Light S.A. (LIGT3) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the first quarter 2021 earnings call for Light. My name is Rodrigo Vilela. I am an IR employee, and I will host this event. It will be held in Portuguese, and it will be simultaneously translated into English. If you'd like to listen to the translation, select English in the interpretation button on the lower part of your screen. These results will be presented and commented by our Financial and Investor Relations Director, Roberto Barroso. And today, we have with us Commercial Director, Thiago Guth, who is going to give details on what has been done in fighting losses, improving revenue and increasing our client satisfaction, and he will also give a brief overlook of Light's plans to work in special areas. Our CEO, Nonato Castro, is also here with us. This presentation is available for download on our IR website, but you can also watch it here on Zoom. [Operator Instructions] This webinar is being recorded, and the audio will be available in the Investor Relations website. As usual, this is our disclaimer. We'd like to clarify that any statements made during this presentation about the company's business perspectives, projections and financial and operational goals are simply beliefs and assumptions of the company's Board. They're based on currently available information for the company. Future remarks are not a performance guarantee, and they involve risks, uncertainties and assumptions. They refer to future events, which, therefore, depend on circumstances that may or may not occur. Investors should understand that the general economic conditions, industry conditions and other operational factors may affect the future results for the company and can lead to results that may differ materially from those expressed in these forward-looking statements. Well, with that disclaimer, I'd like to give the floor to Roberto Barroso. Barroso, over to you.

