Equatorial S.A. ($EQTL3)

Good afternoon, everyone. Welcome to Grupo Equatorial's Fourth Quarter 2025 Earnings Call. Joining us today are our CEO, Augusto Miranda, Vice President, , Mr. Leonardo Lucas; Cristiano Logrado; Tatiana Vasques; and Mr. Liu Aquino CEO of Echoenergia. They will be available to take your questions at the end of the call. Note that simultaneous interpretation is available. [Operator Instructions]. This call is being recorded and will be posted on the company's Investor Relations website at www.ri.equatorialenergia.com.br along with today's presentation. [Operator Instructions]. Before we begin, please note that any forward-looking statements are based on management's current views and assumptions as well as information currently available to the company. These statements are subject to risks and uncertainties as they relate to future events and depend on circumstances that may or may not occur. Investors, analysts and members of the press should keep in mind that factors related to the macro environment, the industry and other variables may cause actual results to differ materially from those reflected in these forward-looking statements. With that, I'll now turn the call over to Mr. Augusto Miranda.

Good afternoon, everyone, and thank you for joining us today. Let me kick things off with the key highlights for 2025. It was a year of solid and consistent performance. We delivered consolidated adjusted EBITDA of BRL 12.2 billion, up 11.6% year-over-year. And on a same-asset basis, EBITDA came in at BRL 10.9 billion, up 14.3%. Total investments reached BRL 11 billion, up 23.5% year-over-year, largely driven by continued build-out of our distribution networks. To fund these investments and take advantage of favorable market windows, we raised approximately BRL 19.5 billion over the year. This allowed us to extend the average maturity of our debt to -- from 5.4 years at the end of '24 to 6.0 years in Q4, while also tightening CDI spreads by 40 bps. On shareholder returns, we approved BRL 1.98 billion in distributions, equivalent to a 185% payout. On the awards front, Equatorial Para was recognized as a top distributor in financial management at the Abradee Awards. As a group, we ranked for the first time in the GPTW, reaching 18th place in Brazil and posted 87% favorability in our Korn Ferry engagement survey, placing us in the top decile of the Brazilian market. In addition, Equatorial was named by extel as the most honored company in the Latin American utility sectors, ranking first in 7 out of 8 categories in the combined survey. On the operational side, we continue to make steady progress across all our key metrics. We kept consolidated losses within regulatory thresholds for the ninth consecutive quarter, with strong performance in Piaui, Alagoas, Amapa and Goias. This underscores the effectiveness of our loss reduction efforts and supports the sustainability of strong performance going forward. We also saw meaningful improvement in service quality with DEC down across all distributors, regulatory compliance in Piaui, and Alagoas and full compliance with contractual DEC and CEEE-D. These results reflect both the investments we've made and the consistency of our execution, supported by our team's commitment to delivering increasingly reliable and efficient service. Finally, in December 2025, ANEEL recognized the amounts due under the administrative process related to the extraordinary tariff review for Equatorial Piaui, originally linked to 2019. In practical terms, this results in recalculating the RTE as if it had taken place in 2019, replacing the annual tariff adjustments with additional revenue recognized in 2019 and carry it forward over time. We'll walk you through the impact on results later in the presentation. Let's now move on to Slide 4 and take a look at our Q4 '25 highlights. From a financial standpoint, we posted adjusted EBITDA of BRL 3.5 billion in the quarter, up 10.5% year-over-year or 20% on a same asset basis. We ended the period with BRL 11.2 billion in cash, equivalent to 2.5x short-term debt, reinforcing a solid liquidity position to navigate a more volatile environment. Company leverage measured by the net debt-to-EBITDA covenant declined from [ 3.2x ] in Q3 '25 to 2.6x in Q4 '25, mainly reflecting the positive impact from the capital gain on the sale of transmission assets, which will remain in the last 12 months EBITDA through Q3 '26. On to investments now. We deployed BRL 2.9 billion in Q4 '25, up 8.6% year-over-year. We continue to focus on expanding and upgrading our infrastructure, improving service quality and bringing losses down in line with demand growth across our concession areas. During the quarter, we closed the sale of our transmission assets, generating BRL 2.2 billion capital gain and bringing in BRL 6.4 billion in cash related to equity value and capital reduction. Proceeds from the transaction, along with cash on hand, were used to prepay a debt in the holding in CSA worth BRL 2.7 billion, redeem BRL 2.6 billion in preferred shares at Equatorial Distribucao and pay of BRL 1.8 billion in interest on equity. On the operational front, Q4 also showed solid progress with YB market growth of 4%, driven by higher consumption across rural, residential and industrial segments alongside below average rainfall in 6 of our 7 concessions. We also continue to see positive trends in consolidated losses, which remained at 0.8 percentage points below regulatory levels, already reflecting CP09 and the updated methodology based on metered market and pass-through energy. On quality, we achieved DEC targets across all distributors in 2025, highlighting consistent improvement in service levels and the impact of our ongoing investments. We also secured approval for a SUDAM benefit at Equatorial Para with the term extended through 2034. In addition, we capitalized retained earnings totaling BRL 9.5 billion. I'll now turn it over to Leo to walk you through the main drivers behind our Q4 '25 results.

