Eneva SA

BOVESPA:ENEV3

Earnings Call Transcript 2024-Q1

[Lino Cancado, executive]

[Interpreted] Good morning, everybody. Thank you for your attendance, and welcome to the earnings conference call for 2024 for Eneva. We will begin with Slide 4 with the main highlights for the period. We started the year with another operationally strong quarter with EBITDA reaching BRL 1.089 billion. This represents an increase of 13% vis-a-vis the first quarter '23. If we disregard the effect of the PM of the trading company, which grew strongly in the first quarter of '23. The operational cash flow reached its highest historical value because of our operations, exceeding BRL 1.1 billion for the first time. In addition, the results support the investment flow required to deliver our first growth cycle. Now this significant result also contributed to controlling our leverage, which closed the quarter while we have the skill and LNG projects, Aneba V and Azulao 950 projects. The expressive cash generation of this quarter also contributes to controlling our leverage, which closed the quarter at 4.1x net debt over EBITDA. We're closing the quarter at around 0.5x lower. When we compare this with the same period last year. The main items that contributed to this result were the continuity of regulatory dispatch to serve the national interconnected service and resumption of energy exports to Argentina, the continuous evolution of the operational indicators of Jaguatirica II TPP, which reached 99% average availability and presented a record of generation since it began operating. And our financial discipline reflected in the SG&A and cost with a reduction of BRL 20 million in the company costs and showing us a quarter of a reduction in our fixed margin. The year 2024 has also seen important progress in the financial, corporate and strategic fronts. SMP reaffirmed the highest level of rating for the company as well as promoting our credit outlook to stable recognition of the evolution, solidity and resilience of our fundamentals. We have completed the company's stance in view of debentures and we'll be able to restructure part of our debt, increasing the duration and reducing the cost. We also concluded the incorporation of the main subsidiaries in the holding, optimizing the fiscal and company structure and making the most of the synergies, especially on the administrative and fiscal areas. I would like to remind you that at the end of April, we ended the term for contributions for the holding of the reserve capacity auction of 2024 schedule for the second quarter this year. The Ministry of Mines and Energy will analyze the contributions to publish the measure of the auction. Eneva has its assets ready in incentivized areas with access to gas reserves and with proprietary gas generation, which makes our offer highly competitive. We continue determined to increase the value of our existing assets and to ensure new monetization cycle for our assets. Well, we continuously assess the different business opportunities that arise for a company that has a varied portfolio and unique competencies in the Brazilian energy sector. I would like to give the floor to Marcelo Habibe, who will speak about the cash flow.

[Marcelo Habibe, executive]

