Equatorial Energia S/Adr

Good afternoon, everyone.

Welcome to Grupo Equatorial's fourth quarter 2025 earnings call. Joining us today are our CEO. Augusto Miranda, Vice President Lourdes Lusca, Cristiano Logrado, Tatiana Vasquez, and Mr. Liu Aquino, CEO of EcoEnergia. They will be available to take your questions at the end of the call. Note that simultaneous interpretation is available. To enable it, just click the Interpretation button at the bottom of your screen and select your preferred language. This call is being recorded and will be posted on the company's investors' relations website at www.ri.equatorialenergia.com.br, along with today's presentation. All participants will be in listen-only mode during the presentation. We will then open the call for Q&A. when further instructions will be provided. Before we begin, please note that any forward-looking statements are based on management's current views and assumptions as well as information currently available to the company. These statements are subject to risks and uncertainties as they relate to future events that depend on circumstances that may or may not occur. Investors, analysts, and members of the press should keep in mind that factors related to the macro environment, industry, and other variables may cause actual results to differ materially from those reflected in these forward-looking statements. With that, I'll now turn the call over to Mr. Augusto Miranda. Good afternoon, everyone, and thank you for joining us today. Let me kick things off with the key highlights for 2025. It was a year of solid and consistent performance. We delivered consolidated adjusted EBITDA of R12.2 billion, up 11.6% year-over-year, and On the same asset basis, EBITDA came in at 10.9 billion, up 14.3%. Total investments reached 11 billion, up 23.5% year over year, largely driven by continued build-out of our distribution networks. To fund these investments and take advantage of favorable market windows, we raised approximately 19.5 billion reals over the year this allowed us to extend the average material to add to from 5.4 years at the end of 24 to 6.0 years in q4 while also typing cdi spreads by 40 bps On shareholder returns, we approved R$1.98 billion in distributions, equivalent to a 185% payout. On the awards front, Equatorial Pará was recognized as the top distributor in financial management at the Abrati Awards. As a group, We ranked for the first time in the GPTW, reaching 18th place in Brazil, and posted 87% favorability in our corn ferry engagement survey, placing us in the top decile of the Brazilian market. In addition, Equatorial was named by Extel as the most honored company in the Latin American utility sectors. ranking first in seven out of eight categories in the combined survey. On the operational side, we continue to make steady progress across all our key metrics. We kept consolidated losses within regulatory thresholds for the ninth consecutive quarter, with strong performance in PIA, Alagoas, Amapá and Goiás. This underscores the effectiveness of our loss reduction efforts and supports the sustainability of strong performance going forward. We also saw meaningful improvement in service quality, with DAC down across all distributors, regulatory compliance in POE in Alagoas, and full compliance with contractual DAC and CED. These results reflect both the investments we've made and the consistency of our execution. supported by our team's commitment to delivering increasingly reliable and efficient service. Finally, in December 2025, Anil recognized the amounts due under the administrative process related to the Extraordinary Tariff Review for Equatorial POE. originally linked to 2019. In practical terms, this results in recalculating the RTE as if it had taken place in 2019, replacing the annual tariff adjustments with additional revenue recognized in 2019 and carried forward over time. We'll walk you through the impact on results later in the presentation. Let's now move on to slide four and take a look at our Q4-25 highlights. From a financial standpoint, we posted at just a bit of 3.5 billion reals in the quarter, up 10.5% year-over-year or 10% on the same assets basis. We ended the period with 11.2 billion reals in cash, equivalent to 2.5 times short-term debt reinforcing a solid liquidity position to navigate a more volatile environment. Company leverage measured by the net debt to EBITDA covenant declined from 3.0 times in Q3 2025 to 2.6 times in Q4 2025, mainly reflecting the positive impact from the capital gain on the sale of transmission assets, which will remain in the last 12 months, EBITDA through Q3 26. On to