Eneva SA

BOVESPA:ENEV3

Earnings Call Analysis

Eneva reports strong cash flow and reduced leverage in Q3 2024.

In the third quarter of 2024, Eneva achieved a remarkable EBITDA of BRL 1.134 billion, reflecting a 27% increase year-over-year. The company’s operating cash flow hit record levels at BRL 1.3 billion, driven by high energy exports and improved asset management. Notably, Eneva completed a BRL 3.2 billion equity follow-on, enhancing its balance sheet and reducing net debt to EBITDA ratio from 4.4x to 3.5x. For Q4, management expects further growth and plans potential dividends, depending on net income and exchange rates, with a robust outlook ahead due to ongoing investments and increased operational efficiency.

Strong Financial Performance in Q3 2024

Eneva reported solid financial results for the third quarter of 2024, with consolidated EBITDA reaching BRL 1.134 billion, marking a 27% increase from the same period in 2023. This growth was fuelled primarily by the Parnaíba complex's performance, reflecting a substantial dispatch to meet record energy exports to Argentina. The company achieved a historic operating cash flow of BRL 1.3 billion, underscoring a robust operational stance. Cash generation has doubled from BRL 1.510 billion in 2022 to an estimated BRL 3.314 billion by the end of 2024, indicating strong cash flow management and operational efficiency.

Debt Reduction Efforts and Financial Outlook

Eneva's strategic focus on liability management has yielded positive results. By the end of the third quarter, the net debt-to-EBITDA ratio decreased from 4.4x to 3.5x, and with ongoing acquisitions, the pro forma leverage is expected to reach approximately 2.1x. The company completed a follow-on offering that raised BRL 3.2 billion, enhancing its capital structure and enabling further investments. The corporate credit rating was upgraded to AAA by Fitch, reflecting the company's solid fundamentals and optimistic outlook for operating cash generation.

Growth through Acquisitions and New Revenue Streams

Eneva’s growth strategy includes acquiring BTG's thermoelectric portfolio, which adds considerable fixed revenue potential, estimated at over BRL 3 billion. The integration of these assets promises to bolster cash flow significantly. The first contracts for on-grid and off-grid gas monetization are also set to commence, enhancing the company’s revenue diversity. As a result, the expectation is for continued cash generation well into 2025 as new operational capacities come online.

Investment in Infrastructure and Projects

In line with its growth strategy, Eneva invested BRL 960 million in infrastructure projects in the last quarter. Key investments included BRL 589 million directed to the Azulão 950 complex and BRL 63 million towards the Parnaíba liquefaction plants. The ongoing development of these assets is critical as they are expected to enhance capacity and efficiency in the long term, particularly with the liquefaction plant now nearing commercial readiness.

Future Prospects and Market Position

Looking ahead, Eneva anticipates strong operational performance supported by upcoming regulatory contracts and energy dispatches, particularly with exports to Argentina expected to continue. Technical developments, including a robust drilling program slated for 2025 in the Parnaíba Basin, are also in place to enhance resource availability. Moreover, the company is poised to leverage its operational flexibility through new gas supply contracts while maintaining a keen focus on disciplined capital allocation to investors.

Dividend Potential and Shareholder Returns

With a turnaround from substantial losses to over BRL 1 billion in accumulated profits, Eneva is considering dividend distributions in the upcoming fiscal year. The executive team indicated that while they expect strong performance in Q4 2024, any dividends will likely be aligned to minimal mandatory distributions due to ongoing investment plans. Projections for a higher dividend distribution will possibly occur from 2027 onward as the company strengthens its cash position and mitigates existing liabilities.

Earnings Call Transcript 2024-Q3

[Lino Cancado, executive]

Good morning, everyone. Thank you for participating in Eneva's Third Quarter 2024 Earnings Call.

Let's start with Slide 4 with the main highlights of the period. The third quarter of 2024 was marked by strong operating and financial results and by the progress on the company's growth.

Consolidated EBITDA totaled BRL 1.134 billion, an increase of 27% compared to the third quarter of 2023. The company's leverage fell from 4.4x at the end of June 2024 to 3.5x at the end of this quarter.

In a downward trend, that will be further intensified by initiatives completed in the first quarter of this year. In this quarter, we recorded a record number of energy exports to Argentina, a figure that was not only higher due to the intensification of thermoelectric dispatch to the National Interconnected System.

