Eneva SA

BOVESPA:ENEV3

Earnings Call Transcript 2021-Q3

[Marcelo Habibe, executive]

[Audio Gap]

We closed the quarter with a cash balance of BRL 2 billion and disbursed BRL 244 million in financing contracted with BASA and BNB for the Azulão-Jaguatirica and Parnaíba V projects.

We continued to advance the works at the Azulão-Jaguatirica and Parnaíba V sites, having reached important stages as will be detailed further on. Our forecast for the start of commercial operation of Azulão-Jaguatirica is until the end of the year; and Paraiba V during the first half of next year.

This is worth mentioning that in July, we made an extraordinary certification of reserves and contingent resources in referring to June 30, 2021, showing an increase of 8% in the volume of gas reserves 2P of the Azulão field as well as contingent resources in the Azulão area and in other reserves of gas and oil in the Amazonas basin.

Considering the absorption of new reserves and discounting the year-to-date production of September, we closed the quarter with 2P total reserves at 30.8 billion cubic meters in the Parnaíba and Amazonas basins.

In the Parnaíba basin, specifically, we had an increase of 1 billion cubic meters in the volume of 2P gas reserves as compared to the third quarter of last year even against a backdrop of strong gas production.

I now turn the floor -- no. Number four, sorry. The consumption of electric energy remained high in the third quarter of '21, driven by the recovery in economic activity. At the same time, the worsening of the hydrological scenario continued to drive thermal electric generation. The graph on the left shows another sharp deterioration in the level of affluent natural energy in the Southeast/Midwest region, showing the worst historical sequence in the last 90 years for the month of July, August and September. In this critical environment, the ONS continued to restrict hydroelectric generation to preserve the level of reservoirs. Thus, to close the balance of the system, thermal dispatch was very high, with an increase of 111% when compared to the same period of the previous year.

The critical hydrological scenario, combined with the increase in consumption, had a significant impact on energy prices. In the Southeast/Midwest subsystem, the average spot price remained at the structural ceiling level of around BRL 580 per megawatt hour in the third quarter when compared to an average figure of less than BRL 100 in the same period of last year.

Now on Slide #5. The left chart shows the very low level of stored energy in the Southeast/Central West (sic) [ Southeast/Midwest ] reservoirs, with the beginning of a trend reversal in October, reflecting recent landfall levels. In the center chart, we see the average spot price projections in North subsystem already reflect lower values for the coming months due to an improvement in the hydrological scenario in the country.

However, even with this perspective of price reduction, it is expected that the thermal dispatch will remain high in the coming months to enable the recovery of reservoirs. And this -- along these lines, according to public sources, the average dispatch expected from Parnaíba Complex in the next 12 months is of about 70%.

Turning now to Slide #6. In the third quarter, all levels plants dispatched based on the order of merit, totally an average dispatch of 98% in the quarter compared to 24% in the third quarter of 2020. With this, gas production also increased considerably so that GTP's average dispatch reached 93% vis-à-vis 26% last year.

In the third quarter, the CVUs for coal plants and Parnaíba I were positively impacted by the significant increase in fuel price indexes, CIF-ARA and Henry Hub. Additionally, the increase in spot price in the period impacted a portion of energy sold in the spot market. All these effects contributed to the growth in net revenues in the third quarter 2021, which increased by almost BRL 1 billion when compared to the same period of last year.

Turning now to Slide 7. I'll talk about the main impacts on EBITDA in the quarter when compared to last year. In this quarter, adjusted EBITDA reached BRL 573 million, a considerable increase compared to the third quarter of 2020. The result was mainly driven by the performance of the upstream segment, reflected the higher dispatch, which impacted the variable revenue from the sale of fuels with no counterpart in costs. The performance in the coal-fired generation segment also contributed to the year-over-year increase in adjusted EBITDA.

In this quarter, both plants had their CVUs positively impacted by the increase in the CIF-ARA, decoupling from the average cost of coal stock previously acquired at lower prices. This resulted in positively variable margins in the plants.

On the other hand, the growth of the adjusted EBITDA was partially offset by the need to reimburse the balance for the Parnaíba II plant, which went through a period of corrective maintenance between June 19 and July 17. During that period of unavailability, those costs totaled BRL 72 million.