investments now. We deployed 2.9 billion rails in Q4 25, up 8.6% year-over-year. We continue to focus on expanding and upgrading our infrastructure, improving service quality, and bringing losses down. in line with demand growth across our concession areas. During the quarter, we closed the sale of our transmission assets, generating 2.2 billion reals capital gain and bringing in 6.4 billion reals in cash, related to equity value and capital reduction. Proceeds from the transaction, along with cash on hand, were used to prepay and debt in holding the CSA worth 2.7 billion reals, redeem 2.6 billion in preferred shares at Equatorial Distribution, and pay 1.8 billion in interest on equity. On the operational front, Q4 also showed solid progress, with YFB market growth of 4%, driven by higher consumption across rural, residential and industrial segments, alongside below-average rainfall in six of our seven concessions. We also continue to see positive trends in consolidated losses, which remained at 0.8 percentage points below regulatory levels, already reflecting CP09, and the updated methodology based on metered market and pass-through energy. On quality, we achieved DEC targets across all distributors in 2025, highlighting consistent improvement in service levels and the impact of our ongoing investments. We also secured approval for a new Shudam benefit at Equatorial Pará, with the term extended through 2034. In addition, we capitalized retained earnings totaling R$9.5 billion. I'll now turn it over to Leo to walk you through the main drivers behind our Q4-25 results. Thank you, Augusto. Good afternoon, everyone. Before we get into the consolidated results, let me first walk you through the most relevant non-recurring items for the period. The first item relates to the closing of the transmission essence sale, which generated a 2.2 billion real capital gain, as Augusto mentioned earlier. The second item relates to the POE RTE from the 2019 process, which had a positive impact of R$212 million on EBITDA and R$188 million on financial results, amounting to R$400 million on net income. The third item relates to the completion of the review of contingency estimates in Goyast, including PPA adjustments. As part of the successful turnaround underway in that concession, we conducted a deep reassessment of contingencies, which led to a net reversal of provisions with a positive impact of 42 million reals on EBITDA and 57 million reals on financial results, and roughly 100 million in pre-tax income. This reflects another step forward in managing contingencies with an improved balance versus PPA levels and continued value capture along the way. Finally, we recognized an impairment of 3.5 billion barrels, of which 3.2 billion relates to our renewable generation platform, Ecoenergia. Let's now move on to slide 7. I'll briefly walk you through the group's consolidated and adjusted financial performance. In this quarter, consolidated margins were up 5.8%, mainly driven by the distribution segment. While EBITDA reflects the equity pickup from SABESP and the exit from transmission, on a same-assets basis, margin growth would have reached 12.7%. EBITDA grew 10.5% or 20% on a same-assets basis. Adjusted net income declined 20%, reaching 802 million reals. This was mainly driven by higher other expenses, including increased inventory provisions, especially in Pará and Rio Grande do Sul. They are getting closer to the tariff revision period. worsening financial results impacted by CDI increase, as well as the increase of other expenses giving a greater provision for inventory losses. 86 million are non-recurring of that total. These effects were partially offset by the EBITDA expansion as well as the equity pickup from SABESP. It's worth noting that the transmission deal helped bring down debt and CDI-related expenses. And since most prepayments took place late in the quarter, the fall impact would only be seen in Q1, 2026. Net debt to EBITDA stood at 2.6 times, reflecting the 2.2 billion real capital gain from the Transmission Assets sale. Excluding this effect, leverage would have been 3.0 times. Let me point out that we remain active in the capital markets, focusing on improving our debt profile by extending maturities and tightening CDI spreads. Lastly, investments totaled $2.9 billion in the quarter, up 8.6 percent year over year driven by para with spending on both grid assets and universalization programs such as loose on to slide nine This is an overview of the operational performance, the commercial performance of our distribution businesses along with the quarter's key financial highlights. On the left-hand