Eneva SA

BOVESPA:ENEV3

Earnings Call Transcript 2022-Q3

[Pedro Zinner, executive]

Good morning, everyone. It is a pleasure to have you all here today to speak about our Q3 results for 2022. But before we start with the presentation itself, I'd like to say a few words. As you all know, I have recently showed -- taken to the Board my intention to resign. It is a difficult decision, but well thought out. I am sure that Eneva will be in excellent able hands. I had the pleasure yesterday of announcing that as of January 1, 2023, Lino will be the new CEO of the company. Lino has been at Eneva for as long as I have, and he's well known and respected not only by our own team, but across our main stakeholders. I am sure that he will turn out to be an exceptional leader, and I fully trust his ability and his commitment to our business. In a way to support, I will be with him through March as he transitions to his new post. I am very proud of what we have accomplished so far. And I am sure that under Lino's leadership, we will go even further. And we are on the right track in creating Eneva 2030.

Since our re-IPO back in 2017, we have raised BRL 5.1 billion in primary capital in the market, and we have invested approximately BRL 16 billion. In the same period, we have delivered a total return to shareholders of 409%, in other words, 38% a year. We have reduced our debt cost by 500 basis points and increased our operational profit by 2x. We have only been able to do all of that with your support, our shareholders. And I'd like to take the opportunity today to thank you all for your trust.

I would also like to say that I am sure that capital allocation done in an efficient manner is part of the company's DNA. And without a doubt is one of our most-valued values by our new CEO. As the company moves forward in its journey, it is fair to say that it couldn't be better positioned for the future, delivering sustainable energy to clients just the way that the country needs. And with some cards -- some trumps up our sleeves that might surprise everyone. I'd like to once again thank you all for this wonderful journey, and I hope to be able to celebrate Eneva's new chapter now under the leadership of Lino.

I'll now turn the floor over to Lino. Lino, over to you.

[Lino Cancado, executive]

Thank you, Pedro, for your kind words. I'd like to say to all of you that I am proud to take on the role of CEO, and I am honored to come after Pedro. We've been working together for the past 8 years building what Eneva is now today. We have strengthened its balance sheet, expanded its footprint and improved its assets portfolio. We have planned with our executive team, the future and the strategy to be followed in the coming years. I am sure that with the support and trust from Eneva's team and from the Board of Directors, we will be able to continue to our growth plans and of increasing the company's value.

I now turn to the call objective to discuss our results for Q3. So let's now move to Slide #3, where I have the highlights for the quarter and some recent accomplishments. We filed an adjusted EBITDA of BRL 598 million, representing a growth of 4% when compared to the third quarter of 2021, driven mainly by energy exports operations for Argentina and also by the acquisition of Fortaleza. In addition, in this quarter, we have raised more money and some financing lines with the objective of sustaining the company's growth. We have captured about BRL 4 billion with another two debentures admissions. And in addition to that, we have hired BRL 300 million with BNB out of which we have withdrew with around BRL 262 million to fund our Futura 1 project. We have closed the third quarter with BRL 8.9 billion in cash and a leverage level of 2.4x as for the net debt/EBITDA ratio for the last 12 months.

As mentioned before, in this quarter, we continue to export energy to Argentina, an operation that has impacted our EBITDA positively to the tune of BRL 110 million. In addition to that, we had important accomplishments. We have concluded the acquisition of Termofortaleza on August 23. And in this quarter, we have been able to recognize another BRL 67 million in our EBITDA. Late September, we want the action for capacity reserve with a project called UTE Azulão 2, which will add 590 megawatts to our generation portfolio. The project will ensure a fixed revenue of BRL 1.9 billion for the company starting -- at the PPA starting in January 2027. The UTE Azulão 2 will be implanted at the same site of UTE Azulão 1, which won the auction back in 2021, so that the whole complex in Azulão will reach the level of 950 megawatts of installed capacity. So as of now, we now make reference to that project as Project Azulão 950.