Thank you, Rodrigo. Good afternoon, everyone. It's a great pleasure to be here to show you our results and discuss it with you once again. About the first quarter results, we're going to give a brief overview. But before we go into the results, we'd just like to go over our new Board of Directors, which was just elected in our meeting on April 29. Along with our shareholders, we were able to have a 100% independent Board, which is totally professional. It's led by Firmino Sampaio, who is very experienced in this industry. We've had the opportunity of introducing him before. He's even been a part of some of the company's results calls, such as during the third quarter of 2020. Along with Firmino, we have Ana Toni as the Deputy Chairperson. She also has a lot of experience. She is a Chairman of the Board of Transparency International. She's spent some time in Greenpeace, and she will definitely help the company in advancing ESG initiatives. Also on the Board, we have Abel Rochinha, who is also very experienced in infrastructure. He's worked in ALL INVEPAR, and he's spent many years in the Enel Group. Helio Ferraz is also a part of the Board. He is an attorney and the VP of the Trade Association of Rio de Janeiro, and he's also in the Brazilian Council of Arbitrage and Mediation. We also have Lavinia Hollanda with us. She's an economist, an engineer. She is a member of Escopo Energia, and she has a lot of experience in the energy industry, and she's also worked in the financial market. Also on the Board is Vanessa Claro, another experienced professional in risk management, and she has also been a director at Tom Telefónica, and she spent some time at PwC. Vinicus Roriz is also a member of the Board of Directors. He's also worked for AmBev, INVEPAR, and he was the Chairperson for Comlurb. We also have Wilson Poit, an entrepreneur, who is also a Superintendent Director at Sebrae São Paulo, who has worked for Endeavor. And finally, Yuiti Lopes, an experienced professional who has worked on the financial market, who's worked in Goldman Sachs, GP Investments and who is currently in LTS. So it's the very professional Board. 3 of the 9 members are women, that is 1/3 of the Board, and we believe that these professionals who are so experienced and who have such different skills will contribute to the company's directorship considering the moment Light is at. Moving on to Slide 3. We selected some highlights for this quarter. It was a very positive quarter from the company's perspective, both Genco and Light trading. But it was a challenge with the distribution company where we still suffered impacts from the pandemic. We still had negative impacts from the high temperatures we had during this quarter. And there were also some advances as we will see during this presentation. Some legal contingencies, liabilities and improved collection. Total losses increased by 555 gigawatt hours in the first quarter, especially due to a higher average temperature, non-billed build energy, because of the heat wave at the end of March and a reduction -- and a lower IEN by 120 gigawatt hours. Regarding our personnel materials, services and others line, we finished in line with our PMSO from the first quarter of 2020. Consolidated PMS increased 2.8% below the inflation for this period. We managed to reduce BRL 20 million in legal contingencies. We increased our collection in 70 basis points versus the first quarter of 2020. And this was despite a bad debt to gross revenue ratio, which closed at 4% in the first quarter. Our consolidated EBITDA was BRL 429.8 million, down 9.9% versus the first quarter of 2020. There was a reduction of about 35% in Light SESA, but we had an increased EBITDA for the trading company and the generation company. Regarding our net debt-to-EBITDA ratio, it was down to 1.4x, which is lower than what we had in the fourth quarter of 2020 when we were at 1.73x. Net debt was BRL 4.3 billion, a reduction of 20.9% versus the fourth quarter of 2020. We also had a robust cash position in the first quarter of 2021, approximately BRL 4.1 billion in cash. Finally, with the impact of swaps mark-to-market on the financial result and the increase in losses, we posted a loss of BRL 41.8 million, a reversal from the profits we had had in the first quarter of 2020. Slide #4 shows a summary of how the grid load and the billed market behaved. The company's grid load went up 4.4% versus the first quarter of 2020. This was especially due to higher temperatures which were, on average, 1.3 degrees Celsius higher in this quarter than the first quarter of 2020. However, the billed market did not behave the same. There was a reduction of 1.7% in the first quarter of this year versus the same time last year. This was basically due to 2 reasons. First, there was a drop in how much was consumed by concessionaires. There was a change in the [indiscernible] substation. So that reduced the consumption in that substation for concessionaires. If we were to exclude that effect, the billed market would have gone up 0.4%. The second effect has been higher losses and non-billed, which was due to the heat at the end of March, but which will be billed at the end of April and throughout the second quarter of 2021. Considering the billed market on how each segment behaved, we saw that there was a growth of about 6% in the residential and industrial segments. The residential increased especially because of a higher temperature in the summer of 2021. While in the industrial sector, it was mainly due to the advances of the steel-working industry, which has managed to perform very well in the last quarters. On the other hand, we've been facing a challenge for government consumption and in the commercial segment. These 2 categories have been having a very slow recovery in our concession area. We're still feeling the effects of the pandemic. The commercial sector is also related to the temperature. But even with the higher temperature, there was a reduction of 5.7% versus the first quarter of 2020. Moving on to Slide 5. This slide shows how total losses behaved on the company's grid load. We can see that there was an increase of 1.6 percentage points from 25.9% to 27.8%. This indicator shows the effect I mentioned of lower billed consumption for concessionaires, which had a negative impact on this index. But versus the volume, there are 3 effects that I can mention that will explain this 555 gigawatt hour increase in the first quarter of 2021. Higher average temperatures, the effect of non-billed energy of about 150 gigawatt hours, and when you have a higher temperature on the second half of the last month of the quarter, usually, the reading cycle does not capture all the energy that was consumed during that quarter. Finally, the company has improved its inventory management -- or excuse me, the