Marcelo Sá (Head of LatAm Utilities at UBS) has released a report assessing the final tariff reset figures for Energisa Mato Grosso do Sul (EMS) and Energisa Mato Grosso (EMT). Below we present his analyses and thoughts related to this topic, as well as his considerations about how this is likely to be perceived by investors.
Similar parcel B but a more favorable X factor and higher regulatory losses
At its weekly meeting on 3 April, Aneel approved the final tariff reset figures for Energisa Mato Grosso do Sul (EMS) and Energisa Mato Grosso (EMT). Aneel disclosed the details of EMT’s final tariff reset figures, which improved substantially from the preliminary numbers. Aneel set a similar parcel B (RAB and regulatory costs) but a more favorable X factor and higher regulatory losses (see Figures 1-3).
We estimate reported EBITDA will improve by R$20m in the first year (see Figure 4) and R$128m in 2022 as a result of the more attractive X factor. We estimate positive NPV of R$186m (R$0.5/unit). If we include EMS’s improved tariff reset figures (see our 2 April note), the total EBITDA gain will be R$52m in the first year and R$204m in 2022 as a result of the more attractive X factor. We estimate a total positive NPV of R$408m (R$1.1/unit) from the improved tariff reset figures of both discos.
New efficiency rankings explain most of the improvement
On 7 March, Aneel disclosed new efficiency rankings and the benchmark range for each disco. This is a very important regulatory assumption, as it affects the calculation of the cost-efficiency target that discos are supposed to achieve at the end of the tariff cycle. A higher percentage is better, as it allows discos to have higher regulatory costs included in their tariffs.
As we discussed in our 8 March note, Regulatory cost methodology changes and new efficiency rankings, we expected the new rankings to have a positive impact on the final tariff reset for Energisa’s discos, especially EMT and EMS, as they gained efficiency in the past tariff cycle.
The final tariff reset figures for EMS and EMT proved our thesis, as the new efficiency rankings had a positive impact on the benchmark range, increasing the lower limit by R$53m in EMS and R$127m in EMT (see Figure 3). As a result, the X factor (T component) improved, helping the discos become more profitable in each tariff adjustment.
Main catalyst: Eletrobras disco privatization
Aneel is likely to publish bidding documents for Eletrobras’ disco privatization in the next few weeks, as the privatization auction is set for 21 May. We believe Energisa and Equatorial are the best vehicles to play the privatization, given their impressive track records of turning around inefficient disco concessions.
Valuation: DCF-based PT of R$35 (8.4% Ke); Buy rating
Energisa is trading at implied 2018E EV/RAB of 2.0x due to its efficient disco operations, high RAB growth and above-average demand growth.
See Report provided by UBS: