Eneva SA

BOVESPA:ENEV3

Earnings Call Transcript 2023-Q1

[Lino Cancado, executive]

Good morning, everyone, and thank you for participating in our conference call to discuss results relative to Q1 2023 for Eneva. Let's move on to Slide #3, where we have the highlights for the first quarter.

Before we start through the details for the quarter, I'd like to emphasize that early in 2023 will mark the delivery of several opportunities we had met out in our business plan, reinforcing the execution of our commitments and presenting significant advances, both operationally, financially and commercially. Within this context, I'd like to highlight that our adjusted EBITDA reached BRL 1.169 billion, a growth of 130% year-on-year. This is the highest EBITDA for individual quarter we have ever posted in the company's history. This result reflects mainly the acquisition of CELSE and Termofortaleza operational assets with relevant fixed revenues, an increase in the availability in Jaguatirica as well, which exceeded 80% in the quarter, contributing BRL 69 million to the EBITDA number.

A strong performance in energy trading which filed an EBITDA of having BRL [ 69 million ]in the period, driven by the reallocation of the Futura 1 contracts and also driven by larger commercial margin and also energy export operations for Argentina, where demand has been growing even in a quarter where we had a peak in Brazil, we reached 220 gigawatts hour for export, which contributed with 39% of BRLs for the quarter's EBITDA. The EBITDA also saw other important landmarks I'd like to highlight as we move forward. Number one, our leverage level as measured by net debt over EBITDA, which reached 4.5x at the end of the quarter.

In Futura 1, all the USBs have been energized and are already generating energy to meet the contracts in the free market and the ramp-up is expected to happen for the end of May. On May 9, we announced the closing of our partnership with White Martins, the signing of the partnership through which we'll trade energy from 3 of the 6 SPEs of the Futura project in high production regime at an average price of about BRL 204 per megawatt hour. We have ensured a supply contract for 2023 through 2030 in the amount of BRL 2.3 billion, considering the average price of March 2023, which will be readjusted as we move forward with the contract. In addition to that the PGC, our Parnaiba generation subsidiary, which includes Parnaiba 1 and V, we have received the SUDENE tax incentive, reducing 75% of our income tax for another 10 years due to investments in modernizing Parnaiba 1 as the cycle comes on, and I'll now turn the floor over to Marcelo, who will be talking about the export market.

[Marcelo Lopes, executive]

Thank you, Lino. Good morning, everyone. Now moving on to Slide #4. We can see on the slide how the demand for energy export has been consistent and higher since 2023, when we compare that number with the same period of last year, which shows a larger wind of opportunity for exports for this year. The light blue color in the chart shows that in the first quarter 2023, demand was mostly met by the export of the hydroelectric scale. However, since mid-March with the approaching of the end of the wet period in Brazil, the turbine fall has been losing strength and opening room for more exports through thermal sources.

Considering this wider window and with a higher volume of demand for export throughout the year, the expectation of a drop in the turbine for investments starting in the middle of the second quarter and the approach of the winter, we believe will have a more favorable energy exports for 2023.

Now moving to Slide #5. I now show you the result of our mark-to-market of our trading portfolio. In the first quarter of 2023, the energy sale contracts previously signed the Futura 1 project were reallocated to the trading company. With this, the migration happened and the net result of the mark-to-market of the trading portfolio, our so-called book, has reached BRL 675 million at the end of March. In the chart on the left, we have the breakdown of this result by year.

Once again, these are present values. In other words, an already discounted flow. If we look at the values on a real basis, those contracts already in our portfolio show a potential of approximately BRL 100 million per year until 2027, ensuring a consistent flow of results for the coming years. It's important to emphasize that this strong performance is backed up by a diversified trading portfolio, most of which is composed of many consumers, 140 in total, spread across several segments, as shown right-hand side. I now give the floor back to Marcelo Habibe, who will be about our financial numbers for the quarter. Marcelo, over to you.

[Marcelo Habibe, executive]

Thank you, Marcelo. Good morning, everyone. Moving now to Slide #6. I have the impact of the net revenue in the quarter. We recorded a net revenue of BRL 2.5 billion in the first quarter of 2023, up 224% from the first quarter of 2022. In the quarter, our business lines contributed positively the results, highlight for the incorporation of CELSE and Termofortaleza for the recently acquired assets, the expansion of our trading portfolio of contracts and clients, which saw an increase of 600% in the volume of energy traded in addition to the variation in the mark-to-market of contracts, which contributed to an increase of BRL 183 million in the quarter and a larger availability at Jaguatirica when compared to the previous year. Also important were the export of energy to Argentina with BRL 77 million and the sale of oil and condensate from Aneba with BRL 33 million (sic) BRL 27 million in the quarter.