Thank you, Augusto. Good afternoon, everyone. Before we get into the consolidated results, let me first walk you through the most relevant nonrecurring items for the period. The first item relates to the closing of the transmission asset sale, which generated a BRL 2.2 billion capital gain as Augusto mentioned earlier. The second item relates to the Piaui RTE from the 2019 process, which had a positive impact of BRL 212 million on EBITDA and BRL 188 million on financial results, amounting to BRL 400 million on net income. The third item relates to the completion of the review of contingency estimates in Goias, including PPA adjustments. As part of the successful turnaround underway in that concession, we conducted a deep reassessment of contingencies, which led to a net reversal of provisions with a positive impact of BRL 42 million on EBITDA and BRL 57 million on financial results and roughly BRL 100 million in pretax income. This reflects another step forward in managing contingencies with an improved balance versus PPA levels and continued value capture along the way. Finally, we recognized an impairment of BRL 3.5 billion, of which BRL 3.2 billion relates to our renewable generation platform, Echoenergia. Let's now move on to Slide 7. I'll briefly walk you through the group's consolidated and adjusted financial performance. In this quarter, consolidated margins were up 5.8%, mainly driven by the distribution segment, while EBITDA reflects the equity pickup from SABESP and the exit from transmission. On a same asset basis, margin growth would have reached 12.7%. EBITDA grew 10.5% or 20% on a same asset basis. Adjusted net income declined 20%, reaching BRL 802 million. This was mainly driven by higher other expenses, including increased inventory provisions, especially in Para and Rio Grande do Sul. They are getting closer to the tariff revision period. Worsening financial results impacted by CDI increase as well as the increase of other expenses, giving a greater provision for inventory losses, BRL 86 million are nonrecurring of that total. These effects were partially offset by the EBITDA expansion as well as the equity pickup from SABESP. It's worth noting that the transmission deal helped to bring down debt and CDI-related expenses. And since most prepayments took place late in the quarter, the full impact would only be seen in Q1 2026. Net debt-to-EBITDA stood at 2.6x, reflecting the BRL 2.2 billion capital gain from the transmission asset sale. Excluding this effect, leverage would have been 3.0x. Let me point out that we remain active in the capital markets, focusing on improving our debt profile by extending maturities and tightening CDI spreads. Lastly, investments totaled BRL 2.9 billion in the quarter, up 8.6% year-over-year, driven by Para with spending on both grid assets and universalization programs such as Luz Para Todos on to Slide 9. This is an overview of the operational performance, the commercial performance of our distribution businesses, along with the quarter's key financial highlights. On the left-hand side, we provide a snapshot of the consolidated performance of our distributors. We highlight market growth, lower losses, still maintaining strong collections and a decline in PECLD. Still on market data, we recently hosted an education session to walk through the new concepts in our operational release aligned with ANEEL's guidance following CP09 approval, which adopts metered market as the basis for loss calculations. This change brings the loss delta calculation closer to the reality by standardizing the market basis used. The materials, including data workbook are available on our IR website. Turning back to the commercial performance. Adjusted PECLD improved from 1.56% of revenue to 0.89%. This was driven by renegotiations, particularly in Rio Grande do Sul with large customers and with Amapa with the government on top of the new low-income tariff. Reported figures were impacted by the update of the provisioning matrix and the rollout of the group-wide PECLD methodology in Goias. On quality, we ended the year with 5 of our 7 distributors within regulatory deck limits. Rio Grande do Sul met its contractual DEC. In Goias, despite having a waiver, delivered its best DEC since 2001, a major achievement. On the right side, distributor gross margin grew 14.2% in the quarter, driven by higher Wire B tariffs and stronger market volumes. Adjusted PMSO increased 7.7% versus Q4 '24. However, when including compensations, growth was 3.6% below inflation. This last indicator shows that PMSO efforts are being redirected to bring compensations down, which is a key as these are non-tariff items and directly impact efficiency gains and at the same time, provide the best quality possible to consumers. When we look at PMSO per customer, grew just 2.6% below inflation, impacted by the larger number of consumers, about 300,000 in the period. On a PMSO plus compensations per customer basis, we saw a 0.3% nominal decline. This improvement reflects the shift in resource allocation toward reducing compensation, boosting EBITDA and improving quality metrics as we'll see on the next slide. Let me walk you through the expressive programs we've made on quality. Let me point out that DEC improved across all companies year-over-year, reinforcing consistent gains in operational performance. Let me point out that we closed 2025 having met DEC targets across all distributors with 2 already reaching the 80% threshold ahead of schedule, reflecting focus, good management practices as well as investments on the networks. The 2 companies still further from the 80% target are more recent acquisitions. Goias on one hand, which has a curve extending through 2028 and Rio Grande do Sul that had its targets reset in 2025 due to major weather-related incidents. We are on track to meet the agreed milestones by 2026 once again. These improvements on quality is something -- or something that we're very proud of and reflect our ongoing commitment to customers and stakeholders. Turning to Slide 12. Let's look at our other business segments. In sanitation, results continue to reflect gains in water metering and growth in billed water and sewage units. EBITDA came in at about BRL 8 million, supported by lower PCLD and tariff adjustment of about 8%. In Renewables, adjusted EBITDA totaled BRL 215 million, down 6% year-over-year, reflecting curtailment impacts. We also provide a breakdown of curtailment by reliability, energy and external unavailability, along with the financial impact since 2023. As a reminder, [ low ] 15,269 addresses compensation for reliability and external unavailability curtailment, and we are actively engaged in discussions to ensure proper reimbursement. I'll now turn the call over to the operator for the Q&A.

