Eneva SA

BOVESPA:ENEV3

Earnings Call Transcript 2021-Q2

[Operator]

This meeting is being recorded.

[Pedro Zinner, executive]

[Audio Gap]

We ended the quarter with a cash balance of BRL 1.8 billion and disbursed BRL 77 million for the financing operations contracted with BNB for the Parnaiba V project. We continue moving forward in the construction of our projects. Azulao-Jaguatirica that is scheduled to begin its commercial operation on the fourth quarter of 2021 and Parnaiba V is expected to start in the first quarter of 2022.

Now regarding our pipeline of projects at the end of July, ANEEL approved to change the implementation schedule of TTP (sic) [ TPP ] Jaguatirica II pushing back the starting date to supply the plant with an exclusion of responsibility for Eneva and maintaining the supply term at 15 years.

Now through gas, we certified in the beginning of August through a report on the reserves certified of the contingents. Resources was prepared by [ GCA ]. In the Azulao field, the report pointed out an increase in natural gas reserves totaling 6.32 BC. And this is a competitive differential of the company that has been consolidating its position as an important natural gas player in the Amazon region in a scenario of increasing natural gas thermal generation in Brazil.

With the results obtained in this certification, we will begin the environmental licensing process for the new generation of the project in the northern region of the country, and we will see different monetization alternatives for this gas. Within the expansion of our business, we have also made progress in our ESG agenda through our sustainability report of 2020 of July, we broadly updated the company's priority themes and define the STGs related to these things, which will be part of our strategy. We progress in monitoring our environmental and [indiscernible] to the carbon disclosure program and committing to answer the CDP climate change and water security questionnaires regarding our performance in 2020.

We also started a structured project to survey risks and opportunities related to climate change. The -- with the results, we want to have a highly mitigation strategy to adapt to climate change, considering the growth strategy and the business portfolio of the company.

Now I turn the floor to Anita Baggio that will give you more details about the recently released sustainability report. Anita?

[Anita Baggio, executive]

Good morning, Pedro. Good morning. As Pedro mentioned, I would like to point out a few highlights from our sustainability report launch last week. Caring for our people is a strong pillar of Eneva's culture. Equity and remuneration is an opportunity, an opportunity as part of this commitment. In 2020, we had our first training program in the operational area with the approval of 25 Brazilians from 14 different states, plus federal district and 67% of them in the north and northeastern regions of the country. Job promotions and merit-based salaries have increased, and we continue to progress in terms of equity between men and women with a 30% merit. And here we have 10% men.

And on Slide 6. Here, our contributions to the community and the development of the regions in which we operate. By 2020, we regenerated over 7,000 gigawatt hour of energy to supply essential activities and the potential to supply more than 3.5 million homes in our country. To foster the development of local industry, we've invested BRL 2.2 billion in maintaining and expanding our operations in the states of Ceara, Maranhao, Amazonas and Roraima. We recorded an increase of 143% in the amount contracted from suppliers in 2020 contributing to raise the employability rates in the north and the northeastern regions. We are

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and income opportunities to less favored communities. Our social programs have actually benefited 62,000 people in addition to the impacts of our social and environmental programs linked to the licenses.

Now going to Slide 7, I would like to highlight our contributions in the fight against climate change. By 2020, we will gear 31% of our total investment to closing the gas plant cycle in the Parnaiba complex. This initiative will generate an estimated 35% reduction in the intensity of emissions from our gas-fired generation facilities. We've also invested BRL 1.2 billion in the deployment of the Azulao-Jaguatirica integrated project. When commissioned, the plant is expected to provide an estimated 35% reduction in CO2 emissions and the generation metrics of the state of Roraima. Together with our strategic planning, we continue to expand supply in the north and northeast, contributing to the decarbonization of power generation and industry in these regions.

Now I give the floor to Marcelo Habibe to talk about the market scenario and our financial performance during the quarter.

[Marcelo Habibe, executive]

Thank you, Anita. Good morning. Starting with the energy market. Electricity consumption in the country has maintained its growth trajectory when we compare it year-on-year and quarter-on-quarter. This is a result of the gradual resumption of the economic activity after the slowdown caused by the measures adopted to contain the pandemic. This has been another quarter in which the hydrological scenario hampered the formation of the affluent net natural and received the volume of energy stored in the reservoirs.

We've had the worst historical sequence since 1931, the period between September 2020 and June 2021 with the deterioration of the hydrological scenario and the increase in energy consumption, the [ O&S ] further restricted generation from hydroelectric sources in the second quarter, triggering the dispatch of thermal power plants to close the [indiscernible] electricity energy base.

At the end of the second quarter, an increase of 60.7% in thermal energy generation was registered compared to the same period last year. This scenario contributed to historical high PLD levels with an emphasis on the southeast subsystem where the prices increased to BRL 104 year-on-year closing the quarter with an average PLD of BRL 229 megawatt hour.

In the second quarter of the year, we saw a high level of dispatch for the second quarter, 58% vis-a-vis 8% in the second quarter of 2020. All Eneva plants were under the order of merit for some time. We also reached a gas production 6x as large as the second quarter of last year, driven by an increased energy consumption and worsening in the hydro scenario as mentioned. In the second quarter, we all saw a hike in fuel prices and foreign exchange rates and in adjustments of contracts by inflation, which generated a positive impact in our CDUs. Therefore, we reached net revenues of BRL 963 million, a growth of 85% when compared to the same period of last year.

Now moving on to the next slide. We'll talk about our financial performance. In the second quarter, we filed adjusted EBITDA of BRL 378 million, a growth of 35% when compared on an yearly basis. The highlight was the upstream segment, growing BRL 141 million in the period. The result was driven by an increase in variable margin in the segment due to a higher gas dispatch in the second quarter.

In this quarter, our SG&A for holding was impacted at BRL 65.5 million by expenses related to incentive plans in the long run, which the company has granted in 2017 and 2018 as a way of variable compensation. Out of that amount, BRL 54.2 million were [ disimbursed ] from cash to pay taxes incurred in the plans that matured in the quarter and the remaining BRL 11.3 million relates to appropriations of current plans. This volume of expenses were driven by the valuation of the company's shares from the time of the granting of those incentives until they were exercised, led to an increase in the price of exercise. As shown on the slide, the valuation was 226% in the case of the plan granted in 2017 and 440% in the case of the 2018 plan.

Moving on to the next slide, I'll talk about the cash flow. We can see here that most of the operational performance took place at the end of the period. Most of the revenue was withheld in our accounts receivable, given that our medium-term to receive is between 30 and 45 days. So those resources will enter the cash in the first months of the third quarter. In terms of investments cash flow, we saw an outflow of BRL 139 million, due mainly to the reimbursements related to the development of Azulao and the construction of Jaguatirica II and Parnaiba V.

Now as for the financial activities cash flow, we saw an outflow of BRL 92 million, mainly due to amortization of interest rates in principal relative to funding and debentures. But we have a positive impact because of the funding we did in May relative to this imbursement along with the Bank of Nordeste BNB. At the end of the quarter, our consolidated cash, which includes cash and cash equivalents totaled BRL 1.8 billion, maintaining a solid liquidity position for the company to support our growth plan.

On Slide #13, we talk about liquidity. In the quarter, we made the fifth disbursement to build Parnaiba V to the tune of BRL 77 million, totaling BRL 611 million so far, considering principal and interests. If we combine the predicted disbursements, which will be liberated as works advance, we will reach a liquidity position of BRL 2 billion to support the predicted CapEx for Azulao, Jaguatirica and Parnaiba V to the tune of BRL 0.3 billion. So the total liquidity position ensures a comfortable situation for us to meet our CapEx commitments in the mid and short run for those construction projects.

Moving on to the next slide. We talk about the company's capital structure. It remains quite robust with an improvement in the term of debt and in an annual comparison at the end of the quarter, company's net debt totaled BRL 5.8 million with a net debt EBITDA ratio at 3.4x at the end of the period. The average term for maturity now is 5.7 years at the close of the quarter, and the average spread on indexed debt are now at 3.9%. For those impacts to CDI this spread came out at 1.6%.