[Interpreted] Thank you, Lino. Good morning to all of you. We now go on to Slide 5. The record cash was BRL 1 billion, representing an increase of 33% compared to 2 years ago before we began to grow in the company. The first result is due to a history that has been built through time to a different front to generate value. I will go through each initiative in the slide, but would like to highlight some. We stabilize the projects that we won in the auction. They have increased the movement of ex revenues and the efficiency of our asset base improving the way we monetize our gas. Secondly, we carried out M&A operations, acquiring assets that provided us high levels of return with a significant flow of contracted fixed revenues and broadening our range of possibilities in the gas and energy chains. This was the case with [indiscernible] Fortaleza and Focus. We diversified our sources of revenue through a more active commercial standard opportunistic bias. We started exporting energy opening a perennial window of efficient monetization for our gas. Additionally, we have one of the largest trading companies in Brazil more than just increasing our cash flow and the strength of our balance sheet, our initiatives have also brought new skills and possibilities, which will soon translate into new business models, projects and new business model and a new source of revenue. As we had expressive growth in our operational cash flow in the last 24 months, we already have contracted new projects such as [indiscernible], UTE, Parnaiba, Azulao 950, which will guarantee the same trajectory over the coming quarters. We go on to Slide 6, where we present highlights on the liability management front this year to enable the company to grow sustainably, we're constantly looking for ways to optimize our capital structure. The 10th issue of debentures worth a total of BRL 2.5 billion concluded a few days ago was another of the company's initiatives to improve our debt profile. In May, we paid the full prepayment of the 7th debenture issue, and we will also settle the 2nd series similar to what was raised. As a result, the level of indebtedness have basically remained stable, but we made important gains in the maturity, cost and profile of our debt. In the graph to the left, we can see after the restructuring at the end of March that we increased our debt exposure to IPCA by 7 percentage points, aligning exposure by the company's fixed revenues. In the graph to the right, we see the effect of our amortization schedule, which now has longer terms, reducing principal maturities in '25, '26 and '27 and concentrating on the period after 2028. We made these movements without sacrificing the cost of the debt. Quite the contrary, the new debt are also less costly with the average cost of consolidated debt reduced by 20 basis points to IPCA plus 5.4% per year. Additionally, as an important recognition of the improvement in our capital structure. We recently had a reformation of the AAA rating by S&P and for the company, the ventures, the agency also updated Eneva's long-term credit outlook to stable, reflecting its view on the company's solid fundamentals and robust outlook even in a scenario of acceleration of investments. On Slide 7, I would like to speak about the optimization initiatives for cost, our strong financial discipline and management of expenses have led to savings for yet another quarter, allowing us to improve the company's operational efficiency. In the graph to the left, we see a nominal reduction of BRL 19 million in the cost of operations in the first quarter of 2024 vis-a-vis the first quarter '23. A large part of the results come from 2 operations, UTE, where we achieved savings with product and service costs related to the operation and the operational progress of the asset and in the Sergipe Hub, where we achieved a significant reduction in cost risk affecting the optimization completed after the acquisition with a renegotiation of costs with asset insurance policies and lower personnel costs. In SG&A, we had a nominal drop vis-a-vis the same quarter last year. This was the lowest SG&A level in the last 12 months. This is the relevant scenario as it occurs amidst the growth of the company, and it shows our financial diligence. We now go on to Slide 9, where we present the main impacts on EBITDA in the quarterly comparison. In the first quarter of '23, we had a reallocation of energy sale contracts to the trading company. This opened rule for the trading of the complex and allowed us to subsequently review our contracts. We were able to work with migrated contracts with a positive one of contract of BRL 1 billion last year. When we eliminate the evaluation of NTM, we had a growth of BRL 107 million in the EBITDA of the company, a growth of EBITDA in practically all segments because of our sound operational performance this quarter. Among the main positive effects, the EBITDA of generation of Parnaiba had a growth of BRL 98 million, with an increase in both the fixed margin and in the variable margin, reflecting the greater average regulated and export dispatches in the period. Upstream contributed with BRL 17 million with an increase in variable revenues and margins in the period, driven by the variable revenues and margins in the period because of dispatches at Parnaiba and the evolution in dispatch and Jaguatirica II. Now Sergipe Hub contributed BRL 40 million to EBITDA, mainly due to the growth in the fixed margin and the reduction of fixed costs and OM. The start of commercial operation of solar generation in Futura. In the second quarter, '23 was also added to the EBITDA for the period, contributing with BRL 46 million as a result of fixed revenues coming from bilateral contracts. Jaguatirica II recorded a growth of BRL 48 million, a result that reflects the stabilized asset first full quarter for the plan. In addition, the holding improved its EBITDA, mainly due to general and administrative expenses in the period. The main negative impact on EBITDA in the quarter was due to the closure of operations of Fortaleza recording a drop of BRL 48 million. This effect was offset by the other segments in the quarter. We now go on to Slide 10, where we have the main impacts of the financial area. The net financial result was negative in BRL 100 million this quarter compared to a negative result of BRL 435 million in the same quarter last year. Now this variation was basically caused by a noncash effect of exchange rate variation and some accounting increase included because of some projects. The exchange rate generated a noncash effect of BRL 155 million on the lease of the Sergipe Hub. On the other hand, at the same period this year, this line item was benefited by BRL 90 million in the result because of the devaluation of the exchange rate that quarter. Now we have another effect in our financial results of expenses and debt previously capitalized relating to Futura 1 project. In the first quarter last year, this asset was still under construction. And now moving on to Slide 11. We have the variations in cash flow for the first quarter of '24. We ended the first quarter of '24 with a cash position of BRL 2,400 billion, slightly below the value of December but with an important milestone for the company. As I said, our operating cash flow exceeded BRL 1.1 billion mark, reflecting our solid operating performance in the period. Other effects included investment cash flow of BRL 602 million, mainly for our projects under construction such as Azulao 950, liquefaction plant in Parnaiba and also Parnaiba for the financial cash flow totaled BRL 708 million, with main impacts being payoffs and interest payments for the period and lease payments, mainly dedicated to FRSU and [indiscernible] in the Sergipe Hub. In Slide 12, we can see the net debt of the company, which closed the quarter with BRL 17.4 billion. As Lino commented, our leverage remained under control, presenting an evolution in the annual comparison from 4.6x at the end of '23 to 4.1x at the end of the first quarter of '24. On the right-side graph, we can see the effects on deadlines and average cost of the debt after conclusion of this liability management stage now in May. In addition to lengthening the materials and the average term of the debt from 5 to 5.6 years and increasing the exposure of the total debt to the IPCA hedged naturally by our fixed revenue. We also reduced the average cost of the debt, expressing the cost of the consolidated debt in terms of IPCA plus we observed a reduction of about 20 basis points in the cost of the debt from IPCA plus 5.6% in the end of the first quarter. And the values and pro forma effects of the restructuring of the debt. I now turn over to Andrea.