side, we provide a snapshot of the consolidated performance of our distributors. We highlight market growth, lower losses, still maintaining strong collections and declining PECLD. Still on market data, we recently hosted an education session to walk through the new concepts in our operational release, aligned with ANIL's guidance following CP09 approval, which adopts metered market as the basis for loss calculations. This change brings the loss delta calculation closer to the reality by standardizing the market basis used. The materials, including data workbook, are available on our IR website. Turning back to the commercial performance, adjusted PECLD improved from 1.56% of revenue to 0.89%. This was driven by renegotiations, particularly in Rio Grande do Sul with large customers and with Amapá, with the government. on top of the new low-income tariff. Reported figures were impacted by the update of the provisioning matrix and the rollout of the group-wide PECLG methodology in Goiás. On quality, we ended the year with five of our seven distributors within regulatory DAC limits. Rio Grande do Sul met its contractual debt. And Goyas, despite having a waiver, delivered its best debt since 2001, a major achievement. On the right side, distributor gross margin grew 14.2% in the quarter, driven by higher YRB tariffs and stronger market volumes. Adjusted PMSO increased 7.7% versus Q4, 24%. However, when including compensations, growth was 3.6% below inflation. This last indicator shows that PMSO efforts are being redirected to bring compensations down, which is a key as these are non-tariff items and directly impact efficiency gains, and at the same time provide the best quality possible to consumers. When we look at PMSO per customer, grew just 2.6% below inflation, impacted by the larger number of consumers, about 300,000 in the period. On a PMSO plus compensations per customer basis, we saw a 0.3% nominal decline. This improvement reflects the shift in resource allocation toward reducing compensations, boosting EBITDA and improving quality metrics, as we'll see on the next slide. Let me walk you through the expressive programs we've made on quality. Let me point out that DEC improved across all companies year over year. reinforcing consistent gains in operational performance. Let me point out that we closed 2025 having met DAC targets across all distributors, with two already reaching the 80% threshold ahead of schedule, reflecting focus good management practices as well as investments on the networks. The two companies still further from the 80% target are more recent acquisitions. Goias, on one hand, which has a curve extending through 2028, and Rio Grande do Sul, that had its targets reset in 2025 due to major weather related incidents we are on track to meet the agreed milestones by 2026 once again these improvements on quality is something or something that we're very proud of and reflect our ongoing commitment to customers and stakeholders turning to slide 12 let's look at our other business segments In sanitation, results continue to reflect gains in water metering and growth in build water and sewage units. EBITDA came in at about 8 million, supported by lower PCLD and a tariff adjustment of about 8%. In renewables, adjusted EBITDA totaled 215 million, down 6% year-over-year, reflecting curtailment impacts. We also provide a breakdown of curtailment by reliability, energy, and external unavailability. along with the financial impact since 2023. As a reminder, Law 15269 addresses compensation for reliability and external unavailability attainment, and we are actively engaged in discussions to ensure proper reimbursement. And I'll turn the call over to the operator for the Q&A. Thank you. We'll now move on to the Q&A session. If you'd like to ask a question, please click on the Q&A icon at the bottom of your screen and type in your question. If you would like to ask a question over the microphone, please click raise hand. Please hold while we collect the questions. Lucas Guimarães from UBS asks the first question. Good afternoon. Congratulations on the results. I have three questions. Thinking about the growth in your distribution EBITDA, what's your take on the RV and NOC? Because we haven't had any price adjustments so far. The impairment for ECHO and CSA indicates that the asset is booked close to the fair market value. Are you going to bring that to market? Do you consider that for an equity swap if we detect improvement in the renewable segment? And the last question about dividends payout. Are you considering retaining more cash for a possible acquisition in the future? Thank you.