Now looking at our amortization schedule, we see that our debt is a long-term one, which over 60% of our debt maturing as of 2025. So we have no pressure on our cash flow whatsoever, and we can carry on comfortably with our growth plan and operational plans as well.

I now turn the floor over to Lino, who will be talking about our investments in the quarter.

[Lino Cancado, executive]

Thank you, Habibe. Good morning, everyone. I'd like to first emphasize that the investments in the quarter reached BRL 453 million, maintaining the fast pace of our major projects for Eneva. Out of that total, 64% were allocated to Azulao, Parnaiba V and Jaguatirica, BRL 225 million Azulao and Jaguatirica and BRL 63 million allocated to Parnaiba V. Out of those BRL 163 million invested in upstream, BRL 44 million were allocated for the payment of signature bonuses. For the second cycle of permanent offer, the contracts were signed in June and BRL 44 million were allocated to the payment of the Jurua bonuses and in the neighboring blocks, which were bought.

Additionally, another BRL 58 million were allocated to the development of Gaviao Preto, which is now under construction for the pipeline and the gas treatment unit. As for the plant, Itaqui made its predicted maintenance plan for the steam turbine and also the boilers. So BRL 12 million were invested also for this major overhaul. Parnaiba II also had corrective maintenance programs, which was non-programmed and that cost BRL 5 million.

I now move on to Slide 17, where we give some more additional detail about the integrated progress Azulao-Jaguatirica. In Azulao, a 100% of the equipment which are needed to conclude the works are already in place, onsite installed and now are under commissioning when the first batch of equipment to liquefy gas is already on to start producing energy now.

So now the plant is already producing gas 24 hours a day at about 1/4 of its capacity. We also started the transportation of the first GNL trucks to Jaguatirica, and we're already sending convoys on a permanent basis to supply the plant's tanks in Jaguatirica, which will also go into commissioning for the turbines. For UTE Jaguatirica II, with all the tanks ready and so we are now at the final stage of commissioning. The start of the testing for the substations Jaguatirica and Boa Vista has also been completed with the conclusion of the transmission line connecting both substations.

As it has been mentioned, the responsibility exclusive provision has been approved by ANEEL for '22 -- early '22. So the contract has been not changed. At the current pace, we expect the plant to be ramped up in the fourth quarter of 2021.

Now moving on to Slide 17. We have an aerial picture of the Azulao plant. In the Azulao field, very well-known by all of you from other earnings calls. As I mentioned, we are already producing gas, also the gas treatment unit also working -- self-generation working at a 1/4 of the plant's capacity to produce liquefied natural gas.

Now moving on to the next slide, Slide 18. We have another picture, a close-up of the Jaguatirica II plant with all the equipment in place. In the foreground, we have the boiler and the gas turbine PG-12. In the foreground, the second gas turbine and in the back, the steam turbine facility.

On Slide 19, we can see that we have 2 different stages of the works. On the left, that's from May 2020, when we were starting the foundation work for the plant for the machinery, which would come to be implemented. In the foreground, you can see the foundation for the pipe rack. In the background, the area where the boilers were implanted. 14 months later, July 2021. This is what it looks, just about ready, all the turbines, boilers, pipe rack, auxiliary systems and in the back, in green, the air cooler condenser and the substation to the right ready to start commissioning. So several systems are already under commissioning.

Moving now to Slide 20. We now have UTE Parnaiba V. Also a comparison between 2 different points in time, November 2020. On the left-hand side, you can see in the back 4 stacks, smoke stacks for the turbines of Parnaiba I. And in up front, we were just starting the boiler construction and some segments of the chimneys for those boilers. The chilling tower on the right, it was just started -- starting to be put together to be assembled.

In July 2021, we can see all the boilers in place at the center, the facility where we have the steam turbine ready to go. We are now concluding the works inside that building. And in the up front, the 12 cells of the cooling tower, all completed already as well.

