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

Good morning, everyone. Good morning, and welcome to Neoenergia's Third Quarter 2025 Earnings Release Call. [Operator Instructions] We 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] Information contained in this presentation and statements that may be made during the call relating to Neoenergia's business prospects, projections and operational and financial goals, are beliefs and assumptions of the company's management, as well as information currently available. Future considerations are not 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 that 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.

Thank you very much, operator. Good morning, everyone. I would like to thank you for joining us today for our earnings call of the third quarter 2025. I'm Eduardo Capelastegui, CEO of Neoenergia. And once again, we are very proud of what we will be sharing with you today. Here with me are Solange Ribeiro, Vice President of Regulation, Institutional and Sustainability; Leonardo Gadelha, CFO; Giancarlo Vassao, Executive Director of Operations; Juliano Pensanato, Asset Control and Planning Officer; Renato Rocha, our IR Officer. I'll make a brief presentation covering the main highlights of the period, and Leonardo will then present the results in more detail. We will then have a question-and-answer session and close with our closing remarks. Beginning on Slide 3, we have the highlights of the third quarter. Firstly, I would like to highlight the fantastic results we've obtained the ABRADEE 2025 award. Neoenergia won 8 out of 12 awards in which we participated. Neoenergia Cosern selected as the best distributor in Brazil as the best distributor in the Northeast. Additionally, receiving an honorable mention for health and safety. Neoenergia Elektro was elected the best distributor in the Southeast, the best distributor in management quality and innovation management and the best in operating management. Finally, Neoenergia Brasilia was the best in the performance evolution category, recognizing the enormous transformation this distributor has been experiencing since its privatization in 2021. These awards confirm once again the leadership of Neoenergia in the operation of distribution concessions in the country, providing quality service to over 40 million. Regarding this quarter's results, the injected energy considering distributed energy performed very well in our concession areas, growing 2.3% over the same period in the previous year. Our operating expenses remain under control, growing 5.6% over the previous year, therefore, in line with inflation. Cash EBITDA reached BRL 2.8 billion with a 13% growth in the quarter, reflecting market growth -- distribution market growth, adjustments in the B portion of Neoenergia Coelba Cosern, the excellent tariff review of Neoenergia Pernambuco last April, roll of operating expenses and lastly, the entry into operation of the transmission line. I'd highlight the case of Network, where the cash EBITDA also grew a significant 13%, reaching BRL 2.5 billion in the third quarter. Net income was BRL 924 million in the quarter, 10% above the profit -- the net income of the third quarter in 2024, driven mainly by the increase in EBITDA. CapEx reached BRL 2.6 billion, which brought our net remuneration base in the distribution companies to BRL 43 billion. On the growth front, we increased our stake in the Corumba plant through an auction going from 70% to 85% with a minimum bid of BRL 92 million, which represents an extremely competitive EBITDA ratio of 5x. Also in growth, we are moving towards the end of our investment cycle in transmission, delivering the last 4 lots in the next 2 months. On the regulatory front, in the quarter, we had the signing of the extension of the Neoenergia Pernambuco concession, the first distributor in the country to have its concession extended in advance. We expect the signing of other 3 distributors in the coming months, Neoenergia Coelba, Neoenergia Cosern and Neoenergia Elektro. Additionally, we had in the quarter the tariff for Neoenergia Elektro and Neoenergia Brasilia, which had increases at the B parcel of 1.30% and 8.3%, respectively, as well as the pass-through tariffs of the increase in subsidies recently approved by the government. Moving to Slide 4. We can see the progress of our transmission projects, which, as mentioned, are entering final stages of construction. We'll start with the lots from December 2018, the Guanabara lot with 98% physical progress already has one action completed contract of BRL 69 million. The other one is under construction with a RAP of BRL 98 million expected by the end of this year. In the Vale do Itajaí lot, we had already BRL 142 million or 51% of the released RAP in operation. And we are at 95% physical progress also completing the project by the end of 2025, when we will release another BRL 136 million amounting to almost BRL 280 million in the lot. In the Morro do Chapéu lot from the 2020 auction, physical progress already reached 99%, we already have BRL 166 million released, meaning 76% of the RAP. The remainder, BRL 52 million was expected to be released over the next weeks. Regarding the lots won in June 2022 auction, were still to be delivered, the largest of all. Lot #2 of Alto Paranaíba, which has been 95% completed. This lot we have BRL 104 million RAP already released and the remaining BRL 328 million will be delivered over the next 2 months. Therefore, we have already released in 2025 around BRL 300 million in Europe and will release an additional BRL 600 million in the coming 2 months, amounting to BRL 900 million in Europe, in 2025 released. In this way, by the end of this year, we will reach a significant milestone of BRL 2 billion RAP fully operational, concluding our investment cycle in transmission that began in 2017. It is worth remembering that the partnership established with GIC in 2023 remains strong and very active. And ever since GIC has acquired 50% of 9 transmission lots built by Neoenergia, the last of which, as you're aware, was Itabapoana acquired by them earlier this year, and also participated with us in the recent transmission auctions. And as you know, they have the right of first offer for another 7 lots, still 100% owned by Neoenergia, including these 4 lots under construction that I have just mentioned that will be completed in the next 2 months. I will now give the floor to our CFO, Leonardo, who will share more details about our results in the third quarter of 2025. Thank you, Leonardo.