ONS has required the generation of Parnaíba TTPs (sic) [ TPPs, ] interrupting our exports. The company's operating cash flow surpassed the BRL 1 billion mark for the second time this year, reaching an all-time high of BRL 1.3 billion in the quarter, driven not only by the availability of assets and dispatch, but also by the positive variation in working capital driven by the monetization of coal inventories, among other factors.

We also had the start of contracts on our on-grid and off-grid gas monetization fronts. And in the next few days, we'll begin commercial operation of our liquefaction plant in Parnaíba, whose first train is at this very moment in the final cooling phase and its rated capacity will be reached this week.

Also on the commercial front, we signed two more gas supplied contracts in the flexible mode with Sergipe, Termopernambuco, the contract will preferably be served through the Sergipe Hub. Hose Riser repair status is ongoing that is connected to the undersea gas pipe. We'll hear more about that on the next slide.

Another important step was the approval of new regulatory CVUs for two of our gas-fired power plants. At Parnaíba IV, a new CVU will improve the margin of the company. For the Sergipe Hub, we will establish a different type of CVU with a higher amount for a new type of dispatch associated with the flexibility and more options to this contract that will reduce the dispatch and minimum time for operation.

This new type of dispatch provides more flexibility and optionality to the company and to the operation of the National Interconnected System.

On the financial front, liability management initiatives continue to bring positive results. Increasing our exposure to the IPCA, the company's main revenue index and also lengthening the average debt term, amortization term.

In mid-October, we concluded the company's follow-on in the amount of BRL 3.2 billion. And shortly afterwards, we closed the first part of the acquisition operation of BTG's thermoelectric portfolio. These operations strengthened the company's balance sheet and will contribute to further reducing our leverage and adding new revenue streams and growth options for the company.

Finally, as a reflection of the contribution of these operations and in recognition of our robust outlook for operating cash generation, we had our corporate rating raised to the highest local level by Fitch with a Stable Outlook.

Moving on to Slide 5. We present the work plan designed to recover the riser problem, also called FSRU, for its acronym in English. As mentioned before, in the market, in October, we detected a fault, as a minor leak in the riser, which in essence, is a pipe that connects the FSRU to the maritime pipeline and takes natural gas to the Porto do Sergipe TPP.

And this leak makes it temporarily impossible to move gas to the plant and to the pipelines. Well, once this problem was detected, we decided to replace a riser with a new one, which is already in our inventory because there's a spare in stock. Experts in the company and third parties were engaged to review the engineering design and also prepare for replacement.

In parallel, commercial team established contracts for LNG and also establishing the contract of the plant and also sell sales of LNG to the grid. So this allowed the connection to the Sergipe Hub, and now it's operational, ensuring the availability of this plant and reinforcing our operational flexibility and also the gas solutions provided by us.

On the left-hand side of the slide, we show an alternative supply solution and the engineering and more details about this operation have been concluded and all services that have -- that are required to replace the riser have been hired and now being deployed.

In November, we are going to disconnect and collect the pipeline that was damaged, and we are going to start the layout and installment and the implementation of the new riser.

So we will start the FSRU, and we'll expect to finish that by December. The CapEx expected for these activities, including the purchase of a new riser to become a spare is about BRL 100 million. And this amount can be reimbursed according to the insurance policy we have for the service -- for the Hub.

On the right-hand side, we show the alternative supply solution designed by the company to enable us to meet our contractual obligations during this period. So there are five initiatives that we implemented.

First, we contracted capacity at a terminal connected to the network to download the load. Then we also charter an LNG carrier to transport LNG from our FSRU to the contracted terminal. Then third, we hired a transportation network to allow us to move the natural gas to the Porto do Sergipe TPP. And then, we signed contracts for the sale of proprietary LNG cargoes and repurchase of natural gas. And finally, we carried out energy hedging operations.

The estimated cost of this contingency plan is expected to vary between BRL 60 million and BRL 120 million, depending on the number of LNG loads that will be sold by Eneva and the price of energy throughout the month of December. And Porto do Sergipe is using dispatch just for 3 months in December.

