M&A Announcement

Jun 28, 2021

Slides

Good morning, everyone, and thank you for waiting. Welcome to Equatorial Energia CA's Acquisition Conference Call. With us today, we have Mr. Augusto Miranda, Chief Executive Officer Mr. Leonardo Lucas, Chief Financial and Investor Relations Officer Mrs. Tatiana Vasquez, Investor Relations Superintendent and Mrs. Luciano Dominguez, M and A Superintendent. This event is being recorded and all participants will be in a listen only mode during the company's presentation. After Equatorial Energia's remarks, there will be a question and answer session. At that time, further instructions will be given. This event is also being broadcast live via webcast and may be accessed through Equatorial Energia's SA's website at equatorialeenergia.com.br, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may post their questions on our website. They will be answered by the Investor Relations team after the conference is finished. Before proceeding, let me mention that forward looking statements are based on the beliefs and assumptions of Equatorial Energia S. A. And on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, Industry and other factors could also cause results to differ materially from those expressed in such forward looking statements. Now, we will turn the conference over to Mr. Augusto Miranda. Mr. Miranda, you may begin your presentation. Thank you. Good morning, everyone. It's a great pleasure to be here to talk about our new acquisition. We are acquiring CEA, We have with us on this call, well, our Financial and Investor Relations Director, Tatiana, the Strategic Financial Strategy Superintendent and Investor Relations superintendent in the group and Luciani, a new business superintendent. We're very happy to give us take a new step in our growth history. We've just started a new chapter in the state of Amapa through a new distribution asset. We are convinced that our Now proven business model will bear fruit for the several stakeholders in this utility, especially new clients. It will be the most equatorial of our concessions as we can see in the image that opens this presentation. We see The 0 spot in Macapa where the equator runs through. Now we can say that we're present from the extreme north to extreme south of Brazil, taking our management model and our culture to all regions of the country if we also consider our transmission assets. We're known for our success in the speed of our turnaround processes for our assets. We are known for our success and speed in our turnaround processes for our assets and our plan is to work on several fronts at the same time. Balance will be important so that we can recover investments that are necessary for this concession, which will contribute to generating jobs in the region and also delivering energy at a high quality and therefore will help to develop the state. Finally, I'd like to emphasize to our investors Our financial discipline once again demonstrated by this acquisition, which leverages our expertise and learning in similar from similar challenges to identify opportunities to generate value, which has allowed us to allocate capital with attractive returns. We now continue with Slide 4. As was said, this acquisition confirms our commitment with the company's growth agenda, but also underscores our important role to develop the region. CEA will add to our portfolio a significantly different excuse me, a significantly sized concession different from our current concessions, but with comparable market and complexity profiles. This will allow us to use our expertise acquired in similar challenges through our management model, which is focused on meritocracy and which promotes and alignment throughout the chain between our goals seeking development and Supply quality, this is translated into benefits for the entire population and will serve as a catalyzer for the state's economy. On the next slides, we're going to discuss the several opportunities that we found in this asset. I'll now pass it over to Lael. Lael, over to you. Good morning, everyone. Thank you for being here. On Slide 5, we see a general overview of the transaction with the main acquisition data for CEA. The total amount paid for this acquisition will be, 50,000, BRL. And We did not see any it's worth noting that we will have an Annual increase in the regulatory PMSO, it will be approximately 57,000,000 by 2026. Regarding the designated RGR of 772,000,000 BRL, All our obligations with RGR, when we take it, will be deducted from the debt as seen by Act 14,120. There will also be a mandatory capital investment of R400,000,000 BRL, which should be carried out when the contract is signed. As a result of this acquisition, we will hold approximately 99.86% of the total shares, but minority shareholders, which now own about 0.13% of the company, can use their tag along rights, which will allow the group to acquire 100% up to 100% of our capital. Differently from the latest acquisition where other proceeding conditions applied, here the main conditioning factor or the business to be closed are only the regulatory approvals by the authorities are presumed besides our capital investment. Continuing with the next slide, I'll go quickly into detail about the main liabilities that we will take. Slide 6, the company with a high level of debt for its size And the way of, making this bid viable was by reducing some of its liabilities to also allow investments to be received as they're still necessary to improve quality and reliability for the electric system in the region and to phosphates development. On this slide, we are seeing the 2020 Balance of the liabilities that will be taken by Equatorial with this acquisition. SEAD does not have any financial debt and it has high