Moving on to Slide 8. We present the main impacts on cash flow. Operating cash flow reached BRL 431 million in the quarter, leveraged by the higher EBITDA in the period due to the better operating result. The result was mitigated by the combination of some effects, especially the impact of the higher impact of -- or working capital requirement in the quarter. That variation was basically due to the higher dispatch and CVUs of the plant, impacting the balance of accounts receivable and an increased value of coal inventories.

In cash flow from investments, disbursements totaled BRL 280 million, mainly for the construction of the Azulão-Jaguatirica and Parnaíba V projects. And for the development of Campo de Gavião Preto. The cash flow from financing activities totaled BRL 116 million, leveraged by the disbursement of the financing with BNB and BASA in the total amount of BRL 244 million for the construction of those projects. In this quarter, we made the last disbursement with BASA, concluding the total expected funding of BRL 1 billion with that particular institution.

The positive impact on the financing cash flow was partially offset by the amortization of interest and principal in the period and by the increase in the balance of linked deposits for the reserve account due to payments related to the Parnaíba I debentures. We ended the quarter with a solid consolidated cash position of BRL 2 billion, which gives us the flexibility and liquidity to face the company's growth strategy.

Moving on to Slide #9, we present Eneva's capital structure. At the end of the quarter, the company's net debt totaled BRL 5.9 billion and leverage was at 3x net debt over EBITDA ratio. The average maturity of our consolidated debt was 5.5 years at the end of the quarter, with most maturities concentrated after 2025.

At the end of September this year, 65% of the debt was indexed to the IPCA and 34% to CDI. The average spread of IPCA index debt was 3.9%, and for the other debts, 1.5% above CDI.

I'll now turn the floor over to Lino, who will detail our investments in the quarter.

[Lino Cancado, executive]

Thank you, Habibe. Good morning, everyone. Investments total in the quarter at BRL 499 million, of which BRL 264 million were allocated to the Azulão-Jaguatirica and Parnaíba V projects. The upsteam total investments amounted to BRL 155 million with a highlight for the development of the Gavião Preto field in the Parnaíba basin at the amount of BRL 93 million. The remainder was allocated mainly to the exploratory campaigns underway in the Parnaíba and Amazonas basin. The generation segment, about BRL 50 million for the acquisition of the main piece of equipment for power for [ TPP ] Parnaíba VI, which closes a cycle for Parnaíba III, totaling BRL 7.7 million. Another BRL 50 million were allocated to the payment of a contractual milestone, contract related to the preventive maintenance of the turbines carried out in the first half of the year.

Now moving on to Slide 11, we present the main advances related to the construction of the Azulão-Jaguatirica integrated project. In the Azulão field -- and we're happy to inform that the liquefaction plant already operates at 70% of its capacity during commissioning. Since September, the plant has already been operating with 100% self-generation. In addition, in October -- or at the end of a more than 115 trucks with GNL (sic) [ LNG ] gas had already been sent to [ UTE ], Jaguatirica and Roraima, accounting for more than 5,000 cubic meters of liquefied gas delivered.

in Jaguatirica II, works are close to finished. In [indiscernible] natural gas has been made available under operating conditions for the generation units. In the same month, gas turbines were turned off for the first time. After that, we concluded the works of assembly and commissioning of the structure of the transmission line of substation Jaguatirica II and more Boa Vista actions. In October, the translation line and the stations were energized and generating -- the gas units were synchronized for the first time with the isolated system of Roraima.

The first megawatt hours were produced at a lower cost and at a cleaner condition. The gas operations are now going through the testing to start commercial operation in the second half of 2021. The water/steam cycle is at the final preparation for the start of commissioning and availability at 100% of installed capacity.

Once again, ANEEL has approved the exclusion of liability with the start of the contract until January 27, 2022, without changing the contract term. And our expectation for the start of commercial operation is expected for the end of this year, 2021. On the next slide, we'll see the main milestones in Azulão-Jaguatirica.

Now moving on to Slide #12, where you can see on the picture on the left-hand side, the gas treatment unit already completed 100% in operation. On the right-hand side, on the top right-hand side, the isotanks, which store the liquefied gas produced at Azulão. On the left bottom, the cryo boxes, which do the liquefaction of the gas at the unit. And lastly, on the bottom right-hand side, you can see the facilities for self-generation, the gas run, a unit that produces the energy consumed by the plant.