management of cut clients, which led to these better results. Now considering nontechnical losses in low voltage market, there was an increase from 50% to 55% this quarter. This is an indicator that is still higher than 36.06%, which is the loss or the regulatory target. When we look at the right-hand side graph, we see how energy volumes have been behaving between traditional treatment areas in green and special treatment areas in yellow or orange. We saw that the amount of losses in the special treatment area has remained flat, which is a good sign for this quarter. But we did see an increase in the losses indicator are the amount of losses in the conventional treatment area. Part of the increase is related to 150 gigawatt hours, which have not been billed, and this will be observed during the second quarter, but most of the impact came from higher-average temperatures. Now some good news that we have for this quarter confirming losses was that 17,000 consumers who were classified as special treatment areas were now transferred to the conventional treatment area. This is a part of our initiative of getting closer to community leaderships in areas where the company has already gone back to working in a conventional strategy. So at the end of the first quarter of 2021, we had 4,419 in the special treatment area and the remainder in the conventional treatment area. Now to discuss our performance in combating losses. The company continues to focus on incorporating energy as we'll hear from Thiago Guth. We managed to have 27,000 toys this quarter, which is much higher than the fourth -- excuse me, than the first quarter of 2020. But we've been very careful about REN. We still only bill what we understand we will receive. So we have not seen a relevant growth in the REN this quarter, and we continue to incorporate energy wherever we can reduce losses sustainably and also improve the company's collection. Still on collection, on Slide #8, we see that we've made strides across all segments, in retail with large clients and also with the public sector. Our total collection was 95.7%, 7 percentage points -- excuse me, 0.7 percentage points higher than the fourth quarter of 2020. So for the first quarter, after the pandemic began, we managed to reverse this trend that we have been seeing on how difficult it was to collect. This was the first quarter in which, after all the actions have been implemented by the commercial directors, we're seeing improved indicators across all 3 segments. As you can see on the right, we still haven't seen a change in the bad debt to gross revenue ratio. We had a slight increase in the indicator from the first to the second quarter of 2020 and from the second to the third. We finished the fourth quarter at 3.9% and this first quarter at 4% on this indicator. Continuing on Slide 9. Here, we see the results of our main operational indicators, both interruption duration and interruption frequency. Here listed as DEC and FEC. We have positive results on both indicators. DEC was, for the first time, below 7 hours this year. It was a difficult summer. We had some storms, but we were able to finish at 6.95, which is far below the 8-hour limit determined by ANEEL. Regarding FEC, we also managed to advance. This was the best result the company has gotten in the last years, 4.41x, and the limit provided for the concession contract is 5.15x. Slide #10 shows EBITDA variation from the first quarter of 2020 to the first quarter of 2021. Our net revenue was higher, especially because of the temperature and because of our power management, not only in the company but also in the trading company. On the other hand, higher losses led to a reduced gain that we had obtained along with the higher energy prices in the first quarter of 2021. So we were close in manageable expenses, PMSO, and also in provisions. We did better in contingency provisions, but we did have a higher PCLD here. So our EBITDA was around 90% of the EBITDA we had last year, a reduction of BRL 45.9 million in the first quarter of 2021 versus the first quarter 2020. Now when we look at this split per segment, we can see that the distribution company's EBITDA is lower because of the effects I mentioned, but we had some effective advances. So we managed to keep a good performance with the contingencies, and our PMSO has basically been stable. With Light energy (sic) [ Energia ], although we had a lower GSF for the first months of this quarter versus the first month of 2020, we managed to do this very well to prevent energy purchases like we had last year. And because of that, our EBITDA for Light Energia was up BRL 52 million. With the trading company, we also managed to move up by BRL 12.8 million because we managed our trading better in our energy contracts and some of them were even readjusted based on IGP-M and IPCA, which have been the indicators we're seeing in these contracts. Slide 12 shows the positive developments we had in legal contingencies. This quarter, we had a reduction in JEC and our contingencies for civil suits. We also received far fewer suits this quarter than in the first quarter of 2020, which shows how our commercial management has been better. And even though we are still continuing to have energy cuts to protect the company's collection. We have still been able to have fewer lawsuits -- or fewer new lawsuits this quarter than in the first quarter of 2020, which also helped in reducing contingencies this quarter. On Slide 13, we see how the company's net profits advanced. We went from $167 million in the first quarter of 2020 to a reported loss of BRL 41.8 million in the first quarter of 2021. And this was basically due to 2 factors. First, a reduction in our recurring EBITDA, BRL 45.9 million, and 2 lines in the financial results, which were worse. A negative impact of our swap operations, which were marked to market. In the first quarter of 2020, with the pandemic and with the stimulus given by the Central Bank, interest rates were lower. And with our future interest rates being lower, we gained a BRL 107 million in tax credits. And this year, the opposite happened. In the first quarter, the future interest rates curve had an inflection, and that also increased the perspective for CDI in Brazil, which had a negative impact of the mark-to-market. So that led to a negative variation of nearly BRL 290 million comparing both quarters and an increase of about BRL 60 million with the cost of the IGP-M versus the update in our debt to CCEE. This debt was paid on April 6. We paid BRL 1.6 billion, which was the remaining debt that we had with CCEE to prevent against new IGP-M impact on the company's bottom line. Continuing with Slide 14. Here, we see the company's robust cash position. We finished the quarter at BRL 4.1 billion -- or nearly BRL 4.1 billion in cash; 