Eneva SA

BOVESPA:ENEV3

Earnings Call Transcript 2022-Q2

[Unknown Executive]

Good morning, everyone. Thank you for taking part on the revenues call 2Q 2022 for Eneva. Just before we start with this call, please be attentive to the disclaimer on Slide #2.

So now moving to Slide #3. I'd like to present you with the highlights of the quarter and our most recent advancements. We have an adjusted EBITDA of BRL 503 million, representing a growth of 33% with regards to 2Q 2021. Even in the scenario of lower dispatch compared to the first quarter of 2021, the company presented an EBITDA growth specifically in the Argentina exports from June in the beginning of the commercial operations of [indiscernible], Jaguatirica and Roraima and the fixed margins of all the plants.

In order to be able to finish with the CELSE purchasing, we had this primary offer of BRL 4.2 billion with a final capture of BRL 4.2 billion.

We closed the second quarter with BRL 5 billion in cash. And with that, our leveraging was lowered to 2.2x net debt over EBITDA. It was an exceptional quarter to the company, and we've made great achievements with our expansion plans. And in May, we have signed up the contract for the purchase and acquisition of 100% of Cebarra, when the main asset is Sergipe Port 1 thermoelectrical plant, already operating, 1.3 gigabytes (sic) [ gigawatts ] of installed capacity, fully contracted in regulated environment until December '34 (sic) [ December '44 ].

Additionally, we have adjacent expansion projects that might add to 1.3 gigabytes (sic) [ gigawatts ] of installed capacity whenever developed. This acquisition marks the advancement of an important gas hub in the northeast of the country. That, after 2024, will be connected to the national transportation [ mesh ] and Petrobras' concessions in Sergipe and Alagoas Basin.

In June, we've signed up a contract for the acquisition of [indiscernible] Fortaleza, [ 227 ] megabytes (sic) [ megawatts ] of installed capacity and energy commercialization contract that is until December 2023.

We've also made progress on gas commerce contracts supplying LNG to industrial clients, Vale and Suzano, with the beginning of the supply plan for the first half of 2024. The gas will come from Parnaíba, where we will have 2 liquefaction units for natural gas.

In that quarter, we also would like to disclose our reports for the Amazonas basin that was put together by Gaffney, Cline, and that was for April 30. And with some certificates here at Azulão field, 14.8 billion and 4.7 barrels of 2P condensed reserves.

With regards to the SG commitments in June, just published our yearly sustainability report, with an operational performance, with social environmental performance that was referenced to the year of 2021. It was the very first time that this report was audited by an independent third party. We've also published new and more comprehensive policies of health and sustainability, and you may track on our website.

Now moving to Slide #4. I would like to quickly present you with the context of the energy market for the 2Q '22. The recovery of the reservoirs and that was basically a result of the high rainfall in that area -- that part of the year. The production was low, and the storage levels of the reservoirs grew above historical averages of the period, reaching an average of 95% at the month of June. In the subsystem, northeast and southeast, the reservoirs have closed the quarter with an average volume of stored energy of 66%, which was the highest level of storage for the month of June since 2012. For the other subsystems, the reservoirs were reasonably stable throughout the half of the year.

And all that has contributed to 76% fall on a year-on-year basis, going from BRL 229 to BRL 56. So those amounts were very close to the structural limits in all markets. Even with the low dispatch, in the thermolytical points in the second half of 2022, we've observed a discreet increase compared to this year, and that was basically due to the beginning of the thermal energy generation to export to Argentina as of March 2022. And the same -- the amount of energy generated for exports has -- it gradually increased along the second Q, going from 0.18 average gigabytes (sic) [ gigawatts ] to 1.4 gigabytes (sic) [ gigawatts ] average for the end of June.

Now on Slide #5. Given that panorama that we just showed, we didn't have thermolytical dispatch of the merit order in the ones analyzed. As of June, Parnaíba I, III and IV gas plants started to dispatch to -- in order to meet the bilateral contracts for Argentina, with a gross generation of 433 gigawatt hour, and out there, #2 also started in June, registering a gross generation of 353 gigawatt hours per quarter. And in this year, we've also started with the commercial operations of Jaguatirica II that in the second quarter has generated a gross amount of 103 gigawatt hours. And the Parnaíba IV produced [ 222 billion ] cubic meters of natural gas and Azulão, 0.04 billion. And as a result of the exports to Argentina, in the Jaguatirica operations, the contractual adjustments of fixed income and the impact in energy trading, the net income -- or revenue grew 4% (sic) [ 40% ] vis-à-vis to the same period of last year, even if with the low dispatch scenario.