[Operator Instructions]. Lucas Guimaraes from UBS asks the first question.

Good afternoon. Congratulations on the results. I have 3 questions. Thinking about the growth in your distribution EBITDA, what's your take on the RV and VOC because we haven't had any price adjustments so far. The impairment for Echo and CSA indicates that the asset is booked close to the fair market value. Are you going to bring that to market? Do you consider that for an equity swap? -- as we -- if we detect improvement in the renewable segment. And the last question about dividends payout. Are you considering retaining more cash for a possible acquisition in the future?

Thank you Lucas. Let me address the VNR VOC question. Our track record is very interesting in that sense. Based on the revision in Maranhao, which was the latest, that happened when the prices hadn't been updated. We've already talked to ANEEL through directly and via Abradee. ANEEL has been working to improve that prices bank. And we have considered some adjustments, some alternatives to overcome that hurdle. We keep on working the reviews. We may have some reviews in Rio Grande do Sul, Amapa and Para and the base price and then the review next year in Para. In other words, we have been working hard to update that price bank. the best VNR VOC item we can get or rate we can get. And at the same time, ANEEL has been working hard to issue an update on that price bank. This is expected to come out later this year or early next year. Let me address the impairment events. Some impairments to a possible divestment. Well, Echoenergia, we have been having that impact from the curtailment for quite some time. This has been hurting the entire industry. And there is a joint effort to improve that situation. There's the reimbursement of part of that curtailment. This is something we've been working on as well as some structuring measures. Some point in time in the future, we may revert the current scenario. This is something that has to be assessed on a yearly basis. If there are -- if there's something changed in that variable, that should be adjusted accordingly. On to sanitation now. A lot of greenfield operations in there. We have had major progress in our requirements, coverage, universalization efforts in some municipalities, but revenue has been impacted, and that's why we have that move in sanitation. On the other hand, the state has been faced with a transformational opportunity with the Equatorial margin, which may change that reality in the future. So now that we understand that has to be updated on a yearly basis, and we'll be adjusting accordingly. As to recycling the most obvious asset, which is transmission, we have been considering with some flexibility in our planning to recycle assets. And at that point in time, transmission was the most evident item. And we keep on monitoring and considering all opportunities in the marketplace to come up with the best alternative possible to our portfolio. We have an open mind as to these opportunities. We take into account the scenario with higher interest rates and opportunities may arise. And when we connect to them, there are many financial instruments we can resort to asset recycling as an opportunity. Is there another one? yes, payout. Yes, I think you've been monitoring it. When we had some acquisitions, we raised the private capital portion to better adjust leverage vis-a-vis the opportunities we're faced with. Anyway, given that scenario, we came up with that proposal to give the balance sheet of the company more flexibility, more visibility. This is yet another alternative, so that we can better capture these opportunities.

Daniel Travitzky from Safra asks the next question.

I have 2. One is a follow-up actually on this topic of growth and opportunities. This is very clear. The company was focused on expanding in sanitation. The SABESP was proof of that. My question is about where are you looking at? Are there are many opportunities in sanitation. There may be opportunities in distribution. So where are you looking at with more focus now? That's the first question. And the second question is about the reassessment of Echoenergia and CSA to recognize that impairment. My question is why conduct that assessment now? What's the end goal here?

Let me answer the last question first about the reassessment. Well, there are no 2 ways to go about it, actually. This is something that you have to assess every year. And in order to abide by the regulation, you have to make sure assets are being recovered. Based on the test we conducted this year, assets were not fully recovered. That's why we had to make that adjustment this year. In previous years, in which there were some moves, we had no indication that we had to do it. As to the opportunities, I'll turn it over to Augusto.

Thank you, Daniel, for your question. Yes. When you look at distribution, we are looking at -- we're looking at it. We are considering -- our planning efforts indicate that, of course, we have to consider everything. It's only a natural move to have and we have to present that to the Board, our take, whether we should take it or not. And of course, sanitation is a priority segment. We made 2 important moves. We went all the way to CSA, allowed us to do the same with SABESP, a very successful decision, an asset that we are monitoring on a case-by-case basis.

[Operator Instructions]. This concludes the Q&A session. I'll turn it over to the company executives for their closing remarks.

Thank you. To wrap up, let me once again reaffirm our commitment to driving consistent value creation for our shareholders, supported by solid performance across all our businesses and underpinned by disciplined financial management, which is a core part of Equatorial's culture. Thank you again for your interest in the company and for being with us today. Thank you. Have a great afternoon.

Thank you for attending, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]