Auren Energia S.A. (AURE3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Auren's Earnings Conference Call to discuss the results of quarter 2 2022. This conference call is being recorded, and the replay will be available at the company's IR website. ri.aurenenergia.com.br, where the slide presentation will also be available for download. [Operator Instructions] Before proceeding, let me mention that any forward-looking statements made during this conference call are based on beliefs and assumptions of the company's management and the information currently available to Auren. These forward-looking statements may involve risks and uncertainties because they refer to future events that depend on circumstances that may or may not occur. Investors, analysts and journalists should consider that any events related to the macroeconomic environment, the industry and other factors can make results differ materially from those expressed in such forward-looking statements. We have today present with us Mr. Fabio Zanfelice, CEO; and Mr. Mario Bertoncini, CFO and IR Director. The Investor Relations team is also present here with us. And now I would like to turn the conference over to Mr. Fabio Zanfelice to start his presentation. Mr. Zanfelice, you may proceed.

Thank you. Good morning, ladies and gentlemen. Thank you for attending our Earnings Conference Call for quarter 2 2022. I'm going to start our presentation right away so that we can leave time for questions in the end. So on slide -- on the next slide, we have today's agenda. We're going to go over the quarter highlights then the energy market, the operational performance, the financial performance, the growth strategy and our closing remarks. For the quarter 2 highlights, from the operational standpoint, here, we have, the first point is the full reestablishment of project Ventos do Araripe III, a project that had an abnormal operation of its transformers, and the situation is normalized as of quarter 2. We also had a great wind performance in our wind farms. We're also going to go over our trading strategy and the continuous increase in the customer base of Auren. In terms of our financial performance, the adjusted EBITDA reached BRL 424 million in quarter 2, a 71% increase year-over-year and operational cash flow of BRL 385 million after the debt service, a cash conversion of 93% in the first half of '22. And also an important highlight was that this quarter, we partially concluded the participants of the VIVEST pension plans, we concluded the migration of the participants. So we had a reduction of the actuarial risk of the plan. Our growth strategy, we completed Auren's corporate reorganization. We're also going to go over some of the Ventos do Piauí II and III wind complex with nearly 60% of the wind turbines already operating, and the COD or the commercial operation date will be in November this year. And also a special highlight to the acquisition of the company, Aquarela. it's a start-up that operates in market intelligence and data analytics. So first, let's start with the highlights of the energy market. On Page 6, we have a very interesting piece of data here. I'm sure you've been following the recovery of the affluent natural energy in recent periods. Here, we have information since October 2020 until the end of quarter 2 2022 in June. We had the worst water crisis in the history of the industry. So we had about a 39% reduction about 3.3 gigawatt average, below the average. But starting in October, when the wet season started again, there was a reversion of this expectation. So we had more than 3.3 gigawatt average of affluent natural energy in relation to the average. So a 3.9% increase in comparison to the long-term average. This inflow recovered the reservoir and made it possible to reduce thermoelectric generation. So we started to see an expressive reduction in thermal generation equivalent to 12.4% of the systems total generation, the lowest level in the past 10 years. On the next slide, we see the effect of this better water level -- this better water scenario. On the left, we have a composition of the different 2-year period so starting in October and finishing June of the following year. So here, we can see the evolution