Neoenergia S.A. (NEOE3) Earnings Call Transcript & Summary

Good morning, and welcome to the conference call on the earnings of the third quarter of 2020 of Neoenergia. This presentation will be delivered by Mario Ruiz-Tagle, CEO of the company; and Leonardo Gadelha, CFO of the company. We should remember that this conference call is being webcast. And it may be found on ri.neenergia.com. And the slide presentation is also available on this website. [Operator Instructions] The conference call is being delivered in Portuguese and translated simultaneously into English. [Operator Instructions] In addition, this conference is being recorded, and it will be made available on the website of Neoenergia's Investor Relations website. This presentation was prepared by Neoenergia to show its overall situation and business activities. Although the information here was prepared carefully and diligently, the information that is provided here can only accurately reflect the moment where -- the information was gathered, reflecting Neoenergia's current conditions and opinions. And so this information may be subject to change. This conference call -- the slides should be seen together with the oral presentation delivered by Neoenergia and also with its financial statements. Neoenergia may not be held liable for any loss incurred, either directly or indirectly as a consequence of the use of this presentation or its content. This presentation belongs to Neoenergia and may not be reproduced, distributed or published to third parties or even used for any other purpose without prior written permission by Neoenergia. We also stress that this presentation may have statements that represent expectations and projections of Neoenergia on its future. These expectations may involve risks and uncertainty and results or consequences may differ from the ones that were discussed or anticipated here. I'd now like to turn it over to Mr. Mario Ruiz-Tagle. You have the floor. Mr. Tagle.