In Slide 6, I would like to highlight the start of the commercial operation of the small-scale liquefaction gas plant, LNG plant, in Parnaíba, which should take place this week. Since the last weekend, we started the final test of the first liquefaction train at the Parnaíba Complex with a capacity of 300,000 square meters a day. With this capacity, we'll already have enough production to fulfill 100% of the contracts already started with Copergás and Suzano.

The second train, which will total 600,000 square meters per day in the plant is currently in the commissioning phase. And then it should begin commercial operation this month after the test is completed.

The commercial operation of the small-scale LNG plant and the start of contracts inaugurate a new business model in Parnaíba, making it possible to monetize natural gas with firm volumes and higher margins to Eneva. So that allows more competitive cost to our customers and also to reduce the greenhouse gas emissions.

The company continues to seek to add new contracts on this front, like the monetization contracts with industrial clients or by replacing diesel for heavy transport.

And we already have a partnership with [ Virtu GNL ] that has a partnership for heavy trucks. And we started this first contracts also with companies that take the agro production to other ports Maranhão. As this continues, we will continue to evaluate expansion investments to cope with this new developing market.

Now moving to Slide 7. I would like to share with you an update on our Exploration Program for the next 2 years. First, it's important to note that as announced previously, we acquired a new drill, a new rig with the capacity to operate in the three basins. It has high operation efficiency, high level of automation, and it provides more safety to operators.

In addition, acquiring this rig allows us greater contribution to be more flexible to schedule our activities and more freedom in 2025 and 2026. That will arrive to Brazil in the first month of 2025. So Parnaíba Basin, we will resume our drilling campaign and with drilling in the areas under our concession until the end of 2025. In the Amazon Basin, we expect to carry out the 2D and 3D seismic acquisition campaign throughout 2025 to define new locations and start drilling new wells that will start as of the first quarter of 2026, right after the Parnaíba wells have been drilled.

Finally, in the Parnaíba Basin, the 2D seismic campaign that will be completed by mid-2025. So data will be processed and then interpreted in the following 12 months to determine the exploration goals and future drilling points.

Finally, it's important to note that as we have not had a drilling campaign this year, and therefore, since there is no new information to be added to our models, we will not be certifying reserves in the beginning of next year. The next reserve certification will be the same. So the reserves will be the same as this year.

And the next reserve certification will be related to the end of 2025, reflecting the results of the next year's exploration activities that will be implemented next year.

Now I would like to hand over to Marcelo Habibe, who will present the financial highlights of the quarter.

[Marcelo Habibe, executive]

Thank you, Lino. Good morning, everyone. In this quarter, we have achieved a record operating cash flow of BRL 1.272 billion, an expressive result from a track record that has been put together and planned over the last few years with the implementation of new various growth initiatives.

Over the last few years, we have successfully implemented our business plan. We've seen the start-up and stabilization of the assets that won the 2018 and 2019 auctions. We've made asset acquisitions, which have brought the company a significant volume of fixed revenue and expanded our business models beyond R2W.

We've diversified our sources of revenue with energy export operations and the signing of the new first on-grid and off-grid gas sales contracts.

Just to highlight some of the most important initiatives. As a result, we had a continuous increase in our operating cash flow, which doubled from 2022 to 2023, leaping from BRL 1.510 billion to BRL 3.104 billion.

In 2024, in third quarter, we achieved a record operating cash generation in the third quarter, totaling BRL 1.272 billion. Year-to-date, our operating cash flow reached BRL 3.314 billion, BRL 200 million more than the full figure for 2023 with still one quarter to go to the end of the year.

And this trend will continue over the next few years as we start the regulated contracts for Parnaíba VI and Azulão 950, the start of operations of the liquefaction plants in Parnaíba and the increasing revenues from monetizing the remaining capacity of the Sergipe Hub infrastructure.

It is also worth remembering that with the recent conclusion of the M&A with BTG, we will add even more resources of revenue to the company, thus further boosting our cash flow.

Moving on to Slide #9. I'll show you an update of the follow-on and the acquisition of the BTG's portfolio of thermoelectric assets. On October 15, the company concluded its primary public offering of shares, raising BRL 3.2 billion and issuing around 229 million shares priced at BRL 14 per share.

As you'll see on the next slide, the funds contributed to optimizing the company's capital structure, opening up space on the balance sheet and adding resources to speed up our business plan.