On the next slide, Slide #13. We see 2 bird's eye view of Jaguatirica plant. On the left, in the foreground, the substation; and then in the background, 2 gas turbines can be seen. On the right-hand side, the GNL (sic) [ LNG ] gas tanks. It's 7 modules. Each module represents 1 day of operation at 100% of operations. And also the regasing equipment, and in the background, again, the 2 gas turbines and steam turbines can be seen as well.

Moving on to Slide #14, please. You can see on the left-hand side, the air cooler condenser, which, as the word says, condenses the steam coming out from the turbine. And on the right-hand side, the facility for the turbine -- the steam turbine. And then to the left, the 2 gas turbines standing can be seen on the next slide.

Slide 15, we'll be talking about the advances -- the progress in Parnaíba V. The start of the operation is expected for the first half of 2022. In September, we completed the cold commissioning and the final task for energizing the elevator tractor to the commissioning of the MV/LV electro centers. With the conclusion of the energization process, we now proceed to the commissioning by individual systems and test which are consuming electric energy.

We also started the [ BTA ] operation, along with the 40-kilometer pipeline, which was concluded last year, allowed us to produce the mineralized water to start the first hydrostatic test for the boilers. We also we closed the internal body of the steam turbine for low pressure.

The next step will be to align the rotating set turbine -- in the turbine and move on with our target of leave the equipment ready to use with electric engines in the shortest period possible with quality and safety. And the main transformer is already ready for backfeed. It has already received the energy from the transmission line.

On Slide 16, we see also some current pictures of where the project stands. On that slide, in the first picture on the left, the moment when the rotor of the turbine, low-pressure steam turbine, was permanently installed. On the second picture, we can see the closing of this steam turbine with the rotor inside that can be seen. Then you can see the building, the installation -- or the facilities for the steam turbine, and then the boiler assembly on the right-hand side.

Next slide, please, Slide #17. Now I turn the floor back to Marcelo to continue with the presentation.

[Marcelo Lopes, executive]

Thank you, Lino. Good morning, everyone. On Slide 17, we see the Tepor project, port terminal project, located in the city of Macaé on the North Coast of the state of Rio. The development of this project is part of the company's strategy to develop a gas hub in the Southeastern region of Brazil. That gas hub includes the construction of thermal power plant and associated infrastructure. All of that integrated with the regasing terminal and with the possibility of future developments of new flow routes to receive pre-salt gas and being able to be connected to the gas grid, which will allow servicing distributing companies locally and also final users, either through gas pipelines or through small-scale GNL (sic) [ LNG] distribution.

As we analyze -- announced last September, we have an exclusivity contract with the Vale Azul group to form a joint venture, with the objective of developing and managing and explore the Tepor project. The agreement assures us exclusive rights to analyze and transact and negotiate transactions through the end of last year -- next year. And then a right to own the project until the end of 2024.

Tepor is located close to the Cabiunas Terminal and also close to the Rota 2 pipeline, which is very important, very strategic for the outflow of pre-salt gas. The main one in the Brazilian coast today and for the next years. The Vale Azul group already has the environmental permits to construct or to build that structure and also for the logistic works. And we have bulk terminals, offshore terminal support up to 21 million cubic meters a day handling terminals for ship-to-ship oil operations and a PGN, which is not part of the transaction.

If we conclude the deal, the company will have the option to conduct other business, including the distribution of GNL (sic) [ LNG ] in small-scale and the transportation of other loads.

I turn the floor back over to Habibe, who will talk about the main evolutions about the company's strategy.

[Marcelo Habibe, executive]

Thank you very much. With this, we close our presentation, and we're going to open for the Q&A to the whole Board of Directors, and we're available to you.

[Unknown Executive]

[Operator Instructions]

So I'm going to read the first question.

Could you update us on the gas commercialization strategy and what is the timing for us to close contracts? And how do you evaluate potential demand and this type of monetization when compared to other gas monetizations? And how can we supply with a capacity reserve or future thermal plants?

[Marcelo Lopes, executive]

Thank you the question. The project we have just introduced to you, which is the Southeast gas hub, is actually included in this strategy so that we can diversify our business models, including gas sales, being it to the end client or to the distributor for those clients that are connected to our network. And for those who are not connected using LNG.

And because today, we're not located close to the pipelines, we need first to find a solution -- to have a solution so that we can have the molecule. So that we can close eventual new contracts in place of this new gas market. We have been discussing this in the regions where we already have the molecule available with some clients.

