Equatorial S.A. (EQTL3) Earnings Call Transcript & Summary

Good morning, and thanks for waiting. Welcome to the conference call of Equatorial Energia S.A. to discuss the details about the acquisition of Amapá Sanitation Concession. Today, with us are, Augusto Miranda, Chief Executive Officer; Leonardo Lucas, Chief Financial and IR Officer; and Mr. Tinn Amado, Regulation and New Business Officer; as well as Mrs. Tatiana Queiroga Vasques, Investor Relations Superintendent; and Ms. Luciane Godinho Domingues, Mergers and Acquisition Superintendent. We would like to inform you that this event is being recorded. [Operator Instructions] This event is also being webcast live on the company's website at www.equatorialenergia.com.br. In there, you'll also find the company's presentation available. Participants will be able to view the slides in any order they wish. The replay of this event will be available short after it's concluded. Remember that all participants on the webcast can post their questions on our website. They will be answered by the IR team after the call is finished. Before moving on, we would like to let you know that any forward statements made in this call relative to Equatorial's business outlooks, projections, operating and financial goals are based on the beliefs and assumptions of Equatorial Energia's management and rely on information currently available to the company. These statements are not a guarantee of performance. They involve risks and uncertainties, as they relate to future events, and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that general conditions, industry conditions and other operating factors may affect the future results of Equatorial Energia S.A. and lead to results that will be different of those mentioned in the forward-looking statements. Now we are going to turn the conference to Mr. Augusto Miranda that will start the presentation. Mr. Miranda, you may go on.

Well, thank you very much, and good morning, everyone. It's a pleasure to be here with you today to talk about our premier in the Sanitation business. We have been trying to go into the business for some time, and now this is true through the acquisition of the Sanitation Concession of the State of Amapá. Together with me are Leo, our CFO and IR Officer; Tinn, Regulatory News Business Director; Tatiana, Financial Strategy and IR Superintendent; and Luciane, our Mergers and New Business Superintendent. We are very pleased with this step, opening a new important chapter in our history of growth, strengthening our presence in the State of Amapá. We are currently convinced that going into the sanitation segment will bear lot of fruit for the various stakeholders of this company, especially new customers. We are recognized for the operation and commercial excellence of our assets. Our plan is to work on several fronts at the same time so that we can accelerate generation of value and deliver a quality service even faster to the community. When we studied the assets in that, we identified that one of the main challenges of this concession is commercial management. This is something we have mastered, and we are already used in operating in complex regions with excellent results, which gives us confidence in this new journey. Another very specific talent of this product is to execute the investment plan that is required to universalize water and sewage services in the state, which today are at unsatisfactory levels. In this sense, we count not only on our proud experience operating efficient utilities in Brazil, but also on a strategic partner with extensive experience in the sector. Finally, I would like to emphasize to our investors our commitment to financial discipline. We identified several opportunities to generate value in this concession that we will detail later on. As a result of our experience operating concessions in the region and the learning from studies on the sanitation sector with participation in previous processes, which allowed us to perform capital allocation at attractive return. Now I'm going to move on to Slide #3. Before going into details of the operation, it's important to mention the relevance of this acquisition for Equatorial and our growth strategy. As of today, we begin a new chapter in our history, a chapter in the sanitation segment. This is important because it represents our entry in a segment that provides a very promising avenue for growth considering the current deficit of coverage that we have in this industry. Currently, about 100 million people do not have access to sanitation, 40 million do not have water supply in their homes. It is estimated that more than BRL 750 billion will be required to universalize water supply and sewage services in the coming years, and thus, naturally brings many opportunities to us all. The sanitation sector has many similarities with energy distribution. And as such, we seek to use our experience based on our proven management model to leverage this movement to diversify into a sector that just like energy distributor promotes great social and environment transformation, which strengthens our commitment to development and improvement of the quality of life in the regions in which we operate. Now we are going to go to Slide #4. I'd like to highlight why we believe this concession is the right choice for us to begin our growth journey in the segment -- sanitation segment since it brings together very favorable characteristics for our entry that are familiar to us. It's a full concession, first of all, in which there is no risk of water availability, and water quality is under our management. Investments are low complexity as identified by our fieldwork, and most of them are concentrated mainly in linear network groups in flat regions. The other interesting point, which further contributes for this to be the right choice for Equatorial is the fact that the commercial challenge is one of the main ones of the concession, commercial cycle, reading, billing, collection and fighting losses is one of the main similarities with the distribution segment. And we have been able to operate very successfully in similar regions. Thus, the fact that the State of Amapá having an average increased income, higher than the nearby regions, and even higher than the average of our concessions in the North and Northeast. This has also contributed to us achieving excellent results. Furthermore, it's important to say that in the fourth quarter, we will be already present in the State of Amapá with energy distribution, which is very important because it will give us the opportunity to gain scale in hiring outsourced labor and accelerate commercial strategies through the knowledge of customers. In practice, it is a competitive edge. Finally, I would like to highlight the choice of our partner, which will be paramount for the efficient execution of our CapEx, besides having great experience in the sanitation segment, as we'll give you more color in the presentation. I will now turn to Leo that will talk about the operation characteristics and opportunities to generate value. Leo?