Subsequent events, I'd like to highlight the closing of the acquisition of CELSE on October 3, which represents our first step in creating a gas hub in the northeastern part of Brazil, whose impact will be realized in our next earnings call. And besides that, as announced yesterday in our material pack, we have another gas field Gavião Mateiro with a volume of gas estimated at 5.62 billion cubic meters. That's the 11th field to be declared commercial level in the Parnaíba Basin, which proves the phenomenal success of our exploratory expeditions in that region. Even more relevant with the addition of those reserves, Eneva now has reached the enough level of reserve to recontract the plants of Parnaíba I and III in future auctions starting next year 2023.

Another landmark was the closing of the projects, Parnaíba V and the solar complex Futura 1. Those projects are now waiting for the regulatory authorizations to start commercial operations, which are expected to happen in 2022.

I'll now turn the conference over to Marcelo Habibe, who will give us more details on the numbers for the quarter.

[Marcelo Habibe, executive]

Thank you, Lino. Good morning, everyone. Now moving on to Slide #4. I'll be talking about UTE Fortaleza. Termofortaleza is a plant which has been in operation since 2003. As part of the PPT, it has a contract to distribute in the state of Ceará until the end of 2023 to provide gas for Petrobras. It's important to highlight that we have acquired the asset on August 23 for BRL 490 million. Back then, when we acquired it, our asset cash totaled BRL 321 million. In other words, the chart on the right of the slide shows that the 2021 EBITDA for the UTE came out at approximately 3.4x the amount paid by the asset, showing its potential to generate value.

The plant adds 327 megawatts of installed capacity to our portfolio, and also brings more predictability for revenues, thus contributing to a journey which the company has started to increasingly lose its dependence on a lower dispatch.

After the contract, which is in place, the plant will be ready to participate in future energy auctions with a more amortized CapEx and becoming much more competitive. As an upside, the acquisition included a potential project to expand to the tune of 369 megawatts. The plant is located in a strategic position. It's part of the industrial complex of the Pecém Port, allowing access to the coast and to ports in addition to transmission infrastructure.

Now moving on to Slide #5. I'll be commenting on our victory at the auction for capacity reserve, which happened in September. We won this auction, as I said, with the Project Azulão 2 at 590 megawatts of installed capacity, which will be built in a combined cycle made up of a gas turbine of the 360 megawatts and a steam turbine of 230 megawatts. We also hired power of 520.8 megawatts average with fixed contractual terms of 70% at the ceiling price of the auction or BRL 145 per megawatt hour, ensuring a fixed revenue of BRL 1.9 billion, for which the base date was May 2022. The contract starts on December 31, 2026 and will extend through 15 years and will considerably increase the predictability of our revenues. On that date, this will also be reinforced by recent acquisitions and the start of regulated contracts of the auctions we have won recently. The victory in this auction represents an important advancement in the company's strategy of growth, thus further strengthening our footprint in the north of the country.

In December last year, we have already won an auction for capacity with the project UTE Azulão 1 hiring 295 megawatts of availability for 15 years, starting in July 2026, ensuring a fixed revenue of BRL 217 million per year at prices of July 2021. The project will be implemented in a simple cycle being made up of a single gas turbine of 360 megawatts. UTE Azulão 1 and 2 will be implemented jointly and will be called Complex Azulão and will total 950 megawatts of installed capacity and will replicate our R2W model used in the Amazon Basin.

I'll give the floor now back to Lino for Slide 6 about our commerciality statement for Parnaíba. Over to you.

[Lino Cancado, executive]

Thank you, Habibe. As I mentioned before, we announced -- we actually presented to A&P, our commerciality statement of a discovery made before and called na Bacia do Parnaíba São Domingos, which will be now called Campo Gavião Mateiro. This is the 11th gas field discovered in the basin, once again, proving the extensive knowledge we have of the region. And as a consequence, the continued success of our exploratory campaign in that region, the Parnaíba Basin. The P-mean volume in gas in place estimated is 5.62 billion cubic meters. The VGIP range is between 8.72 billion cubic meters for P10 and 3 billion cubic meter in the case of P90. Once again, these are not recovered reserves, okay?