2021, BRL 2 billion in cash; and BRL 1.8 billion comes to term in 2022. The company's average maturity is 2.1 years, and we want to extend this with new issues. The cost of the debt, this is the discipline that we managed to have in the last few years. We managed to reduce the company's debt cost, which was higher than 8% on nominal terms to under 7% in the last quarters. And when we look at the actual cost, as inflation goes up, we've been able to reduce the actual cost of the company's debt, significantly. Regarding our debt profile, 2 debts were amortized in IPCA this quarter. After we got cash results from the follow-on, BRL 1.3 billion, we paid BRL 300 million in debt to the BNDES, which cost IPCA plus 11% a year, and we also prepaid a debt that cost IPCA plus 5.74% a year, which was a new debenture issue by the company. So basically, 2/3 are indexed to the CDI and 1/3 indexed to IPCA. Considering our net debt-to-EBITDA ratio, the company's leverage was reduced significantly over the last 3 quarters. The company's EBITDA dropped -- excuse me, evolved in the third and fourth quarter because of COVID accounts being received. So that basically maintained the company's leverage. And this quarter, our leverage went down especially because of the follow-on primary -- excuse me, the primary follow-on in January 2021, which improved our capital structure and allowed us to get BRL 1.3 billion in cash for the company. So continuing on Slide 15. We can see how much our corporate rating has improved from 2017 until now. We were upgraded twice by S&P. The current rating is AA+ with Fitch after the follow-on. Our rating was also raised from A- to AA+ in January 2021. And in Moody's, we went up from BBB+ to A1 in May 2021, which was when we were most recently upgraded by Moody's. On Slide 16, we see our 100-day plan. Many of you heard about this from the company's management. We have been mentioning the 100-day plan. The entire Board had been working on it from January, and this has been concluded as of April. We advanced on several fronts. The idea behind this plan was to assess the company's organizational structure, also provide a process review, review our institutional aspects. We did a budget review, and we also started adapting our systems. Within the organizational structure, we focused on attracting leadership, establishing a strong leadership in the company. In process reviews, we've made several improvements by implementing a new management methodology. We have several committees, which have been implemented and in operations from the institutional point of view. We've reinforced and tried to reinforce the company's authority to improve its reputation with several stakeholders. From a budget perspective, we reviewed our budget with the Board with new assumptions. And we're now at the end stage of defining and deploying goals. And from a system's perspective, we are technology-intensive with an emphasis on operational efficiency. And on Slide 17, we have lifted some of the main achievements that we were able to summarize here. Considering the short time we have, we just wanted to bring you some of our main results. Looking at finance and IR, we improved the company's capital structure in January. We also have been focusing on improving and extending our debt maturities. We have an agenda planned, which is now being implemented. And we also managed to repay GSF to stop IGP-M from impacting our financial expenses. Looking at distribution. Light so far had decentralized operation centers. We had 6 operation centers in the company. They are now centralized. We created an integrated operation center where, in a single center, we can manage the entire high-, medium- and low-voltage grids, improving our service quality and reducing OpEx, and now having even faster decision-making. So with that, we expect to increase our productivity. We readapted a lot of our own structure and third-party structures in the distribution branch, and this is to reduce costs significantly in 2021. From the legal and institutional relations perspective, we have already created a judicial demands committee, which has been identifying root causes and improving judicial subsidies so that we can continue to reduce the number of lawsuits that the company gets and also reduce provisions for the next years. Our institutional agenda has increased the company's credibility with strategic shareholders -- excuse me, stakeholders. Considering our people in corporate management. We are implementing a program for management excellence, where we've been trying to capture better results with the adoption of a new management model, where we are trying to accelerate this process by hiring a management consultancy company, which has been helping us to implement these initiatives faster. We also produced a new organizational design, which is now being concluded. We were searching for an efficient and agile structure, which allows synergies in the company. We're also implementing a new methodology for the definition and deployment of goals to be applied in 2021. To discuss our administrative and controller branch, we have updated the technology park in the company, and we have a plan for the company's Technology Director. We're also preparing the company for a digital transformation. This controller has also done very well in reviewing contracts focusing on reducing costs and aligning our interests with our suppliers' and with the service providers that the company has towards better results, considering regulation, energy and commercialization. Preparations for tariff reviews in March 2022 have already been structured, and we have been following up on this process every 2 weeks. It has started some time ago. The company has a relevant regulatory agenda, and we have been monitoring it through public consultations in progress regarding losses and risk areas regarding bad debt, operating costs the issue of the PIS and COFINS taxes, which are relevant for the company. We had a ruling from the Supreme Court that confirms our understanding about the lawsuit that we had received in April 2019. And we're also following CP 35, which is on its third phase, which discusses the economic imbalances of the -- caused by the pandemic. Finally, we have a construction of a bypass tunnel in the largest complex, which had its environmental license granted, a construction consortium has been concluded, and we have started reviewing the executive project. So it's ongoing, and we intend to build this in a bypass in 2023. Last year, ANEEL approved this construction. And if Light company is not renewed, it will be paid damages on the amount of the entire value paid plus correction for inflation. Now Thiago Guth will present the improvements that we've made on the commercial area in the last 4 months. Thiago, over to you.