Thank you, Augusto. Good morning, everyone. This is Leo speaking. I will start on Slide 6, where I give you an overview of the Concession. As mentioned, this acquisition confirms our commitment to the growth agenda of the group. Also, it further strengthens our role in the development of the region, specifically in the State of Amapá. The coverage area that is object of this Concession consists of the urban centers of all the 16 municipalities of the state, reaching a population of more than 800,000 inhabitants, mostly concentrated in the municipalities of Macapá and Santana. This population today is not reached by any sanitation treatment. Only 9% have sewage collection and 36% have water supply provided by concession companies. The concession in Amapá, as said before, is a full concession. That is, it covers the complete cycle from water catchment to sewage treatment and return to the springs in addition to commercial management. The term of the concession is 35 years, and it will start after the end of the assisted operation period, which should last up to 6 months. As for the reuniformization of services for sanitation, sewage, the goal is to reach 90% of the clients in 17 years; water supply, 99% of the clients in 11 years. Some municipalities, however, had shorter times as it is the case of Macapá itself. In addition, the percentage of losses in the network will have to be reduced to 30% within 9 years as established in the Concession agreement. The investments estimated by BNDES to meet this commitment is approximately BRL 3 billion. And there is also the need to promote additional investments according to the rules of the invitation to tender. We will talk about that further. I am going to [Audio Gap] segment and a broad track record in the execution of works for the industry and also for -- in the operation of assets. We understand that this way it will generate value through our culture of operational efficiency and financial discipline. Transferring to the sanitation sector, the efficient management of investments, for which we have recognized and our strong experience in the utilities business cycle. In a setup that will benefit from SAM's extensive track record in the sector. In this way, the consortium has significant competitive advantages brought by both parties. On the one hand, SAM brings the expertise of someone who has been working in the sector for many decades as a contractor and also with experience in operations as a concession company. It operated the full water and sewage concession in the municipality of Santana [indiscernible] from 2003 to 2006, and the public partnership administrative concession of sanitation in Serra, the largest municipality in the State of Espírito Santo with 500,000 inhabitants between 2014 and '18. Also, both companies have strong experience in CapEx management and efficiency, which will be paramount to generate value in the concession. In addition, we will use the strong knowledge in the revenue cycle process and the values of operational efficiency and financial disciplines that are part of our DNA in order to accelerate the execution of our business plan, seeking the best results possible. Finally, as we have already mentioned, the knowledge of the region, including the concession area, is a characteristic that allows us to identify the best opportunities to create value. Going on to the next slide, I will give you brief details about the main characteristics of the contract. As I mentioned before, this is a full concession. This means that the company will be responsible for the complete cycle of services from water catchment, treatment, distribution, sewage collection, treatment, and finally, the return of water to the springs. Besides, the commercial management will also be the responsibility of the concession company. And as in previous processes promoted by the BNDES, the granting authority is the state, in this case, the State of Amapá. An important point to mention is that we are talking about a new company, [indiscernible], and therefore, no liabilities prior to the signing of the contract will be taken over. The contract is already in line with the requirements of the new sanitation regulatory framework. Regarding tariffs, Amapá's tariff is that they were not the lowest in the country. Thus, the contract estimates a precedent condition to adjust the tariff before the signing of the contract. The tariff discount offered in the auction of 20% uses this new tariff as a reference, positioning the state to a tariff level that provides for the necessary investments to expand infrastructure and universalize services. In the concession period, the tariff will take into consideration performance indicators that must be accomplished and that will impact the subsequent tariff processes. Those indicators will be detailed on the next slide and will be measured as of the third year of operations. The contract also established annual tariff readjustments with the main objective of recomposing the operation costs through a parametric formula. Every 5 years, the tariff review will update the goals of the performance indicators and customer services. In summary, we are committed to meet the CapEx and certain performance targets, and the tariff is already defined and adjusted by a known formula. This means that any gain in relation to EVD studies are gains for the utility company. We then move on to the next slide, where we bring the main contract goals. I'm starting on Slide 9 to address the main goals and commitments of the concession. The main objective is to universalize sanitation services, both in water supply, collection and the treatment of sewage in the region. In water supply, the utility goal is reach 99% of our clients within 11 years. Currently, water supply covers about 36% of the population. In sewage treatment, the goal is to reach 90% of the clients in 17 years. Currently, out of 9% of clients do have sewage collection, there is no treatment. It's worth mentioning that some municipalities had specific deadlines for the universalization of their services. In Macapá, where you have most of the population, the deadline is 8 years; in Santana, 7 years. In sewage treatment, both have 16 years as their deadline. The losses -- water losses, we should reduce in 9 years the level of 70% that we have currently to 30%, which is basically going to be done with investments in the network. Another goal of ours, which is paramount for us to evolve services, is hydrometering of 100% of clients in a period of 3 years' time. That is measurement of water consumption. Additionally, as mentioned, we have to abide by minimum standards of operations measured by the general performance indicator. It's important that this indicators already encompass naturally the universalization and performance goals such as water services, sewage services and distribution losses. On Slide 10, we show that in our view Amapá Sanitation Concession has less complexity in comparison to previous challenges because this is a new company, yes. It's important to highlight opportunities in 3 main fronts; operations, commercial and investments. In operations, the opportunities are present in managing energy and the energy efficiency of the company, which enable us to have gains by reducing operation costs. It's important to say that energy is one of the main inputs for the treatment of water and sewage. Another important point to be mentioned are possible gains of scale in the hiring of outsourced services, both in operations and administrative areas. With regards to infrastructure, network expansion that today reaches only 36% of consumers in water supply and 9% in sewage collection should be accelerated in making an increase in the customer base compared to the EVTE. Finally, with the challenging losses, currently, 70% of the water supply, most of it has to do because of a precarious actual -- current infrastructure -- I'm sorry. As those losses are physical losses, that is, they are part of the distribution network, per se, and therefore, they are going to be addressed with investments. Our objective is to advance a timeline to reduce losses as provided in EVTE. Remember that our goal is 30% in 9 years. Commercially, we are going to use our experience in the revenue cycle to improve efficiency in processes, today, almost nonexisting. Fighting apparent losses, water thefts, we are going to use strategies such as registration, sectorization and water metering. There is an absence of collection of services for sewage in the region. This requires education of consumers and communication to the community. We have the experience and tools to address this challenge. For you to know, EVTE talks that the collection rate today at 60% should reach 9% in 15 years. We currently operate at higher levels in our concession areas, although we have a lower average income in Amapá and higher average ticket. We closed 2020 with an IRR of 103% even with the pandemic. In addition, a new registration of consumers will make us place consumers in the right categories. In the region, there is a huge potential of commercial clients. Also, we are going to generate an acceleration in the timeline to implement meters. The idea is to have measurement of all customers in 3 years' time, which enable us to increase revenues and be more efficient in fighting losses. The last pillar on Slide #10, investments, basically will enable us to benefit from the group's vast experience in allocating capital in an efficient and disciplined way. We are going to accelerate our investment timeline compared to EVTE, which will enable us to expand revenues with positive impact in the project returns. In addition, we have an objective of savings of 5% to 10% when executing the provided CapEx at present amount, which will positively contribute to our returns. CapEx execution is very important because of its effect on other pillars. It is through investments that we are going to be able to expand the network, universalize services, reduce physical losses and work with the water metering of our clients. Therefore, we count on the experience and history of capital allocation of the company in an efficient, disciplined way. We also have the opportunity to fund part of this CapEx with the Banco da Amazônia. We have already a letter approved for 26 years, and we can also have tax benefits from SUDAM. On the next slide, we show details about the dynamics of additional investments that were spelled out in the indication to tender, which altogether add up to a total CapEx of BRL 3 billion. You know that the offer was BRL 930 million, but have to be paid in full in the signing of the contract and that should be allocated 100% to the state municipalities. As mentioned in the auction, the granting amount is a reference to calculate additional investments. Therefore, you have the minimum amount, BRL 50 million, and you discount it of the offer. Therefore, you have an additional investment of BRL 880 million to be paid in the next 12 years. This additional investment will be paid annually together with the granting power, corrected by the IPCA rate, and payments are going to start happening as of the third year. We should invest annually 5% of the total amount up to the seventh year, that is from the third to seventh year with an accrued percentage of 25% of the total amount. As of the eighth year, the annual percentage is going to be 15%. And by the end of the 12th year, we are going to reach 100% of the total amount. It's important to note that according to the dynamics of payments, the period is close to 9 years, which generates a present value that is much lower than the BRL 800 million (sic) [ BRL 880 million ]. On Slide 13, I'm going to talk about some of the future opportunities that we see in the segment. Currently, the North, Northeast and South regions of the country have the highest gap of sanitation infrastructure compared to other regions. According to the SIS, the North and Northeast regions have only 12% and 28% of their population, respectively, with access to sanitation networks. In our view, that represents a valuable opportunity as it gives possibilities to new privatization processes, which are favorable to us, considering that we are present and we know how to operate in those regions. In addition, the success of the recent privatization processes and Decree 10.710/21, that established economic financial parameters for sanitation concessions, will also probably bring opportunities of growth in this sector. Thus, it's important to highlight that considering only the concession companies today that have ongoing projects with BNDES are potentially that can be privatized more than 29 million consumers can be reached, most located in the regions in which we operate or where we have experience. Now I'll turn back to Augusto for his final considerations.