Also in October, the company completed the purchase of 100% of Tevisa, Povoação and Linhares. Three of the four assets being acquired from BTG's thermoelectric portfolio with only the acquisition of Gera Maranhão is still pending, subject to the fulfillment of certain conditions. These four thermoelectric assets totaled 849 megawatts of power and accounted for more than BRL 3 billion in fixed revenue in the last 12 months, bringing a robust and concentrated cash flow until the end of 2025, precisely the most capital-intensive period for the company.

The acquisition also brings about several opportunities for generating additional value, such as the possibility of recontracting the portion of the TPPs that are being decontracted until 2026 as well as taking advantage of operational and financial synergies with Eneva's portfolio and balance sheet.

Moving on to Slide #10, I present the effects of the movements we talked about on the company's leverage front, which have not emerged in the company's third quarter results.

Starting from a leverage level, at the end of third quarter 2024 with the conclusion of the follow-on, we have decreased by 0.7x our leverage level. After that, with the partial conclusion of the M&A relating to Linhares, Tevisa and Povoação, considering here the cash outflow for the acquisition of the assets and the result of their net debt and EBITDA for the last 12 months on the base date of June '24, the company's adjusted leverage would be reduced by another 0.7x, reaching the level of 2.1x net debt over EBITDA.

Finally, with the conclusion of the acquisition of Gera Maranhão, considering the price conditions disclosed in the 12-month result of the assets, the pro forma post-closing leverage would remain at around 2.1x, a substantial improvement on the leverage of 4.4x posted at the end of the second quarter of this year.

The reduction of the company's leverage opens up space on the balance sheet for us to make new capital allocations and continue on our growth path, taking advantage of the short- and medium-term opportunities that will arise, such as new capacity auctions, the decision to invest in new liquefaction plants and the acceleration of our exploration plan.

Moving on to Slide #12. I present the main impacts on EBITDA in the comparison between quarters. Eneva's consolidated EBITDA grew 27% or BRL 242 million vis-a-vis both periods, reaching BRL 1.134 billion in the third quarter of 2024. This result is mainly due to the performance of the Parnaíba complex, which -- and the upstream as well, which has together recorded a growth of BRL 457 million, reflecting the average dispatch of 80% in the period to meet the record demand for exports to Argentina and the regulatory dispatches to the SIN.

Sergipe and [indiscernible] were in line with EBITDA for last year. And in the segments where we saw a reduction in EBITDA, it's worth mentioning, number one, a reduction of BRL 17 million in the solar front, impacted by higher costs coming from the purchase of energy, due to larger curtailments, an increase of energy prices and a worsening of hydrological scenario, a reduction of BRL 132 million in coal to a mismatch between the average inventory cost acquired at higher levels in 2020 and the medium CVU of the period.

And lastly, we had the effect of the end of the EBITDA contribution from the TPP Fortaleza, which is now being -- is under hibernation.

Now moving on to Slide #13. We have the main impacts on the financial results quarter-on-quarter. The net financial result was negative by BRL 478 million in the third quarter compared to a negative result of BRL 636 million in the same quarter of last year. This improvement was basically explained by the non-cash impact of the exchange rate variation on the lease of the platform of Hub Sergipe with a total positive effect of BRL 203 million quarter-on-quarter. That improvement was mitigated by tax rate inputs and also the debentures issued in the third quarter of 2023 and the operations closed since then.

Moving on to Slide 14. We see the main cash flow variations in Q3, which have contributed to the cash generation reported in the period. As I said, operating cash flow reached its historic mark of BRL 1.3 billion in the period, driven by the strong operating performance and the positive variation in working capital.

As for the investments cash flow, we had a disbursement of BRL 612 million, mainly for our projects under construction, Azulão 950, the liquefaction units in Parnaíba and the TPP Parnaíba VI as well as for CapEx to support our operations.

Financing cash flow recorded a total outflow of BRL 238 million, positively impacted by the conclusion of the liability management process, the effect of which exceeded the amortization of principal and interest payments for the period, but offset by lease payments mainly for the Sergipe Hub platform and payments relating to the half yearly dividends of the Parnaíbas PN or preferential shares and interest on the anticipation of receivables.

As a result, Eneva ended the third quarter 2024 with a cash position of BRL 2.123 billion before the follow-on funds with a cash generation of about BRL 400 million in the period.