Now moving to Slide 6. Let me present you with the main impacts on our EBITDA. As mentioned, even with the lower dispatch, the adjusted EBITDA, excluding the dry wells, has reported BRL 503 million in Q2 2022. That was 33% above the last year period. The main factors were that mentioned, energy exports to Argentina, BRL 114 million. Aside to that, the beginning of the operational -- the commercial operations of Jaguatirica has had a positive impact with, BRL 55 million (sic) [ BRL 61 million ] in the generation segment through the operation of Jaguatirica.

Now the expansion of the fixed margins of the gas and coal plants have contributed to an increment of BRL 26 million in the EBITDA if compared to the same period of the previous years. We've also verified a positive noncash impact of BRL 56 million, and that marked position of the future contracts of the commercializing party. The negative EBITDA impact with regards to the Upstream segment was a reflex of the significant reduction on the gas sales for the Parnaíba plant complex due to the less energy generation.

Now moving to Slide #7, I'd like to present you with the main impacts on the cash flow. The operational cash flow has reached BRL 306 million in the quarter. That was leveraged by the higher EBITDA in the previous period. That result was mitigated by the need for running capital and working capital during that period, and the supplier's responsible for the execution of works and equipment and the integrated project, Azulão-Jaguatirica. In investment cash flow, the disbursements have summed more than BRL 620 million and were basically devoted to the disbursements to pay for the solar Futura 1 project, together with other projects that I will mention soon. The funding cash flow was positive for BRL 4.2 billion, which was a result of the follow-up that was competed in June. And as a result, Eneva has closed the quarter with a solid cash position of more than BRL 5 billion.

Now moving to Slide #8. Let's talk a little bit about the capital structure of the company. Eneva has also completed, in June 2022, an issuance of debentures that totalized BRL 2 billion that will have a positive impact on the -- our cash flow in the quarter 3. The net debt, a totalized BRL 3.5 billion (sic) [ BRL 5.3 billion ] and the leveraging was in 2.2x net debt over EBITDA. The average deadline was 4.6 years at the end of the quarter, with most of the periods in '26. 60% of the debt was indexated by the IPCA, and the average spread of the debt was 3.7%. And for the other, that's 1.4% above the CDI.

And now I'd like to give the floor to Lino, who is going to give us the details of the quarter investments and will tell us about the implementation process of our main construction projects.

[Lino Cancado, executive]

Thank you. Good morning, everyone. We are now on Slide #9. And we can see that the investments for the quarter have exceeded BRL 870 million, and almost 60% were invested to the construction projects. In other words, solar Futura 1 project and the [ UTS ] Parnaíba V and VI. And solar Futura 1 project, the photovoltaic modules were 100% in the site, and the sectioning of the transmission line has been concluded, and the beginning of the commercial operations is estimated for 4Q 2022.

For the Upstream activities, investments have summed BRL 159 million, out of which BRL 57 million were associated with exploration campaigns in the Parnaíba and Amazonas basins. And we had 5 wells perforated and the beginning of the perforation of another well in the Parnaíba basin. It's also worth highlighting BRL 88 million allocated in the development of Gavião Tesoura, Gavião Preto and Gavião Belo and in the installation of the compression in the Gavião Branco production station.

And the gas generation in [ UTS ], we also met the contractual milestones related to the HGP gas turbines for Parnaíba II thermal power plant.

For Azulão-Jaguatirica, we've improved performance and the cycle efficiency of both gas turbines and completion of the assembly of the water supply system in the dispenser area.

Now as you can see from Slide #10, here is an update of our thermal projects under construction. In Azulão-Jaguatirica, 2Q started with the commercial operation of the third generation unit and the commercial operation of Jaguatirica II's total capacity. As already mentioned, we've completed the improvement of the performance of -- and cycle efficiency of the gas turbines and the water supply system in the dispenser area.