Good afternoon. So first, to refer back to what was mentioned on losses recovered in the first quarter of 2021. I think the effects of temperature have been very clear. As for cuts, we had a reflection from the volume of cuts made. And this was started last year so that we could reduce defaulting to a better level. So this reduced the inventory of cuts. We started at 480,000 clients with cuts, and we finished with 476,000. And in April and May, we are hoping that we can continue to decrease this inventory even further. It's important to say that the effect of this has been lower energy increases, which has been offset by an increase in traditional energy recovery actions. This is very important for the company. And we will continue to perfect this process so that we can have a more sustainable management of this client base. So we hope that we can continue to intensify cuts and fighting nonpayments, and we hope that this inventory can be at a lower level so that we can continue to recover energy through this. Considering the company's loss strategy, it's important to reinforce that our strategy has been based on sustainable energy increases and using the energy recovery process, but this should also be connected to a good kind of collection so that we can reduce PCLDs from being incorporated in the future. So this is a structural action. And over time, we will see it being reflected in the company's results. And this is different from our collections process, where we were able to have agile changes. We changed how this process is managed, and we had a better profile from the beginning of the year on that set. Considering structural actions, it's important to highlight some of the initiatives we have already had, such as hiring loss combat professionals who are experienced, training our field team and identifying a number of frauds that were not identified before. We also reviewed contracts for partner companies and even managed our own team with a significant increase in productivity. We started normalizing clients which -- excuse me, fraudulent clients, and we reviewed our grid shielding process. This was a process that already existed in the company, but was not so efficient. So we reviewed this process for the first time. And in the grids, we already worked, and we were able to reduce losses, which had reached 40% in the first shielding process, and is now at 7%. It's a structural process. It requires investments. And at first, we had to calibrate it to see how it would be executed, and we also had to acquire some equipment to make it efficient. We now see a number of actions that will require a more robust structure so that we can strengthen the company's energy park, such as replacing obsolete meters. The company now has a park of about 900,000 obsolete meters, which generate higher fraud levels and even administrative losses. We've mapped this entire park, and we're going to accelerate the replacement of these meters. We also implemented measurement scales, which were difficult to operate before and which we have now improved, and we're working on administrative losses in measurements, both in tele measurements and conventional measurements. So in the first quarter, we have already reduced the number of non-measured clients, and we also reduced the number of misreads. We're working on restructuring and retrofitting our measurement park. We now have 200,000 obsolete measurement devices, which now need to be retrofitted. So I mentioned some structuring initiatives that we understand fit in our strategy. We believe that we'll see higher energy levels in the future, and this fraud detection system has been calibrated and will continue to be calibrated with a collection strategy. One of our strategies was to integrate the collection plan with the fraud combat or the loss combat plant so that we can consider the client's ability to pay with the energy recovery process and the volume and amount of retroactive months that could be charged for that client's profile. So this not only recovers sustainable energy, but it makes our collection reach higher levels now. So this also helps us to reduce the PCLD rate. So still on the structure -- excuse me, on the collection structure. We've reviewed this area. We implemented new ways of selecting those to be charged. We started a program to collect from our clients, and we started many other initiatives so that we can collect from an administrative perspective and also in managing the teams that are performing the power cuts. This operational effort will also reduce our cut inventory. Considering that the volume of reconnection for every cut was lower than the market average by about 60%. By reviewing contracts and managing contracted parties, we're able to reach nearly 100%. Finally, structuring activities with communities. We understand that this will also increase energy and not recoveries so that we can reduce losses sustainably with higher energy levels. We've started discussing this with 180 community leaders. And this is a process that goes both ways with communities. So we create a broad communication channel. We create community leaders, and we have a structure that includes social directors where we can have better communication with the communities. Our project started with 4 communities, Babylonia, [indiscernible]. So we have already visited these locations. We've mapped clients who were committing fraud so that we could recover their registration. We started communications to understand how we can -- what we can do by using resources that have already been approved for energy efficiency. And we're talking to different stakeholders on the private sphere and in the government so that we can assess their ability to pay. We'd just like to say that we're very excited about this initiative. Communities have been responding very well. It's been very positive. Other communities have come to us because of this effort we began, wanting to regularize some of the units before this project has -- had even been concluded. So we're going to have a pilot in these 4 communities so that we can assess gains, adjust any improvement opportunities and then scale it up for 2022 and for the following years, and we also want to have a better communication process so that we can normalize clients in these communities. Finally, we are investing in technology. We started by using analytic tools to help us fight those at default. We have a structuring process to manage field access. We have a market solution. It's well positioned in the assessment, and we are going to manage field teams much better. So our project has already began, and by the end of the year, we will institute it in the commercial and technical areas. Also, loss combat involves the entire company. So we're working on servicing clients, considering that many times, because of a lack of connection to the company's customer service, clients may be called in for a fraudulent connection. So considering our market, we need to have agile services. It needs to be digital and simple to use to make it easier for clients to contact us. So we started a project, reviewing all of the company's customer service lines, and we're making it digital throughout 2021 in the most important lines. And this project will continue in 2022. We call this project [indiscernible]. We're also investing in technology so that we can expand the use of analytics in the commercial area even more. Regarding the tele measurement park, we also have great news in using the information we already have to better guide fraud combat. We're doing this, and we have already started picking up some results in the first quarter of 2021. So to summarize our commercial strategy. Besides managing and reviewing the company's management process, as Barroso said, across all the company's areas, the commercial area has been working on a structural level to increase the consumption of energy and to recover it sustainably by also helping our collection curve to be sustainable and by reducing PCLD. We expect to have significant results this year already, so that we can start seeing the effects of the structural measures this year. We'll pass it on to Rodrigo now.