[Andrea de Azeredo, executive]

[Interpreted] Well, good morning, everyone. In Slide 15, we can see the investments made by the company in the quarter, totaling BRL 421 million, mainly intended for projects under construction and upstream activities in Parnaiba. In the Azulao 950 complex in the Amazon total of BRL 125 million was invested in the quarter with emphasis on the BRL 89 million allocated for the settlement of the construction installments of the turbines, BRL 11 million, destined to proprietary engineering and EUR 11 million related to payments of the EPC for the fulfillment of these project stages. In this plants, which we were building in the Parnaiba complex for the sale of liquefied gas and [indiscernible]. Suzano in new markets, we invested BRL 78 million referring to payments, reaching different phases of the product in addition to BRL 21 million in liquefaction equipment, including logistical costs in upstream, BRL 56 million we invested in the quarter with emphasis on BRL 38 million invested in the exploration and BRL 17 million for the development of [indiscernible] fields. And finally, we invested a total of BRL 47 million, which were mainly intended for the provision of services totaling BRL 45 million in the quarter. And now in Slide 16, I'm going to talk a little bit about the update of the recent milestones in the Parnaiba project, the LNG project. The project has a 94% compliance to the schedule being 100% contracted and with all equipment assembled highlight goes to the following milestones. So the conclusion of the assembly of all of the equipment of the liquefaction plant and the regasification plant. The conclusion of the commissioning of the 32 cryogenic trailers and the conclusion of the hydrostatic test carried out in the interconnection pipe with gas treatment unit. As the next milestones for the next quarter of '24, we plan to conclude the electromechanical assembly of the liquefaction plant and the commissioning of the regasification unit. We also estimate that the beginning of the operation of the plant will take place in July '24. Now on Slide 17, I would like to introduce the updates of the Azulao 950 project. Currently, the physical compliance of the project is 95% with physical progress of 22%. I highlight that the civil construction has advanced by more than 45%, and we have already concluded the piping and connection of clusters for to the ETG as well as the beginning of the assembly phase of the 750-ton crane. We also completed the turbine pedestal. Actually, I would like to call your attention to some regulatory achievements among them. The gas pipeline and TPP installation license in authorization of plant suppression and the conclusion of all of the civil construction for this half of the year. By the end of '25, we will have concluded the energization of the plants. And the combined cycles will take place in '26. And now in Slide 18, I would like to highlight the updates of the Parnaiba VI project. It is in the final phase of construction and assembly with basically total physical compliance to the schedule and 93% accumulated physical progress. We concluded the production of the first demoralized water and energization of the transformer, the hydrostatic test and the commissioning of the CMS. We also started the flushing of the oil system of the turbo generator and also the loop test for the JV and BOP. In the second quarter, we will carry out the hydrostatic testing of the steam recovery boiler. And by the end of the year, we will conclude the mechanical assembly and start the commercial operation. And in January '25, we will start activities. And I now turn over to Felippe Valverde for the Q&A section.