Parnaíba V in July, we have completed the removal of the temporary pipes in July 2022. We've qualified the agreement, and we did the very first synchronism of the papers. In other words, we've generated energy for the SIN for the first time. That is still in test. And we will also execute other test, and the 96-hour test is scheduled for the end of August. And finally, in September, we intend to do the performance test for the final approval of the work, the beginning of the operating activities for the end of 2022.

And we've started with the civil works and for the hydrostatic test of the boiler. And the expectation of this risk of the commercial operation is estimated for Q4 2024. And the CAR will be started in January 2025. So for the coming slides, we have a couple of pictures of the mentioned projects.

In Slide #14 (sic) [ Slide #11 ], we can see an aerial view of Jaguatirica, which is 100% operational, as mentioned before.

And moving to Slide #15 (sic) [ Slide #12 ], with Parnaíba V to the left, and we can see the steam turbine fully finished and in operation, as I mentioned, having generated the first megawatts and to the right, in other words, a view of the operating plan with the cooling tower. And in the more -- at the bottom, we can see the steam turbine.

Parnaíba VI, the foundation works that are still underway for both the boilers as well as the steam turbine. And to the right, we can see the steel shop for the carcass of the last part.

And here, for the Futura project on Slide 14, we would like to present that update, and the project has reached 71% of physical progress. And the greatest milestone was the completion of the transmission lines and the sectioning of the 500 kV line that was estimated to take part on 3Q of 2022 but was pushed upfront, and that was shortened the critical path of the work. We've also had significant advancements in the pile driving, the setting up of the trackers and the setting up of photovoltaic modules, the string inverter setup and the medium voltage grid.

So we've noticed here some productivity increase in all those activities throughout the 2Q 2022. Still, the second half, 100% of those trackers and string inverters, photovoltaic will be completed. And additionally, we've also completed the installation of the second transformer elevator of the substation, and we have acquired a third transformer that will be kept as a reserve. Both the hot and cold commissioning of the [ UVs ] have advanced, and the forecast of the completion is for 4Q 2022 and the beginning of the operating period for that same period of the year.

And a couple of pictures here for the progress of Futura 1 in Slide #15, with photovoltaic panels installed and already in the commissioning process in the first [ UFVs ].

And the next one, 16, with the setting up of the trackers in the first picture from left to right, from top to bottom. The second picture is the excavation of the drainage slots. Third is the perforation and the [ craning ] of the power drives. And this is -- we will set up the panels, place the inverters, and then we will prepare the stations and then the mid-voltage transmission lines.

Number 17, we can see the substation, 100% complete and, to the right, the transmission line, the 400 kV (sic) [ 500 kV ] transmission line that is 100% complete.

And in the next slide, we can see the progress in those sectioning of the 500 kilovolt that was basically closed. Its critical path was basically closed in last July.

So with that, we are now finishing the presentation part, and I thank you for attending this session, and let's now start with the Q&A session.

[Lino Cancado, executive]

[Operator Instructions] And I'll give the floor now.

[Unknown Executive]

Thank you, Lino. And the first question is for Marcelo Lopes. Can you mention the projects under the Azulão complex, which the company needs to -- intends to participate in the September reserve energy auction.

[Marcelo Lopes, executive]

Thank you very much for your question. First and foremost, as it's been publicized, we have recorded and registered a number of projects for this auction with even more capacity than the demand established for the auction. Some projects have been licensed by Eneva. We do hold the licenses. And we have other projects which have -- whose assignment has been negotiated.

So for projects licensed to participate in the project is no longer an issue for us. Everything is in the right track. What we are doing now is we are analyzing the adequate volume for us to bid. And this is going to happen in late September.

[Unknown Executive]

Thank you, Marcelo. Next question, Marcelo Habibe. Can you give an update on the acquisition of Bahia Terra How is it going? And what are the expectations for the conclusion of the deal?

[Marcelo Habibe, executive]

Thank you for the question. Well, right now, we are negotiating. We're not negotiating with Petrobras due to legal actions. There's a lot of discussion on the winning consortium, and Eneva is discussing with Petrobras. We intend to resume negotiations soon so that we can have a good conclusion of that. We had moved on in terms of pricing and sales contract and everything. We were doing good in these discussions. But -- so we hope that the issues are resolved soon so we can resume negotiations with Petrobras and finalize this by the end of the third Q. And we finally can acquire the project.