Thank you, Eduardo. Good morning, everyone. I will begin with the analysis of Neoenergia's consolidated results on Slide 6. The evolution of the gross margin in the quarter was 10% compared to the third quarter '24, reaching BRL 4.556 billion the quarter, this increase is mainly explained by the positive effect of the tariff adjustments and revisions at the end of April of the distributors in the Northeast Elektro and in August. We have maintained a good cost with a growth of 5.6% in the quarter closing the quarter at BRL 1.082 billion. As a result, the EBITDA 14% growth in the quarter and cash EBITDA, a 13% growth, reaching BRL 2.804 billion, reflecting the improved margin of the distributors and good cost control. The Networks EBITDA represented 89% of the consolidated EBITDA of the generation of clients, 11%. Neoenergia's net income in the quarter was BRL 924 million, therefore, a 10% increase compared to 3Q '24. On the next slide, we have our CapEx in the quarter. We invested a total of BRL 2.6 billion, therefore, at the pace of the last quarters and in accordance with the plan. The total year-to-date amount is BRL 7.6 billion. As usual, CapEx was mainly all in Networks, representing 98%. In the quarter, the highlights were BRL 1.8 billion in distribution, the expansion and improvement of the network, BRL 730 million in the progress in transmission works related to the completion of the last 4 projects, as Eduardo mentioned. On operating performance in Networks on Slide 9, we see the variation of injected energy in our 5 distribution companies, which was already disclosed to the market, showed a growth of 2.3% compared to 3Q '24. Therefore, a growth equal to the previous quarter and also due to the milder temperatures. The total number of consumers reached 16.9 million, representing an increase of 342,000 new customers in the last 12 months. Moving to loss. We had another quarter with a good performance at the index. We continue with 3 out of our 5 distributors within the regulatory limit. Brasilia and Pernambuco are not within the limit, but distance to the regulatory compliance is smaller than in the previous quarters. Besides the new regulatory levels defined for both educate we are getting to very close levels to compliance. On Slide 11, we see third quarter PECLD, loans and loss provision reached BRL 116 million, an improvement compared to previous quarters. In the chart below, we see that the collection rate generally indicated a sound trajectory compared to the previous quarters. On the next slide, we move to the quality indicators, DEC/FEC etc, in our distributors, they continue on a downward trend, all of them in line with the regulatory standards. We also like to highlight the chart with the current percentages of compliant, that's per distributor underscoring the good quality performance. Now on the Network results on Slide 13. We can see that in the third quarter, we had an 11% growth in gross margin, mainly explained by the tariff adjustments and provisions of the Northeastern distributors in April and Elektro more recently. Operating expenses in the quarter grew by 9%. Therefore, we see a one-off pressure in the quarter due to increased maintenance focused on quality on increasing collection actions to improve revenue collection in the market. Even so Network EBITDA grew by 16% and Networks' cash EBITDA 13%, reaching BRL 2.455 billion in the quarter. We also see the breakdown between distribution and transmission, where cash EBITDA grew 11% in distribution and in transmission, 47% with the entry of new projects. The regulatory EBITDA of transmission assets was BRL 252 million, BRL 140 million from 100% Neoenergia assets, BRL 112 million from the JV with GIC, which we account for using our net equity method. On Slide 15, we see the Generation and Clients. This is moving here to Slide 15, we see the Generation and Clients business, which consolidates Renewables and Liberalized segments. In the quarter, EBITDA of the segment was BRL 394 million, a 2% growth compared to the same quarter '24. However, year-to-date result is still negatively impacted by Termopernambuco, which in the previous contract had a higher margin. On the right-hand side, we see the breakdown by business line. The EBITDA in HPP in the third quarter was BRL 95 million decrease compared to Q3 '24 due to the effect of the deconsolidation of the Baixo Iguaçu plant. Wind power, BRL 269 million EBITDA, 3% reduction due to lower wind speeds in the quarter. Solar EBITDA was BRL 8 million, in line with Q3 '24. And Termopernambuco EBITDA was BRL 6 million due to the new contract with no dispatch in the quarter. Finally, in the client business, our EBITDA in the quarter was BRL 17 million, a BRL 6 million growth compared to the third quarter in '24. And now moving to Slide 17 and concluding, we have our capital structure, and we see we closed the third quarter with a net debt at BRL 47 million, therefore, higher than the second quarter due to the pace of CapEx and the greater effect of the tariff variation as a consequence of the executive order 1,300, which brought the tariff for low-income consumers to 0 in the case consumption went up to 80 kilowatt per month and this significantly increased the tariff asset of our distributors over the approval of the executive order. This is a temporary effect, and then we will have it going back to what it was. Our net debt ratio closed 3.52x. But just regarding the additional tariff effect, it would have been 3.47x in line with the second quarter in '25. The structure of our debt remains very comfortable, well distributed with an average term of 5.7 years and a competitive average cost. We're still benefiting from a credit market that is a high demand with a AAA-rated securities bond and to include -- to ensure our CapEx plan for the year, as we can see in the chart here. Having said that, I will now hand the floor to our operator to open the Q&A.

