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

Good morning. Welcome to the conference referring to the relevant fact of the acquisition of CEB-D. This presentation will be held by Mr. Mario Ruiz-Tagle, the company's CEO; Mr. Pedro Azagra, the Counselor of the company; Mr. Leonardo Gadelha, CFO; Mr. Eduardo Capelastegui, Executive Director of Patrimony Control and Planning; Simone Borsatto, Executive Director of Development; Luiz Ciarlini, who's Director of Coelba and Mr. Renato Rocha, Investor Relations Superintendent. This conference is being simultaneously transmitted through the Internet through a webcast and it can be accessed through ri.neoenergia.com, where we also have the presentation available. [Operator Instructions] This conference is being held both in Portuguese and in English with simultaneous translation. [Operator Instructions] This event is also being recorded, and the recording will be available at the RI website of Neoenergia. We would like to clarify that declarations that might be made or statements that might be made now about operational targets and financial matters are premises of the administration of the company as well as information currently available by Neoenergia. Future consideration is not an assurance of performance. They involve risks, uncertainties and premises because they refer to future events. And therefore, they rely on circumstances that might or might not happen. Investors should understand that general conditions, conditions of the industry and other operational factors can have an impact in the future results of the company, and it can also lead to results that are different from those expressed in the future conditions. I would like now to give the floor to Mr. Mario Ruiz-Tagle. Please, Mr. Mario, you can proceed.