Moving on to Slide #15, I present our capital structure. On the first chart on the left, we have our net debt, which closed the quarter at BRL 15 billion with a net debt-to-EBITDA ratio of 3.5x. Considering, however, the effect of the conclusion of the follow-on and the final closing of the M&A, our pro forma leverage would reach 2.1x, a significant improvement on the 4.4x posted in the second quarter of 2024.

In the other charts on the slide, we see the quality of our debt, which, as a reflection of the liability management initiatives have become even more concentrated in the long term, closing the quarter with an average maturity of 6 years.

In addition, debt exposure to the IPCA increased by almost 10 percentage points vis-a-vis the second quarter of 2024, in line with our obligations with the main index of our revenues.

Additionally, in recognition of the improvement in our capital structure and the solid outlook for operating cash generation, our corporate rating was raised to the highest local level in Fitch's rating, AAA, reinforcing the solidity of our fundamentals.

With that, I'll now turn over to Andrea Monte, who will go into detail about our investments in capital projects.

[Andrea Monte, executive]

Thank you, Habibe. Good morning, everyone. In Slide 17, I highlight the investments made by the company, which totaled BRL 960 million in the quarter, mainly for projects under construction, which accounted for approximately 70% of the total invested.

At the Azulão 950 complex in Amazonas, a total of BRL 589 million was invested in the quarter with the following highlights: BRL 255 million for the supply contracts for the main equipment required to set up the power island; BRL 157 million for construction services at TPP, GTP, Substation and Transmission Lines; and BRL 103 million for EPC and other third-party services and project support activities.

In the Parnaíba liquefaction plants, we invested BRL 63 million, of which BRL 53 million were earmarked for the final stages of the construction, assembly and commissioning activities as well as logistical costs and some of the last milestones relating to liquefaction and regasification equipment and systems.

At the Parnaíba VI TPP, we invested a total of BRL 54 million, concentrated in payments to EPC contractor for construction assembly and commissioning services.

Lastly, in upstream, investments totaled BRL 162 million in the quarter, of which BRL 108 million were invested in the development of the gas fields in Maranhão, most of them for the construction and assembly activities of the gas pipeline that will connect the Gavião Mateiro and Gavião Belo fields to the Parnaíba Complex.

Moving on to Slide 19. I would like to present updates on the Azulão 950 updates. The physical adherence of the project is at 97%, having reached 39% of physical progress. All the civil basis for the main equipment have been completed, with the first transmission line tower being assembled as well as the second turbine and gas generators that were received.

We have started earthworks next to the substation to connect the plant's high-voltage line to the National Interconnected System. We also erected the boilers metal structured and finished concreting the base of the steam turbine and laying the gas pipelines, connecting different clusters to the plant. The project continues to stick to the time line.

And as next milestones, I would like to highlight the energization of the plant, which will be completed by the end of 2025, and the combined cycle at the end of 2026 and the simple cycle schedule for the beginning of 2026.

Moving on to Slide 20. I'd like to highlight the updates of Parnaíba IV (sic) [ VI ] project. It is in its initial phase of systems implementation and preoperation with 97% compliance with the physical schedule and a cumulative physical progress of 97%. By the end of the year, mechanical assembly will be completed and will begin tests and commercial operation. The plant's regulated contracts is scheduled to come into force in January 2025.

Now I hand over to Felippe Valverde for the Q&A session.

[Felippe Valverde, executive]

Thank you, Andrea. Good morning, everyone. So now let's start our Q&A session. [Operator Instructions]

First one from Guilherme Lima of Santander.

Could you comment on the contract established with Vale that was announced in the news? How the gas supply will be made? And the second question about the small-scale business. When will the operation reach the normal levels? And how would the EBITDA ramp-up will be? We noticed that you mentioned BRL 17 million of revenue, BRL 14 million in cost. So how can you evolve in terms of margin?

Marcelo?

[Lino Cancado, executive]

We have a problem with Marcelo's connection. This is Lino. I will answer those questions for him. So first about the contract with Vale. So the gas will be supplied through the Sergipe Hub or involving other origin contracts in our grid.

Regarding the margins you asked, this information is protected by a confidentiality agreement with Vale. As to the small-scale business, as I mentioned, this operation is under test. So the plant is already operating at a test stage, correcting some abnormalities that are normal to this process.