Moving on to Slide 7, we have the main impact on the EBITDA of the company. The EBITDA for the first quarter, the highest ever recorded in a single quarter by Eneva, an increase of 138% when compared to the same quarter of last year, an important landmark for the company, where we exceeded BRL 1 billion.

The main factors driving those increases were BRL 29 million in export generation for Argentina allocated at Parnaiba Upstream, BRL 50 million at Jaguatirica II due to an increase in its availability throughout the first quarter of 2023. We also had another BRL 25 million monetizing the condensate trading produced by Azulão and also oil from Aneba. We also had BRL 471 million from acquisitions we made in 2022, BRL 347 million, of which related to CELSE and BRL 124 million related to Termofortaleza. In addition, we also had BRL 248 million in our trading company with an increase in the trading margin and an impact, again, of the mark-to-market of the allocation of the Futura 1 contract to the trading company.

The main negative impact when we compare quarter-on-quarter came from the accounting record in the first quarter of 2022 of BRL 122 million relative to the advantageous purchase of focus. It is worth mentioning that the EBITDA in the remaining of 2023 will be positively impacted by advances in important projects of the company, especially the availability at Jaguatirica also availability at Parnaíba V for exports through December 2023, and Futura 1 which is expected to happen in May. Moving on to Slide #8, we have the main impact on the consolidated financial results.

Financial numbers was negative at BRL 435 million in the first quarter, mainly driven by the CELSE debt, which came at BRL 182 million in the period. It's worth mentioning that we are actively working to renegotiate that debt and reduce its related costs. Other factors that have impacted the financial results were BRL 138 million by the growth in volume of debentures, the total indebtment of the company. We also had BRL 58 million (sic) BRL 59 million coming from the result of expenses with debt charges, interest on debentures and monetary variation arising from the startup of Azulão, Jaguatirica and Parnaíba V which were previously capitalized since the projects were not yet operational back then.

Also, BRL 38 million relative to the CDI increase in the period and BRL 46 million in interest on the lease referring to the FSRU ship chartered by CELSE. The positive effects in the results were mainly due to the cash earnings in the quarter in the amount and also foreign exchange variations.

Slide 9 presents the main changes in cash flow. The cash flow of our Operating activities recorded at BRL 573 million in the quarter with the main negative impact, it's the increase in working capital. The main factors driving this increase were the negative impact on the quarters accounts payable and the accounting offset of the noncash amount of the mark-to-market of the trading contract recorded in this quarter's EBITDA that will materialize in the upcoming years.

These factors were partially offset by a lower accounts receivable balances related to export revenues. The cash flow from investment totaled a cash outflow of BRL 341 million in the quarter. These figures were allocated to Parnaiba 5 project, the liquation plant in Maranhão, Azulão 950-megawatt project and Futura 1 among other investments with the company's current activities. The cash flow from financing activities totaled an outflow of BRL 781 million. This amount refers mainly to the creation of deposited in sales and payments of interest incurred in the period as a result and never ended the quarter with a cash position of BRL 1.5 billion.

Now on Slide 10, we see details on Eneva's capital structure. The first quarter of 2023, the company's net debt totaled BRL 17.1 billion and the leverage measured by net debt over EBITDA was 4.6x the reduction in leverage compared to the fourth quarter of 2022 already signaled an improvement in our leverage profile, which increased last year due to the company's growth. Now the average maturity of the consolidated debt was 5.3 years at the end of the quarter with no maturities concentrated on 2026 and the end of the period 42% of the debt was indexed to IPCA, 41% of the CDI and 15% was prefixed. Fausto will talk about the investments of the quarter and about the status of our projects.

[Fausto Caretta, executive]

Thank you Habibe. On Slide 11, we see our investments totaled BRL 516 million (sic) BRL 517 million in the competency base views and were destined mainly to the activities of projects under construction. In UTP, Parnaiba VI, we invested a total of BRL 73 million in this project. We received the cooling tower structure and concluded the assembly of the heat recovery boiler models and the construction of the containment base on a structure designed to retain the liquid waste generated by the plant's activities. In the Azulão 950-megawatt complex in the Amazonas, a total of BRL 211 million were invested in the period, BRL 170 million of which were used to pay the first milestone to the supplier of the simple cycle and combined cycle turbines. Also, BRL 63 million were directed to well drilling and completion activities and BRL 24 million to basic engineering of the primary treatment unit UTP, draining and earth-moving projects were also approved in the period.