Thank you, operator, for the presentation. I'd like to thank you all who are here with us this morning for this conference call. We will present the rationale behind the acquisition behind CEB, which took place in December 4. We are convinced that this was a huge step forward in our growth process. CEB is the best alternative for consolidation, which has been sold in recent years through auction processes. It's really important to understand that this operation has to be seen from a comparative analysis perspective. We have to look at 2022. It will be the first full year when the company will be under Neoenergia's command and control. That's when it will be possible to have the first full year for comparative analysis purposes. It's also important to highlight the turnaround process at Neoenergia when we joined. We show Neoenergia's capacity to do this [ from energy ] when we joined electrosynthesis replicable at CEB now. This is a concession that provides very special characteristics. This is seen -- this is reflected in its value. It represents low regulatory risk, low operational risk, low financial risk. Recovering investments, of course, will generate an improvement in operational indicators. And it will also increase remuneration. Also an improvement in delinquency and losses. This is a concession that goes until 2045. And there is an opportunity we didn't place in our models, which is the renewal of the concession. This concession is one of the concessions that has less debt levels in auction in recent years. That's why we don't need to increase capital. We can start working with the concession and leveraging it, creating some opportunities. So we can now move to Slide 3, where we see the schedule for today. So we have -- what we have done in terms of efficiencies and growth, transaction details, some ratios and we have some annexes that will be presented quickly. On Slide #4, we see a map showing Neoenergia after this amazing step and our growth story where we incorporate an additional network business. Our net asset base goes to BRL 20.6 billion. This is considering our current base of BRL 920 million. And there's important room to grow. As for concession, 6,000 square kilometers which brings us a less complex management than other distributors we have with huge territory expansions or areas. We also believe that we've increased 1.1 million in clients, and it's a population served of 37 million resilient citizens. We are the second player in distribution in Brazil. And it's also important to say that the track record is excellent in terms of value. In Slide #5, we show you how Neoenergia has been evolving after the integration with Elektro and Iberdrola's control. This is really important to show the scope can capture from a value-generation aspect, applying now the same model at CEB, the recently acquired company. Look at the EBITDA between 2017 and 2018, a growth of 24%. And in 2019, we will reach BRL 5,700 million. This is a 25% growth. In the third quarter of 2020, we had an EBITDA of over BRL 4.4 billion. In terms of net income, we see the BRL 529 million net income. And in 2018, BRL 1,500 million. And in 2019, we finished the year-end BRL 2,229 million. When we look at the OpEx, our OpEx growth -- grows below inflation rates and below the number of customers. We are at the same OpEx levels that we had in 2017. Now we are managing appropriately. And when we see the remuneration base, the RAB, we also see that between 2017 and 2019, there was an improvement in 23%. So that means that our companies, our distributor companies are all appropriate and we understand that for us it's possible to make this management in the face of the challenges CEB has. We are having performances below PMSOs. We've been successful in our adjustments, process and in the review of tariffs since 2017 until 2020. Our investments have been acknowledged. Finally, I want to say that throughout this period, we've had a very efficient management with continuous cost reduction. We also absorbed inflation. We grew our customer base. And in the third quarter of 2020, we had 14,000 customers. This is based in a management model with technical units for distribution, and centralization of our corporate processes. You can also see clearly the turnaround in 2017, that's Slide #6, where we see the evolution at Coelba, Celpe and FEC -- both DEC and FEC, companies that were closer to regulatory levels. So the challenge for the concession -- for the CEB concession is to frame quality regulators or quality indexes within regulations. Those indicators lost their path and went over regulatory thresholds, so we have to make the proper investments and focus the OpEx to maintain this network. So moving on with today's agenda. We have now the transaction details. Let's move to Slide 8. Neoenergia won the auction for the CEB. The auction conditions: It's an urban area, the structure and the assets are of great quality. In terms of investment and management, this will bring important value for our shareholders. We -- 100% of the shares of the company were sold. So this gives us a lot of flexibility in managing the company. The winning offer was of BRL 2.51 billion. And the second offer was of BRL 2.508 billion. So it was just a 0.28% appreciation regarding the second offer. There's full payment in exchange for the transfer of ownership. We're going to talk about this further when we describe the next steps. An important element was regulatory limits or financial covenants to adequate operational indicators. They were postponed to '21, '22 and '23, respectively. That is compared to 2018, 2019 and 2020. This is really important because it gives us a time frame to do the necessary investments, to adjust us to regulatory limits. I would also like to say once again, the financial covenants of this transaction. We have to do comparative analysis considering numbers obtained in 2022. This will be the first year of full consolidation when we can look at CEB, the benefits of Neoenergia's management. So the company is presenting an important deficit in terms of management. And this is not the company we're going to have in the future. So it's really important to highlight the added value that Neoenergia's management will bring. What is the acquisition rationale on Slide 9? BRL 2.5 billion, as I mentioned. As we are showing, Neoenergia has an experienced team with enough expertise to execute CEB's integration in an agile way. We have, as a great example, the case of incorporation of Elektro into Neoenergia. Besides bringing Elektro to our structure, it led to an interesting case of integration, the new Neoenergia and Iberdrola. It's also important to highlight the growth in regulated businesses. We have long-term contention agreement until 2045. So it's a 25-year contract. CEB serves a population with the highest per capita GDP in Brazil distribution area with high load concentration in customers per square kilometer. So indicators such as delinquency and losses will clearly -- they are now a portrait of the lack of management. And when we modernize the company when we create new collection channels, that will certainly be improved. The acquisition will provide operational synergy and cost gains for Neoenergia, which will implement in an agile way, the turnaround plan for CEB. This is our challenge, is to bring closer the capture of this value. This is an urban area, high quality of clients with good economy profile. We have a very positive expectation to fit the company into regulatory indexes. We are following on this operation since last year and strongly -- starting in August 2020, we had a due diligence process, complete process. We were part of it and over 120 qualified employees and advisers were part of this due diligence process. Operations will have a positive impact on Neoenergia since the first full year of consolidation. So 2022 will be the period where we will have the stamp of Neoenergia. That's when we will have the management model and the capture of synergies. Also, this has no material impact on financial covenants due to the good results we've had recently. That will respect the required target in our investment policies. Slide 10, I'm going to give the floor to my colleague, Eduardo Capelastegui. He's going to talk about more technical aspects and ratios of CEB.