Thanks, Leo. I'd like to close reinforcing that our history, in all our acquisitions and transactions, were based on serious work with detailed studies and people that were obsessed in making things happen. We are recognized by identified major opportunities, sometimes surprising the market and delivering great results, balancing our commitment with several stakeholders, benefiting the communities in which we operate in. At the same time, we deliver results and returns that are expected. I'd like to close reinforcing some of our commitments. To investors, today, we opened a new avenue of growth for the group in the sanitation market in a very favorable moment, not only because a more restricted prospect in terms of growth in the distribution sector, but also because abundant prospects of opportunities in the coming years. Start working in the sanitation segment is perhaps one of the most important moves to diversify our portfolio in our history. Additionally, we once more show our commitment in creating value to our shareholders based on growth. We continue based on our financial discipline and efficient allocation of capital that we are recognized for. For the government of the state, society and clients, we believe in the role of the company to develop the region also with the universalization of basic sanitation with quality services. The necessary investments to promote universalization will contribute to generate employment in the region, and we expect a better structure will promote indirect advances in other fronts, such as tourism. In addition, investments will have positive impact on health and environment of the whole concession. We believe our management model focused on operational efficiency with the owner culture are extremely important for us to be successful in the management of utilities and now in the sanitation segment. This new step is an important turning point for the group, and we are going to work very hard to replicate this model, trying to innovate it and bring further returns to our stakeholders. Now we are going to turn to the operator for the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Carolina Carneiro with Crédit Suisse.