However, this is done outside of the gas network and also in the delivery forms for the distribution of LNG. But this is nothing that we can discuss yet, and regarding the alternatives to sell to the end client or to supply for thermal plants, this is something that will always be taken into account in the discussions that the company will have.

We have to find the best opportunities to use the molecule, be it for an industry or for a thermal plant, trying to evaluate the best opportunities to monetize the molecule in the auctions that we have in hand as well as future opportunities, and that will be part of the analysis for the gas strategy.

[Unknown Executive]

Well, thank you, Marcelo. The next question, I will ask actually Pedro to answer it.

What is the status of the profit negotiation? Could you further discuss it?

[Pedro Zinner, executive]

Well thank you very much. And I thank you for the question. I think that regarding [ Urucu ], we are engaged with the discussions with Petrobras, but the prices have changed. Our discussions with Petrobras have been intensified, and we've been discussing it for a longer time than we would have liked. But I think that time somehow works in our favor because we have some options, and then we can make the best choices for us in terms of capital allocation.

This will give us a better perspective and somehow will also decrease the emotional biases related to the negotiation of these transactions. I will tell you why I'm saying all this. I think that this would be our B plan, and you will see the reserve certifications at the end of the year. And we had a very successful campaign in the past and also in the surrounding areas that were purchased in the auction.

We have also gone further with the [ Urucu ] gas. So those are part of our options, as I mentioned before. And so in face of this context, I think that the main decision we have to make in the near future is related to the most efficient capital allocation. So first of all, we have to make the Urucu acquisition and then in the future, connected to Jurua or else accelerate the Azulão asset and then replicated in the Amazonas basin in scale -- in a larger scale.

And so one of the prior questions asked about the possibility to multiply this model. Since we've already given a first step in this regard by having a thermal with a capacity of 275 megawatts in the next December auction to commercialize gas in the Amazonas basin.

The negotiations will move on, and because of the long negotiation, we have included this possibility in our portfolio. Also in terms of cash generation, as you've seen, and we have a very large acquisition portfolio, and we will only make any purchases if we do believe that we will have an increase in our returns. So growing for the sake of growing does not generate value.

[Unknown Executive]

Thank you, Pedro. And the next question is, you were trying to buy [ Echoenergia ], and it was sold to Equatorial. So do you have any other target in mind? I now turn over to Marcelo.

[Marcelo Habibe, executive]

Well, thank you for the question. Well, we were actually in process of the investing. We analyzed the asset, we liked it, we performed a due diligence, and we considered that our price limit went beyond by [ Equatorial ], and they got it.

Our strategy includes evaluating real -- the segment of the renewals. We are evaluating other assets. But for confidentiality and competition purposes, I will not mention the names. But we are following it up. The market of renewables has increased a lot in the last few years, but it's very fragmented.

There are many possibilities for acquisitions. It is important for us to try to have platforms with a specialized team, and this is a new competence we must acquire, but we do have other alternatives. We are evaluating it. And in our capital allocation, we always look at 2 variables: risk and returns.

So when the risk is lower, we can have the luxury of having a lower return, and the other way around is also true. We're evaluating other opportunities. In due time, we'll inform you.

[Unknown Executive]

Thank you, Habibe. Next question. Eneva closed the third quarter of 2021 with accumulated losses of BRL 590 million and had a net profit of BRL 362 million. So should we suppose that if we keep the current conditions in the market in the second quarter of 2021, the company will revert this accrued losses into accrued profits? And with that, the company would be ready to distribute profits to the shareholders.

Well, I thank you for another question. It's actually an excellent question. We do have accrued losses of BRL 590 million. We hope to decrease it so that perhaps in the first or second quarter of next year, we will zero and revert this position. We'll have accumulated profits, and we'll be able to share dividends. We have drafted our dividend policy, and we're discussing it with our Board of Executives. And so we first need to turn around this result.

And then after that or simultaneously, we will start with our dividend policy. And then at the end of the day, the rationale, all us has to do with efficient capital allocation, and we will distribute dividends when we have a good opportunity, but the -- we must have a healthy leverage level. So this is what we believe that should be done, and we hope that in the next few months, we will let you know what the main parameters will be.

Well, thank you very much. [Operator Instructions]. If we do not have any other questions, I'm going to turn over to Pedro so that we can wrap up this call.

[Pedro Zinner, executive]

Well, once again, I wanted to thank you all for participating in our call, and I will see you next time. Have a great day.