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

Good morning, and welcome to the conference call regarding Neoenergia's Second Quarter 2022 Earnings Results. This presentation will be led by Mr. Eduardo Capelastegui, CEO of the company; and Mr. Leonardo Gadelha, CFO of the company. [Operator Instructions] This conference call is being held in Portuguese and have simultaneous interpretation into English [Operator Instructions] In addition, the event is being recorded and later, the replay will be available on Neoenergia's Investor Relations website. It should be noted that this presentation may contain forward-looking statements that represent Neoenergia's expectations and projections about future events or assumptions. These expectations involve several risks and uncertainties and, therefore, may be results or consequences different from those discussed and anticipated here, I should say investors should bear in mind general conditions and the current scenario could impact future results of the company, leading to results that differ materially from those anticipated here. I would now like to turn the floor over to Mr. Eduardo Capelastegui. Please, you may proceed, sir.

Thank you very much, operator. Good morning. I would like to thank you all for joining us today in this earnings release call to present our results for the second quarter and the first half of 2022. I am Mr. Eduardo Capelastegui. This is my first call on quarterly results as CEO of Neoenergia, and I'm very proud of what we are going to share with you today. Here with me are Solange Ribeiro, Vice President of Regulation, Institutional and Sustainability; Leonardo Gadelha, our CFO; Juliano Pansanato, our new Executive Director of Asset Control and Planning; Giancarlo Vassao, our new Executive Director of Operations; Fulvio Machado, Executive Director of Network; and Renato Rocha, our IR Director. I will make a brief presentation going through the main highlights of the period, and then Leonardo will present the results in more detail. We will then move over to the question-and-answer session, and I will close with some conclusions. Well, on Slide #4, we have Neoenergia highlights. Just as the first quarter of the year, the second quarter had a lot of rainfall and lower temperatures. April to June were the months that had the highest rainfall rate in the past 5 years. Still, the injected energy in our 5 distribution companies had a 0.8% growth in the second quarter over the same period last year, confirming the resiliency we have in the market in our concession areas. Our EBITDA had a 40% growth and the cash EBITDA of 32% in the quarter, reflecting the success of the latest readjustment and tariff reviews to different businesses, just as the improvement in the construction projects especially in the Chafariz wind farms and Dourados transmission, Santa Luzia and Jalapão. All of them beginning operations in the second half 2021. Our net income in the second quarter reached BRL 1.1 billion, 7% higher over the second quarter in 2021, showing us a balance between the EBITDA growth and the financial results growth of Neoenergia. We executed a CapEx of around BRL 2.1 billion in the second quarter 2022 resulting from our proven execution capacity and the growth of transmission projects for wind and solar energy besides the recurring investment in distribution companies. Additionally, we closed the second quarter with 2.96x our net debt-to-EBITDA ratio with full control below the numbers are the second quarter, the previous year, the first quarter of this year. And we are very happy to announce the beginning of partial operations of the Oitis wind farms in Bahia and Piauí states. Our largest wind complex with 566.5 megawatt of installed power distributed in 103 air generators with 5.5 megawatts each. And also with the new solar park, Luzia and Paraiba operations, our first solar generation in operation, both confirming our business plan that was approved by the Board of Directors. We are also celebrating the acquisition of