[Operator Instructions] Our first question is by Ricardo Bello from Safra Bank. So we will move to our next question by Henrique Simoes from UBS.

Just a brief question. How do you see the conclusion of the transmission lines? And what about the negotiations with GIC? How are they going?

Thank you, Henrique, for the question. As regards the transmission line construction works, as mentioned previously, we have 4 or 5 sections to be concluded. We are making good progress above 95% execution. And we are expecting to conclude by the end of the year. Between November and December, we expect to deliver 100% to have completed 100% of the lots that are still under construction. Starting January next year, January 1, all of them will be in operation, BRL 2 billion approximately in operation starting January 1, 2026. As regards to GIC, this partnership remains strong, solid in regards to the auctions. And also now when we deliver the lots, the remaining lots, we will proceed as we did with the previous lots. Our GIC will evaluate our lots. We're talking about 7 lots now this time around for the [indiscernible] approximately 1.2 million in RAP, a significant amount. And now GIC is conducting the assessment of the assets. It will submit a proposal. However, we're not obliged to sell. They're not obliged to acquire, but it is a solid partnership, and we believe it will continue evolving in this direction. It will submit a proposal according to criteria, and we will then, of course, have meetings, conduct discussion. It's an interesting proposal. As in the past, we will move to the 50% investments as you are aware. In summary, this agreement is holding strong and solid. This is an important phase now. These assets will be the objects of the new transaction as in the operations phase as well. We are concluding the construction and entering into the operation phase. Everything according to the plan, no surprises. And we have been engaging in conversation with GIC about these 7 lot as mentioned, which represent a significant volume, CapEx and RAB as well.

Our next question is from Ricardo Bello from Safra. We have one more question from Raul sell-side analyst from XP.

I have one question related to [ 1304 ] and the curtailment discussions. I'd like to know what role ANEEL has played in these conversations as an interested stakeholder in the process. So can you give us an overview of the role ANEEL has had in the discussion? And if you can tell us what can be expected, what the reports will contain, there's been conflicted clashing information about maybe something broader, broader information and afterwards, we've heard something different. We'd like to hear from you how -- where we're standing with regards to [ 1304 ] in curtailment.

Thank you, Raul. So as regards to curtailment for Neoenergia, as you're aware, the impact is quite limited on us. To give you some figures in the third quarter, it was a BRL 40 million impact in the first 9 months of the year, BRL 70 million, of course, BRL 70 million. But compared to other players in the industry, our impact is much lower, which does not mean to say we're not playing an active role in the discussions with the sector, with the regulator. This is a big discussion in the executive order 1304, 1304, Neoenergia is contributing to find a structured solution to tackle this issue going forward and also looking at the past year-to-date in the sector, we have, of course, billions, it amounts to billions. Therefore, yes, we are taking part in this process, and we firmly believe that this executive order, the MP 1304 will include interesting proposal in this regard.

Next question is by Daniel from Safra.

I have 2 question. One, regarding to costs, an interest cost management in this quarter by Neoenergia. I'd like to know if this will be a recurring level going forward, how you see this will evolve in the coming quarters? I have one question about the opportunity in transmission. There will be an auction this Friday now. Are you considering to participate in this auction? And if so, how would you actually be involved in this opportunity?

Thank you, Daniel. Well, in this third quarter, we had an extraordinary effect in some distributors. Neoenergia Coelba, where we had BRL 20 million -- BRL 25 million in assets. We're making relevant investments in Baixo. So we had an impact, but it's not a recurring effect. We do not expect it to happen again. This was Coelba, but we also had something at Elektro. It's not asset, but it's regarding [ recession ] costs in the quarter. I would say these were the most relevant one-offs in regards to the increases in the quarter. And to your question, these are one-offs, and we do not believe they will happen again. On the coming quarters, we, of course, are committed to growing above the inflation as we have over the past years. Bear in mind, we have a primarized operating model. We have cost control and productivity that is more assertive, more accurate. We do not really rely on the market evolution in terms of costs. Most operators are proprietary our own. So we firmly believe that we can say we will continue on this growing trend with inflation. To your second question, transmission lines, this past quarter, we mentioned that we will not go to auction now in the transmission auction this Friday. We have analyzed the loss, assessed the loss jointly with our strategic partner, GIC, and we have not closed. We've decided not to go to auction. We're looking at a 2-digit loss. This is what we require to go to transmission auctions or any other investments we might consider. So with this in mind, we will not be going to auction this Friday, this week.

Our next question is by Andre Sampaio from Santander. And he would like to hear an update on the possibility to see changes in the dividend policy of the company. Can we expect more dividends with the reduction of leveraging next year?

Well, we have been keeping to what we've said over the past quarters, 2025. This is our last year where we're making massive investments mainly because we've concluded our investment cycle in transmission. And therefore, starting next year, we will invest only in distribution, [ BRL 6 million to BRL 7 million ] and together with the cash flow increase resulting from the new assets in our operations, we -- Neoenergia will begin the deleveraging process. And how fast it will happen, that will depend on the divestment pace with GIC. If we do not divest with GIC, we will also reduce the debt. If we do, it will be more accelerated, anyhow say 2025, we will reach our cap in regards to that. And of course, throughout 2026, we will most likely by the end of 2026, we will start considering reviewing our dividend policy since the debt will be declining and the cash will be growing. And as a manager, of course, we have to submit proposals to our Board. And this is one of them. This is one of the alternatives. And as Andres mentioned in the previous quarters, we are thinking that in the second half of 2026 and late '26, we will get back to this point to this discussion with our Board.

Thank you. The Q&A session is now adjourned. We would like to give the floor to Mr. Eduardo Capelastegui for his closing remarks.

Okay. Thank you once again, operator. I would like to share one final message, reaffirming our commitment to all of our stakeholders at Neoenergia. We are remaining focused on deleveraging and on what it leverages, effectiveness and safety in our operations, of course, also adding value through optimal capital allocation and maintaining sustainable growth with our results, and we better represent this through the expected growth of our EBITDA cash since our IPO has grown over 120%. We firmly believe in the regulatory robustness of Brazil, which once again has proven with the signature of the approval of the concession of Neoenergia Pernambuco, which brings us the safety we need to ensure higher investments and higher quality to all the citizens in Pernambuco. We will now continue with the process to approve the other 3 concessions. And the proper capital allocation is also key to us, an important lever to improve value for our shareholders together with the GIC progress and transmission. These are excellent examples of such. Additionally, the network business remains important focus for Neoenergia in transmission and progress in transmission will take us in January 2026 to operate in BRL 20 million in assets, higher than BRL 2 million annually. In distribution, we are the highest when it comes to revenues, investments and number of customers in the industry. And we're also #1 in terms of operations as shown by the ABRADEE awards. We're committed to continue investing in providing quality services, [indiscernible] continuously almost 17 million customers. For shareholders, I would like to highlight once again that we have a strategic clear pathway going forward and the right team that is engaged and fully committed to deliver the results. I'd like to conclude as usual by thanking all of the employees of Neoenergia who have fulfilled their roles for past challenges, delivering results and created value to our shareholders. Thank you very much. I wish you all an excellent day.

The third quarter 2025 earnings release of Neoenergia is now adjourned. The IR department will be available to entertain remaining questions. Thank you to all of the participants. We wish you an excellent day.