Good morning, everyone. Moving on with the presentation. Slide 10, we show a comparison of the sizes comparing Neoenergia and now with the incorporation of CEB. We will have an increase of over 7% moving to 15 million consumers. This is a population of 9% at the market level, an increase of 11%. We will reach 65,000 gigawatts hour. Per capita consumption is quite high. So we will improve this number by 3% average consumption per client and RAB will have -- will reach BRL 21 billion. That will be a growth of 6%. The same -- these are the main numbers for CEB now joining Neoenergia. Slide 11, we show you the market profile, both for distributed energy and customer base. So the entry of CEB in the Midwest will diversify our market, which is currently concentrated in the Northeast of Brazil. As you can see in the graph, there is a huge concentration of clients both residential and commercial. This is 50% of distributed energy. And these are the customers that add a lot to the business. Brasilia has the highest GDP in Brazil, the highest GDP per capita in Brazil. And the population growth is higher than national rates. On Slide 12, it's important to compare the EBITDA gross profit margin. The 4 distributors are around 62%. This is the EBITDA gross profit margin connection. This is 37% the average. So the potential of improvement is of 25%. Of course, this is the sum of several initiatives and leverages. I'm going to go through some of them. And this has a great potential of improvement -- potential higher than BRL 135 million, actually. Slide 13. These are the leverages for value creation so that you can better understand the rationale. The first is CapEx and regulatory limitations. What we see regulatory depreciation. CEB, the growth in the last 4 years has been reduced, 4.4% as you see on the right. And when we see it Neoenergia, this growth was 41% in the same period. What is the consequence of that? While CEB, 32% of the assets are 100% depreciated, whereas Neoenergia, we have 17% ratio. This is really important because it opens a huge opportunity of investment in the RAB to improve quality and other important variables that add a lot of value. So our forecast is that for the next 3 years -- in the first 3 years, the CapEx will triple the recent historical average, which was of BRL 70 million. So that will be around BRL 20 million. And from the fourth year onwards, this level will drop to 2.5x higher. This is really important both in customers and also remuneration base. So this is an amazing opportunity for RAB and in terms of improvement. Slide 14 now. We show you some indicators. As you know, we have DEC and FEC. These indicators are outside tariff coverage. So DEC 9.2 hours, when the limit is 7.9. FEC 7.3, losses are above 14% and when the regulatory target is of 11%. And PECLD, same thing, 1.1% when the target is 0.4% of delinquency. So I'm going to show you each of these specific variables. Neoenergia has a proven track record in its distributors to make them turn around. And we will explore this expertise to CEB so that we can frame all these indicators within regulatory targets. That's how we are going to create value. In Slide 15, we talk a bit about efficiencies and OpEx here. We compare CEB with our 4 distributors. The average is of BRL 187 per customer. And in CEB, this is over BRL 300. It shows clearly a huge gain potential. Above all, if we consider that in Brasilia, CEB is an urban distribution operator -- operation. The logistics are more simple than in Bahia or Pernambuco, for instance. So here, there is indeed an important point. When it comes to efficiencies, we want to implement an action plan. And in 2023, we want CEB to have the OpEx at the regulatory level. So it's a gain of 20%. That starting in 2023. We believe that '21 and '22 will be transition years and in 2023, we are going to be able to be at 120%. Slide 16, a bit about losses here. When we compare CEB, we've used the complexity index created by ANEEL, the energy -- Regulatory Energy Agency in Brazil. And we see that CEB and Cosern are quite similar, as you can see in the middle of the graph in terms of complexity. But CEB is above the regulatory threshold. And it's getting worse. Its performance has been getting worse, which is connected to a reduction in CapEx. This is something we also noticed. When we compare this to Cosern on the right-hand side, which is a growing journey and an improvement in terms of tariff coverage. So we believe there is a huge opportunity in that sense. Here, the goal is to reach the regulatory threshold within 3 years. That's what we've defined. So taking 14% to an 11% level in tariff coverage within 3 years. Slide 17 now, a bit about delinquency, PECLD. When we compare this to Cosern, as I mentioned in the previous slide, we noticed that CEB has this regulatory limit of 0.38% of our gross revenue. And performance is of around 2%. 2019, a little bit of improvement, but it's still above coverage. And Cosern, as you see, has an opposite position. We know that the clients we have in Brasilia, middle-income class, high per capita income, so there's a huge potential to create value here. Our target is to reach regulatory threshold starting in 2024 for delinquency. Slide 18, we talk about quality indicators. CEB has this commitment to deliver on specific quality levels. And on the left-hand side, you can see that the regulatory limit has been reduced, whereas CEB's performance is quite stable. In 2019 and early 2020, it seems to be a little bit off track. So with Neoenergia on the right-hand side, all of them, both in DEC and FEC, they are within regulatory thresholds. So the idea here is to have a sound investment plan, as I mentioned, equivalent to 3x the historic average in the first 3 years and then 2.5x. This will allow us to improve this indicator and fit CEB within regulatory limits of DEC and FEC. The target here is to reach this within 2 years, regulatory limits within 2 years. I'm going to give the floor now to Leonardo.