Thank you, Thiago. We'll now begin our questions-and-answer session. [Operator Instructions] Let's start with Andre Sampaio from Santander Bank.

I have a couple of questions. The first one is about the ICMS tax on the PIS/COFINS charges. We got a ruling from the Supreme Court yesterday on that. So do you have any new information you think that changes anything for you? Do you believe it is feasible to increase the price for those listed in the invoice, for example, with CPFL? We saw -- we heard that this would not be feasible. So if you can tell us a bit about that, that would be great. My second question is regarding one of the graphs you showed in the release. There was something that struck me there, which was the energy price level that you listed. I wonder if that is exclusively for the trading company or if it's for the entire business.

Andre, thank you for your 2 questions. First, to answer your question about yesterday's Supreme Court ruling, we're still waiting for it to be published. We did watch the vote. We know what the result is, but it's very important to wait for it to be published, so that we can assess it with our attorneys who are handling this suit so we can see if there has been any change to -- from the ICMS that has been paid. And it's likely that for Light-specific case, well, there was a mention that we had to get a ruling on the paid ICMS tax. We haven't gotten that information yet. We will need to analyze it in our specific case. The most important thing in practice is that we're very confident that we were going to get this ruling, of course, if it had a negative impact on the previous rulings that had already been made. So we understand it to be positive because that prevents any sort of discussion on changing what has already been decided. Considering the energy price graph, this was a demand that we got from several investors. This is the price for January 2021. These were contracts for end clients. So it would be Light's contract with end clients. So there's no transfer pricing from Light Energy to Lightcom. This would be the end price for January 2021. And now from the next releases, we'll keep it updated for the market. It's a way of providing to the market the average price that has already been sold.

Thank you, Andre. I'll pass it over to Marcelo Sá from Itaú BDA. BY

I have a couple of questions. First about losses. Something that struck me this quarter was that you had higher losses in the good area. You mentioned why, but I think the magnitude in gigawatt hours was really impressive. Were there a lot of reclassifications that changed this mix so much? How do you justify this difference in the good area and the risk area? Now looking at the fee split, in a previous conversation with the company, I remember that a part of the conversation that Light had with the regulators was to try to see some of the loss in the risk area and a lower area -- or excuse me, a lower loss in a good area to define what would be considered regulatory losses. Has this conversation continued with the regulators? Do you see this gap being lower? Looking at the reported figures, your gap is 800 basis points in losses. So I'd just like to understand what it could be looking at a longer perspective in a normalized world.

Thank you for your questions, Marcelo. Considering the increase in losses in the conventional area. The biggest reason are the 3 lines we mentioned. The main volume related to 555 gigawatts, which was the increase we saw this quarter, was because of the temperature. So we'd say that about 300 gigawatts is related to higher temperatures, especially in the conventional treatment areas. 150 gigawatts, and this is important to highlight, I'm not sure if this is clear, 95% was an impact on the conventional treatment area, but it will be seen in the conventional treatment area. So we expect to see a reduction in the volume of losses considering what hasn't been billed in March. It has been billed and will probably have a positive impact after April in the conventional area. And since the previous plan was focused on conventional treatment areas, as Thiago said, there was a change in the plan, and we were focusing on structuring the new strategy that the directors were going to follow. So there was a reduction in the -- of 120 gigawatt hours in the cut users' inventory. It was only conventional, but when you look at a lower figure after 1 quarter, this, of course, has an impact in the conventional area as well. Now in terms of what was changed from the special to the traditional area, well, the impact was very low, 17,000 clients. And as we always say to the market, we only reclassify them once a year. And this goes for clients in the conventional areas for the special area or vice versa. So just to recap, at the end of 2019, it was about 600,000 clients in the special treatment area, and it went up significantly in 2020 -- excuse me, from 2018 to 2019, we went to 600,000 to 700,000. And now from 2019 to the end of 2020, it went from 704,000 down to 653,000, of which 17,000 were reclassified to the conventional treatment area and about 30,000 clients really were disconnected from our grid. So we have active clients registered at special treatment areas 653,000 clients as of December 2020. Considering our discussions with ANEEL, Light made its contributions in the public hearing, CP29, which is the hearing on passing on losses to tariffs for the next tariff review and the methodology, there are 2 possibilities. A conventional possibility, which is according to the complexity ranking. In the previous methodology, Light was the second most complex distributor after [indiscernible] only, and this is now being updated. There's an alternative methodology, which is having specific losses, as you mentioned, for risk areas and a lower loss for the entire area. So if you separate that, specifically the risk area from the conventional area, it should be lower. We've had meetings with some of the ANEEL directors and their assistants to present the contributions the company has made, and we followed that discussion with the superintendents in charge so that we can have meetings. We have meeting schedules with several directors so that we can present our contributions. However, ANEEL is still discussing this matter. We still don't have any news about the agency's decision because it's still being made. And the different agencies have made their contributions and are just adding to the material that they presented before.