I have 2 questions. The first is about losses. You mentioned in your presentation that you first believe that you can reduce the curve faster than what was established in the auction model, especially, I believe, because of the items that you mentioned of leakages. You said that 40 percentage points have to do with network leakages. Could you please give us a bit more color on this leakage? And in terms of CapEx, how much time would it take you to complete the necessary CapEx? And would that imply advancing any CapEx plan that you already have in your plan? And the second question is the universalization goal. You also mentioned that you have 17 for sewage and 9 for -- 11 for water, but you said that you cannot advance these times as well. So if you could give us, again, a bit more color about why you think so? And again, how much CapEx you would have to invest beforehand to achieve this target? Especially in sewage, I think that's particularly important.

Carolina, thanks for your questions. They are quite relevant. I'm going to start answering your question on losses. Well, basically, it's the same rationale that you have on major reservoirs. This is damage caused by the lack of investment. So they are facilities problems. So the CapEx that is going to be invested is certainly going to change the scenario and then you go to the retail. Of course, like energy, you go from the greater to the smaller, but you set up a plant and you monitor your actions to the areas that you have the most loss or the most need. And I would like just to make a side comment. This is what we do today with energy losses. I couldn't hear your question -- second question well, but Leo, if you can please answer it because I really missed a part of it.

It's the universalization. Just if you could comment what is the time, specifically for sewage because the original plan is 17 years. So I would like to know what you believe is possible in the universalization target.

Well, Carolina, Leo also mentioned that in his part. The type of work that we are talking about is in direct work. We don't have any geographic issues. The land is relatively flat, and these are simple work. Basically, the idea is to have process owners and carry out the work. And these advantages -- this advances, if they can bring us an advantage, we are going to advance. What I can tell you is that we are going to advance. We don't know how much, but again, the idea is to start with areas that are more relevant. If we advance, this is going to benefit the population. We are going to have a large number of consumers, and therefore, we are going to have better returns for the business.

If you allow me -- this is Tinn, I would like to complement your answer. And if I'm connecting the dots between your first and second question. You asked about losses. Remember, 70% losses refer to a billing of only 36% of the total possible universe of consumers. So for us to reduce the 70%, we have to invest in working with the networks that already served these consumers. But all the other consumers that will be universalized will have a new network. Therefore, the magnitude of our CapEx, they already will be implemented in a network with a much lower loss and universalization that Augusto mentioned. We cannot forget that Macapá and Santana accounts for 80% of the state's population. Those regions are more densely populated. They have a higher per capita consumption, and they should be universalized earlier than the other municipalities we are going to work with, 8 and 7 years, respectively, okay?

Our next question comes from Marcelo Sá from Itaú.

I do have some questions. First, I would like you to comment about possible synergies that you have with the distribution business in the CapEx that you're going to invest in sanitation. Do you have synergies with distribution? Is there an intelligent way to optimize investments? And if it is substantive, I would like to understand that. And also additional investments. When you see at the forecast, what we did in terms of sensitivity analysis was to keep the amount and the final tariff of the contract without having any additions based on new volumes that are going to meet in investments. I would like to know how this connects to the returns that you are going to have. And also the final point is the EBITDA margin to be considered in the long term. BNDES is talking about 53% in their estimates. This is in line with what we see in mature concessions, often even higher than that. But what would you think the EBITDA margin would be for this concession in the long term?

Thanks, Marcelo, for your question. Well, first, CapEx, we did mention that we expect something between 5% to 10% when you think the main CapEx, and in terms of additional CapEx, in addition to the terms that we mentioned and corrections, we already operated with such dynamics. You have a funding plan or investment plan with the granting power, but sometimes you find opportunities to execute and manage some of this CapEx. And to some extent, I believe we are going to have some discretion in discussing CapEx investments and also to execute these investments, depending on their nature. So we are going to have a full awareness of our needs in terms of the infrastructure and social needs of the state, and I believe that we are going to be able to contribute to the discussion. As for margin, based on everything that we mentioned, advancing investments and really work in the revenue cycle management and also OpEx investments that we are able to deliver, we believe that we can go way above this EBITDA margin in the long term, delivering higher margins. And we cannot forget, Leo, that here we are talking about the full concession. So a full concession, per se, tends to have higher margins than we have in the industry as a whole. And also, Equatorial has a history of operating in hard with higher margins than the companies in the segments in which it operates. So I think these are 2 very important points.