[Unknown Executive]

Marcelo Lopes, as for the bilateral contract signed due to exports to Argentina, which contributed to the EBITDA this quarter, what can we wait for the next results? Did the company see this effect right in the beginning of Q3?

[Marcelo Lopes, executive]

Well, June generation was quite high. We were able to generate in Parnaíbas I, II and IV. We were able to generate energy all throughout the working days. This did not happen in the month of June. We did have some restrictions when it comes to exporting energy from the north and southeast regions. Our generation had a competition with wind power, resuming of water power plants and hydro plants and everything. So in June, we had smaller numbers.

And now in August, we do have tests in Parnaíba V, which prevent us from using the units of Parnaíba I. So I believe we'll have more than July but less than June. And then September, the demand in Argentina goes down because the temperature goes up. However, we believe there's space for us to generate some value. Of course, we're still assessing the figures to be expected there, but there's room for more volume once Parnaíba V is available.

And we'll be able to be quite competitive as compared to the generation done internally in Argentina against the gas that the country needs to import. So even though the temperature is going up in the country and the demand for heating goes down, we believe that there's a window of opportunity to export energy to Argentina.

[Unknown Executive]

Adding to that question, does the company has any risk in the exports to Argentina? What's the counterpart terms and payment conditions?

[Marcelo Lopes, executive]

Well, the counterpart in operations for Eneva is [indiscernible], which is a trader that is established in Brazil that has a guarantee provided by CAMMESA, which is the Argentina system operator. And there's also a guarantee by Itaú Bank. So we have the guarantees there. And at the end of the day, we have a financial structure, and Habibe can add to that, but Itaú Bank is involved.

In June, we did have high generation, and we have gotten some financial resources already, so no issues. So we have a guarantee structure, a financial structure, and we understand that the operation is covered.

And Habibe, if you want to add to that.

[Marcelo Habibe, executive]

No, you're right. We have bank warranties and guarantees there. There's no payment of default on the part of Argentina. In June, our exports generated revenue for us of BRL 114 million in EBITDA. We have costs to generate, costs to adjust the system. But the revenue received was over [ BRL 200 million ], and this has been fully paid, so there's no default payment there. Once again, we have no history and any issues in terms of payment from Argentina.

[Unknown Executive]

Next question is about the September auction. Does the company have any projects in the northeast of Brazil using gas from Parnaíba?

[Marcelo Lopes, executive]

No, northeast projects have been registered there.

[Unknown Executive]

Next question. The company's financial position seems to be comfortable today to do all the disbursements estimated. But I'd like to know if the covenants are a concern to the company and if there's any perspective to get a waiver in case it's necessary.

[Marcelo Habibe, executive]

Well, thank you for the question. You're right. The leverage of the company in the second half of the year was quite low, but it's a temporary leveraging. We do have resources of the roll-on, and we haven't disbursed the acquisitions yet. This will be addressed in Q3. And the major acquisition for us also will happen in Q4, and therefore, leveraging will increase and should peak in Q4.

We expect that it will be lower than our contractual covenants today with 4.5% net debt over EBITDA. We have started negotiating covenants with our partners. We have assemblies called for. And many of our debentures are related to infrastructure, so this is pretty much scattered around. So the first assembly needs high attendance. And the second assembly generally, attendance drops relevantly. So we have been successful in second assemblies, and we have been successful there.

We have reduced -- we have a new contractual covenant for 6.6, which we don't expect to continue. But just to highlight, we have been quite successful with the assemblies, and we expect to conclude all of the assemblies by the end of August to early September.

[Unknown Executive]

Thank you, Habibe. Next question, Marcelo Lopes. Does the company see possibility to supply gas from Parnaíba to the northeast in the September auction?

[Marcelo Lopes, executive]

Answer is no. There's no discussion in that sense, not even for our own projects or for projects to supply gas from Parnaíba to any other project. Just stressing the point here, the projects that have been registered for the northeast bid, none of them have a supply or a letter of intention.

[Unknown Executive]

Well, if there are no more questions, I'll hand it over to Habibe to close the call.

[Marcelo Habibe, executive]

Well, once again, thank you very much for being here today. We'll, once again, see ourselves in the earnings meeting for the next quarter. Thank you very much. Have a great day.

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