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

Good morning, everyone. Welcome to Neoenergia's 1Q 2025 Earnings Release Call. [Operator Instructions] We should inform you this call is being recorded and will be made available on the company's IR website, ri.neoenergia.com, where the complete earnings release material is available. It is also possible to download the presentation using the link sent via chat, including in English. [Operator Instructions] The information contained in this presentation and statements that may be made during the call relating to Neoenergia's business prospects, projections, operating and financial goals are beliefs and assumptions of the company's management as well as the information currently available. Forward-looking considerations are no guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand general economic conditions, market conditions and other operating factors may affect Neoenergia's future performance and lead to results that differ materially from those expressed in such forward-looking statements. The presentation will be led by Mr. Eduardo Capelastegui, CEO of the company; and Leonardo Gadelha, CFO of the company. I will now give the floor to Mr. Eduardo Capelastegui.

Good morning. Thank you, operator. Good morning to all. I would like to thank you for tuning in for the presentation of our first quarter of 2025 results. I'm Eduardo Capelastegui, CEO of Neoenergia. Once again, we are very proud of what we will share with you here. I'm joined by Solange Ribeiro, Vice President of Regulation, Institutional Affairs, and Sustainability; Leonardo Gadelha, CFO; Giancarlo Vassao, Executive Director of Operations, COO; Juliano Pensanato, Asset Control and Planning Officer; and Renato Rocha, IR Officer. As usual, I will make a brief presentation covering the main highlights of the period, and Leonardo will present the results in more detail. We will then move on to the questions and answers. And in the end, I will make my closing remarks. So to begin on Slide #3, we have the highlights of our first quarter results. Injected energy considering distributed generation performed very well in the concession area, growing 3.6% in this quarter versus the same period in the previous year. Operating expenses are controlled with a 3% growth only in relation to the previous year, therefore, well below the inflation. EBITDA amounted to BRL 3.7 billion with a 6% increase in the quarter, reflecting the dynamics of a larger market, sound operating performance of assets and controlled costs. CapEx amounted to BRL 2.2 billion in the quarter, which brought our net RAB in distributors to BRL 41 billion. On the asset rotation front, we announced the sale of 50% of the Itabapoana transmission lot. One more transaction with our partner, GIC, which generates great value for Neoenergia and its shareholders and reinforces our deleveraging strategy. On the other hand, we are also successful in the April tariff processes. Neoenergia Coelba and Neoenergia Cosern underwent annual tariff reviews with an increase in the B parcels of 8.1% and 6.6%, respectively, driven by the high IGP-M index and in the case of Neoenergia Coelba by the improvement in quality customer service with Factor X. Neoenergia Pernambuco underwent a 4-year tariff review, which, among other things, enabled, firstly, the full incorporation into the remuneration base of investments made over the last 4 years. Secondly, the increase in the regulatory WACC, which amounted to 8.6%. And thirdly, the increase of the losses coverage that went from 0.9% of our coverage from 15.2% to 16.1%, once again, an almost 1% increase with the highest coverage. All of these factors in the case of Neoenergia Pernambuco represent an increase of over BRL 300 million in the distributors' EBITDA when compared to the EBITDA of the year prior to the review. This is higher than 20% increase in the EBITDA of the distributor. This regulatory soundness is in line with the request made this quarter for early renewal of our 4 eligible distribution concessions, Neoenergia Coelba, Neoenergia Elektro, Neoenergia Cosern, and Neoenergia Pernambuco. Moving on to Slide 4. We can see the progress of our transmission projects, starting with the lots from December 2018. The Guanabara lot with 95% of physical progress. One section concluded, energized with the release of RAP of BRL 65 million in May, while the other section is in progress with a RAP of BRL 100 million anticipated for the third quarter this year. In the Vale do Itajaí lot, we are 87% advanced in construction and have BRL 58 million RAP released in 2024. Now in the end of April, we will -- now we will conclude 2 more sections that account for an additional BRL 90 million in additional RAP, reaching 56% of the released RAP for the lot. And finally, we will conclude the project in the second half of 2025, when we will release the remaining BRL 116 million, reaching a total RAP of around BRL 265 million in the Itajaí lot. In the Morro do Chapéu from the 2020 auction, the physical progress has reached 97%. We already have BRL 105 million of released WAP, almost 50% of the total amount. We will still release the remaining BRL 120 million (sic) [ BRL 112 million ] of the RAP in the second half of 2025, concluding this lot with higher than BRL 100 million. As for the June 2022 auction, the largest of all, lot 2 of Alto Paranaíba with all the works that have advanced 72% completed. We have in this lot BRL 7.4 million released RAP, and we will also release remaining BRL 400 million in the second half of 2025. Therefore, throughout 2025, we will have released approximately BRL 900 million in new RAP, reaching the significant milestone of almost BRL 2.2 billion of total RAP operated by the end of 2025. We will then conclude our investment cycle in transmissions, which started in 2017, as you're all aware. And now turning to Slide 5, we will talk about the Itabapoana operation. As you heard a few days ago, we announced the sale of 50% of the Itabapoana transaction to GIC, therefore, strengthening our partnership, which now has 9 assets in the subholding with 50% stake for each partner. GIC continues to have the right of the first offer for the assets that are under construction. And as they enter into operation, an assessment process will begin on a case-by-case basis. Speaking now about the transaction, the Itabapoana transaction, we received BRL 127 million from the 500% equity stake and we deconsolidated net debt in the amount of almost BRL 600 million. We have closed this operation with multiple EV/RAP around 9.1x higher and 18% the real IRR for the buyer and operation that adds much value to Neoenergia and to all of the shareholders. Now I will give the floor to our CEO (sic) [ CFO ], Leonardo, who will share more results on the first quarter 2025 results.