Good morning, everyone. Thank you, Eduardo. Mario and Eduardo mentioned the pillars that guided this transaction. In Slide 19 now, we see value-creation avenues or the leverages of value creation for this asset. The first one is an efficient loss combat, fighting losses efficiently. Until 2023, we want to reach regulatory limits. And how are you going to do this? Well, we will regularize most clandestine clients. We've already mapped those during the due diligence process, and we want to do that in the first 2 years. We also want to inspect 100% of large customers, intensifying the volume of inspections in retail in the first 3 years. Second point is fighting delinquency. We want to adjust this to regulatory levels within 4 years through actions such as increasing the volume of actions in the field. So energy cuts where necessary and increasing that by fivefold compared to current levels. We also have large-scale administrative collection actions with tailor-made communication initiatives for each client portfolio. We've seen that this is very efficient. We've done that in the last quarter and is a very effective collection action. And we will also review renegotiation conditions for customers with overdue payments, so that they can pay their debts. Quality recovery. DEC and FEC, we want to have these within regulatory levels in the next 2 years. We see here the leverages. Well, the first is a relevant increase in RAB, considering the age of the assets and the high level of depreciated assets, 100% of assets. A lot of room to invest, and we are in full conditions to do that. I'm going to get into these details in a minute. We will also do on strengthening of our preventive maintenance, processes and apply the best practices that exist in Neoenergia Group. Regarding OpEx, item 4, we want to have responsible and effective management of expenses. OpEx at the level of the other distributors of the group. We already have a very sound structure which will allow us to plug CEB within the existing platform of the Neoenergia Group. It's a huge opportunity to have synergy and efficiency, also administrative synergies, renegotiating contracts. And this will give us greater bargain power. CEB is now going to be part of a group such as Neoenergia. There will be a gain in productivity looking at the Neoenergia operating model. We see this already in other distributors since 2017 when we had our integration. Finally, some other items. Some have already been mentioned by my colleagues. This is an urban company that will be management. So operational complexity is lower than what we currently have in our distributors. Low level of contingencies and pension funds. So the exposure risk is much lower than in recent transaction in this industry. It's also important to highlight that we did not consider in our base case and our evaluation of the company, the option of services to be provided. Again, this is the city with the highest per capita GDP in Brazil. It's a huge opportunity, but it was not considered in our base case, in our evaluation, okay? Another opportunity we see is optimizing CEB's capital structure. As you know, CEB currently has a sub or an underleveraged structure negative net debt. So we can improve that. We can optimize that. We also see tax opportunities. CEB has a net base and other deferred assets that will be used. They have been mapped in the data room process. So we expect to benefit from an income rate -- an income ratio that is beneficial for us. And finally, we have Bahia Geração de Energia. We also expect to have benefits -- tax benefits from that, taking advantage of the premium that was created in the transaction. Moving on to the third part of today's agenda, Slide 21. We are going to talk about the capital level, debt level. It's important to state that the acquisition is supported exclusively by Neoenergia's balance. We will not have to increase capital for this transaction. We are working -- without CEB, we are going to levels of 3x and even below that. And next year, we're working at 3.5%, but this is being finally adjusted in our budget. So we will be below 3.5%. I'm going to talk about the liquidation, but that will take place only next year. It will not affect 2020 covenants. It's going to have an impact in 2021. We see 20 bps increase. So by late '21, we will be close to 3.6%. So even after