credit quality, but it has relevant liabilities due to default payments on operational obligations as shown on this slide. Among them, supplier debt or ARD has a 1,500,000,000 We'll have a $1,500,000,000 discount when the purchase is liquidated, as will the RGR loan, which will be completely reduced as shown on the previous slide. So part of the remaining liability is made up of other obligations like tax liabilities and liabilities like CCEE, PND and PEE. So the current liability of about 3,100,000,000 around $2,300,000,000 will be deducted, which leads to a value of about $800,000,000 taken by the group. Out of this value, about 600 are ARD, that is suppliers, of which 250,000,000 will be paid upfront and the remainder will be paid in 24 monthly installments at a cost of CDI plus 2.7 percent a year. Now the CCEE liability will be one of the priorities settlement because it has a high cost of IPCA plus 12% a year. We have the liquidity, the low leverage and good access to the capital market so that we can restructure sales obligations at the right cost and Term Conditions and this will be one of our funds to generate value for the asset. Continuing with Slide 8. Here we have an overview of what CEA is and what is its concession area. This concession is different from others because it has a smaller scale when it comes to the market size. It's an area of only 16 municipalities with a total of about 800,000 inhabitants In a market that's highly concentrated in Macapa and the neighboring municipalities, especially Santana. The total loss The total loss level is quite high, close to 50% and this will be one of the main working fronts for us. The concession will have a 30 year term and the contract will continue until November 2051. The next Tariff review will be in November 2026, but we are foreseeing an extraordinary review in 2023 to completely open the so called shielded basis. The graph below shows pro form a figures showing how this asset adds to our size, the number of consumers and our market for the Equatorial Group based on 2020 data. Considering the compensation basis for the last tariff processes for all companies, Equatorial is expected to have a net compensation of R13.6 billion dollars which will still receive tariff revisions from Equatorial Marigno in August this year and CEE in November. Continuing with the next slide. Looking at our current concessions, we can see that CEA operates in an area that has a very similar geographic demographic economic profile to some of our other concessions, especially Equatorial Parat, which is a neighboring region. This will allow us to take the lessons we learned from this region and combine them with our expertise to use them in accelerating the turnaround process in Amapapa. CEA is currently counting on 200,000 consuming units and it has an average home performance higher than our current assets, which translates into a higher average consumption above 400 kilowatt hour per client. The low concentration of low income clients, much lower than Para for example, is influenced by the high number of illegal units, which will provide us opportunity in regularizing these clients. Another great opportunity will be opening the so called shielded basis, which is what's seen to take place in 2023 as we'll show soon. However, it's important to Highlight that this acquisition with this acquisition, our distributors now cover 24% of the Brazilian territory and services 13% of its population. Continuing with Slide 10. Here, we see the market structure for CEA, which provides interesting opportunities. The consumption profile is concentrated in the residential class over 15%, which should increase, as irregular units are regularized. It's important to highlight that there is a clear opportunity about Low income clients and their registration efficiency, Because, we can regularize many of the connections as I mentioned and there's also a low There's a high registry inefficiency. We have currently only 21% of families registered to low income registrations already registered. So they could benefit from the social tariffs, which is very positive for these consumers. We're going to expand the registry, as we've done in other concessions where registrations are significantly higher. Another highlight for growth in the region is that it has been growing in demand even in challenging periods such as 2020, which faced not only the pandemic, but also power shortages impacting that figure. In the last decade, even with low investments, the energy injected into the concession area grew by 4.5% a year. This is higher than what we see in Para and Maranhao. It's important to highlight that this growth was not accompanied by distributed generation because of low investments in expanding and maintaining their grid, which offers a great opportunity for us. So the next slides, we're going to go into the main opportunities found for generating value in this acquisition. Slide 12. The first driver On Slide 11 is a reduction in PMSO. The PMSO per consumer in SES is currently close to 600 BRL a year. Our shareholders will notice that this level is much higher than what we use in our current distribution companies which is around 180 to 190 BRL per consumer. But it's important to highlight that The size of the concession with a low number of consumers will not allow us to gain in scale as we have in other assets. So it is not comparable. On the other hand, the regulatory level at CEA is also higher, which reflects the difference in scale. As a result, The optimum level of operational efficiency in sales will be different, meaning it will be higher than the other distribution companies in the group. In any case, as we've said in the past, the company has been structured to accelerate integration processes for the new acquisition companies with corporate areas looking at processes horizontally, which will allow us to execute several things at the same time and that will make it so that Each new asset will provide us with lessons and evolutions for our model. So, the high concentration of consumers, 80% in only 2 municipalities will be essential to capture the efficiency gains and accelerate CEAs PMSO reduction. Continuing with Slide 12. One of the main challenges we have at CEA will be to control its high loss level, which is currently 50%. This is an opportunity for a clear reduction, which will as a consequence generate value. Regarding the regulatory loss limit. CEA's trajectory was flexulized by law as we see in this graph. The real losses in 2020 defined the regulatory level for 2021 and what was, defined in 2020, The difference between real and regulatory levels will be reduced by 25% a year until 2025. These losses represent a loss for all of society as they make services more expensive for other clients and get in the way of public investments for the population. We have a very well structured plan for loss reduction. We've identified opportunities to register public lighting, implement energy balance in transformers. We can better direct to the inspection program or areas where the loss level is higher and finally, we're going to regularize the high number of illegal connections and workarounds, which will increase our client's basis and We have efforts to register low income clients. Continuing with the next slide. Here we see the opportunities in supply quality, which have been an important point in the concession, especially recently. Regarding the regulatory goal, the curves have been flexibilized with fixed values for DEC and SEC until the end of the current cycle, that is 2026, And individual compensations will be converted into special obligations to promote service improvement. Operational quality indicators have been evolving and this will be done through investments in the grid and also by improving processes, using our experience in working in complex areas to find the best results. Another important role will be A dialogue between public agencies, government agencies and the supply chain, so that the current risks are mitigated. And therefore, we can't prevent events from happening like the ones happened in November last year from happening again. So it will be important to provide the system with more reliability and robustness. It's worth highlighting that quality improvement in servicing our clients is one of the main parts in our commitment and our more mature distributors have reached leading positions in Anel's quality rankings for some years. Continuing with the next slide, we see the opportunities for value generation. Here we see that the that CEA's current net asset basis represents 460,000,000 BRL. Differently from CEE's process, here there's a possibility for NRTE that is an extraordinary tax review, As I had mentioned before, this total review for the asset bases It should take place during the tariff review for 2023 and will allow us to capture The results from the investments paid by the group. Historically, Equatorial is accelerating its investments into new concessions, especially in programs to improve quality to combat losses and also to accompany the market's growth. Finally, I'd like to highlight that CEA has a tax loss that generates a future opportunity in making use of these credits, which now amount to R1.1 billion dollars from the moment the company starts presenting profits. We can offset 30% of the losses that are payable with these excuse me, the taxes that are payable with these losses. Augusto will continue with the next slide. Thank you, Lal. Across all of the acquisitions, our story has been based on Serious work, by people who are driven to make things happen. We are known for delivering good results, balancing our commitment with our stakeholders. I'd like to conclude by reinforcing our commitments for investors. Once again, we are demonstrating our commitment with the value creation agenda generated from growth, but also based on financial discipline, trying to efficiently allocate capital. And this is what we're known for. For state governments, for the society and the consumers that is our clients, we believe in the company's role in developing the region and we're making major investments so that our services evolve in quality and reliability, so that Our consumers will be satisfied and society will be benefited in general. To our recently acquired employees. I'd like to highlight the values that we have as a group, which have allowed us to reach consistent results throughout history and which is only possible, because of your work. We're focused on people and our emphasis is meritocracy. So that is the base so that we are consistently known as the best places to work according to the Greater Place to Work rankings. So we are counting on you so that we can beat this challenge in recovering CEA, making it into the company that has the quality that the population deserves. We'll now continue with the questions and answer session. Thank you. Thank you. We'll now begin the questions and answer session. 