Moving on to Slide #21. We have additional details about the construction of Parnaiba V. We have scheduled operations to start in the first half of 2022. A 100% of critical materials have already arrived at the site, have completed the powering of the substation. The first picture on the left, that's when the switch was turned on, and we were able to power the substation. That's very important for the whole enterprise because it will allow us to power the whole plant to then commission its respective subsystems. The electromechanical assembly of all equipment is at an advanced stage, and we expect it to be concluded by November 2021.

Commissioning activities of several subsystems are already underway, and the assembly of the access of the turbine, second and third pictures to the right, have already been completed. On the second is when we have the casing for the turbine is being installed. And then on the right, we have the access of the lower pressure segment of the turbine. And the high and mid-pressure segments have already been installed. They are to the left of the casing and the mid picture.

I now turn the word back over to Marcelo Lopes, who will be talking about our portfolio.

[Marcelo Lopes, executive]

Thank you, Lino. Good morning, everyone. I'd like to start on Slide 23 to provide some context that we have a need to expand the Brazilian thermal electric mark. As the regulatory framework has advanced in terms of making new projects feasible, thermal projects that is. On the left-hand side, we see the evolution of intermittent sources. We see how the percentage of those sources has doubled in the past 5 years.

That chart, combined with the worsening of the hydrate crisis, which have been strongly affecting the southeastern systems, emphasizes the leading role that natural gas has to play and will continue to play to ensure the energy balance for the system and speed up a change, a migration to a more sustainable metrics. That scenario is supported by recent mechanisms created by the government to ensure safe supply of energy.

Both the auction model for capacity reserve is a -- we have a first auction announced for the end of this year, 2021, and also the announcement of a additional contracting of 8 gigawatts from a natural gas plant, preferably in Brazil. And a significant part of that will have to come from the Amazon region. All of that sustains or supports the playing role of natural gas and offers a wide range of new opportunities, new businesses, which is the case of Eneva.

As Pedro has mentioned, moving on to the next slide. As mentioned -- as Pedro mentioned, we have recently announced a report of reserve certification at the Amazon basins and Solimoes basins. The results of that certification expand the major potential of our assets and allow us to speed up our plan to explore those regions with the highlight at the start of the development to make contingent resources to be implemented. That's a snapshot of how Eneva has consolidated as an important natural gas player in the Amazon region.

On the next slide, we have the potential demand in the northern region, considering both optimistic and conservative scenarios for new projects and also for the conversion from other fuels. We know that we have a big challenge to monetize the potential offers in that region. And so we are also trying to replicate our model R2W. We are also mapping consumers that might have a demand for that replacement of gas for diesel -- or diesel for gas. We're also reassessing projects to monetize gas in the Amazon, looking at maritime, transportation, fertilization and others. Our strategy also seeks local partners to support us in logistics and also in trailing the gas.

I now turn it over back to Pedro for his final comments.

[Pedro Zinner, executive]

I think I'd like now to go to the Q&A session so that we can continue our conversation. Thank you, Marcelo.

[Flavia Heller, executive]

Good morning to everyone. This is Flavia. I will be the mediator of the Q&A session. [Operator Instructions]

The first one is from Joao Pimentel, BTG. Could you give us a little bit more color on these maintenance shutdowns of Parnaiba II? We saw this in Q1 in 2021. And now second quarter, what exactly are the shutdowns? And when do you expect them to be resolved?

[Unknown Executive]

Well, thank you very much. Well, the shutdown during Q1 was scheduled. And this is scheduled to carry out 32,000 hours of maintenance. It worked almost 40,000 hours. Now the second, the second shutdown that we had that was during June, and a little bit of July was an unscheduled shutdown because of the steam turbine incident that has already been resolved. The machine is working, and it's working at 100% of its capacity, and we do not expect any more difficulties here.

[Flavia Heller, executive]

Joao again. Could you give us an update on the conclusion of the Urucu operation? What is missing for the deal to be concluded? Is it continuing on its normal course? Or is there something that may have delayed concern -- the process?