Over to you, Leonardo. Thank you, Eduardo. Good morning to all. We'll look at the first quarter results on Slide 7, the consolidated results for Neoenergia. The evolution of the gross margin in this semester was 6% over the first quarter in 2024, reaching BRL 4,942 billion, which is explained by the distributors market. We have a strong cost control with a 3% growth only, closing the semester with BRL 1,064 billion only. EBITDA grew 6% in this quarter and cash EBITDA had a 1% reduction, reaching BRL 2,781 billion, a result of the negative adjustment by the IGP-M in Parcel B of the distributor last year and the new contract for Termopernambuco. This was partially compensated by Novo Mercado, as I mentioned. The Network EBITDA represented 93% of the consolidated EBITDA and the Generation and Customers 77%. And the net income of Neoenergia in the quarter amounted to BRL 1,001 billion with an 11% decline compared to the first quarter '24. As for CapEx on the next slide, we had a total of BRL 2.2 billion, therefore, in pace with our investment plan for the year. And as in the previous quarters, CapEx was almost fully in Networks, representing 98%. In this quarter, highlights were BRL 1.3 billion in distribution and expansion and improvement of the network quality, and BRL 869 million in transmission works -- projects. On the next slide, on Slide 10, we will look at the operating performance of the Network segment. We see the variation of injected energy in our 5 distributors. And as announced to the market, we had a solid growth in the quarter even when compared to the first quarter in '24, which was strong with higher temperatures. Consolidated growth was 3.6%, including DG. Total number of consumers reached 16.7 million, therefore, a growth of 294,000 new customers over the past 12 months. On Slide 11, looking at losses, total losses, good evolution in the loss rate in Brasília alone. We had one particular worsening because of the rainfall. So we deployed teams there to reestablish the energy supply, and we expect for this to recover throughout the year. Starting in the second quarter, we will see important gains in coverage with the adjustments of the DG and the Pernambuco review with 0.91 increase and we go 4 of the 5 distributors that are within the regulatory limits, therefore. On Slide 12, you can see that in the first quarter of '25, PECLD reached BRL 146 million, therefore, remaining under control in relation to previous quarters as in the charts below, the collection index also had a positive trajectory in all of the distributors over the past quarters. On the next slide, we'll look at the quality indicators, GEC and FEC in our distributors maintaining a declining trajectory. They're perfectly within the regulatory framework. Now moving to Slide 14, looking at the results of our Networks. In the first quarter, we see an evolution of 11% in gross margin, as I mentioned, which is explained by a better market scenario. Operational expenses had a 2% growth only, very good performance. Network EBITDA grew by 12% and cash EBITDA Networks reached BRL 2,488 billion (sic) [ BRL 2,588 billion ] 5% above the first quarter '24 despite the negative adjustment of Parcel B by the IGP-M, as mentioned. On the right-hand side chart, we see the distribution and transmission breakdown. EBITDA -- cash EBITDA and distribution grew 2%. And in transmission, 168% with the new projects that came in. Regulatory EBITDA of the transmission assets amounted to BRL 223 million, BRL 121 million and 100% Neoenergia assets and BRL 102 million by the -- with the GIC JV and the equity equivalent. On Slide 16, we'll see the results of our Generation and Customers business. Remember, we consolidate the segments of Renewables and Liberalized. In the first quarter, EBITDA for this segment was BRL 263 million with a negative impact by Termopernambuco in the first quarter '24 was still under the previous contract with a higher margin. On the right side, we see -- we break it down by business lines. EBITDA for hydro in the first quarter was BRL 136 million, the variation is explained by the deconsolidation of Baixo Iguaçu. EBITDA for wind power, BRL 102 million because -- with the 8% reduction because of the higher OpEx in Chafariz since we reached the end of the guarantees assurance from the supplier. In solar, BRL 5 million EBITDA, BRL 6 million reduction because of the lower generation in the semester because of Luzia complex and Termope complex, while the EBITDA was negative in BRL 1 million, resulting from the new contract that I mentioned and the low supply -- low dispatch in the semester. And now I will finally Turn to Slide 17 -- or rather in the previous slide, I should also mention that Customer business had a BRL 22 million EBITDA in the quarter, BRL 16 million growth in this quarter. And now on Slide 17, capital structure. We see we closed the first quarter in '25 with a net debt of BRL 44.4 billion, BRL 1 billion above the previous quarter, roughly explained by the CapEx pace our net debt-to-EBITDA ratio, 3.49x. But if we look at the cash entry in the Baixo Iguaçu entry, this goes down to 3.41x. The debt structure remains comfortable, well distributed with the 5.8 years average deadline diversification with funds indexes and we have a competitive spread with incentivized debentures that we settled last week in 3 of our distributors amounting to BRL 2.1 billion after the swap reached rates low or below the CDI. So we had a negative spread, which makes us believe in the CapEx cycle that we will this year more firmly. And now I'll turn it back to the operator for the Q&A session to begin.