Good morning, everyone. Thank you. Thank you for your words. We're hoping that everyone is fine. Your families are well. Thank you, everyone, for your help during this conference call to present our earnings in quarter 3 and the 9 months of 2020. We have here today, Solange Ribeiro, Deputy CEO; Leonardo Gadelha, CFO; Eduardo Capelastegui, Executive Director for Asset Control and Planning. And I also have the opportunity to introduce Fulvio Machado, our new Officer for grids, we will replace Andre Moreira, who left the company. Having Fulvio is a recognition of our talent development plan, leading to our plan for changing the company. Fulvio had been an active participation in our grid department. He is electrical engineer, has a long career, started as an intern and is now Head of the Department. And then we have Renato Rocha, our Investor Relations -- Head of Investor Relations. I'll give you a brief presentation of how we are overcoming the COVID-19 crisis and then I'll talk about the earnings. Then Leonardo will give you further details about our earnings. And finally, we'll have a Q&A session and our final remarks. Well, we have about 2 months to go to the end of the year, a very tough year for everyone for the reasons we all know. But for Neoenergia, the results of quarter 3 give us confidence that a resumption of economic activity has led to some degree of normalcy and that the crisis is now being left behind. In this new phase, we call this a phase of living with coronavirus, requiring more care in health and safety for our employees, suppliers, builders and customers. On Slide 4, we discussed the action that has been implemented to ensure that our employees are being taken care of and that our business remains profitable. In quarter 3, we started going back to our offices, adopting all health and safety issues and measures based on what the WHO has established. So we have ensured that power reaches our 14 million customers to encourage economic activity. I'd also like to stress that our expansion project in transmission and wind power keep going well, ensuring return to our business plan. In this quarter, we have the ability to deliver. And we were proud to have the first online public hearing for environmental permits. After we also did this with ENAMA. So this is another action by Neoenergia to ensure that we respect all the deadlines in our transmission project. We've also recently announced the acquisition of a project to develop 400 megawatts of renewable energy in the state of Bahia, an asset with great wind potential and also very strategic because it fits to the -- after the completion of the Chafariz and Oitis wind parks this quarter. We also received all the COVID account resources in our distributors, totaling BRL 1.66 billion and also gave to ANEEL our contributions in the Public Consultation 35, so that distributors may have according, of course, to the legal and regulatory framework, economic balance after the impact that they had as a result of the pandemic in their markets. In our case, in particular, this impact was BRL 36 million in quarter 3 and year-to-date, BRL 333 million. We also are fully committed to Brazil and our society, our concession areas. So Neoenergia is proud to have supported our developers and suppliers with materials requests and also respecting our service contracts, providing stability and employment to our employees and also making it easy for our customers to play. We have donated 100,000 COVID tests to the Fio Cruz foundation, air breathers to the Federation of Industries of Bahia. We have supported 125,000 families, donated 40 tons -- 21 tons of food and also refrigeration and air conditioning equipment to hospitals and health care units. We also have provided emergency help for those who are working in the Pantanal region. Now on Slide 6, let's look at the highlights of our earnings in quarter 3 and the first 9 months of the year. We can believe that the crisis is now beginning to be behind. We have very good news from market performance and also collection performance and also default perspectives. So considering our expense controls and our results, we have excellent results today. Our injected energy increased 7.9% regarding the second quarter. And year-over-year, the growth rate was 1.3%. The AFDA and our distributors had better collection as a result of our power cut and collection actions that we have been implemented. So it dropped 50.2% compared to the previous quarter and 1.9% year-over-year. As for operating expenses in quarter 3, we had a 3% increase as a result of the power cut and collection actions and the amounts were greater than before because now, we are recovering the payment culture of our plants. In the 9 months, we are 3% below the same period in 2019, absorbing inflation pressure. So the growth of our customer base increased, and we had an increase of head count of 704 employees with new projects. Our EBITDA in turn reached BRL 1.76 billion in the quarter 3, 17% up when compared to the same period in 2019. In the year-to-date, it reached BRL 4.4 billion, and this represents a 4% increase year-over-year. Both are a direct consequence of economic activity, which has resumed in our concession areas and also capturing of efficiency by our employees. Net income in quarter 3, BRL 814 million, 36% greater than the third quarter of 2019. And in 9 months, BRL 1.8 billion, a 13% increase, again, as a result of a greater EBITDA, as we said before and a better financial result with a better interest rates. We are watchful of cash and liquidity in our company. So we finished quarter 3 with a net debt EBITDA ratio of 2.85x net earnings and this with a better debt profile and also the gains of the COVID account, which took place throughout the quarter. These resources are not accounted as debt. Finally, as a result of our growth projects in transmission and wind power in addition to investing in distributors, we also had a CapEx of BRL 1.8 [ billion ], and that was a record, 60% above the third quarter of 2019. And we should consider the year-to-date in these 9 months, we have reached BRL 4.2 [ billion ], 42% greater than the same period in 2019. On Slide 7, we can see the development of our transmission project. I'd like to stress that our projects are on budget and with good anticipation prospects, considering what was on the business plan, ensuring the profitability we had expected. As for the April 2017 lots, we have delivered 3% substations for lots 22 and 27 or significantly before the deadline and below the CapEx forecast by ANEEL. At the Beginning of the quarter in July before our original forecast in 25 months before the ANEEL deadline, we delivered the first of the 5 segments of lot 4 of the April 2017 auction. We are expecting to deliver until the end of the year an additional segment of the line so that we can receive approximately 50% of RAP. At the end of 2020, we'll be receiving about BRL [ 70 ] million of RAP annualized from the April 2017 projects, which proves our ability to execute and also to ensure the return we had expected. As for the December 2017 lots, we have also good anticipation prospects. Considering our business plan, in lot 4, we have about 2 million people on the building site with no COVID case so far, all health and safety. We have already built 1,229 foundations, representing 85% of the total, and we have already assembled 243 -- sorry, 432 towers, 30% of the total. In lot 6, we have 751 workers on the building site, and we have built 261 foundations, 37% of the total, and we have assembled 123 towers, which is 17% of the total. This is aligned with what we had expected, which -- so we can ensure that everything will be anticipated. As for the December 2018 lots, we had the first online public hearings on environmental licensing, which is unprecedented for lots 1, 2 and 14 for December 2018. In lot 1, we already had the previous permit for substation Gaspar 2 and Indaial and Rio do Sul in addition to the 104-kilometer line of 230 kVs and 28 kilometers of 500 kV. In lot 14, substations of Marmeleiros and Livramento follow their construction project. We have already received the previous license for the 245-kilometer line of 500 kV. That's Povo Novo-Guaíba. As for lot 9 in the 2019 auction, we have 90% of the CapEx already under agreement. We completed the environmental studies, and this project is in its initial phase of the previous license. Slide 8. This is about the implementation and development of our wind farm projects. The Chafariz complex in Paraíba is moving on. So we are ahead of our business plan again. We started the work 30 -- sorry, 3 months before in October 2019, and there have been no relevant impacts as a result of COVID-19. We have about 1,400 people on the building site. The project is really well developed, with 129 of the 136 foundations already digged for the wind turbines and 101 have already -- the concrete has already been put. And the prediction is for the wind turbines to be ready in 2022. With 566 megawatts that's when the operation is expected to take place, and we want to meet the needs of our final consumers and ensure the participation of Neoenergia in the movement to liberalize Brazil's energy market with its own power. The concession contracts have already been signed for the new power. 92% of the purchases have already been awarded, so that the major contracts, including wind turbines, equipment and construction of the projects have already been signed. This quarter, we had the first inspection visit to get our installation license, and we expect the work to start in February 2021. With Oitis and Chafariz Parks becoming operational, Neoenergia will have half of its wind power, that's into the free market of this energy, will be sold with a price that will ensure that our projects remain profitable. To give further details about our earnings, I'd like to turn it over to Leonardo Gadelha, our CFO, which will provide you with more details about our third quarter earnings and the first 9 months of 2020.