[Unknown Executive]

Well, it's following its normal process. Together with Petrobras, we are negotiating all the points, commercial conditions, legal conditions, everything in the contract turnout. We still cannot disclose anything. Everything is according to our plan. And I hope to give you news in brief. But for the time being, we cannot disclose anything.

[Flavia Heller, executive]

Now [ Guillermo Limas ], Santander. Could you comment on the opening of an incremental public call for the purchase of natural gas, if you can give an idea of the objective deadlines, conditions, localities, notions of the amount involved and how the suspension of Petros natural gas supply to the northeastern distributors would impact them?

[Unknown Executive]

The main objective for this public call is to look for different options in our gas portfolio. So yes, we -- our ambition is to establish ourselves as a trader in regions where we do not produce or still are producing like northeast, southeast. And public call is to look for producers that don't have scale to enable this gas toward the market. And with our competencies, we could work like an enabler to offer this gas to the market.

Volumes, terms, well, we are being very flexible. And the idea here is as soon as we map the opportunities by these producers, we could try to see and to specifically talk about volumes and terms, but for starters. It will start from the beginning of next year and maybe projects that will take 3 or 4 years. But -- and we could be interested in buying them. What you're mentioning about Petrobras regarding the news that was published this year of the drop of the offering in the northeastern distributors. I think that this helps us in an initiative because we want to be a [ commercializer ], and we want to be a solution supplier for this market.

We could never imagine that this could happen before the public call, but I believe that this is an additional element that can be added to our strategy because we want to originate supply alternatives in order to provide solutions to our customers, amongst them, the industrial market and the distributors from the southeast and from the northeast.

[Flavia Heller, executive]

Next question from [ Ivan Marcelo ]. I would like to know about the maintenance shutdowns regarding the current need of power?

[Unknown Executive]

Well, thank you very much for your question, Marcelo. We have already concluded the major overhauls of 32,000 hours. We concluded the last overhaul of Parnaiba II. And this is -- and we had to carry out maintenance on the heating side of the gas-fired machines. So this is something that takes 32,000 hours.

Now the coal plant, we ended the major maintenance of the steam turbines and the only pending maintenance for next year is the P2 steam turbine that will take out throughout 2022. These are the minor maintenance routines. And we also have minor shutdowns that we carry out every year. And sometimes we need to maintain equipment, and we have to shut down the plant. But the major 32,000 overhauls will have ended already with the P2 during the first quarter.

[Flavia Heller, executive]

Now [ Marcelo Palio ], Itau. Will we will have a reserve auction at the end of the year, in which projects would you be interested to participate?

[Marcelo Habibe, executive]

Thank you, my namesake. For the capacity auction in December, well, we are thinking about projects or third-party gases. There would be gas power. There are some, especially in the southeast, there is a project that has a portfolio of options that we are analyzing. And we are developing projects of our own gas in region where we already have productions. And even the reserve certification that we just carried out and announced is totally aligned with the strategy to participate in the auction that will take place during the end of the year. I can't disclose the details of these projects. Nonetheless, this is something that we have our eyes on, and there are high expectations here.

[Flavia Heller, executive]

Now Habibe, from Marcelo Sa. Are you contemplating on M&A in [indiscernible]? What's the size of the opportunity?

[Marcelo Habibe, executive]

No, we are not -- we are not talking to Golar to buy their assets. Now it's called New Fortress. So we have no interest in the assets of Golar.

[Flavia Heller, executive]

Thank you, Habibe. The next question, [ Luciano Costa ]. Could Eneva tell us if they're looking for opportunities in the acquisition of renewable generation assets? Is there...

[Unknown Executive]

Well, last year we clarified publicly the renewable assets are part of our strategy. When we see the long term, we see value, we see if they can complement our portfolio. Yes, we're paying attention to some opportunities, nothing that we can disclose. These are things that are being negotiated confidentially. There are some bilateral negotiations. At the given moment, we will disclose this information, but for the time being, we cannot. And now I will give the floor back to Pedro to end our call.

[Pedro Zinner, executive]

Once again, I would like to thank everybody for participating in our earnings results call. And I hope to see you during our next call. Thank you very much.

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