That's very clear. Let me just confirm if I understood it right. I thought the split between the traditional and special risk areas was discussed on a specific level when we were reviewing tariffs for 2022. And I thought that the discussion now with ACP was about changing the conventional level. But apparently, you might have decisions on both situations, right? So we might get some news about the loss level for like before 2022. Is that right? Or will there be a different methodology? And the final outcome, will it only be known in the specific review for each company?

Yes. You're right, Marcelo. As a reminder, in the 2017 tariff review, the methodology that Light used for its losses was applied according to the model foreseen at the time. The only exception was the cap for the most complex distributor hadn't been included in the model. And this happened for ANEEL Rio. It had a different treatment for losses before the tariff review. So just as Light find its concession contract, it did too. And ANEEL made a major advancement. In CP29, they discussed 2 models: a conventional model; and in order not to do something very specific for each distributor, we proposed an alternative model, which would treat those distributors differently in risk areas and then it would apply the model. So Light made contributions to perfect the methodology that have already been proposed by the regulators. And as you said, if the methodology is approved over the second quarter, for example, of 2021, the company and the market can make their estimates for how much the model would give as an output before March 2022.

[Operator Instructions] We'll pass it on then to Wellington Center. Wellington your microphone is off. [Operator Instructions] I'll pass it on to Henrique Peretti, who is an analyst from JPMorgan.

I have a question on demand. We saw that even with lower temperatures, demand went down in the first quarter. Do you have any idea of how this is going in April and May? And my question is about your tariff sensitivity. If ANEEL raises its tariff, we don't know, right, if it will be 37%, 38%. It could remain flat. But every percentage point is going to impact your tariffs. So do you believe the positive impact on loss recovery, would it offset the higher incentives that you would have before losses and the reduction in consumption? We know that Light has one of the highest tariffs in Brazil. So the second point is that right now 58% is losses. So you're saying that 50% of the population has to pay for the 50% that is not paying. So I'd just like to hear from you what your strategy is. Would it be to raise your coverage significantly? And would that have a negative impact for your future revenue?

Okay. Thank you for your questions, Henrique. Considering demand, we are still not clear on how it will perform in the second quarter of this year. As a reminder, the second quarter of last year -- of 2020 was the one that most deeply was affected by the pandemic. At the end of the third quarter of 2020, we -- well, excuse me, at the end of the second quarter, we'll have the 12 months that were affected by the pandemic, we see that the industrial segment has recovered as well as the residential one. And this has made a positive recovery as of the third quarter of 2020. However, the government with concessionaires, when we look at, for example, trains and underground trains, in Rio de Janeiro, it has recovered slowly because this is an industry that did not receive any sort of aid so far from the government or from any kind of subsidy. So it has not recovered from the impacts caused by the pandemic. And the commercial segment also has been deeply impacted. We saw a number of restrictions in the first few months of the year, especially February and March. But we've seen that these measures have been relieved a bit as the vaccine has been advancing in April and May. If we have more regular vaccinations and if we have fewer restrictions in the next months, we hope that we can recover the commercial segment at a higher pace than what we saw in the last quarters. So we hope that the second quarter is more positive than the first quarter of this year, since we've been seeing some positive signs. But we still have 1.5 months to go. So if there are any restrictions, this prediction might not come true. Considering the tariff. As soon as we got the approval from ANEEL on March 9 to readjust our tariffs for this year, out of every BRL 100, only 15.2% stays with the company. And as you said, and as Marcelo said briefly, right now, we are at an 8 percentage point gap between the loss included in our tariffs and the loss that was effectively incurred in the last 12 months. So if the agency understands that the complexity level for Light has deteriorated over the last 5 years and that the right tariff would be to pass on the losses above 36.06%, our understanding and even based on what the regulators have been seeing, and all the efforts they've been making and reducing charges, transmission costs, it may be that we will see a fair passing on of the price and the tariff, but maybe the consumer might not even see the price going up because regulators might have already implemented a number of measures that will reduce purchasing costs, such as the Taipu measure that started in the last few months and even retransmission. So we know that understanding losses in the tariff would not create dis-encouragement for consumers. Our understanding is that the impact for the end consumer will not be so significant since only 15.2% of the tariff now comes to the company for -- to cover its regulatory depreciation, to make if its investments, to cover our operational costs and even to pass on losses. So the cost of distribution is very low in our price as we published on March 9. I'm not sure if that makes it clear for you. We're going to pass it on to Matheus Amorim from Navi.