the acquisition, we will still have a very comfortable balance, good, safety margin in that regard. We currently count with CEB when it's integrated into the group. There will be broad access to different sources of financing, very competitive costs. In the third quarter, our average cost of debt was 4.7%. This is the Neoenergia debt and CEB, as I mentioned previously: it has an underleveraged capital structure; negative debt -- net debt in the third quarter; and a very comfortable amortization schedule with an interesting upside of reducing the current cost of debt. Until closing of the operation, actually, we do have right now several proposals from different banks and institutions. And we will probably hire a bridge loan to liquidate this operation with cash and also using the bridge loan. And we will have some time for the takeout of the bridge loan. We will use the distributors themselves for that. So this is going to be an operation that's going to be smooth, I would say. We will be able to explore this integration of CEB in a group such as Neoenergia. Here on Slide 22, you see numbers that you all know, our leveraging -- sorry, on Slide 21, the graphs on the bottom, Slide 21. Debt amortization, you see on the right-hand side, we are in a very comfortable position. Now to Slide 21 -- 22, sorry, Slide 22. We here highlight some points that show that the market since it does not have access to in-depth information, and we did have access to the data room and the due diligence process, we interacted with the company's management. So we really -- the market uses multiples to make the valuation. But if you want to use multiples, we have to look into 2022 when we will have the first full year after consolidation because the closing will be on March 2021. 2022 will be the first full year of CEB within Neoenergia. So integration brings positive impacts from the first year of consolidation. We maintain the soundness, the financial soundness of Neoenergia below the covenant limit. And this is one of the last opportunities for consolidation in the distribution industry in Brazil. We don't see any other attractive assets such as this one, that's why this transaction was so important to us. On Slide 23, we see the next steps. I would like to highlight the fourth bullet here. Until March 4, 2021, we want to have the financial settlement, the auction settlement and the signing of the SPA. Here you see all the steps. And the impact for Neoenergia's balance will only be noticed from this date on. Before we finalize, we have some annexes starting on Slide 25. In terms of comparisons, here you see DEC and FEC at CEB compared to the average of recent privatization. So for both DEC and FEC, company CEB is at a lower rate. Our effort for this turnaround is going to be a smaller one. It's really much under our control. When we look at losses and delinquency as well at the bottom of the graph, we see that they are below the standards of the last and most recent privatization. So this makes us very comfortable that we do have the capacity to execute on the plan. Finally, on this slide, we see that average CapEx 2 years before the transaction, you see it's really low for CEB, 2.7%. of revenue compared to 8.8% of the average of privatization. A lot of room to invest and to improve our RAB. In the last slide, #26, here you see, this is the metric that the market looks at. We have some elements here. And we look at 2022, the multiple RAB/BRR 2.7x, which is also below the average of the recent privatizations, which was of 3.1x. And the 2 other comparisons that we have here in the bottom, the percentage of contingencies and provisions as a percentage of firm value, quite low, 4.4% for CEB compared to 18.3% of the average of privatization. So this really shows that risk is very low here. After going through the due diligence process, we are very much comfortable that we will not have a negative surprise, precisely due to the very low level of contingencies and provisions. Finally, on the right-hand side, different from other transactions, this does not require capital increase. Quite the opposite. CEB has an underleveraged structure, as I mentioned. So we do not need to increase capital at the company. So these are the main points that we wanted to cover. I'm now going to give the floor again to the operator to open for the Q&A session.