Lots 2 and 11 for transmissions in the auction on July 30, bringing new returns with a 2-digit growth during a 30-year period. And with these 6 highlights, we see, once again, the excellent and sustained results we've maintained in the second quarter and that we're delivering throughout 2022. On Slide #5, we also have a big announcement to share with you. The Board of Directors of Neoenergia, the last meeting on July 19, approved our 16 goals, ESG goals for 2025 and 2030 commitments, with 16 goals that comprise the environment, social and governance roles, reaffirming our commitment to the sustainability agenda. We will also disclose the results of the goals, and they will also be shared on our website containing full details and other relevant fact. It also comes to show that ESG is part of our DNA, was a super green loan of BRL 550 million signed by Neoenergia Coelba with the IFC, an arm of the World Bank. I should point out, there are ESG goals such as a percentage of women electricians in the company, a reduction of the carbon emissions index, which will be attained and will lead to a review of our funding spread. And this is unprecedented in a distribution company of electricity in Brazil, which comes to show all of our actions in different areas at a national and international level. On Slide 6, we have the growth projects started with transmission. We are moving forward with all of our projects in the 2018 lots. We are looking at deliveries for the second half of 2022. In the second semester, new assets representing BRL 103 million in RAP, annualized RAP, will come into operation, representing 20% of the full RAP in 2018. And as the start of operations of the December 2019 auction lots. Therefore, many deliverables this first half and second half. In December 2020 auction, we should point out that 100% of our materials and services are contracted and moving forward with licensing permits. In December 2021 auction, we obtained a deferred request for environmental licensing waiver confirming the very low risk in the execution of this project. As regards to renewables, we have great news. Our Oitis complex has 126 megawatts in operation, commercial and in test -- under testing, confirming the success of the execution of this project totaling 566.5 megawatts throughout the second half of 2022, in line with the business plan and with the expected returns. Our first solar complex in Luzia is also under test and will be delivered in the second half of 2022 also. And Luzia, well, I should point out also the concession rights we obtained with ANEEL. And therefore, we will be able to increase by 100 points the returns of the project once. This considerable review of the tariffs and transmission systems will be carried out, surpassing the expected results that were expected. And including my presentation, I would like to share, on Slide 7, the excellent performance of Neoenergia Brasilia. So in all aspects, it is a success. And we can actually say that we are ahead of the business plan. The losses, the second quarter of 2022, marks the sixth consecutive quarter with reductions in the indicator, which 12.4% at the moment and still in a downward trend. In terms of collections, we also have good news. We had a 93% performance last year. Today, reaching 98% roughly, also in line with the other 4 distribution companies of the group, all resulting from the corporation of intelligence and discipline in cost and collections. In OpEx, we are clearly at a different level of expenses accelerating the regulatory OpEx, reflecting the new robust culture that has been adopted with new efficiencies in Neoenergia acknowledged by the market, and also resulting from investments that have been made. We have surpassed the regulatory levels at 5.12x, and they're very close to reaching the same in DEC, also performing far below the concession contract 0.45. Well, I will now give the floor to our CFO, Leonardo, who will provide you with more details on our results for the second quarter in 2022. Over to you, Leo.