Thank you, Mario. Good morning, everyone. I hope everyone is healthy and your families too. As Mario anticipated, we had very good results in quarter 3, showing that we are on pre-COVID levels now. Let me go to Slide 10. As we usually start talking about our consolidated earnings. So on this slide, we can see that our margin increased 15% -- consolidated gross margin increased 15% with BRL 2.640 million. And this was a result of more customers, tariff readjustments and also Elektro revision in August 2019 and also the progress of our transmission projects, as Mario said. In the 9 months, we have grown 6% on our margin. This margin includes VNR and IFRS 15, which have no cash effect. So variation of VNR in quarter 3 was negative as we had a one-off in Elektro's tariff revision of BRL 157 million. So when we compare VNR, it is negative. And then the variation IFRS 15 is positive in the quarter comparison because of the progress of our transmission project works. We'll give you more details when we talk about our grid results. In the cost line, we had a variation of 3%, consolidated, following a very positive and incessant path, absorbing inflation with increased customers and 704 new employees. Because our activities have now become more primary in our grids and distribution, which also shows the actions of power cuts and collection actions and also the return to our offices. We have now a rotating system of our teams in our offices not only in the holding, but in the entire operation. So in the year-to-date, we had a 3% reduction in these 9 months. Slide 11. Our EBITDA. So this quarter, our EBITDA was BRL 1.764 billion, including VNR and IFRS 15. So the growth was 17% year-over-year. On the right-hand side, we see, as we have always done, have our EBITDA without VNR and without IFRS 15. In other words, we're approaching these 2 effects. So this combined adds up to BRL 305 million in quarter 3. So when you compare the 2 effects, the increase in EBITDA is 15%. When we compare the 9 months, we've been growing 5% in our EBITDA. We should remember that second quarter EBITDA was BRL 1.1 billion. So growth in the second quarter to the third quarter was greater than 60% in this comparison. And this shows that we are back to our previous growth pace before the crisis. If this EBITDA, 84% was generated by our grid business, 10% by our Renewables segment and 6% liberalized. Now at the bottom right, we see the impact of COVID on our consolidated results in the quarter, BRL 36 million in distribution. And this split into market and default and also a revision of BRL 4 million in our sales totaling BRL 32 million in the quarter and BRL 343 million in the year-to-date. Slide 12. We have reached a net income of BRL 814 million, that's a 36% increase, BRL 814 million, right? In this effect on EBITDA is the reduction of our -- the cost of our debt as a result of reduced market rates and also liability management. In the year-to-date, we have a growth of 13% of our net income. We should also highlight, as we did in the other quarter, this comparison is negatively affected because we're not declaring or stating interest on our own capital. This year, we decided not to do this as a result of COVID. If we had stated that in June, this would have been BRL 56 million better than it was, but this effect tends to disappear throughout the year as we will state this -- make this statement at the end of the year. As regards our investment plan, and this is Slide 13, we finished the quarter -- sorry, the semester with a CapEx of BRL 4.2 billion and about BRL 1.9 billion -- BRL 1.87 billion in fact, in this quarter. So again, more growth than in the previous quarters. This was a record CapEx number. And this was expected as we have made progress in our transmission and wind projects. 86% of this total was directed to our grid business, BRL 1 billion for distribution including the expansion of the grid and asset renewal among other fronts and BRL 510 million to our transmission works. So it's clear that this CapEx is ramping up in transmission. Renewables. We invested BRL 8 million in hydro power. We have all our assets operational. And BRL 288 million in our wind farms as the complex Chafariz makes progress in Paraíba as Mario said. So we have this increased CapEx, especially in Chafariz. Now liberalized, we have invested EUR 21 million in program maintenance or scheduled maintenance. So we have been following -- we are strictly in line with our plan in spite of the pandemic effect, especially in quarter 2. Now on Slide 15, we will discuss the grid segment earnings, which is our flagship. So we will give you more details about this. On this slide, we talk about distributed energy. And the information has already been anticipated. We have already disclosed this a few weeks ago, these numbers, so I'll be brief here. We have the few energy or power. So this was -- on the slide, we see that -- well, what I highlight here is, especially the difference in between quarter 2 and quarter 3 on average, as we had said before, our distributors fell 9%. And now we can see growth in some of our distributors, Elektro for instance, that was the highlight of the quarter and others with very similar volumes. So the evolution from quarter 2 to quarter 3 was very good. I'll now move on to the next slide with some new information. We -- and this is about distributed energy, which we hadn't anticipated before. So it was stable this quarter, when we compare it to quarter 2. At the end of September, we had 14.2 million consumers. So there was this increase of 219,000 customers in 12 months. We'd also like to