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

My first question is about leveraging, Neoenergia's leveraging. You mentioned this 3.6, right? You were looking at that for leveraging. And I believe that since the covenants are calculated the way you showed it, using this number using the BR GAAP, which is the regulatory EBITDA. It's a little bit higher, and this generates some debate in the market concern about the true financial health of the company and its ability to leverage itself. Could you give us a vision of how that works for CEB? Would you go for transmission auction with less appetite? Is this an issue in your opinion? Or is that appropriate for higher leveraging? Second question is about the use of Bahia Geração as a vehicle. You mentioned quickly the choice of this vehicle could generate some sort of benefit. Could you elaborate a bit further on that? Is this is a holding that is not operational? Any tax benefit? Why using this vehicle?

Carolina, thank you for your questions. I'm going to start answering about the capital structure. As I mentioned, we are looking at the 3.6 level by late 2021. This has an impact in the improvement we are looking at for 2021. This is the final stage of budget approval. And this will lead to an improvement of 20 bps when we incorporate CEB. You are correct, of course, this leveraging level does include IFRS. 100% of our debt considered IFRS 15. If we exclude IFRS 15, leveraging will be higher, of course. In 2021, when we have this impact, we are concluding the transmission projects, most transmission projects. This leveraging level is not a reason for concern. As I showed you in one of the slides, the quality of our debt is quite high. When we look at the amortization of the debt, which you can see, let me go back to the slide. Slide 21, you see that the concentration of that is very low for '21 and '22. So distribution is quite good, I would say. So this is not a cause of concern from our standpoint when we look at leveraging levels. You asked about the transmission auction. We are, of course, constantly assessing our strategy for the auction. It's important to remember that if we are successful in any of the later tranches of the auction, CapEx does not pressure or compete with our 2021 leveraging because there's the signing, there's the licensing process. CapEx is quite low for the first year. And then you would start to have a CapEx of this tranche for the auction, having an impact in 2022 when the company starts to actually deleverage. So it does not limit our participation but, of course, we will assess this thoroughly throughout the process. Mario wants to add something.

Thank you for your question. I would like to highlight what Leonardo said. The appetite for the transmission auction depends from the discipline of capital allocation that we have. We have our investment policy that has been approved by our Board. We have a lot of efficiency in that sense. And there are some analysis, of course, in terms of the leveraging of the company. This is a moment when Neoenergia is growing. We are giving an additional step in our growth together with the wind parks that are being built and the transmission auctions that are also under construction. They are before schedule, actually. This gives us enough trust to keep on moving. But I want to tell the analysts and the market that we are very responsible in our capital allocation. We have our policies for that, and the appetite is connected by the profitability of the assets. And by the synergies, by the operability, and our capacity to develop this process in better conditions. This is what we are focusing on in terms of our appetite for this auction. Capelastegui will talk about Bahia Geração de Energia.

Thank you, Carolina, for your question. Yes, we decided to have Bahia Geração. Bahia Geração is an empty society, I would say. It has nothing. But it still wants to implement in other 4 distributors due to the premium, amortization of the premium. Before we do that, we really documented in 2011 when we acquired Elektro, we did the same thing. So in '99, '98, the first premiums, we did not know a lot about it, but we've learned a lot since then. In 2011, the Elektro Incorporation was quite successful and prepared us to do the same with CEB. We've managed to do that in previous occasions. And we will incorporate Bahia into CEB benefiting from some tax situations. That's the reason why we decided to use this vehicle. Another comment, in the reverse in corporation, we were quite successful, so we can improve the capital structure because the debt at Bahia Geração will become a CEB's debt. So there's this additional benefit in terms of premium and in the capital structure of the company.

Next question comes from Andre Sampaio from Santander.

My first question is about the overhiring level. Can you tell us a bit about the situation? We know that several companies have faced overhiring, how does that look at CEB? My second question is about the outperformance, the OpEx outperformance level. You want to reach 120% in the next few years. Can you explain a bit about your visibility starting the next tariff review in 2026 with the new cost methodology that is currently being the subject of public hearings. Starting in 2026, will you still have the same OpEx outperformance levels?