Thank you, Eduardo. Good morning to all. Well, as mentioned by Eduardo, we had a consistent quarter with consistent results. And on Slide 9, we can see the evolution, the 34% evolution of growth. Consolidated margin in the quarter driven mainly by the effects of Parcel B readjustments, tariff reviews we set, excellent results in renewables with the Chafariz complex in operations starting last year. And also with Termopernambuco's results this quarter, we have maintained a good performance with the operational expenses, 11% growth over the second quarter '21, absorbing the inflation of almost 12%, an increase in number of clients, greater head count and new businesses in transmission projects and renewables. In Slide 10, we see that the EBITDA also about 40%, reaching BRL 3.226 billion in the quarter. As seen to the right, far right, EBITDA cash ratio, looking at the VNR, IFRS 15, we have a 32% ratio, a strong rose as in the previous quarters. We also -- our net income was BRL 1.75 billion, representing a 7% growth over the first quarter in '21, and despite the pressure with financial lines, due to the higher interest rates. Now on Slide 11, looking at CapEx. In the quarter, we had BRL 2.122 billion and the highlights are BRL 1.2 billion in distribution, BRL 551 million in transmission with the construction works. Moving forward in Oitis as well and the Luzia solar, also BRL 430 million, both in operations now starting this first quarter 2022, indicating we're in line with our CapEx plan for the year of BRL 10 billion as planned and confirming our execution capacity. And now on Slide 13, looking at networks. We can see the variation, the distribution of injected energy, which is consolidating the 0.8% growth in the 5 distribution companies as expected, as predicted. And communicated to the market. The second quarter normally has lower temperatures until this year with the seasonality, there were heavy rainfalls mainly Pernambuco in June. We had a 250% rainfall than the historic average with over 1,000 millimeters accumulated in the first half. Distributed energy on Slide 14, we see the evolution in our 5 distribution companies. As also communicated to the market in the second quarter, distribution companies had growth in line with injected energy of 0.7% growth. The total number of consumers reached 15.9 million. Therefore, 309,000 increase of clients in the last months. And now looking at losses in Slide 15. As regards total losses, once again, we had a good performance in the quarter with the trajectory of changes in all, except for Pernambuco, which was in line with the previous quarter, despite the heavy rainfalls in Coelba, Elektro, Cosern and Brasilia had presented reductions. Elektro and Cosern are still within the regulatory limit with losses in Brasilia, as Eduardo mentioned, with the performance that is better and last year is closer to the regulatory limit earlier than expected. And as regards default delinquency in Slide 16 in the second quarter, well, it was maintained under control, very well under control, despite the economic situation also as a result of the water shortage and the readjustment in tariffs. The PECLD was controlled as a result of collection actions in pre-COVID levels, BRL 125 million lower than the first quarter of 2022. And therefore, well, delinquency is still under control and all distribution companies, the result of the collection actions and all the payment methods that were made available to our clients by the company. As regards DEC and FEC in Slide 17 in hours and times, we had consistent improvement in quality indicators, both in hours and times and distribution companies despite the rainfall level, higher rainfall levels, in the concession area. As I should point out, as also mentioned by Eduardo, the performance Neoenergia Brasilia, which is close to be within the regulatory DEC limit and is below the concession contract limit. On Slide 18, now looking at the networks results. We have an evolution of 31% of gross margin, reaching, this quarter, BRL 3.7 billion, driven by the readjustments, the tariff reviews and Parcel B, VNR and IFRS 15. The OpEx also had a 11% growth in this quarter, confirming the efficient cost management, absorbing the inflation in the period with a higher head count and the new transmission projects in the period. In Slide 19, we have the networks EBITDA with a 33% growth in the second quarter. And [ really out ] the VNR and IFRS values, it was a 35% growth, reaching BRL 1.808 billion, driven by adjustments and the new operations of Dourados, Santa Luzia, Jalapão projects. And net income reached BRL 1.111 (sic) [ 1.118 ] billion in networks in the second quarter, a 5% growth over the second quarter in '21. In Slide 21, now looking at Renewables and Liberalized segments, we had a summary of the results of both segments, which had a strong performance. Both performed very strongly. In the second quarter, the EBITDA in Renewables reached BRL 261 million with 86% growth, therefore driven mainly by the EBITDA and wind farms that were [ 123% ] with the Chafariz complex that began operations in the second semester of 2021. The EBITDA of hydrothermal plant also contributed with 13% growth in the quarter. Liberalized reached EBITDA in the second quarter of BRL 254 million, a 105% growth over '21 with strong results in Termopernambuco reaching BRL 247 million EBITDA in the quarter. And since it did not operate, it benefited from a low PLD in its contract. Moreover, our [ trader ] and he also had a BRL 6 million EBITDA in the quarter. And now looking at our capital structure on Slide 23. As regards our structure, we closed the second quarter with a net debt of BRL 34.5 million, mainly driven by the CapEx realization according to plan, still strong results that represented, reduced our net debt to EBITDA ratio going from 3.14 in the first quarter, on closing to 2.96 now in the second quarter. And we expect more leveraging threefold going forward this year, still below what is planned in the original plan. The debt structure is still very comfortable with a good distribution over the next years with a 5-year period on average. And we have disbursed to date, BRL 9.3 billion in new fundings our capital contributions with the successful mission of debentures in the 5 distribution companies in the past days. We can claim we have addressed all our funding needs in the market for 2022 and now only with disbursements for lines that have -- is contracted like BNDES. They -- and [ IS 5 ] and this actually reassures us in terms of our business plan despite the macroeconomic instability. And now I will ask the operator to please open for questions, the Q&A session.