between the wet period and the dry period for each of these 2-year periods. And from June to September last year in 2021, the stored energy evolution reached 1 -- the stored energy reached one of the lowest historical levels. But fortunately, starting in October, we start to see recovery and storage reached 75% in May 2022, one of the highest storage levels in the last 11 years. So the water conditions have been reestablished. The storage is at very favorable conditions, which led to a reduction of our marginal cost of operation as we can see here on the right. At the same time, last year, we saw a higher marginal cost of operation in August, reaching nearly BRL 2,500 per megawatt hour. And starting this year, we have one of the best marginal cost of operation of the last years, which led the system to be at the regulatory for 55.70 megawatt hour. On the next chart, we have data about our operational performance. So here, we have information about the energy balance of our hydro assets, which are 100% operated by Auren. So this is to give you an idea of how the hydrological risk has been managed in Paraibuna and Porto Primavera. In quarter 2, in order to cover for the GSF of these 2 plants, we acquired at the price of BRL 269 per megawatt hour. Compared with quarter 2 '21, this value was higher. In quarter 2 '21, we covered nearly 300-megawatt average of deficit at BRL 193 per megawatt hour. Of course, this difference has an effect on the diligent decision making of the company last year, we made a decision to go for this -- the coverage of this deficit when we were with one of the highest supply risks for the system in the past 10 years. So some of this decision that we made is related to risk management for the company. On the next chart, we have some good news. In quarter 2, we had a wind power generation above the P50 certified for projects, Ventos do Piauí I and Araripe III. Here, we have aggregated data for the 2 wind farms. They are 30 kilometers away, one from the other. So here, we see the benefits for the region. It's the same wind regime. So this was very close for the 2 wind farms. The performance of the 2 wind farms was very similar in this recent period. Average wind speed was 8.2 meters per second. In quarter 2, it was at 8.6 meters per second. But in quarter 2 '21, we had an impact due to the accident that happened in Ventos do Araripe III, which has been completely normalized, which we had already mentioned. And the generation was 7.3% over the P90 for Ventos do Piauí I and 1.4% above the P50. For Araripe III, it was 11% above P90 and 5% above the expected value for P50. On the next slide, we are presenting for the first time the consolidated numbers for generation and trading at Auren. So here, you see the company's resources and requirements. So in resources, we have all the purchase agreement of Auren trader plus the total physical guarantee of our hydro plants and also our wind farms. And in the requirement line, the red line, we see all the sales contracts that Auren has. So all the sales contracts for its own assets and also for the stakes it has in other hydro assets. Here, we see that the company is totally contracted until 2025. Here, we see an excess in this balance of 185-megawatt average in the first year, 110 in the second and 52 in the third year, in 2024, 132 megawatt average in 2025 and in the long term, from 2027 to 2032, we have a contracting level of 65%. It's important to highlight that, this considers the total physical guarantee of the company, plus the purchase contracts. We don't have any hedge for GSF in this calculation. These are public numbers. So we don't really disclose our GSF presences. But of the 3,343 megawatt average of resources, only 840 are subject to suffering the impact of the GSF because this is the portion that the company has as physical guarantee in hydropower plants exposed to GSF. So this is just to call your attention to the number that is exposed to hydrological risk. The trader reached a trading volume of 2.6 gigawatt average until 2026. Today, we are still among the top 3 energy traders in Brazil. Now I'm going to turn it over to our CFO, Mario Bertoncini, who's going to talk about the financial results of the company in quarter 2.

