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

Good evening, and welcome to this conference about the asset exchange between Neoenergia and Eletrobras December 16, 2022. This presentation will be held by Mr. Eduardo Capelastegui, CEO, Neoenergia; Mr. Leonardo Gadelha, CFO, Neoenergia, Mr. Carlos Henrique Choqueta, Executive Director of Development. And Mr. Renato Rocha, CIRO. This audio conference is being transmitted simultaneously online via webcast, and it can be accessed online through ri.neoenergia.com, where we also have available the presentation, the slides for this presentation. [Operator Instructions] This broadcast will be held in Portuguese, and there is simultaneous interpretation into English. [Operator Instructions]. As a reminder, any statements that might be made during this call connected to business perspectives at Neoenergia, forecast operational targets and financial targets are based on beliefs and assumptions of the company's management as well as on information currently available to the company. Future considerations are not a guarantee of performance as they involve risks, uncertainties and assumptions, as they refer to future events and therefore, they depend on circumstances that may or may not occur. Investors should understand that general conditions, industry conditions and other operational factors may have an impact in the company's future results and may lead to results that differ materially from those expressed in these forward-looking statements. I will now like -- I will now give the floor to Mr. Eduardo Capelastegui. Mr. Eduardo Capelastegui, you may begin.

Thank you very much, operator. Good evening, everyone. First of all, I would like to thank you all for joining. At this time of the evening, we are aware that it's a little bit late in this Friday, but we wanted to have this call on Friday. We registered the relevant factor at the CVM. And we wanted to talk about this operation, how it's structured, what is the economic situation so that you can continue your own conclusions. As the operator said, I have here with me Mr. Leonardo Gadelha, our CFO, Mr. Carlos Choqueta, Development Director; and Renato Rocha, who is our CIRO. I'm going to do a brief presentation, and then we will have time for a Q&A session. As you know, in recent months, we had several meetings, and the Neoenergia Group is working in 4 major operations. These operations have the goal of optimizing our portfolio and strengthening our balance sheet and balancing our assets as well. These 4 operations. The first one is connected with hydro assets where Neoenergia does not have shareholder control. We have shares, but not control. The second line is connected with thermoelectrical assets. The third one is connected to transmission assets. We have got a financial partner, who is supporting us in this line. And the fourth one is connected to Belo Monte to this asset. So in this move, we have been doing -- I'm very happy to announce this evening the result of the first of these -- out of these 4 operations. And I wanted to present to you this asset exchange operation with Eletrobras. Eletrobras is a company that has partnered with Neoenergia for many years. We've built many hydro stations together. And this shows this partnership and this collaboration, as you will understand, in this -- in our opinion, this is a win-win situation both for Neoenergia and Eletrobras. This transaction, I'm about to show you is quite sophisticated for the Brazilian industry, and it will raise value or create value for Neoenergia. And once again, it will have mutual benefit for both parties involved. Neoenergia will receive 49% from Eletrobras of its participation or its share in Dardanelos. So we will reach 100% of ownership of the assets we will control and then consolidate the Dardanelos project. Besides this asset, Neoenergia will also receive 0.04% that Eletrobras currently has in Neoenergia Coelba, Neoenergia Cosern and at Afluente T. In turn, Eletrobras will receive 51% of share from Neoenergia in the Teles Pires and Baguari projects, controlling and consolidating both assets on their side. So there will be no need for additional payment. This exchange of assets already takes into account a balanced participation in these transactions or in these operations. We will give you more details about the rationale behind this transaction, which once again is aligned to our strategy. First, I wanted to highlight that Neoenergia currently has no control of hydro assets because we have a minority stake. So after this operation, we will have 100% of ownership of Dardanelos, so we will consolidate this asset. For us, Dardanelos is really important. This is a premium asset, as you all know, in operational terms and also in terms of financial performance. It has a very low leveraging level, almost zero actually. And with a contingency level, that is also very low. From a financial perspective, this operation has a balance of values between Neoenergia and Eletrobras. It's a multiple of 7.8x for EV/EBITDA, 8.8 for Baguari and 10.3 for Teles Pires. That's the ratio for the 3 of them. As you will see, this will lead to a positive impact for Neoenergia in terms of EBITDA, net income, net debt from year one, actually, after closing of this transaction. While having 100% of Dardanelos opens many avenues for value generation. And this leads to an increase -- an immediate increase in dividends and the flow of dividends. And we will capture on many synergies in terms of contracts, structuring costs, using our own capital. So we have identified many improvements. From an ESG perspective, we also foresee several positive impacts. This will allow us to simplify the corporate structure, the group's corporate structure and a reduction of contingencies exposures. I would also like to mention that Dardanelos is currently the plant with the best use of area in Brazil. So this is a very interesting transaction. Moving on to Slide #4. This is a graphic representation of the pre- and post-transaction corporate structure. As you know, in Teles Pires, we currently have 3 shareholders, Neoenergia has 51%. And post transaction, Teles Pires will become a company controlled by the Eletrobras groups through Eletronorte, Furnas, Eletrosul. With our Dardanelos its the opposite, now Neoenergia will have 100% of ownership. With Baguari Neoenergia or Baguari one will become 100% to Eletrobras and at Afluente T, Neoenergia will increase its share and reach 98.98% with Coelba, 93.09% with Cosern and 90.17% with Afluente T. Slide 5. Here, you see a little bit of these 3 assets. Here, you see many operational and financial information about these projects. One of the relevant points of this operation is that it was executed in record time, 1.5 months. We know these assets very well, and we could conduct this transaction quite swiftly. From an operational perspective, as you see, Dardanelos has high hydro use. It has a concession until 2048 and 100% of the energy sold in the regulated market at a price of BRL 255-megawatt hour. So in recent years, as you see, the EBITDA for 2021 was of BRL 281 million with a net income of BRL 188 million. Dividends BRL 88 million and net debt is almost nonexistent. As for Teles Pires, this is the largest plant out of the 3 ones, you see here, 65% of the energy sold in the regular market, the price is BRL 109. As for EBITDA, since debt is high, it has great results for EBITDA, but for net income, the debt it has ends up having an impact in net debt or net income. In 2021, they had a positive result due to a rearrangement, you might remember. But if we hadn't had this extraordinary event, we would have negative net income. Baguari, on the other hand, is quite close to Dardanelos. It's a smaller plant with considerable results, positive EBITDA and net income and net debt quite very much under control. In Slide 6, you see a summary of the value of the generation assets. It is important to mention that the multiples are very much aligned. Just Teles Pires is a little bit above. For the valuation of participation in these distributors, we use valuation from a recent transaction we've conducted. We've acquired percentages as you remember, and we look at what has been paid throughout the period. That's 1.3x, so it's quite competitive. That's the ratio, EV/RAB. In Slide 7, we see financial impacts, as I mentioned. For Neoenergia, since closing, from the moment of closing, we expect an increase in EBITDA of about BRL130 million a year. This is basically connected to Dardanelos and to the deconsolidation of Baguari and Teles Pires. In year one, 2023, when we close, there will be an extraordinary impact of about BRL 460 million, that's positive with market, a markup that we will have in Dardanelos. So it's an extraordinary noncash event. And we will have a positive recurring impact of BRL 130 million a year for EBITDA. For net income, average impact will be of about BRL 30 million positive a year. And in year one, we will integrate this to the company. As for net debt, that's about BRL 100 million a year. That's the cash expansion. And for covenants an average leverage reduction of about 0.05 or 0.1. In Neoenergia, we are around 3, 3.1. So we would be about 2.9 or 2.85. So this is clearly a valuable operation for us with a positive impact in our balance, in our results and in our financial position as a group. As my final remarks, I would like to mention the most important points in this transaction. The first is to highlight that this is the first operations out of the 4 we are working on. The other 3 are moving very well. And when we look at 2023, we have preserved, we are very much optimistic. We expect in Q1 to have another call like this one to keep on delivering the results of these operations. Well, Dardanelos, I highlight, once again, it's an excellent asset with great operational and financial performance and with a lot of cash predictability because it's regulated, fees are regulated and quite high. It generates value for our shareholders and reinforces our good capital allocation. It also optimizes our portfolio. We are rotating from less strategic into more strategic assets where we have control. This move also reinforces Neoenergia's soundness in ESG aspects. We move from assets that had a higher volume of contingencies. We're moving away from them. And this transaction also simplifies our corporate structure, it allows us to reach better results and we will -- it will bring benefits for our balance and for all companies involved. So we can now move to the Q&A session. And once again, I want to say that this is a win-win operation between Neoenergia and Eletrobras. It's a complex operation that was conducted in record time. And I am sure that this will add a lot of value for both parties involved. As for Neoenergia specifically, we will have even more credibility to a plan we've mentioned before and little by little, we are delivering on the results. So that's how I finalize my presentation. And operator, we can begin the Q&A session, please.

[Operator Instructions]. Our first question comes from Henrique Peretti from JPMorgan.

I have many questions, actually, but I will start with the most important ones. First, what explains the difference in multiples in the assets, we have a higher multiple when compared to Dardanelos? Is this leveraging? And in Teles Pires, we also see that the book value is about BRL 2 billion, and valuation went to 100%. So Teles Pires is below. Will that lead to a loss or a gain in P&L terms? So that's my first question.

Would you like to ask all your questions at once.

Okay. My other question is about contingencies. You mentioned that -- you are reducing the exposure to contingencies. I hope -- I imagine that this is for Teles Pires as well. So what are the contingencies that we currently have in Teles Pires? And why do you believe it is important to mitigate this risk?