2, questions will be taken as they come in. We ask that you pick up your handset when you Ask your question to provide optimum sound quality. Please hold while we poll for questions. We have a question from Florent Pimentel from BTG. Regarding the new regulatory loss levels. When do you believe you can reach regulatory levels? Good morning, Joao. Thank you for your question and thank you for listening to our call. So as Leo said during the presentation, Companies have different levels of complexity. Naturally, With that, we learn with every concession. So we're bringing to The lessons that we got in Marango and Para and that we're getting in Piaui and Alagoas, and all of this will be used there. So the corporate area which works on service plans has identified many opportunities. So we believe we're going to speed up the turnaround for the company too, but We're going into the company now. We're going to review the data. So we're going to see the problems up close. And what I can tell you is that it will be accelerated, but I don't know about the data. It will depend on what we find there. So we will accelerate, but, you know, Lao, if you'd like to say anything, please add to my answer. Yes, I'd just like to say that we don't work with precise guidances on that, But we have to look at the track record. You know, this is a market that has many illegal connections and many workarounds. So We need to find the best level and that will probably accelerate Our process significantly so that we can as soon as possible have efficient operations just as we do with our other distribution companies. Jerome Pimentel from Betege Pectoile has a question, and he says, given that the PMSO per consumer ratio will be higher than in other concessions. Sorry, can you repeat the question? I couldn't hear you. I don't know if you could hear us. What is the target level for PMSO? Hello, I'll let you answer that one. Okay, good morning, everyone. So again, we don't have many guidances. We're trying to Just say that there will be savings because of the scale. On the other hand, we'll probably accelerate the number of consumers that we have by working on the You know, illegal connections and workarounds, but obviously there should be a benefit from the scale. Of course, regulatory levels there are higher and we hope to operate with efficiency once The turnaround was over. That is, we want to be better than the regulatory, the MSO. So we will Accelerate a lot so that we can reach that goal as soon as possible as well. Regarding opening our AB, what potential value do you expect to incorporate? So, Drorin, this is a practice. Often companies don't reached the goal. So it's very difficult to have an asset in the field and look at their and counting figures. So if you look at the history of Victoria, We have a process that is maturing every day. We have a specific area for that. So the company is generating opportunities as happened in Biaui and Alagoz and in other concessions where we're finding opportunities. So I'd say that in 2023, we will definitely bring changes. Of course, I don't want to mention the size that we're expecting, but we do see opportunities And, you know, our asset department, does that very well And they'll find it, but I don't want to provide a guidance because, well, we don't want to generate expectations. Joao Pimentel from Baetjer Pactual has asked another question. What levels of CapEx should we expect for the next 5 years? So, Sean, as was said, this is a concession that has a lot of suppressed demand. And it's going to have reasonable levels of CapEx. So for our bid, we took a look at the local rallies for that concession, And we found a reasonable level. If you look at Equatorial in Para and other regions, We are always advancing, but we don't want to provide a guidance for this increase because, well, we're going to show you the data we have once we had it. When we go into a locals market, we need to have a strategic plan and then we'll let you know. But it will be a much higher level of investment than what we Historically, I've been in the company, but I don't want to specify a size. Yes, and it's higher than the historical level because This is a company that has not received many investments. So There's a lot to address and traditionally when we find an asset like that which also has You know, a great opportunity for growth, we try to get it as soon as we can. So in the first cycle, we will probably have a much higher volume than the historical levels, so that You know, all of this can be put into place. Carefully, of course, but and so that we can meet the suppressed demand. Right? That's right. Even the power outages that they had there will be something that we're going to deal with. Ms. Martha from Zero Auto has asked a question. Since you mentioned CEE many times, when will AAA Equatorial integrate the company. Thank you for your question, Marta. The company, You mentioned CEE? No, CEE. Oh, okay. I see. So Martha, some has already been converted and in the first Half of July is when we will be integrating it. So The company will be taken completely in Rio Grande in July. Okay, Ms. Antonio Moura from Citibank has asked a question. This win for the And CA bid, can it allow us to make any assumptions about your participation in a sanitation bid? Well, that's not new, right? Equatorial is maturing, we're redefining our Sumptions and this is a segment that we are looking at. So in principle, we will look at it and we'll see if the conditions, from that bid, makes sense for us. But we will analyze it. And if it does make sense, We'll then decide if we will participate it. But, yes, there is an interest from the company. And, Leo, if you want to tell us Anything else? Well, yes, our interest in sanitation has already been shown. We've been taking pardon several bids, the last one from Sidai, for example. So We always have interests even when it drops out our concession area and within our concession area, of course, this is even more relevant. But You know, these advantages appear when you're in concessions for a long time. So it is favorable being in the same place. So it will all certainly be studied. Pedro Mounsini from Goldman Sachs has a question. Good morning, everyone. I have three questions for you. First, about your funding structure for the payment that you're