highlight the distribution in classes in distributed energy and then free market and then the commercial segment. So throughout the quarter, it was clear that our performance was very similar. The 4 distributors had very similar performance levels with a growth in residential or household and also in the free market. Rural, the rural segment as well, except for Cosern, but the Commercial segment is really important for Neoenergia and its performance was a little weaker. In other words, it hasn't recovered as much as we had expected. Now on Slide 17, on loss. We now show, when we consider our loss performance in the quarter, we had COVID, of course, but we had 2 distributors in the regulatory limit. And this was Cosern and Elektro. The greatest difficulty to carry out inspection visits during the pandemic and less demand in our high-voltage customer markets led us to have a slight worse results when we compare it to the previous quarter. So we have energy that was lost in absolute terms here at the chart and the lost energy in gigawatts is aligned to our history. But then this rate was affected by a denominator that does not reflect the resumption of the high-voltage market where less -- or loss of energy is observed. So there was a pandemic and the effect of the rate I've just mentioned that led to this result. On Slide 18, this is one of our highlights of the quarter. So we had the evolution of our collection, and this was a very important highlight. In this quarter, the 4 distributors had strong recovery in collection. The result was, of course, a consequence of our collection efforts in quarter 2 and again, power cuts, which were resumed. Some Of these collection actions had great results, including, I'll mention some, 318,000 power cuts over 2,000 negative credits, and also more negotiation. Digitization initiatives also, which we started in the previous quarter, credit cards, virtual cards, bonus actions or the so-called digital solidarity. So these were actions that started in quarter 2 and became more intense in quarter 3. And again, power cuts being resumed was a turning point. Even if you consider the low-income project, we show our evolution in collection without the low-income project. But then, we were again above 100%. Only in Elektro, we were at 98.6%. Then on the right-hand side at the bottom, we see that collection, if you include now this low-income project, it's still restricted for -- or power cuts, there are restrictions for power cuts in these households, in the low-income households, but we are very close now to 97%, 98%. And this means we are above our historical levels. On Slide 19, we see the AFDA allowance for doubtful accounts. So we have the allowance that we make every month for default or doubtful accounts. So when we consider this improvement in collection, we had a consequence in our AFDA. So in quarter 3, it was BRL 104 million in our grid business compared to BRL 106 million in quarter 3 2019, which shows we have resumed our normal AFDA levels. In the second quarter, this amount was BRL 209 million, and this was a result of the power cut and collection actions I've already mentioned. Operating indicators on Slide 20. This is measured in hours, available hours. So we had very good results for all distributors. They're all within the regulatory limits. And this, of course, including the process reviews. In other words, we have keeping price efficiency, and we have also improved operating quality. I'd also like to stress that in August, we had the best result -- the DEC results in Coelba's history, 0.76 hours. And in September, again, the best in Cosern's history, 0.46 hours. So this was something to be really proud of in this quarter, proving the quality of our distributors and FEC again, shows or measures the frequency of incidents with the grid, and we have capped very positive trend in the 4 distributors. Now grid results or DRE, we start with our gross margin. It increased 13% on Slide 22, right? So it increased 13% in quarter 3. And this was a result of our customer base, the revision of our and also tariff adjustments with a higher IGP-M index. Our distributors, they follow their old concession agreement. So with the new IGP-M level, they now tend to benefit from this. 3 of them will be reviewed only in 2023, Coelba, Cosern and Elektro. The review will be in 2023. In other words, we are benefiting with a better IGP-M level. We should also remember that this margin includes VNR and IFRS 15 with noncash effects. VNR has always been BRL 131 million. And compared to the third quarter of '19, there was a negative impact of BRL 63 million. We had the one-off effect of the Elektro's revision. IFRS 15 variation was positive in BRL [ 186 ] million between quarters because of the works in the transmission projects. As for our PMSO, we have increase of 2% in quarter 3, capturing efficiency. Also having electricians. We had 636 electricians that are now working when we compare quarters and also compensated by MSO cost reduction. In other words, inflation was absorbed and also as a result of our increased customer base. We should also highlight that the power cut actions had, of course, an effect in PMSO, but it was compensated by AFDA. So this is an increase of BRL 10 million, which compares to a reduction in AFDA of BRL 100 million. So it's very clear that this was the right strategy to invest in this collection initiative. On Slide 23, this following slide, our grid network increased 20% in quarter 3. That's BRL 1,527 million. So again, really well aligned when we consider the VNR difference I mentioned. And as I said before, this