[Felippe Valverde, executive]

[Interpreted] Thank you, Andrea. Good morning, everyone. We will now start our Q&A session, and I'd like to remind you that event of questions should be made using the Zoom platform. We have already seen the first questions here. Could you comment on the current hydrologic scenario and what impact you would have for the second quarter of '24. And in case you have any opinion about this and how the La Nina phenomenon could impact this scenario?

[Unknown Executive]

[Interpreted] Well, thank you, Carol, for your question. This year, we have had a significant volatility in the water scenario in the market. Summer was very dry after November, December, January and February with low levels much below the historic average in March. Rain levels went back to the historical levels, reverting a trend that we had for increased prices. However, in April and talking a little bit about La Nina because La Nina brings a lot of rain to the south. And it did happen, we can all see the very sad situation we have in the south region of Brazil. But the rain was very concentrated and does not really help us in terms of energy provision so that in April, we went back to a situation where our water levels are well below the average in the Southeast. So much so that this volatility brings a lot of uncertainty. In the end of the year, we believe that the Brazilian electric system will have a dispatch related to power and the trend is for it to be amplified due to energy requirements. In March, we had some litigation, but it's the April drought last for a few months, this is a possibility in special in the last quarter around November and December. If the rainy seasons for the next year is delayed. So as it happened and is only normal in this sector, we have a lot of volatility dispatching due to potency is something that will happen energy dispatching is less likely, but it's not something we rule out for November.

[Felippe Valverde, executive]

[Interpreted] Well, the second question asked by Carol is about growth. Regarding growth, could you update us on the assets that are [indiscernible] for example, a possible M&A for Eletrobras thermal plant?

[Marcelo Habibe, executive]

[Interpreted] Well, thank you for your question. Unfortunately, we do not have any update or anything that we can share with you right now. This is a public transaction. We are interested, but we have nothing to comment about it right now. But we will rest assured, do so as soon as we have any news.

[Unknown Executive]

[Interpreted] Thank you very much. Well, the second part of your question about growth has to do with the expectations for the capacity auction, both because of a possible delay for the date of the auction also because of the duration of the APP and also the size of the thermal product.

[Unknown Executive]

[Interpreted] Thank you, Carol, for your question. We all followed the auction. It was delayed 1 month, it was closed in the end of April. We believe that this month delay will probably lead to another delay in the update of the auction, which was originally in August. Now our expectation is for September, but we're still not sure. It depends on the Department of Energy. So because of the demand, we do believe in the projections based in the last EPE study where there is an aggregate demand combining product '27 and '28 for a 1 giga for the thermal plant. And we do not believe that the battery or hydroelectric power plants will be included in the auction. If they do, they will not have an impact on this demand because the nature of the product offered by the hydroelectric power plant because of safety and non-dependence this product will not suffer any impacts in case we add anything. And the numbers we're working with internally is 8 gigas, and it will be divided between product '27 and '28.

[Felippe Valverde, executive]

[Interpreted] We have received a question about commercial products. We have some important initiatives, and we would like to ask you to update us on the supply contract with 1.1 million cubic meters, the remaining capacity for Sergipe and the plants in Parnaiba.

[Marcelo Habibe, executive]

[Interpreted] Thank you for the question regarding the gas table and the amortization of the Sergipe Hub as we informed you on Sergipe event, we're very close to signing the first long-term contract for the supply of gas based on flexible modality with a thermal electric plant. We still have not concluded this. That is why we have not communicated to the market. These discussions are well tensed. As part of our thesis to monetize the Sergipe Hub, what we would like to do is service other thermoelectric plants, the expansion of the Sergipe project itself, which is one of the projects that Eneva has in the next capacity auction. Now regarding the monetization of the remaining capacity, we hold conversation with several potential clients, and we hope we're seen to be able to announce novel these what we have underway is a public call that is very well positioned when it comes to competitiveness, and we hope to be able to give you good news regarding this very soon.