Thank you, Henrique, for your questions. Well, first question first. You asked about the difference in multiples in these 3 operations, most of all, you mentioned Teles Pires, which has multiple that's a little bit higher than others. So Teles Pires is a large asset with sales price that is considerably low. So the EBITDA of BRL 300 million for an asset that have -- that has [ 529 ] of energy. So this is based on future forecasts for energy prices. 65% is sold in the regulated market and the remaining 35% is sold through a different structure. The question here is the debt in Teles Pires, BRL [ 2.6 billion ] in debt, that's distributed 200-- well, BRL 500 million, it's in the holding, the umbrella holding, which is also being transferred to Eletrobras right now. So once again, that's [ BRL 2.6 million ] in debt. And considering the enterprise value, we reach this equity value. So in terms of losses in 2022, well, what we're going to do now is we will compensate this with Baguari. In Baguari, we're going to have more value. It's going to be above book value. And this will lead an accounting loss of BRL 150 million for Neoenergia. Why? Because from an accounting perspective, we have to record this year. The results of the assets we sell and only at closing time next year, we can record or file the surplus for Dardanelos. And then we have BRL 460 million. So it's BRL 150 million negative and BRL 460 million positive in 2023. So at a global level, the positive -- the accounting impact is positive. We lose a bit in Teles Pires. We win with Baguari. But when you look from a global perspective, the accounting impact is quite positive, BRL 300 million more or less. So that's the accounting impact compared to the book value of these 3 projects. From a contingency perspective, what we have mapped, is a contingency volume for Teles Pires of about BRL 400 million. and about BRL 170 million are likely that will be discounted from price, and the rest are possible contingencies that are also taken into account. So in these amounts, we have different types of contingencies. Machinery, these are things that both Neoenergia and Eletrobras acknowledge, and they were encompassed in the valuation process. So the values take that into account.

I have another question actually. If you have an update on Belo Monte? So is this a possibility of maybe consolidating Belo Monte as well? Is this a negotiation? Is this on the table right now? Why aren't you doing this at this time? I imagine this is a more complex negotiation. Could this happen maybe next year? Or with Belo Monte, are you intending on selling everything?

Thank you, Henrique. Well, Belo Monte, you might remember in 2021, we marked this asset. It was a nonbinding proposal, which we still have, and our balance already reflects the market value. This operation is still active. And our forecast is that out of the 4 lines I mentioned in our opinion, this will be the last one to happen because there are some variables connected to Neoenergia. This is still to be defined. So we are selling this stake. It doesn't make sense for us to have 10%. This has been said already. And we are depending on the hydro [indiscernible] when it's clear, then we will be able to have a more concrete proposal. But we are still on the selling side. Well, you asked about the timing, I don't think this is for 2023. I would look at 2024. The other 2 operations I mentioned will probably happen in 2023. But Belo Monte 2024, I can be very transparent about this.

Next question comes from Renato Pinto from Scotiabank.

Good evening. I would like to know if Dardanelos has a GSF insurance. As for the other shareholder sales, do you also intend to do exchanges and assets maybe for Belo Monte? And if Belo Monte will be left for 2024, then as a consequence for 2020 up until June, you would have in transmission and thermoelectric assets. Is that correct?

Yes, Dardanelos has a GSF insurance, as well as Baguari. I don't remember if it's 92% or 91%, but yes, it has insurance. I can give you the exact percentage later, but it is insured. As for exchanges, let me tell you that in 2023, we are working -- we have been working in these other operations for months with the thermal electric areas and transmission. This will be for 2023. And yes, Belo Monte, we are looking at a longer horizon. So this is more or less the timing aligned to our conversations since the first operations. This is the first one. We still have 2 to go. And they are moving very well. They are on track. As for exchanges, well, for transmission and thermoelectric, there's no exchange possibility. These are not exchange type operations. These are actually sales operations on both cases, so there's no exchange. And for Belo Monte, I don't know. We still have to look at it because it's a more complex asset. So we will still have to see what we can do. Of course, we would like to sell our stake, and that's it, but it's more complicated. So for Belo Monte, we have to create a more complex structure. But for thermoelectric and transmission, this is just sales, sales, cash, no asset exchange involved.

Next question comes from the webcast platform and it comes from Mr. Andre Sampaio from Santander Bank. He asks, I would like to understand what is the planning or the plan for the other hydro assets? Does it make sense to keep a position in this industry?

Thank you for your question, Andre. Well, we've never talked about leaving hydro. This has never been our perspective because we believe it adds value. Our proposal was to rotate reorganize and reprice assets. Thinking of assets where we didn't have full control. We didn't have full control in Dardanelos, and we didn't have control in Teles Pires and in Baguari we had 51%. We also don't have control over Belo Monte. So our operations for hydro assets, they focus on these points. We have amazing assets. Now we have Dardanelos, this is premium assets with good prices that generate a lot of value. So I want to make it clear that we don't want to leave hydro at all. It's just about a repositioning to add value to reorganize our corporate structure and to have better focus on an active control so that we can generate more value. So that's our strategy.

If there are no further questions, Neoenergia's call is finished. We thank you all very much for your participation, and have a good evening. Thank you very much.