EBITDA was also affected in BRL 36 million, as a result of the impact of COVID, when we consider the market situation and default. So this is in the year-to-date, this accounts for BRL 333 million. Now at the bottom of the slide, we see our EBITDA, a distribution EBITDA, which increased 10% and the transmission. In transmission, it increased 209%, and this was expected when we consider the projects and also IFRS 15. So these 2 effects played a part, one part is cash and the other word -- the other part is noncash. On Slide 24, net income in the grid business. It increased 50% in this quarter, reaching BRL 805 million. In the year-to-date, BRL 1,801 [ million ]. So a 16% increase year-to-date. In the consolidated earnings, this comparison is negatively affected in BRL 56 million because we're not preparing -- declaring our interest on our own capital, and this will be declared at the end of the year. So this will be compensated. Now moving on to our Renewable segment -- renewables. So when we analyze the earnings on Slide 26, it's clear that there is an EBITDA increase to BRL 175 million this quarter. That's a 2% increase. And we are now breaking down the EBITDA for hydro power and wind power. So the Hydro Power segment, the -- our EBITDA result was affected negatively, especially by the Belo Monte situation because of the energy that was no longer contracted with the price in the North region. So it is the ceiling price. And this is a 46% decrease in our EBITDA. And this was explained by the effect of Belo Monte and the Hydro Power segment. As for Wind power, it has a better sales seasonality this quarter, again, a positive impact. So the EBITDA increased 69% as compared to the third quarter of 2019. So 2%. And then the net income was BRL 68 million in quarter -- this quarter, and this is a decrease -- a 9% increase as compared to the same quarter in 2019. Now liberalized, that's Slide 28. There was this 18% increase. So that's BRL 117 million. This improvement was a result of Termopernambuco. And we said this before an operating report that was less power generation in quarter 3, but this was offset by the effect of energy purchased at a low PLD. So we had an increased EBITDA, although there was less power generation. And then our distributor -- reseller had an EBITDA of BRL 10 million, which is a result of a new commercial approach with a focus on the end customer and also caring for the other -- businesses of Neoenergia. So the liberalized net income was BRL 71 million in quarter 3, up 87% from quarter -- third quarter of 2019. And in year-to-date, 94% is the growth. The final slide, capital structure, Slide 30. Here, we show that we finished quarter 3 '20, as Mario said, with a very comfortable leverage level of 2.85x net debt-to-EBITDA ratio. Our cash increased to BRL 6 billion. So at the end of the quarter, we already had a really comfortable of BRL 5, 600 million, and now it's BRL 6 billion and the debt -- net debt was reduced to BRL 16.8 billion, and that was a major reduction of our net debt. So we have a robust balance sheet. And only 16% of our debt is short-term debt. The remainder is long term. As for the bottom part -- sorry, bottom right of the slide, between the principal and interest rates, we have only BRL 1 billion in debt service. So as a result of the work we've been doing, our liability management efforts, which has been underway, we reduced the average cost of our debt to 4.7% in quarter 3 and the average term was increased to 4.5 years. As for transmission and wind power projects, funding has been insured for most of them, 100% of our wind farm projects and for our transmission projects. There are some of them that are still waiting for the licensing. As Mario said, we are expecting between the end of this year or beginning of next year, this will be sorted out. Our debt is well diversified with no exchange rate exposure. So the same debt that we captured in any other currency, we just make all the changes and it's also affected to the COVID account, we received BRL 1.66 billion. And this is off-balance resources because the collateral is tariff assets. Now on Slide 31, funding. So in quarter 3, we insured major funding. So when we add that to what we already had, the total is BRL 8.2 billion in available credit lines. So in addition to the end of the quarter with BRL 6 billion, we already have BRL 8.200 million for our lines. Now the quarter operations. I highlight BRL 3.4 billion for our CapEx with BNDES funding for the distributor CapEx or a 2-year CapEx for the distributors. This contract was a 20-year contract that goes beyond our concession terms. And this was an important undertaking with BNDES. BRL 369 million awarded to lot 6, the December '17 lots and then BRL 715 million for Oitis with BNB. And the cost level of BNB is unmatched. And then another line, we had already contracted -- or sorry, hired and that was an important line, and we had 2 tranches. So we've already paid BRL 836 million. So we had CDI at 0.5%. So this was my message about our capital structure in addition to have completed our funding plan for 2020. And this shows that we have a wide access to different sources of funding on the market. Now for 2021, I'd like to stress that, a year where we have a lot of CapEx concentration on our plan as we will be delivering our transmission and wind power projects, we already have 70% of the CapEx for 2021. It's already -- in short, it's already agreed. And as I said, in this -- with this BRL 8 billion of contracts we already have. So this is the end of my presentation. Operator, can you please start the Q&A session?

