the next 3 years. And regarding financial expenses, we saw an increase compared to the previous year, mainly explained by a higher average debt balance during the period and by nonrecurring effects, particularly by the Rondonia agreement. And here moving on, I'm going to be talking about our business verticals here. We're talking about distribution here, the distribution highlights. We ended the quarter with a 4% market growth with gains across all our distributors and a highlight for Mato Grosso and Mato Grosso do Sul who grew close to 6% in the quarter. And the main highlight was the residential class with a growth of 7.4%, driven by a higher average consumption and expansion of the customer base. This result becomes even more significant when we look at our market profile. The residential segment represents 41% of Energisa's consumption. Energisa, in comparing to Brazil, it's 31% and it allowing us for a more intense capture of income and household consumption growth. And I also highlight here the industrial class, represented a growth mainly by the food chain. Currently, approximately 44% of Energisa industrial market is linked to the food and agribusiness chain, sectors that continue to show strong momentum and sustained energy demand growth. In summary, the greater share of the residential market and the essential industrial sectors, they make energy consumption more here for Energisa more stable, reducing the impact of economic fluctuations and providing a greater predictability of results and cash generation in the long term. In the slide here, we're going to be talking about the PMSO. They totaled BRL 928 million, up around about 12% compared to second quarter '25, mainly reflecting -- explaining our greater resilience, notably this year in preparation for the El Nino phenomenon as well as efforts to comply with the regulatory targets of the new concession contract. Mato Grosso and Mato Grosso do Sul were the ones that absorbed the most in here. Meanwhile others showed even reduction in year with these objectives here -- the regulatory objectives here. This showed here, this is really good for the year of '26 for the climate phenomenon. The investments allocated to energy distribution grew 12% compared to the same period last year. Results here were directed toward network expansion and modernization, automation, service quality improvement and combating electrical losses. And here, we check here growth in the market, electrification of the company and frequent and intense climate events. They are fundamentals to improve the resiliency of the company and sustain the numbers checked here. On the next slide here, I'll talk about how proper capital allocation strengthens service quality, operational efficiency from our energy distributors. First here, speaking of electrical losses, we closed the quarter at 12.28% remaining below the consolidated regulatory limit for the fifth consecutive quarter. the limit was 13.05%. And even considering the seasonal variation of certain quarter, we maintained a favorable margin of 0.77 percentage points relative to the regulatory limit. And it's important to highlight that 7 of the companies, they were below it. And about the debt here, we closed the year with 0.56%, a reduction of 0.86 percentage points compared to the same period. This performance was by nonrecurring events and mainly the agreement reached between the Honda and Ca and as well as and Oi Telecom as well at Oi billings on the situation. Excluding these extraordinary effects, the default rate would be 1.37%, still below the prior year, demonstrating continuous improvement in this indicator even amid a still challenging macroeconomic environment. and talk about that in fact, all the groups remained within the regulatory limits. And in some concessions, we were already operating at levels representing the best results in their historical series as highlighted in the slide. And talking about natural gas. It's a little bit important milestone at Energisas,mi potentiality and growth. It's the ESG's third anniversary within the group. When we made this investment, we saw a unique opportunity to create value in the market with enormous expansion potential, and the results already demonstrate the accuracy of that vision. In just 3 years, ES Gas expanded its customer base by 28%, reaching 100,000 customers and expanded the distribution network from less than 500 kilometers to 664 kilometers, making sixth largest pipe gas distributor in Brazil. More important than the numbers achieved so far is the potential we still have ahead. Epitanto, about 94% of the population is not connected to the gas network, highlighting significant room for organic growth and expansion for our regulated asset base. Looking ahead, we have a robust investment plan of ES Gas according to the tariff process. We talked recently by 2030, plans to invest approximately BRL 900 million, expanding the network by another 480 kilometers, connecting 92,000 new customers and helping avoid around 700,000 tons of CO per year in the state. So we celebrate these 3 years. We're not just celebrating a successful acquisition. We celebrate the construction of a new growth avenue for Energisa based on market expansion, regulatory predictability and value creation. And now moving to the combined performance of our gas distributors. The segment continues to increase its contribution to the group's results as a strategic growth vertical for Energisa. Talking about the holding company. EBITDA reached BRL 58 million in the quarter, up 86% year-over-year, driven by market expansion, customer base growth and operational efficiency gains. And results also maintained a positive trajectory, considering both business, EBITDA adjusted for home income reaching BRL 6 million, up 80% quarter-over-year. Combined gross margin grew 28%, so totaling BRL 243 million. We also made progress on important operational and regulatory initiatives. notably the implementation of Augas tariff cycle, the expansion of Saga's service and 11% growth in Nora's combined customer base. In the quarter, we invested BRL 69 million in expansion of natural gas distribution infrastructure. Moving into the Energy Transmission segment. I'd like to highlight one of the quarter's most significant transactions, the signing of the sale of 5 operational transmission assets, Paz. This was already talked here. This is an important milestone in executing our portfolio management and capital allocation strategy. It has a value of BRL 2.3 billion and an equity of BRL 1.5 billion. like approximately 10x EBITDA and 8.3x RAP. This was above the average for the company's stock trading. This demonstrates the company's ability to develop, operate and monetize assets, capturing value for our shareholders. They represent about 25% of the total. This will be robust, about like BRL 737 million. The portfolio remains growth -- important growth optionality with projects in Amazon Maro currently under implementation, which will add significant revenue in the coming years. and also highlight the physical progress of Amazon and Amazon Loch above 85% in conclusion, reducing execution risks and increasing the brandability entering operation ahead of schedule on the situation. And I'll turn to Energisa. After a significant cycle of distributor generation expansion, Energisa is entering a new phase of asset maturation, converting the investments made into revenue growth, EBITDA and value creation in generation, trading and energy services businesses. EBITDA counting everything reached BRL 49 million in the quarter, up 147% over year-over-year. Year-to-date, the vertical's EBITDA reached BRL 113 million, an increase of more than BRL 100 million compared to the first half of '25. In distributed generation, we reached 476 megawatt peak of installed capacity with 125 solar plants operation across 9 states, while the customer base grew 26.5% over the past 12 months with a decline in defaults and a stable churn. In the free markets, we traded more than 200 average megawatts in the quarter and reached 1,686 consumer units under management, representing 35% growth compared to the second quarter of '25, reinforcing our position in the strategic segment for the group. And finally here, I'd like to highlight the evolution of Oz, which continues to advance its strategy, consolidating itself as a financial products and service platform within the utilities environment. In the quarter here, talking about reliability and cash flow net altogether. And cash generation reached BRL 18 million, up 62% year-over-year. and net income reached BRL 19 million, up 66%. After a cycle of structuring investments, Mota combines growth with consistent cash generation and return on capital. This is evident in the evolution of profitability indicators with ROI of 36% and ROIC of 37% over the past 12 months, both at positive levels. These results reinforce Energisa's strategy of developing new growth platforms, expanding revenue diversification and strengthening the contribution of unregulated businesses to the group's value creation. That concludes the main highlights of the quarter. And operator, please go ahead for the Q&A.

Our first question comes from Lucas Gimaresau.

Two points I would like to ask here. First about the PMSO of the quarter, which would be the normal level if we didn't have the maintenance for El Nino? And why did you guys change this via the PMSO, not via CapEx? And the second question is a little bit about leverage. How you talk about how you see the unleveraging here ahead and which will be the effect on the reduction of the VNR on the renewed concessions? Okay, Lucas.