Well, if you allow me for a follow-on in terms of potential gain in terms of average tariffs, you talked about the reclassification of consumers, some are commercial, and they are classified as residential that really will make a difference. I know that you have the 20% discount with regards to the BNDES tariff. Do you think this reclassification could make you go back to historical levels? Or what do you think is going to happen? I don't know if you can quantify those benefits already.

Tinn, I think that you can complete the answer, but I will start. Well, Marcelo, you see in energy distribution, this is something that happens every day, and we have to watch out for. Sometimes you have a residence and you have a tariff. And then they open a door, and it turns into a business. And for some reason, they don't migrate. So there are opportunities. We have to watch out for them all the time. We do have experience, and we know that we are going to come across these situations. Tinn?

Well, Marcelo, this is relevant. We are not going to give you any guidance in terms of magnitude. But this is a process that we are going to start with the registration of consumers before the takeover. I think that is clear. Remember that we have this assisted operation period, and the idea is to reclassify registered consumers to try and see whose customers are going to migrate from residential to commercial. But it is relevant. That's all we can say.

I have 1 final question with regards to synergies between distribution and sanitation. If you think of your OpEx, so you had someone that, I don't know, provide services to your distribution service, and you're going to do, I don't know, the same in sanitation. Regulatory-wise, how does it work? How do I -- do you address that in energy distribution? Do you split work hours? Because I believe that you're going to have an overlap of employees that work in both concessions. Regulatory-wise, how does it work?

Well, the first point that has to be highlighted in terms of own personnel, today, we have our personnel in the electric sector that cannot be shared with other sectors. Now contractors, outsourced services, we can do that even in concession areas where I don't have sanitation. So it is what you said. So a meter reader, for instance, reading meters is basically the same. You probably need 2 devices to issue 2 invoices, but the meter reader can be the same. Collection, commercial processes, admin services, these things are going to be allocated to each company. You're going to split by 2, and it's going to be cheaper for those companies. And then the regulatory process in the distribution business goes into that comparison table. And in sanitation, it is kept by the company because it's a full concession. But one second, we do not have synergies with own personnel. You're talking about contractors, outsourced employees, and that we can do with any kind of concession. Yes, we still really are talking about prices, synergies. The more you grow, the better commercial terms that you have in products and services. The company will naturally enjoy that. And even work methods, we have already implemented several optimization in the meter reading process. So this kind of things can also be replicated and allocated in the sanitation business, the way we do things. And I think the potential is huge. Although there are some restrictions, but we are going to respect them.

Our next question comes from Flavia Sounis from Goldman Sachs.

I have a question that's a bit more related to the kind of returns that you see in this operation. I would like to know how this compares to previous acquisitions that you had. We saw interesting returns, so just, are you expecting the same? Is it going to be slightly lower because you still do not have much experience in the segment? So I would like to know what you are expecting.

Flavia, thanks for your question. Well, if you think about this, this is a bit that we really devoted to. We have been working with that for a long time, and we have joined people with experience. And the idea is really to work in a very safe way with the possibilities that we have. In terms of return, Leo mentioned that why the concession makes sense because it's a full concession, because it is an area in we already operate. So the return is going to be compatible with the segment. I think that has to do also with our responsibility of capital allocation. So we wouldn't do away with that. So the target is compatible to the kind of segment in which we operate. I don't know, Leo, if you want to add something to the answer.

Yes, it's very important to remind you all that we have quite strict discipline in capital allocation. It is a full concession. It has a simpler CapEx with a higher concentration in 2 municipalities, a very flat area. We have the distributor energy in the same region. So we are very confident that we, for example, will not like energy for a certain sanitation station. We talked about the energy consumption, which is high in water treatment and sewage treatment. So we are working in a way that is suitable for the concession operation, and we believe that we are going to have a return that can be even better than the distribution segment. And we were enabled to really study the segment and have the right partner to go into this business. So we are quite confident, and we are confident on the numbers and the prospects for this business.

There is one point that is quite interesting, Leo, which is our partner. If you think of SAM, you know, they have been working in the infrastructure segment for a long time, specifically sanitation. So this is a concession that has lots to be done, that will demand reasonable CapEx, and this confidence of having a partner that understands the segment that they really know the business. And commercially speaking, it's very similar to our business. So we believe that all that gives us the confidence that we are going to be as successful as we were in the distribution and transmission segments, and I have no questions about that.