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

I have two questions. The first is about losses. You have a very good performance, and you have recovered all your collection situation. And the P&D, in other words, you avoided losses. And of course, you suffered as a result of the COVID impact. So again, I just need to understand a little bit better, what is your strategy to reduce losses? And if you see that the action that has already been taken is yielding results. So I need to understand, what will happen in the next quarters? Now my second question is about the wind power project. So you purchased an additional 400 mega to add to your portfolio. I need to understand how this portfolio will develop vis-a-vis the portfolio we already have in Oitis and the sale of power. So what are you expecting? And what is the idea about the beginning -- building this wind farm? When are you expecting to develop this additional portfolio?

Thank you, Carolina, for your question. As for your first question about losses, let's discuss this with Fulvio Machado. He will give you our view with regard to losses. Fulvio, please.

Thank you, Mario. I hope everyone is okay. Let's discuss the losses of the group. We have a very robust plan. So we expect that the action that was implemented have been yielding results. The action was taken throughout this year. And we have -- the rate was affected by our high-voltage clients or which haven't resumed their pre-pandemic levels. And this affects Coelba and Celpe in particular, Cosern and Elektro, they have a cluster of being below the regulatory coverage. So they have been performing better. What we've been done in this period is shielding action and also police action with large customers. And we are convinced that this will reduce our rates down the road. In other words, what we have done means good prospects in the future.

Thank you, Fulvio. Now Carolina asked for the projects that we bought in Gameleira in Bahia with 400 megawatts, the development of these projects for us is very strategic because we -- in this period, we will keep developing these projects in terms of land and wind in the region, which is very good quality wind when we consider all the wind farms that are already in this region and then environmental licensing. So in 2021 and '22, we are expected to develop a project that we will start building. And with the CapEx, we'll start after 2023 when Neoenergia completes the projects that are currently under construction and also the large investment in transmission will be already operational. So we will start the new constructions. So we're expecting this to start after 2023 with more comfortable leveraging, which we expect to take place next year with a large amount of investment in wind power.

[Operator Instructions] Our next question comes from Fernando Zorzi of Itau.

I have a question about the balance of your distributors. And for the public prosecutor, they have already said they were contrary to this balance, there were many news that were not positive about this equilibrium or balanced situation with your distributors. Can you talk to us about the latest of this discussion, which I believe may have a positive repercussion in this proposal of the re-equilibrium or balance initiative?