As usual, early in the year, the company will announce the certification of those recoverable reserves, which will be done by a third-party company. The increase in gas volume will allow for the validation and [ wiring ] of plants, Parnaíba I and III and new existing energy auctions.

Moving now to Slide #7. I show you the status of Parnaíba V and solar complex Futura 1. As for UTE Parnaíba V, which is the closing of the cycle of our Parnaíba I, in October, we concluded the availability test for 26 -- 96 hours along with ONS for the start of commercial operation. We are just waiting for the approval from the regulators, which will happen in November now in 2022. The start of the CCEAR for that plant will only start in January 2024, when we will receive -- start receiving the fixed income. Before the start of the contract, the plant will be able to operate at the merchant modality.

For Futura 1, the construction and commissioning have already been completed. We have now -- we now are waiting for the regulatory licenses so that we can conclude the commissioning of the measuring and billing process, which is necessary for us to start the commercial operation. That also is expected to happen before the end of this year. So we are celebrating those 2 landmarks now, very relevant and very important for the company's future.

On Slide #8 -- moving now to Slide #8. Now I'll now turn the floor back to Habibe.

[Marcelo Habibe, executive]

Very well. Let's go on to Slide #8 to speak about our net revenue. We posted a net revenue of BRL 1.7 billion, a growth of 11.5% vis-à-vis the third quarter in '21. The main factors contributing positive to this result was an increase of volume negotiated with the trading company with the incorporation of the focus trading and, of course, the entry into operation of Jaguatirica. On the other hand, we -- this impacted the revenues of coal generation in the Parnaíba Complex, which was offset by the exports of energy to Argentina with a contribution of BRL 181 million to our net revenue.

We go on to Slide #9, showing you the impacts of EBITDA. Adjusted EBITDA that exclude expenses with dry wells reached BRL 598 million in the third quarter '22, 4% above the EBITDA recorded in the same quarter last year. Some factors contributed to this growth. The contribution of BRL 110 relating to the exports of electrical energy towards Argentina, the one-off impact of accounting of BRL 216 million in the holding due to the purchase of CGTF, BRL 67 million resulting from the commercial operation of UTE Fortaleza between the 23rd of August until the 30th of September and the positive impact of the mark-to-market of the future energy contracts totaling BRL 25 million besides enhancement in the fixed margins of the coal plants and the Parnaíba Complex.

The negative impact of EBITDA-verified upstream is a result of the significant reduction of the sale of gas to the plants in Parnaíba Complex for the period of the third quarter '21. The coal segment also had a drop in EBITDA due to the lower variable margins referring to the third quarter 2021, when we were benefited with a mismatch between CVU and our average inventory cost.

We go on to Slide #10, where we show you the main cash flow impacts. The operating cash flow of the company reached BRL 540 million. The operational cash flow, working capital had the impact of the operation of export to Argentina, which took place in June of this year. Besides other assets and liabilities, we had a positive impact of BRL 215 million in the quarter, offset by the BRL 260 million, referring to the very advantageous acquisition of CGTF.

The investment CapEx represented BRL 540 million during the quarter. These resources were geared mainly to the acquisition of CGTF exploration and development activities upstream in the Parnaíba and Amazon Basin and the implementation of Azulão-Jaguatirica and the construction of Futura 1. We had BRL 3.9 billion in funding. Now this amount was used for the issuance of the 2 debentures and are funding contracted with the BNB. These resources will be used for the acquisition of CELSE, which took place in October and for investments in Futura 1. As a result, Eneva ended the quarter with a sound cash position of BRL 9.2 billion.

We now go on to Slide #11, where we speak about the capital structure of Eneva. The net debt of the company totaled BRL 5.7 billion and leverage was 2.4x net debt over EBITDA. The average term of the consolidated debt was 5.8 years throughout the quarter, with most of the maturities concentrated at the end of 2026. At the end of the period, 56% of the debt is indexed according to IPCA and 44% to the CDI. The average spread of debt indexed to IPCA is 3.6%. The rest of the debts are 1.4% above CDI. Now these figures reflect the swap operations we carried out for the 8th and 9th debenture emissions. With this initiative, we were able to reduce the spread of our debt.