And by the end of the week, we believe that it will reach its rated capacity. As to the initial cost, I think that there are some incurred costs both by moving the LNG load from Azulão to Parnaíba to make commissioning easier for our customers and other costs related to the beginning of operations. And as this plant reaches its rated capacity levels and part of these costs will be removed from the P&L of this activity.

[Felippe Valverde, executive]

We have a second question from Daniel from Safra.

Can you comment on the perspective on thermal dispatch in Q4, considering more rainfall and the possibility of energy exportation? In addition, how do you see the new auction for capacity coming up?

[Lino Cancado, executive]

As for the rainfall levels, higher rainfall levels were expected for November. We are in the early stages. We need to wait and see if those volumes will be confirmed. But either way, the Parnaíba Complex has been dispatched earlier in the month despite the heavier rainfall levels. But at the same time, we are being called to dispatch as of next week to Argentina.

So even if there is no dispatch for the local ONS, the possibility of exporting Argentina to Argentina in November and December is a real possibility, and we count on it.

[Felippe Valverde, executive]

A second question from Daniel from Safra. Can you give us an update in the construction of Azulão 950. How has the work been coming along? Do you still expect to conclude in time?

[Lino Cancado, executive]

Well, as I've mentioned before, during my presentation, we are working very much in line with the schedule at 97% of adherence to the schedule. Many of the milestones we had set for the year have been met. First turbine, second turbine, the arrival of the steam turbine also has happened and several other milestones have been accomplished, the finishing of the gas pipelines, conducting of the cluster and several of the critical milestones that we had. In terms of purchase orders for the main bits of equipment and also the secondary bits of equipment.

So -- in short, work is following -- is on track according to plan. And as I said, our schedule for the first turbine is to start operating in the first quarter of 2026 and for the combined cycle for the end of that same year. In other words, once again, very much on track with the original schedule. No major issues or questions in terms of scheduling.

Going back to the previous question, I would just like to comment on the perspectives on the auction related to capacity. I think, we skipped that part of the question. So as to when we expect to have an auction of capacity, well, we expect this to take place since there is a deficit in power. We expect to have that by 2028 according to the Energy Research Institute of the Ministry of Energy. When this auction is going to be made, this bid is something that needs to be waited. There's a lot of speculations in the market related to that bid. So I would like not to dwell into that. But I expect that to take place at some point, of course, not this year because this is November already, but at some point in the first quarter of next year.

[Felippe Valverde, executive]

Next question. With a positive variation of the accumulated profit line, is the company considering distribution of dividends on the results of 2024?

[Lino Cancado, executive]

Thank you for your question. Indeed, we were able to cross this line. In the end of 2023, we had BRL 300 million in accumulated losses. And in this 9 months, we had a little bit over BRL 1 billion in accumulated profit. So then we turn from accumulated loss to accumulated profits, totaling almost BRL 500 million.

So in the last quarter, we could depending on the amount we accumulate in profits, we may be able to pay dividends. Because although we believe that operation -- in terms of operations, the fourth quarter is going to be strong because of the dispatch operations in October and November so far. So we expect to dispatch to Argentina until the end of the year.

So in terms of dispatch operations, we are very positive about the fourth quarter results. And the new revenues that we are going to have because in Termopernambuco, some gas contracts, the small-scale contracts that are in this final stage of commissioning, all of that leads us to believe that we are going to have a strong fourth quarter that indeed would increase the profits in the period and consequently with a potential pay of dividends next year.

But it's important to highlight that we have about BRL 3.6 billion in liabilities, in loans of FSRU that is pegged to the dollar. So depending on the exchange rate at the end of this year, we could have a positive or negative impact on this particular line that will affect our net income and consequently, the payment of dividends.

Having said that, for next year, we have a strong investment plan. So depending on the net income, we maybe we'll distribute just the mandatory amount of 25% because -- although we have lower leverage and cash generation is high, we do not think it's time to distribute extraordinary dividends, just sticking to what is mandatory. And as of 2027, we can consider a higher level of dividend distribution.

[Felippe Valverde, executive]

Thank you. Now with this last question, we end the Q&A session and the earnings call for the third quarter of 2024. Thank you for attending.

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