Thank you for your question, Andre. As for -- in the due diligence process, the volume of overhire at CEB was modeled, and it is in the company's valuation. We have a good opportunity until 2023, '24. We will be able to add value as to what has been considered in CEB's modeling. Regarding the outperformance of OpEx, Capelastegui showed quite well the company's performance and the agility we made these changes in the Neoenergia Group when we incorporated Elektro. So our expectation is to be very agile and swift to implement the measures that will allow us to reduce operational costs at CEB and allow us to have better tariff coverage. We have a unique modeling. Corporate processes are centralized, and this allows us to save on expenses, and an operational model that will also be implemented. A challenge in terms of cost reduction goals through automation in the network, this is quite important. And also in RAB, in tariffs, to update systems and other mechanisms that allow us to improve our management and decrease operational costs. Our expectation until late 2022 is to capture a lot of efficiencies in that sense. I'm going to give the floor to Capelastegui, who will explain this process regarding the new models.

As Mario mentioned, we made these calculations looking at the ANEEL methodology. It has adjusted to the limits, the thresholds, an incentive regulation. So there is a percentage in our 4 distributors. Currently, Cosern are at the limit, 20%. Coelba and Celpe above 20%. When we look at ANEEL's new methodology in our models, the new OpEx levels, we believe that in 2023, we will reach 120%. As Mario mentioned, the corporate aspect is centralized already. So we have, Bahia, Campinas, Pernambuco, but this is concentrated and automated. So that leads to high levels of efficiency and synergy. And now we will incorporate the small distributor within a corporate model that is working quite well. Operationally, we will incorporate the model, assess whether the model we are using at the rest of the group. It's been quite successful, as you know, when it comes to safety and quality and efficiency. And we will use this at CEB. Of course, we have to analyze this thoroughly. But taking CEB to the same level we have in other distributors, we believe this is very much feasible within 2 or 3 years.

The next question comes from Fernando Zorzi from Itau.

I have 2 questions. The first is regarding CapEx. Strong growth of CapEx. Is there any limitation to reach this level? And my second question is about regulatory levels. The new methodology has to review this every year. And there is a decrease of this in the next few years. How would this go into the 2026 foundation? How do you see this premise for the next few years?

Fernando, thank you for your question. Well, as for CapEx, we have an increase, as you saw in the presentation, threefold increase for the first years and then 2.5-fold which is CEB's history. Why is that? Well, the need, the company has of good assets that must be modernized. We have to reinvest. They have 34,000 clandestine customers that have to be incorporated, several investments that can be used for other elements to the decreasing technical losses, automating operations in terms of installation, reconnection, this will also improve. The group has a huge expertise in terms of CapEx execution and distribution. It improves the quality of the network. So we have the numbers of the base. This has been acknowledged by ANEEL in terms of the tariffs of the company. And our CapEx plans, our investment in the distributor, this is an additional element. So we have no restrictions. If we can accelerate the distribution of CapEx and obtaining the regulatory levels, that's what we'll do having the availability of resources, as Leonardo mentioned. We will be able to leverage that using tax correctly. There will be an important step forward in terms of investment. As for regulatory aspects, we are looking at 2021, 7%. And starting in 2025, 6.5%. We use in our models, for CEB, a conservative number, looking at the macro economy of our country. And I believe this is appropriately reflected in our model.

We have a question now from Lilyanna from HSBC.

My first question, can you explain or talk about your 2023, 2024 EBITDA when you reach the targets in terms of operational efficiency losses and delinquency? You are aligned to the advisers looking at CEB or can you do better than what is there? My second question, can you talk a bit about the expected returns? You talked about regulatory walk. We have the upside risks. What type of returns do you have by acquiring CEB? And the third question, if I may. The amortization of goodwill. What does Bahia Geração has today? You talked about the possible incorporation of an asset that would be operated at a loss or that currently operates at a loss, is that correct?

Leonardo is going to answer the first 2 questions and the third question will be answered by Capelastegui about Bahia transmission.