I would now like to return the floor to Lino, who will speak about our investments and the status of the Parnaíba VI work.

[Lino Cancado, executive]

On Slide #12, our investments totaled BRL 487 million and were geared mainly to activities in Futura 1 and upstream. Regarding the solar project Futura 1, the resources were geared to the payment of suppliers like EPC, solar panels, inverters and electrical centers. In Upstream, we invested BRL 62 million in the perforation of 3 wells for our exploratory campaigns in the Amazon and Parnaíba basins. We have also invested in the development of the 6 gas camps in the Parnaíba Complex, where we concluded the drilling of the wells in Gavião Belo and Gavião Real. Regarding the coal generation activity, we highlight the conclusion of 100% of the minor overhaul and the substitution of the sixth stage of the Pecém II turbine. In the Azulão-Jaguatirica system, the highlights were the thermal isolation of the pipelines, advance in the electric panel and operational enhancements in the generation of Azulão. This quarter, we also invested resources in the liquefication plant that will provide LNG for the contracts that have been signed with Vale and Suzano in Maranhão.

In Slide 13, we show you an update of the Parnaíba VI project, which is the close of this project. The highlights of the period are the realization of 60% of the design review of the 3D model, the delivery of the boilers, the chimney and the inlet duct at the port of China. We carried out the plant tests for the turbine rotor as well as the execution of all the civil construction of the turbine, the cooling tower. The entry into operation is forecast for the fourth quarter of 2024 with CCEAR beginning in January of 2025.

With this, I would like to end the presentation, and we will now go on to the question-and-answer session.

[Unknown Executive]

[Operator Instructions] Which is the company expectation for the new assets and which are the expectations of conclusion of your agreement with Petrobras?

[Unknown Executive]

Well, thank you for the question. As you are familiar with, we have the date of 3 of November, where we were allowed to continue on with our negotiations between Eneva and Petrobras. We have engaged once again with Petrobras. We have held some meetings. We are discussing the final clauses of the SDA. And with this, we will begin working with the governance of Petrobras and work with an internal committee, go through auditing and then be able to speak to the management. So this is proceeding at a normal pace, a very fast pace in a certain way. And it is following as forecast until we get to the signature of this contract. The important news is that the group is engaged once again, and we're presently undergoing negotiations.

[Unknown Executive]

[Operator Instructions] As we have no further questions, I would like to give the floor to Lino for the conclusion of this call.

[Lino Cancado, executive]

Well, once again, I would like to express my thanks for the participation of all of you.

[Unknown Executive]

Apparently, we have just received a question some -- last-minute questions, so we will go back to answering these questions.

If you could detail the financial performance of Jaguatirica.

[Unknown Executive]

The Azulão-Jaguatirica project is still resolving some of the problems that we have with the quality of the Siemens equipment and it became necessary to replace those that are still under the warranty period. We do hope that these problems will be resolved in the first quarter -- or the fourth quarter, sorry, of 2022. Now the natural gas processing unit of Azulão, we're also enhancing the efficiency and availability in the processes. We have seen an increase in the performance. And because of this, we hope to attain the performance forecast until the end of 2022.

[Unknown Executive]

A last question here. If you could detail the capital structure for the acquisition of CELSE.

[Unknown Executive]

Well, thank you for the question. As a reminder, the acquisition of CELSE took place on October 3, the amount disembursed was BRL 460 million by the company. Now how did we fund this? We issued shares totaling BRL 2.4 billion in primary offer and the difference of BRL 2.5 million came out of the company's own cash with the debt emission of BRL 2 million that took place in the third quarter. And of course, this has already been mentioned in the call. This was the capital structure used for the acquisition.

[Unknown Executive]

Very well. With this, we would like to end the question-and-answer session, and I return the floor to Lino to conclude the call.

[Lino Cancado, executive]

I would like to thank all of you, the investors for their trust in the company. I hope to be able to count upon the same support that Pedro received during these years, and we will meet again once again at the next release call. Thank you very much.

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