Now Parnaiba, the small-scale LNG plant that is built close to Parnaiba complex, we invested BRL 40 million throughout the quarter. We signed contracts with the EPC employees responsible for liquefaction, regasification and with other logistic operations besides the topography, drilling and factory inspections of the liquefaction equipment were started. Now Futura 1, the figures were mostly related to the registration of invoice for payments to suppliers of solar panels and equipment and, to a lesser extent, to operate and maintenance costs that are being capitalized given that the solar park had not come into operation by the end of the quarter.

Finally, in Upstream, we invested BRL 32 million in the development of gas field in Parnaiba complex, highlighting [indiscernible]. We also invested BRL 12 million in the exploratory activities in the Parnaiba and Amazonas Basin, including amounts for long duration tests carried out in Aneba. Now Slide 12. This is the status of future Futura 1 one of the largest solar complexes in Latin America. In the beginning of the second quarter of 2023, we gradually started test operations in each of the 22 UFVs according to the releases received by ONS and ANEEL. At the end of last week, we completed the energization of all 22 UFVs and with this, all units are already generating energy for trading.

We also requested the issuance of the DAPr-Ps that are permanent generation [ authorization ] granted by ONS. Considering the deadlines for the issuance of the DAPR, ONS afterwards, the order by ANEEL are forecast for the start of commercial operation of 100% of the complex is the end of May. Slide 13. This is update of small-scale LNG project in Parnaiba. The work is already 98.5% contracted with 96.3% of physical adherence, we have already concluded the earth moving stages in the site in April and the mobilization of the EPC, which is the regasification site, which was concluded in May as the next milestone for 2023. I highlight the beginning of the receivement of equipment at all sites in June, the conclusion of the manufacturer of already 100% contracted.

In 2024, we calculate the conclusion of the reception of equipment at the sites in January, the conclusion of liquefaction commission in April and the conclusion of regasification in May in order to allow the beginning of the commercial operation in the second quarter of 2024. Now on Slide 14, I present the updates of Parnaiba VI project. The project is at 108.4% of physical compliance and 68.8% of physical progress in the works. We are preparing for the arrival of the generator and the complex in May, which is one of the projects milestones. We have already concluded the alignment of the steam turbine inner casing at the Sao Paulo plant, the positioning of the boiler drums and the assembly of the equipment basis and the substations measurement and building panels.

The milestone in 2023 include the delivery of turbine in Parnaiba in September and energization of the transformer in November. For 2024, we plan to complete mechanical assembly in February, start test operation in July with commercial operations scheduled to begin the third quarter of '24, and CCEAR start-up in January of 2025. Now on Slide 15. Here, we have the updates of the Azulão 950-megawatt project. The stages of vegetation suppression and the mobilization of the project management teams were concluded.

We also completed the drilling of four wells and performed licensing of a more in line with our planning. The CapEx of the is already 32.6% contracted. We have already contracted 100% of Power Island with GE, all the services and equipment for the wells and engineering for the feed, and we are progressing in the contracting of the remaining equipment and services. For the year 2023, the next milestones are the final phase for the mobilization of the civil work in June, the signing of contracts for critical equipment in August and the signing of EPC contracts in December. For 2024, we calculate the start of pipeline construction and plant energization for July.

We estimate the COD of simple cycle for January 2026 and the combined cycle to start operating in October of 2026. Now I give the floor to Felippe Valverde for the Q&A session.

[Felippe Valverde, executive]

[Audio Gap]

[Marcelo Lopes, executive]

We're very close to what will happen where we believe in a high demand for the reserve auction. Our estimate is about 8 gigs, which is part of what was the contract in terms of thermal companies until 2028. And we believe that even if we look to achieve a neutral level, in other words, that thermal competing with other sources, including hydro plants, the trend for that product, we believe that thermal plants tend to be more competitive for this type of auction.

[Felippe Valverde, executive]

Thank you, Marcelo. We have another question coming in about Argentina. How are you mitigating potential risks in sales to Argentina given the fragile situation of the company. Can you talk about the topic a bit, please?

[Marcelo Habibe, executive]

Thank you for your question. Our sales to Argentina, it happens through a middleman, Argentina sales selling company, the trading company -- sorry, the trading buys from the Brazilian trader. Within this triangle, there are two insurance or assurance instruments. Argentina ensures the banking payments to the first top quality bank and the trading company through a different assurance structure, sometimes using the same bank, some other times using other banks. But in any event, first rate banks. With all of that, the combination of efforts, payments are assured. So in short, sales to Argentina have a bank assurance in place as is.