[Operator Instructions] Our first question is from Mario, sell-side analyst from Banco Safra.

I would like to ask you a question in relation to capital allocation, considering the company leveraging, which has reached control -- is under controlled levels now and that the main investments in transmission should be concluded by the end of 2025 and the 25% current payout. I would like to understand if -- how the company sees the capital allocation from 2026, starting in 2026, if there's room for reviewing the dividend policy.

Mario, thank you very much for your question. As mentioned, in 2025, we are concluding our investment cycle in transmission. And also starting in '26, we are planning to continue having organic growth in distributors. It's BRL 5 billion to BRL 6 billion annually. We do not foresee investment opportunities that are profitable in renewables considering price curtailment, market price differences, we do not foresee appropriate returns in renewables. In the latest transmission auctions, we don't see we're competitive. We are requiring returns in reals of 2 digits. So, yes, this is what we foresee for 2026, focusing on organic growth and distribution, which will lead us to a deleveraging process that will be gradual and will be then accelerated as these processes happen through our partnership with GIC. If all of these things will happen as foreseen as expected, we well, if it's different from what we expected 3 years ago. If things continue as expected, we will start fast deleveraging, and we will have to think and consider what we will do next. We don't want to have money in cash. We want to continue growing organically with distribution. We will review our payout policy more likely. When this will happen? Well, 2025 is, well, investment year. 2026 is the leveraging year, and we will try to figure what's the best possible moment to start considering these options. It's important to mention and underscore that, yes, we are fulfilling -- we've been fulfilling the plans we have disclosed in the past 3 years and now Neoenergia, whether through the reduction in organic investment or through the asset rotation project that we've been conducting in the past 3 years with different operations that add value. These things will lead us to reducing our debt and increasing our EBITDA and therefore, having a privileged position to begin considering payout increases or also considering growth opportunities, but also underscoring those as long as we fulfill with the capital allocation criteria, as you all know, we have 2 digits below actual returns of investments.

Our next question is from Guilherme Lima, sell-side analyst from Santander.

I have one short question in relation to the Termo EBITDA in the first quarter '25 now under the new contract and the prospects for evolution, EBITDA evolution going forward, considering this current fuel solution in the plant.

Thank you, Guilherme, for your question. Termopernambuco, as mentioned, remember, once we had an early contract earlier is an asset that with 0% dispatch, we will have a 0 EBITDA roughly. If we hadn't anticipated this contract, our EBITDA would be negative in BRL 150 million with 0 dispatch EBITDA should be 0. And with the dispatches, we will look at BRL 50 million EBITDA increase probably. So for the next quarters in 2025, considering the hydraulic situation in the country and the reservoirs do not believe our dispatch will be very relevant. Therefore, we will probably remain with our EBITDA close to 0. And now over the past 20, 25 years in Brazil, well, we had 2 or 3 years of calm and then there's a year where we have slower 6, 7 months. This plant is not giving us any headache. We have the contracted -- the contracts. We are waiting for the dispatch to begin. Once it begins, we will have expressively -- we should have expressive results. Now with dispatch 0, our EBITDA should also remain at 0. The first quarter, our EBITDA is slightly negative because of the maintenance that was programmed. It was scheduled, but it was a one-off. And we do not expect it to repeat. So we should expect with dispatch 0, is the EBITDA also close to 0 or 0. And I would add the following, starting next quarter, this comparison will be more fair, more just. In the first quarter, now we're comparing it to the first quarter in '24 when we had the previous contract with a higher margin. And now starting -- well, we had a contract up until May, and now we will have the same comparison. But starting in the second quarter, it will be a more fair comparison. Starting in April, May, May, we'll have different things in Neoenergia. As earlier mentioned, yes, about Termopernambuco and also a positive effect of the tariff reviews in April of 8%, 7% of Neoenergia Pernambuco, almost 20%. Additionally, the market compared to '24 should grow more because last year, the first 4 months, well, we had very high market for temperatures. The first quarter is good. As you could see, the numbers were robust, but we expect from the second quarter to grow -- to have a double-digit growth, positive tariff reviews resulting from the comparison to '24 with a Termopernambuco effect, and a market scenario that should grow higher than the first half. And in transmission, with operating transmissions. Now almost BRL 100 million additional RAP, as I mentioned, this will happen throughout the next quarters in 2025. So for the next 3 months and 2025, we expect to have positive results and even better than this first quarter, which, as you can see, well, had robust numbers, not robust figures.

The Q&A session is now closed. I would like to give the floor to Mr. Eduardo Capelastegui for his closing remarks.

Once again, thank you, operator. On Slide 20, finally, I would like to say that, yes, we are reinforcing our commitment with all of Neoenergia stakeholders. Here at Neoenergia, we are continuously focusing on 3 leverages. Firstly, efficiency and safety in our operations. Secondly, creating value through the optimal capital allocation; thirdly, sustainable growth in our results. And we can express this through the expressive growth of cash EBITDA, which grew 120%. Additionally, we continue investing in quality customer service to the almost 17 million customers we have, and we firmly believe in the safety and predictability of the regulatory framework. And we have approved the request of immediate renovation of the concessions of our 4 distributors. The projects in construction are progressing. And in 2025, we will have the important mark of concluding the investment cycles and transmission delivering the last 4 lots. And after announcing the first quarter 2024, the sale of the Baixo Iguaçu plant, we are now having one more important operation in asset rotation with GIC, with our partnership. Adding value, creating value to our shareholders and focusing on deleveraging even further. To our shareholders, thank you for your trust. And once again, I would underscore we have the right team in place. We're fully engaged and committed to delivering the results that are expected. And I wish to conclude, as usual, by thanking all of our employees in Neoenergia for fulfilling the role, surpassing challenges, delivering results, and adding value to our shareholders. Thank you very much, and I wish you all an excellent day.

The earnings release call for the first quarter 2025 results of Neoenergia is now adjourned. The IR department will be available to entertain additional questions. Thank you very much to all of our participants. We wish you a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]