Leo, thank you, Lucas.

Let me address the VINR VOC question. Our track record is very interesting in that sense. Based on the revision in Maranhão, which was the latest, that happened when the prices hadn't been updated yet. We've already talked to Aniel directly via Abrati. Aniel has been working to improve that crisis bank, and we have considered some adjustments, some alternatives to overcome that hurdle. We keep on working the reviews, we may have some reviews in Rio Grande do Sul, Amapá, and Pará, and the base price, and then the review next year in Pará. In other words, we have been working hard to update that price bank, the best VNR block item we can get, or rate we can get. And at the same time, Anil has been working hard to issue an update on that price bank. This is expected to come out later this year or early next year. Let me address the impairment events. Some impairments to a possible divestment. Well, Eco Energy, we have been having that impact from the curtailment for quite some time. This has been hurting the entire industry. And there's a joint effort to improve that situation. There's the reimbursement of part of that curtailment. This is something we've been working on, as well as some structuring measures. At some point in time in the future, we may revert the current scenario. This is something that has to be assessed on a yearly basis. If there's something changed in that variable, that should be adjusted accordingly. On to sanitation now. It's a lot of greenfield operations in there. We have had major progress in our requirements, coverage, universalization efforts in some municipalities, but revenue has been impacted, and that's why we have that move in sanitation. On the other hand, the state has been faced with a transformational opportunity with the equatorial margin which may change that reality in the future so now that we understand it has to be updated on a yearly basis and we'll be adjusting accordingly as to recycling the most obvious asset which is transmission We have been considering, with some flexibility in our planning, to recycle assets. At that point in time, transmission was the most evident item. And we keep on monitoring and considering all opportunities in the marketplace to come up with the best alternative possible to our portfolio. we have an open mind as to these opportunities we take into account the scenario with higher interest rates and opportunities may arise and when we connect to them there are many financial instruments we can resort to asset recycling as an opportunity. Is there another one? Oh yeah, payout. Yes, I think you've been monitoring it. When we had some acquisitions, we raised the private capital portion to better adjust leverage vis-à-vis the opportunities we're faced with. Anyway, given that scenario, we came up with that proposal. to give the balance sheet of the company more flexibility, more visibility. This is yet another alternative so that we can better capture these opportunities. Very nice. Thank you. Daniel Travis from Safra asks the next question. Thank you for taking my question. I have two. One is a follow-up, actually, on the topic of growth and opportunities. This is very clear. The company was focused on expanding in sanitation. The Sabaspi was proof of that. My question is about where are you looking at? Are there many opportunities in sanitation? There may be opportunities in distribution. So where are you looking at with more focus now? That's the first question. And the second question is about the reassessment of Ecoenergia and CSA to recognize that impairment. My question is, why conduct that assessment now? What's the end goal here? Well, let me answer the last question first about the reassessment. Well, there are no two ways to go about it, actually. This is something that you have to assess every year. And in order to abide by the regulation, you have to make sure assets are being recovered. Based on the test we conducted this year, assets were not fully recovered. That's why we had to make that adjustment this year. In previous years in which there were some moves, we had no indication that we had to do it. As to the opportunities, I'll turn it over to Augusto. Thank you, Daniel, for your question. Yes. When you look at distribution, we are looking at it, we are considering.

Our planning efforts indicate that, of course, we have to consider everything.

It's only a natural move to have. And we have to present that to the board. our take whether we should take it or not and of course sanitation is a priority segment we made two important moves we went all the way to csa allowed us to do the same with SABASPI, a very successful decision, and that's it that we are monitoring on a case-by-case basis. Thank you. Let me remind you, to ask a question, please use the Q&A icon at the bottom of your screen. To ask a question over the phone, please click Raise Hand.

This concludes the Q&A session.

I'll turn it over to the company executives for their closing remarks.

Thank you.

To wrap up, let me once again reaffirm our commitment to driving consistent value creation for our shareholders, supported by solid performance across all our businesses and underpinned by disciplined financial management, which is a core part of Equatorial's culture. Thank you again for interest in the company and for being with us today. Thank you. Have a great afternoon. Thank you for attending, and have a great day.