Can you hear me?

Yes, we can.

Okay. I have 2 questions, okay? First, I'd like to understand a regulatory perspective. We know that there is a bill that will not stop the advances of GD in Brazil, and Light is a concession that has a major effect because its tariff is higher and people have a higher purchasing power. Yesterday, they approved a bill that basically takes resources from ICMS, PIS/COFINS and uses them to reduce tariffs for the next 5 years. So they want to have this foreseen in law. So I wonder on what is the impact of that. Will that create more pressure for ANEEL to reverse this amount for tariff? I know that you have a strong legal basis to get a part of this for yourself. So I'd just like to understand what the regulatory risks are. And my second question is, what is your perspective for this year? The rainy season seems to be very light. There's a pressure on tariffs. We might -- beyond the red flag tariff, you might need to increase your tariff, and the economy doesn't seem to be recovering as we expected, especially in Rio, when we look at the data. So I'd just like to understand a bit more about that. What are your challenges for your concession throughout the year? We know that there is a structural level of loss, but I'd just like to understand if this year allows for you to receive the results of the efforts you're making? Or are we still going to have to wait until next year for things to recover?

Great, Matheus. Thank you for your questions. Let's start on the regulatory overview. As I said in the last slide of the presentation, we have an intensive agenda when it comes to discussing regulatory issues, and we also have a strong institutional agenda. The GD bill has been discussed by Light and other distribution companies so that we can protect consumers even. This is something that ended up having one side initially. You had a single narrative. And now we see that there's been a more balanced debate. You can clearly see that the debate has 2 sides. If you don't have fair regulations and legislation, consumers that don't migrate to GD might have an increase in their tariffs in the future because subsidies are included in these tariffs. So that's something that makes us a bit concerned. We have been paying attention to it, and we've been trying to contribute to the discussion so that this is understood by the greatest number of leaders possible, so that we can have a good discussion. So that if it moves towards an approval, so that it's balanced. So far, our understanding has been that we are not seeing a balanced discussion. So it would need to be discussed even further. This is what we're trying to foster with our institutional agenda. The same goes by the [indiscernible] bill that went to the Senate. It's still going to be discussed in the lower house. It may go back to the Senate. So it's a long journey, and we will be there to discuss it along with the other distributors. There are major discussions on the PIS and COFINS taxes, and we're seeing that regulators are trying to contribute with both fronts. We understand that ANEEL also expects it to be balanced when it impacts the tariff. Our expectation is that we can move forward with the regulatory agenda balanced. Considering our reservoir levels, they are at the worst level in the last 22 years -- or excuse me, the second-worst position on the last 22 years. So considering tariffs, this is a situation that really demands our attention. The Brazilian power matrix is much different from what we had in the past. There were a number of thermal plants that were built. The wind and the solar grid has expanded. So we don't believe that this is a major concern. I don't believe there will be any rationing. But the different tariffs mean that we're going to be at the red level for a longer part of the year. The cost for distributors also tends to be higher. If you don't have a good rainy period in September, October [Technical Difficulty]

Barroso seems to be down. He might have had some issues with his Internet connection. So I think we covered most of your question, Matheus. If you still have any questions, right, I think we missed like 2%.

Yes. Just a question. Does red level 1 and level 2 change the tariff that much for you in percentage terms?

Yes. There is an impact. It's not a significant impact, but it is there, yes. Well, everyone, I think that's all the questions we had in our Q&A. No one has raised your hands anymore. So -- and well, we've been talking for an hour and 20 minutes. So thank you for being here on behalf of the company, and we are open if you need any clarifications. Thank you, and we'll speak to you next time.