Thank you, Fernando, for your question. As for the government's control bodies and the regulatory agencies, we are convinced that things are being well done that we're on the right track. In addition, historically, this is something that has always happened. So everyone is playing the role considering their jurisdictions. And then as a result, we are really okay with this. As for ANEEL we made our contributions with the other companies in the sector in the CP 35 framework. So we have all the technical and legal foundations for the concession agreements be written to ensure financial and economic equilibrium for the concessionaire. So I believe that this was something that should be just be done when we consider how extraordinary the pandemic has been. ANEEL we believe, when we consider all the electric companies, consumer associations and other agencies, ANEEL has the legal and technical foundation, economic foundations for discussing this [ happiness ] material to make all the decisions about CP 35. So I believe that a regulatory framework will be created for this business in the future. We are convinced that this agency, ANEEL has a history of preserving contracts and controlling risks and the perception of risk in the power sector is very low when compared to other infrastructure sectors. And this has led to a lot of development in the investment in addition of new technology interest mission and then, the expansion new technology in power generation and also distribution. So new technology will help our customers on all fronts. And this is something I want to make absolutely clear that, those who are really interested in low electric tariffs are us, the distribution sector. We really expect that the tariffs and the impact on the customers are really received by distributors above all. So I'd like to stress that we are absolutely okay. We believe this decision will be historical, and we are convinced that ANEEL's teams and -- are aware of the situation. And they will reach a fair decision that will deal with the wishes and desire of all stakeholders. They have been working with the electric sector, and we have a COVID account granted to everyone. And of course, I think this is reasonable that everyone gets this rebalance. Of course, this is not something that should impact the -- power tariff in the next few months as the resumption of economic activity may be slower than the resumption of electric power. Anyway, we are interacting with the agency as always. And it's undoubtful that in the next few months, we will find a reasonable solution to this situation.

Our next question Daniel Travitzky, Banco Safra.

Now when I look at the market of different consumer classes, we saw this reduction of 16% in industrial and commercial rate. So how much of this reduction is a result of the impact of the pandemic? And how much is it a result of clients migrating to the free market? And when we consider this migration of this 85.5% going to the free market, how do you see this shift when we look at it? What is your strategy? Can you comment on that?

Thank you. Thank you very much for your question. First, what I said recently, we believe that resumption of economic activity for some segments, especially industrial and commercial segments, is slower. So there are some restrictions, operating restrictions for some products, especially the commercial operation. As for the industry, as the economy resumes its normal activity levels, it will meet our expectations for the next quarters. As for migration to the free market, I'll ask our, RI area to give you the details. They're on our release, of course, but I'll ask them to contact you and give you all the details. Now migration, leaving of our clients to free markets is totally free and neutral. We have been supporting this. In other words, separation between distribution and commercialization or sales. We want to put an end to this perception of the impact of clients to -- the free market generates losses to us. Our tariffs and our earnings are related to this. So as long as customers are end distributor, we have no impacts in our earnings.

This is the end of our Q&A session. I'd now to turn it over to Mr. Mario Ruiz-Tagle for his final remarks. You may proceed, Mr. Tagle.

Thank you, operator. Well, we have some final remarks. One of them is, we have a final message that stresses our commitment to executing our business plan and executing the investment. We want to ensure that we add value to our shareholders and also the quality of the services that we are delivering to our customers. We have our principles, our values. These never die and also trust in our business model that has been resilient, including in the difficulty we've had in 2020. And we are committed to creating value to our shareholders. What we need is, of course, regulated business with solid growth. And of course, regulatory robustness is very important to us, and we're making the most of it. And we have been growing in our concession areas and these are reacting rapidly with the results that we expected. In our experience, we have also been overcoming the crisis successfully. In other words, the darker times are being left behind. The crisis is not over yet. We should be alert. But in quarter 3, we -- it becomes clear that we have the ability to manage the crisis. And in quarter 4, which has already started, it's usually a very good quarter for Neoenergia for seasonality reasons for warmer and drier weather. And we had a very good beginning. We haven't start advancing in expanding and investing in our distributors in our transmission and wind power projects. We're also seeking new opportunities. We have real prospects of delivering our projects that are under way before the deadline and at a lower cost. We are focused on our cash, taking care of liquidity. As Leonardo said, we have completed all the funding that we had expected for 2020. And we are convinced, as I said, that distributors will have economic and financial balance and that they recognize the impact we have suffered and that they do justice like, with what happened with the distribution -- the contribution of the distribution sector for solidity and the operating -- operation of the power sector. I want to finish with a message of optimism and thank Neoenergia's employees on the way that they have acted throughout the crisis without relenting. And this has led us to achieve the great results we have presented today and also to ensure that power reaches everyone's homes, companies, industries and that everyone gets quality of life. And that we keep creating adding value to our shareholders. Thank you, everyone, for attending this conference call or earnings release, and we'll see at the end of the year. Have a great day.

Neoenergia's conference call is now closed. Thank you, everyone, for attending. Have a great day. Thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]