[Felippe Valverde, executive]

Thank you, Habibe. Now let's move on with Argentina. We have a few questions about Argentina. I'll try to summarize them all into 1 question. Can you comment on the expectations of -- for exports in Argentina for the coming quarters? As you complete the pipeline. Could that limit the potential? Also, can you give us more details about the transmission capacity to Argentina. And how is Parnaiba competing with other thermal assets.

[Unknown Executive]

Thank you for the questions. Let's start with data. Today, we have got a [indiscernible] conversion company, which can convert 2.2 gigs or transfer 2.2 gig from Brazil to Argentina, and we also have the converting company in Melo with Uruguay, another 500 megawatts. So in total, we have a capacity of transmission between Brazil and Argentina and Uruguay of 2.7 gigs. Uruguay is able to send energy to Argentina. So in some periods of the year, all that capacity may be transferred to Argentina, depending on the demand coming from Uruguay and of course, also depending on internal restrictions of both countries. As for how the Parnaiba complex is competing with other thermal companies. Early in the year because of the high water availability, the turbine flow took up most of the energy, which was exported to Argentina.

But as we mentioned before during the call, as the wet period ended and as reservoir levels dropped, that turbine-based energy tends to converge to 0 and we'll be having a thermal-based export process. Three players have been meeting the demand for thermal generation. The cogeneration thermal plants on Petrobras, which generate to meet internal demand, and they are competitive, of course because it is their opportunity to generate vis-a-vis spot prices, the coal-based thermal plants in the southern region of Brazil, which have some flexibility.

And because of that, they turned out to be very competitive as well. And Parnaiba because of the R2W model, which brings competitiveness to the process. So throughout time, we have the bids, which happened through the trading companies in Brazil. And those players -- those three players have been able to meet this limited demand, limited to the transmission of As I said, we believe that the [ indiscernible ] period is coming to an end. We are already in the month of May. And the turbine base flow is still happening at lower volumes than in February and March, but it tends to converge to 0 in May.

And the trend is that thermal generation will be able to meet that export demand, and it should remain the same throughout the year. The pipeline expected to start this year should not change the possibility of our exports. With the second phase, which is expected for next year, we expect that for the summer period, we may need to resort to other types of generation. But in the winter because of heating equipment, we'll be able to export energy from Brazil to Argentina.

[Felippe Valverde, executive]

Has there been an update of [indiscernible ]complex?

[Unknown Executive]

No, no update since Petrobras was notified by the MME the day after we spoke to Petrobras. They requested a period to understand and internally discussed with the new Board to replan their strategy. But since that day, we haven't been able to talk to Petrobras due to their request and we were never formally notified. We know that this is an ongoing process. So we're still waiting for Petrobras' position in order to see what we will do within this process, and we expect to receive a notification in the upcoming months.

[Felippe Valverde, executive]

The next question, now replacements and generation. Can you talk about of substitution per generation. How would this work in practice?

[Unknown Executive]

Thank you for your question. Now this opportunity of generation per replacement by flexible plants. This is an opportunity that we've mapped, and we are working with interested partners, but there are challenges that we have to overcome. One with the regulatory challenge, because in the current regulation, this is not foreseen. Therefore, we have to focus on the regulatory point. Now at the same time, we have to develop models together with our potential partners. This works when you have a partner that has the gas opportunity cost to buyer to sell to a third party higher than your opportunity cost to generate in order to substitute this partner every time. We have this. There is an arbitrage. And afterwards, there's a possibility of sharing the result that is generated. So we are working on the contracts, and at the same time, we are also engaged together with the regulatory teams in order to enable this possibility within our regulation.

[Felippe Valverde, executive]

The next question. The Fortaleza thermal plant, any update of gas in the thermal plant Fortaleza through GNL.

[Marcelo Lopes, executive]

Thank you for your question. The two options are possible, and they have already been answers of [ Gaspar 2 ] is a project that tagged the subsidiary of is interested in participating. The challenge here is the market to enable work, a project like [ Gaspar 2 ] the thermal plants that work with a flexible modality, not these thermal plants won't be able to work with their budget with we're working with a gas supplier. This is Shell in order to have a supply contract option to participate in the auction. We are closely following the evolution of the project, and we expect this supply to be feasible, so it can participate in Termofortaleza in the upcoming auctions. For the time being, there is nothing materialized.

[Felippe Valverde, executive]

Thank you, Marcelo. With this, we've approached all the points that we received through our Q&A box. Now we bring to our -- to the end the Q&A session. We thank all of you for your participation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]