Yes. And in addition to our expertise, commercially speaking, there is also a very structural point. Remember, the average income in the region is higher than our regions, and the average ticket is lower because of all the capacities that we talked about.

Our next question comes from Arthur Pereira from Bank of America.

If you could approach 2 topics. First, additional investments. First, capital expenditure and performance, regardless to the core CapEx, I think there is room to outperformance the -- outperform the BRL 880 million or when you are going to negotiate authorities, you would think of this expenditure that was arranged, and also the scope. You mentioned that it could be a sanitation even outside the sanitation area, and you talk about urbanization of areas. So I would like to know what you're trying to do and if you have possibilities of synergy with the distribution business in terms of these kind of investments. And also in terms of costs, I would like to know if inefficiency in electric energy could be shared with consumers. And also the targets that you have in the BNDES business model, you have a target of 10%, which is way above what we see in this kind of regulated service. So is there a level that you think would be -- that would make more sense?

Tinn, do you think you can answer this? You talk about additional investments, and then I'll turn to my room. My phone is not very good.

Well, we don't have outperformance for additional investment. Spread amount, the BRL 800 million (sic) [ BRL 880 million ] will have to be addressed with the timeline that we've presented in the presentation. So it starts with a lower percentage, and it goes up to the 12th year with 15% in the final years. And here, we indeed have to invest that in the concession in the agreement with the state and municipalities administration. So there is no outperformance. Investments are updated based on the IPCA rate, and the present amount is going to be lower of the BRL 880 million, which is the result of the spread.

Could you talk about the scope and go into the cost?

Well, the scope is spelled out in the contract. It can be to sanitation as a priority. It is going to be sanitation in rural areas. So the current concession to the company will continue to exist, and it will provide services to the population that is nothing encompassed by the concession. So as a priority investments are going to be directed to that, but it can also be directed to organization should be agreed on with the government administration. We are going to set together a timeline of different works that may be necessary. We are thinking of highways, the things that are more connected to infrastructure for us to be able to reach those regions that are not covered. So the objective of these investments are clear, and the answers have always been with regard to that, to provide services to not covered population, rural population, and mostly in sanitation services. And an additional point is there is a very interesting peculiarity, is that because there is a long time, if for any reason in the period there is a lack of balance in the concession company, this event can also help to solve the imbalance. So this is also a very interesting characteristic that we should mention. Okay. And about the electric energy, the contract is very clear. So operational efficiencies are not shared with consumers. This is for the concession company. So any alternative that we believe is correct, migration to the free market, use of special energy, distributed energy, anything that we believe is fit, should not be shared. And I think the third question is about collection. Well, the collection curve compared to the EVTE is more aggressive. We think we are going to reach better rates because that's what we are used to doing. We just completed a very complex bid. We know the region in depth. We know the consumers. We are used to the area. So we are going to bring this curve of improvements to the sanitation business as well.

Our next question comes on the webcast. What is going to be the return on net equity that is expected by Equatorial in this investment?

Leo?

I think we have already answered the question. We do not give guidance on these numbers, but certainly, we are going to get returns that are quite compatible to the segment. And the specific concession of the segment, we believe that this is a segment that has a higher return than energy distribution, and therefore, it's going to be above the average returns of Equatorial Energia. This is all that we can talk about.

Another web question from Santander. I have 2 questions. I would like to understand the company's capital structure strategy. And what is your leverage expectations for '22 and '23, considering investments in new concessions and the granting of [indiscernible]? Are you considering a follow-on? Second question, how do you intend to balance a dividend payout strategy with the capital needs to fund new investments?

Leo, can you answer?

Okay. I'm going to turn to Tatiana to go into details, that we have the possibility of getting to 85% to 90% of leverage. We already have the agreement of the team, and we want to optimize the structure and adjust it to our capacity. Tatiana, could you give a bit more color?

Well, yes, this investment is an investment that we can absorb in our capital structure. We do not need to make any adjustments to our structure. The idea is to fund the concession and then have a takeout with the issuance of debentures. And the investments have several lines -- several funding lines that are available. One of them we were able to get the letter of the Banco da Amazônia. We already talked about that, which will -- helps us to have access to credit at a very interesting cost. The letter approved talks about a 26 credit, including a 6-year waiting period. And so we -- as Leo mentioned, we have a total leverage between 85% and 90% of investments. So we are quite comfortable with that. With regards to cost, Leo already talked about that, that the base cost is IPCA plus spread that will depend on when we signed the contract. And in the case of debenture, the idea is to have a debenture with the agreement of Equatorial Energia, and it's going to be compatible to the cost of our debenture issuances.

Our next web question comes from [indiscernible]. Are you thinking of funding at the concession and CapEx? What is the estimated cost and time that you are considering?

I think we have just answered this question. We can have a very high leverage levels, and the lines enable us to have high leverage levels. And we already talked about the credit and funding structure.

The next question comes from Daniel Travitzky from Safra.

Could you talk a bit about the credit terms for CapEx? Do you have pre-approved lines? Can you talk about credit lines a bit?

This question, we have already answered, about credit lines. We have a letter with BASA that has already been approved. We already talked about times. And if you have any additional questions, we can answer further on if it is a specific question. But I think we can move on to the next question.

Our next question comes from [indiscernible].

About additional investment, what are they exactly? Can you use the investments made by the distribution company to discount from additional investments? Are they part of the urbanization process?

I think that we have already answered these questions. I think that we can -- yes, we have answered these questions. I think that it's fair.

[Operator Instructions] Our next web question comes from [indiscernible] from [indiscernible] Investments. Will the company continue to take part in new sanitation bids?

Yes. We have already taken part in 5 auctions, and that's exactly. When we see there is an interesting business that makes sense, we are going to be part of it.

Our next question comes from Carlos [indiscernible].

With regards to the SUDAM benefits, are you already having negotiations about that?

Well, the law that enables us to request the benefit is in effect until 2023. We have broad experience in requesting and approving requests of this nature. And the kind of magnitude of investments that you have there certainly fit the request, and the law enables us to place the request until 2023. So we do want to make the request for the incentive.

Our next question comes from [indiscernible] Capital.

Congratulations on winning the bid. Would you give us a bit detail about an outperformance of BNDES and the reclassification of customers? Do you think you're going to have a major upside, migrating clients from the residential to commercial segments?

Do you think you can repeat the question? No, I think it's okay. I think that we expect to outperform the EVTE. This is implied in our business model, something that we are going to do before we start operating in the concession area. And we do believe that we have -- we're going to have an important reclassification of consumers. I think there was a third point. I think it is OpEx, yes. About OpEx, we have a track record of operating in OpEx with efficiency as well in losses. And in terms of collection, I think that we explained it quite well. The difference that we are expecting and the collection rates that we had in 2020 in our regions of 103% in a year that we had the pandemic, and thinking that the average per capita income in Amapá is higher than in our other concession areas. So that really shows the capacity that we have to outperform. And since 26, we had a growing curve in terms of collection rates, and we have been advancing a lot in terms of definition, and each cluster responds to a different kind of stimulus. So all this knowledge is very important for us to advance in Amapá as well. Yes, in a nutshell, it's a combination of our experience, commercially speaking. That is really a differentiator, especially in this kind of region, a higher income of the population and a lower average ticket. So I think that this combination will enable us to have a much better result than what was established in EVTE. And as for losses, remember, of the 70 percentage points that we have today, and that's a part of 36% of the consumers we are going to work with, 40 percentage points are physical losses. And with investments, you can reduce them to a much lower level. The other 30% will be addressed as we face losses in our concession areas. Let's remember that we are going to have a meter reading for all the customers in 6 years. So that is going to make a huge difference.

We are now closing the Q&A session. I'd like to turn the call to Augusto Miranda for his final considerations. Mr. Miranda, you may go on.

Well, once again, I would like to thank you very much to be part of this call. On behalf of Equatorial, we are committed to deliver quality services and ensure differentiated returns to our shareholders. Once again, thank you very much, and I wish you all a good day.

Thank you. Equatorial's call is now closed. Thanks for joining us, and have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]