[Unknown Analyst]

[Interpreted] Congratulations on your results. If you could speak about your budget for the other quarters of the year, especially regarding CapEx. We see there is a drop in the Azulao 750 projects. This is something for the quarter? And what can we expect for upcoming quarters?

[Unknown Executive]

[Interpreted] Now regarding the CapEx flow for Azulao 750. We had several milestones with the equipment supplier that are located at the end of the quarter. We have a delay of a fortnight. So this means the flow will be similar to the other levels we had previously. We have this time displacement only of fortnight as you can see

[Felippe Valverde, executive]

[Interpreted] Well, thank you Lino. We have received a question here on the participation of minority groups. If you could speak to us about the BRL 7 million disbursed in the minority participations.

[Lino Cancado, executive]

[Interpreted] They weren't disbursed. They were simply accounted for-- to explain this clearly. Secondly, this full amount, reflects the minority participation that we have nowadays for Itau and our Parnaiba Complex. It's due to the sale of shares that we carried out last year vis-a-vis the profit of the thermoelectric complex, excluding the part of the IPO.

[Felippe Valverde, executive]

[Interpreted] Thank you. We have another question on the company optimization, the administrative optimization. If you could speak to us about the incorporation of CELSE and the holding. And if you could refer to this movement.

[Marcelo Habibe, executive]

[Interpreted] Yes, the incorporation of CELSE is well advanced. There is only one stage that we still have not concluded the approval of the transfer of some environmental licenses of CELSE to Eneva to the parent company, the holding, and this license depends on the approval of [ IBAMA ]. [ IBAMA ] is an agency that is on strike, and we do hope that at the end of the first half of the semester, we will conclude that. Once this is concluded, it will bring about 3 main benefits for the company. Nowadays, CELSE is the main cash generator of the company and to have that cash generation as part of the holding we'll, of course, be very positive for the company. Especially in the holding where we have the greatest disbursements, we have the contribution of projects Azulao 750 and having cash in the right place, of course, will be very important for cash generation. Secondly, by incorporating CELSE, we're going to add value to this acquisition. And this will be amortized through time, reducing our taxation base in the company. And finally, in the holding, the company presently has a fiscal loss an accumulated fiscal loss of BRL 2.5 billion, and we're going to use a fiscal optimization to reduce to 0 the income tax that will be paid by CELSE. So these are the 3 benefits that we will be able to count upon as of the second half of this year.

[Felippe Valverde, executive]

[Interpreted] Well, thank you, Marcelo. We have received the last question here on the demand from Argentina. If you could comment on the demand scenario in Argentina. Will the demand for exports increase and which are the more competitive players in there?

[Lino Cancado, executive]

[Interpreted] Thank you for the question. We do believe there will be demand into-- there already in demand. Argentina has not imported from Brazil this month because it's a month of very cold temperatures in the south, especially in [indiscernible]. They're not importing energy from Brazil because of the flooding in the region of Rio Grande do Sul, which doesn't allow us to send the energy through the converters. We're assessing alternative operational measures so that we can eliminate this bottleneck, referring to exports. And as soon as this is resolved, the trend is that Argentina will continue to demand energy and the exports will be resumed once again. As this year, we don't have the competition of an excess of water as we had last year. We believe that the exports to Argentina will be serviced by outside generators, and there should be no difference vis-a-vis the scenario we saw previously where the Parnaiba Complex has very interesting competitiveness to service a significant part of the demand. We know that there are other players who may participate. And well, they could compete up to 400 or 500 megawatts, but in demand higher than this that we would already have in May, we will have interesting space to monetize the capacity we have at Parnaiba very well.

[Felippe Valverde, executive]

[Interpreted] With that last question, we would like to conclude our conference call. Thank you all for your attendance, and we do hope to see you in the conference call for this…