going to make for CEA. Will you have any debts with the holding? Will you do anything to how to make use of the shielded basis? That's my first question. Secondly, your Will you have to invest in high, the voltage to, you know, supply the region because of the limits you have there in your infrastructure, not only related to CEA, right, but If the government wants to, you know, make, ensure the the supply. And also, I see that, defaulting is very high. So What is your plan for that? And if you imagine that these tariffs will be closer to other levels. We know that it can, especially because of defaulting, but what is your expectation? I'm sure that that's a part of your process to bring clients into your payment payer basis. Right? If you have a higher tariff, that might get in the way of bringing in clients? Thank you. So you asked A number of questions, so if you could summarize them. Well, I did Right. So you asked about say CapEx and the what will be the average tariff and how we're going to reduce that? So about the payment, we this is a resource that we already have in cash. We have, you know, many, liquid assets or net assets. So This is all done through capital reduction. So, we do have resources in our holding for this payment. You asked about the CapEx level, I'm going to let Viviani answer that one. And about your about the average tariff, Maybe you're confusing it with the average ticket, which is high, but the average tariff is low. It's much lower because the company is, well, being divested, but The average ticket is higher and this will be reduced over time with a reduction in illegal connections in our lost combat program. Okay. And Do you have anything on supply? I don't know if you can ensure the supply of power for the region anyway. Well, in, the capital in Macapa, You have 2, 500 KV transmission lines. So That is a solid and robust system, but it does require transformers, and this is something that is, will be discussed with the Ministry and with Anel, so that we can reinforce the system. So we will try to contribute with our experience in Eletron Orchard and other transmission areas. About the average, we Had an analysis of the system and let me see if I have the numbers here. We're looking at the technical reserves at the level of the substation. So we intend to invest The technical arrangement there doesn't have much flexibility. So first, we need to go from the highest to the lowest level. Right? So we can have, transformers with Different loads and that might allow us to have more flexibility. So the first thing is to make small investments for an interconnection between the substations And then you have to look at it as a pyramid. Look at the top first until you can reached 127 to 220 volts. So that's basically it. This is a part of our plan and once we get in, we'll have to refine this plan. We're being patient because this is a repressed demand that we'll have to accelerate. So We already have actions in course so that we can do it. Auguste Said it very well and we have to highlight that there we have a long tradition of Looking at this closely, interacting and influencing discussions to reinforce the base grid, which impact our concession areas. So this is very present in concessions that we already work in and We will definitely look at this closely so that The, basic grid has the configuration that will allow, you know, for Amapa to be continuously reliable. Yes, Laul. This is actually a group effort. Right? We always find fragilities. But when you're together with society, with the government, with the transmission company, We can build a better solution that works long term, so that we can have supply quality for Society and Amapa. Great. Thank you for your answer, everyone. Mr. Victor Becky from XP has asked a question. Regarding losses and illegal connections, what is your expected growth for new connections? I don't understand the question. Well, we should have new connections. As Lou said, We have about 50% losses, so it's a high volume. So naturally, this will be reduced. We have Actions to tackle that, so that allows us to have some projections. About newcomers, I'm not sure, I don't understand if that's what you're asking about. But When we had 1% loss that you're actually having 4, that's the match value, that's the net value. Because every day you have new people coming in who are illegal and people that you've mitigated. So it's a daily struggle that you always have to work on. But you have to gain on a net basis, and it will be the same there. So we're going to have inspectors and so on. There's a big number of illegal connections. So that's a part of, you know, surveillance. It's having technology with committed people and that we really can due to reduced losses. Yes, we believe that explains the significant proportion of the losses. Even when you look at the low population density and also the fact that you have a big concentration around the city. So we believe that this is a great opportunity and We're going to go after it, so that it reduces our losses. This concludes the questions and answer session. I would like to invite Mr. Augusto Miranda to proceed with his closing remarks. Please go ahead, sir. Once again, thank you for being in our conference call about this new acquisition, which has made us very happy. We can ensure that we will work hard to provide the results that consumers, society, the government and Anil expects and also our investors. And I have to refer once again to our experience, our commitment and our team to say that this will come as soon as possible. So once again, thank you for being here and have a good day. This concludes Equatorial Initiatives conference call for today. Thank you very much for your participation and have a nice day.