[Operator Instructions] Our first question is from Andre Sampaio, Santander.

I have a question regarding Termopernambuco. Can you tell us more about what is planned for expansion, potential investment, potential -- the ESG documents that will be also submitted? How are you actually moving forward with this part of the business?

Thank you, Andre. As you are all aware, Termopernambuco has an economic life cycle, which will be concluded in April 2024. The original contract with Petrobras. And therefore, we will have a 1 year -- 1.5 years actually before we enter into a 15-year contract. And we might not be able to anticipate this new contract, but these are 2 economic scenarios that are quite different. You have the one that is reaching the end, one that will be renewed. It will be a new one under new conditions, new terms too as well. The doubt we had a few months earlier was regarding the new cycle, which has been defined. And now we have an important flow, an important new deal for a longer period of time. And we are reassured that we will -- well, we have an expansion project in Termopernambuco, too, which is being analyzed and nothing has been defined yet. However, this asset is very valuable. And will be very interesting, especially looking into gas. And as with the group of assets, part of the group of assets that we are considering and considering bringing into the group and let us see how we will move forward over the next months and the decisions that will be made.

If I may, I'd like to ask one more question. Regarding the Enel sale process. I would like to ask you if you have changed your position or you're not actually interested in this asset.

We are not interested in this asset. We're not considering this asset, and this is the same position that we have shared with you in the past. We have the same stance at the moment. We're not considering and we're not interested.

The next question is from Rafael Nagano from Credit Suisse.

I have 2 questions, please. In relation to the distribution companies in terms of volumes, what do you expect going forward if the mix of tariffs we had in the cycle which was maybe lower, maybe it should now turn around? Or should we expect the same level -- the same EBITDA levels that are somewhat lower? The second question refers to the HPP, the hydro power plant sales and how that plan is going forward.

Thank you for your questions, Rafael. In fact, as mentioned, we are, of course, we have the climate impacts, environmental impacts, temperatures, rainfall. And on average in the past 2 quarters, we maintained our levels. For the second half, we have different expectations first because we do not think things will remain as they are. Second, because through all the initiatives to revert tariffs that you are all in track with, with the PIS/COFINS, et cetera, we will be looking at tariff reductions, which, in our case, go from minus 21% to minus 8%, depending on each Disco. And in terms of Pernambuco, we are looking at 20%. We believe this will be very positive in terms of losses, default and market. And it is -- well, of course, you have -- if we have more normal weather conditions and relevant tariff reviews, consumption and the mix, well, should be actually maintained that the second half of the year at improvement levels with a clear recovery. As far as your second question, as we mentioned earlier and the previous opportunities by modified priority is to, of course, value Neoenergia's assets. We are all aware we have several assets. Belo Monte, you all know it's public. We are selling Belo Monte. They are assets that are there because they're not strategy or under our control or have low return rate -- low returns. We are considering actually how to value those assets. And this is something that we have been considering in the market. Of course, I cannot speak openly about these actions at the moment. But yes, it's in the market already. And maybe over the next 6 to 12 months, we will have concrete operations. We are also considering bringing in investors or partners to also join us in our growth opportunities in transmission, renewables. And we're also going to the market and analyzing these opportunities. There isn't much more I can share at the moment, but you will definitely, of course, keep track of the things we will be doing over the next 6 to 12 months.

[Operator Instructions] There is one more question from Daniel Travitzky from Banco Safra.

I have a question on the performance of the wind farms, in particular, Oitis. We had, of course, the wind performance was somewhat negative in this past quarter. I'd like to learn what your experience was in terms of wind performance, how much you have reached in the wind farms, P90, P50.

Daniel, thank you for your question. In Brazil, up in the Northeast, the first 2 quarters normally have lower winds, and there are higher winds in the second half of the year in that region. And therefore, we have had lower winds in this past quarter, but it is not actually directly tied to what will come later. We've had 2 years with lower quarters in the first half and a positive upward trend in the second half. And of course, you have the influence of El Niño, La Niña occurrence in this second semester in the second half, but has also been, of course, considered [ appraised ] in our budget. And the [ impulse ] that we have been receiving from our climate experts are winds that are actually expected pretty much in line with what is expected for the second half. This is the answer I have for now.

We have one more question from Henrique Peretti, JPMorgan.

I have 2 questions. One, on the [ GD ] impact. I want to know if there has been a relevant impact in concession area. It has reached 1% point in growing demand. It could have been a higher percent that are reported and that is why I asked the question. My second question is regards capital allocation. In the past, you've indicated neither [indiscernible] considered reviewing the dividends policy and of this the CapEx cycle. And I would like to know if this is still the case.