Thank you for your questions. As to the first question, I cannot talk about the EBITDA of the next few years. We can talk afterwards in further details so that I can help you model this and you reach the number. Regarding the new or our expectations for CEB with these initiatives, we have a slide here, in which we mentioned. After we implement those initiatives, we expect to see an improvement above BRL 135 million for CEB by executing -- BRL 135 million, that's the potential we expect after implementing all those initiatives. Regarding what you asked about Bahia PCH, Eduardo has commented a bit about this previously. Oh, I actually forgot to answer about return rates, right? Well, we are actually looking at something between 9% and 10% for this acquisition considering all the premises that we mentioned, and we really do believe we will get there.

Lilyanna, regarding Bahia Geração, as I mentioned to Carolina, it has nothing in it. It's an empty company. When it acquires CEB, it will generate a premium within Bahia Geração. There will be a debt, as Leonardo mentioned. And in Bahia Geração, this would be a holding. So it would have to be incorporated into the distributor. In the telecom industries, in the banking industry, we do the same thing, and we do this in our 4 distributors. We've learned, as I mentioned, on how to do this operation so that risk is minimum. The company is quite well prepared to do that. So we are being careful to reduce those risks. I hope I was clear in my answer? There's nothing in it once again. We want to amortize the premium as a tax shield.

And you will not incorporate another subsidiary? Is it just a current benefit amortizing the premium?

Well, CEB has a relevant volume as you see in the third quarter of 2020. CEB has a relevant scope that could not be used because there was no net income so far. If net income becomes positive, well, then you make use of the deferred asset. Our tax rate for the next 5 years will be between 15% and 20% and then it will drop by 30%. In the first 5 years, the tax rate, the average will be around 15% or 20%. You can see that the volume of accumulated deferred is quite significant. So the potential is huge.

We have a question now from Pedro Manfredini from Goldman Sachs.

This is Pedro Manfredini. I have a question about return. The return you mentioned is a leveraged return, 9% to 10%. This is leverage, right? And my second question, within CEB, is there any forecast of investments that you've identified that was not put into the base or in the last review? Anything along these lines as we have seen previously in other distributors? Finally, the 9% or 10%, is this a leveraged return? And else leveraged tier is of 11%. From a financial perspective, could it be more interesting to have a buyback for this strategy?

Manfredini, thank you for your questions. Let start with the first one. Let me clarify, the tier is at the level of the project nominal. It is not the leveraged tier. The nominal tier at the level of your project-leveraged tier is higher than the [indiscernible]. The second aspect you asked about was the asset base, did we identify anything? We didn't. We did not identify any alternative business. We will, of course, keep looking -- [indiscernible] okay? Regarding buyback, well, we do not consider you compare this to the tier, the leverage tier, but it's not, as I have explained. We do not consider this although we saw other companies making such announcements. But we do have projects and we can generate returns. We have a growth agenda that does not reduce the size of it. And of course, we are looking at our free float. We have a very good liquidity. The free float is of around 19. We want to move forward in this crisis. With COVID crisis, the main growth drivers is in the distribution area. We are bringing another company into the group as a privatization process for the next few years, and we are convicted or we are convinced that we bought a company that brings a level of customers equivalent to the one that we have at Elektro. This is the highest per capita GDP in Brazil. We are serving with service quality, the capital of our country, the capital of Brazil. And the main challenge for us, as we said before, is to go on in this path to create value as we showed, starting in 2016 when we incorporated Elektro into Neoenergia. For U.S. investors and analysts, it is important to know that you can count on us to clarify any questions you might have. There is this importance of doing for comparison purposes, looking at 2022. 2022 will be the first full year with the Neoenergia stamp on it. And we have this amazing group of professionals of experts to make things happen in the company. We will do this at a speed that will allow us to bring forward the capturing of the value that we see at CEB. We are available. Our Investor Relations area is available to you and they can provide any clarifications you might need. I thank you all very much for your attention.

Thank you. This conference call is now over, and we thank you all for your participation. Have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]