Thank you, Henrique. Well, in answering your first question, distributed generation. In fact, we are now feeling the effect of the micro-distributed generation and concession areas more than others. We have one up north in Cosern, a high impact and with a significant impact. And as for -- well, what is positive to us? First, a new regulation and all that impacts the distributed -- distribution company. And now, of course, I can turn it over to Solange to explore this further. But we are, of course, looking at all of these factors. And of course, in 2022, it's neutral. But we want, of course, to have something that is continuous. This energy, of course, comes out of this -- of our energy of this load and is, therefore, excessive in the distribution companies. Solange can you also add?

Yes, I would add that according to the legislation as of a certain level, this is neutral in terms of income levels or earnings. And in terms of the overproduction or contracts. We have been already talking to ANEEL, and we should consider the effect of under contracting as an involuntary effect. And therefore, there's neutrality to the process.

Yes, precisely. That is correct. It's important because these are significant volumes and you should also bear that in mind. To your second question, the payout policy, it's also something we've discussed. And after the results of the last auction, we had actually, well, a payout plan that was previously designed and was submitted to the Board. And of course with the volumes in June 30th, the policy is not actually effective because it does not change the current scenario much. So now we're reviewing it. We will be redesigning it and consider which way to go forward, and it's precisely what we're doing at the moment. We're considering what we can propose, what we can do, what can be attractive, what can be applicable. And this is the phase we're in at the moment. Maybe Leonardo wishes to add more to this answer.

I would just say that, well, yes, this scenario has not changed. We believe we see there are advantages in having a clear policy that is tied to leveraging the payout. But as mentioned by Eduardo, with these latest events and the 2 acquisitions of the 2 lots that we obtained with the CapEx is concentrated mainly as of 2024. And the deleveraging curve is slower. Therefore, it will continue, but more gradually. And yes, we will keep on focusing on a more clear policy, but in the short run -- well, not so much in the short run. This is what has changed in regards to the leveraging levels resulting from the new acquisitions of lots. And -- but the concept remains the same.

I see. And one more question, if I may. You said in the next review, well, according to the legislation, it has to be neutral. And in ANEEL, you want to have the involuntary contracting. Will that be by the next review?

As of January 2023, it will be neutral. Right now, we're talking to the regulator, to ANEEL, to look at the involuntary levels. Whatever is installed in the farms in the complex, as of 2022, would be considered involuntary. So these are 2 different aspects.

We will now close the question-and-answer session. I will now give the floor to Mr.Eduardo Capelastegui for his final closing remarks. You have the floor Mr. Capelastegui.

Thank you very much, operator. And I would like to point out that, once again, we have our strong commitment with all the stakeholders. 2022 has been a challenging year, however, we're going to reach the end of the year with a stronger and more profitable company as you have seen in the results that we have shared in this call. We have had consistent results, confirming the continuous value that we are creating to our shareholders. Since the IPO in 2019, our EBITDA cash and net income has grown by almost 80%. And with our new assets, we will continue growing on the same trajectory. We have been controlling costs, losses, delinquency. And we have also reassuring our clients will get energy supply and will play an important role in the Brazilian electricity sector. We are constantly innovating in renewable energy. And in Brasilia, we've had a great success proving our capacity to deliver. We are extremely aware of our health status, and we have a capital structure that is appropriate. As mentioned, often times over the past 2 months, we have to show the correct value of our assets. This is a priority for us in Neoenergia. It's among our top priority to prove this in the short and medium run. I'm very proud because in [ June ], we have been fulfilling our ESG commitment, and we will continue going forward. Likewise, our another priority is be active in quality communication on all the projects and actions that we are carrying out. And we will focus more strongly on the identity authority of the brand Neoenergia over the next month. We will see concrete actions in this aspect. To our shareholders, to all of those who trust in the work we do, once again, I would like to reassure you that we have the right team. A team that is engaged to producing the expected results. And I would like to close by thanking all of the employees of Neoenergia for keeping up with the results, for making sure we are, at Neoenergia, driving our economy and providing quality of life to our customers. Thank you to all of you for joining us, and I wish you an excellent day.

Neoenergia's earnings release call is adjourned. Thank you all for joining us today. We wish you an excellent day, and thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]