Thank you, Fabio. Now on Slide #13, we have the company's EBITDA and revenue performance. The net revenue in quarter 2 was very much in line with results of last year with a small increment, and the difference here is in the EBITDA. As Fabio had said, we closed quarter 2 2022 with an adjusted EBITDA of BRL 422 million (sic) [ BRL 424 million]. It's 71% on higher than the EBITDA of quarter 2 last year. And for the first 6 months of '22, for the first half of '22, it is 8%. This EBITDA is 8% higher when we compare year-over-year. The main factors that led to this major improvement in our EBITDA were mentioned before, including our generation performance and particularly the full recovery of wind generation in Ventos do Araripe III and also the performance over P50 of our wind farms and good climate conditions in the inner part of the state of Piaui and Pernambuco. Also better sales contracting prices. And this also reflects in better dividend, so a cash effect of dividends and a lower aggregate cost in the purchase of energy when we compare year-over-year. Despite the higher price in the net zero rate, which we performed in the second half of last year. Despite this effect in our consolidated numbers, we had BRL 93 million -- our costs with energy generation this quarter were BRL 93 million lower year-over-year. On the next page, we have the highlight of our capital structure and Auren's cash flow we finished quarter 2022 with a net debt EBITDA ratio of 1.8x and an increment of 0.3x the EBITDA compared with 3 months ago when we closed quarter 1 '22. And this is mainly due to the progress of our works in Ventos do Piauí II and III, the releases from the BNDES and the investments in the project itself. Our net profile is still the same. It's practically a 50-50 split between BNDES and debentures. And our cash position is very robust. We closed quarter 2 with a cash position of practically BRL 3.5 billion and a totally rescaled debt with an average maturity of 7 years with no pressure whatsoever in the coming years. Now from the standpoint of cash generation, which we have on the bottom of Slide 14. Here, we see a snapshot of the first half of 2022 with a cash conversion ratio post that service or post that interest of 93%. This means that 93% of our EBITDA is converted into operational cash generation post that service. So this is 93% for the first half of '22 and nearly 92% in quarter 2, very much in line with the plan and expected. We invested BRL 982 million in CapEx this first half. basically focusing on Ventos do Piauí II and III. So we closed the first half with an important cash flow level due to the capital raise. And now we're going to talk about our growth strategy. Okay. Now let's go over the growth strategy of the company. So about the project that is now being completed its final stages of construction, Ventos do Piauí II and III. It's in the same generation cluster that we have in Piauí I and Araripe III. Through financing from BNDES, we invested BRL 1.6 billion, 70% of this energy is already contracted until 2032. And as you can see on Slide #11, where we show the company's full balance sheet, this energy is considered contracted until 2025, fully contracted. Today, we have the 93 wind turbines that compose the 2 wind complexes, 70% of them are already operating. So today, we have 55 wind turbines that are already operating, 36% in operational, in commercial operation and the rest is being tested. So we started immobilization in March 2021, and we expect to complete in November '22. This is a wind farm that we built within the budget. On budget and on time, as we say, and we will start operation -- and we were able to start operations despite the COVID pandemic. And despite the adversities, the company was able to reach its objective to build this wind farm within the premises that we use for its approval. On Slide 17, Here, we are announcing the construction of the first solar project, already starting to develop. These 2 projects were announced in our pipeline. The first one is the hybrid project, Sol do Piauí which will be installed in the Ventos do Piauí on site. It's the first hybrid solar wind power generation plant of Brazil. The pilot project was approved by ANEEL in 2019. The estimated CapEx is BRL 255 million, we already have advanced financing with BNDES. So we already have the funds for this project. We expect to start building this year and complete the construction in quarter 3 '23. Jaíba V in the north of the state of Minas Gerais, one of the regions with the best radiation of Brazil, so 620 megawatts peak and 500 megawatts AC to be installed. It will be one of the country's largest photovoltaic plants with an estimated CapEx of BRL 2 billion. We will also start constructing in quarter 3 this year, and we expect to complete in quarter 1, 2024. So now we will make our closing remarks. On Page 19. Here, we have a look at social activities, the social actions of the company. It is a project that we would like to render some visibility here during this conference call. The company is working on these projects as a private company and also as a third sector organization with the government of Pernambuco. We started a technical training course in the City of Araripina in Pernambuco. That region has a very high potential for generation of renewable energy. So we saw there the opportunity to provide technical training to the population that lives around our farms and plants, which would bring a benefit in terms of education and also social benefit to the communities. So we're working with [ Instituto ] Votorantim and [ Itau ]. So to build this technical curriculum for renewable energies and update the curriculum of other courses such as IT and workplace safety. We have more than 152 curriculum and also to prepare the classes to be given to students in the state network of schools of the state of Pernambuco. This started in 2020. In 2021, we formed the first classes, and the curriculum was launched in 2020. This curriculum was built on top of the basic national curriculum. So this makes it -- adaptable -- educate teaching institution in Brazil. We're very happy with this partnership with Insituto Votorantim and [indiscernible], and we're very happy to be able to create this training program and to be able to offer technical professional training to the populations and the communities where we operate right in the border between Pernambuco and Piauí. And on the next slide, we will continue with very diligent management of our directional energy positions through our trader with a very prudent energy balance. We will continue to invest in our market intelligence, capacity and commercial management. One example was the acquisition of a stake in the company, Aquarela. Transaction that was closed in quarter 2. We will continue to have our capital structure prepared for our growth opportunities both organic and inorganic. We also give highlight to the addition of 548-megawatt AC of installed capacity in Sol do Piauí and Jaiba V in addition to the 409 megawatts of Ventos do Piauí II and III, which are in the final stage of construction. And we reinforced our capital allocation discipline focusing on value creation to all our stakeholders. I stop here, and we are available for questions now.

[Operator Instructions] The first question comes from Mr. Rafael Nagani.

I have three questions. My first question is about the traders. Was there any advance in the case or you had with -- and my second question is about the pension plan. You just completed your migration, so what will be the impact on your provisions that we should expect for quarter 3? Will it be in line with the BRL 300 million that you already paid or anything different from that? And the third question is about capital allocation looking forward. You announced a new project that will start -- to be implementing now the solar projects. And you had previously mentioned the capital investments in the secondary market. So with these new projects in our portfolio, will you somehow postpone your M&A options? Or are you still actively searching for M&A possibilities?

Thank you, Rafael, for your question. Regarding [indiscernible], we have no updates about that case. To be honest, we are asked very often about negotiations and about this topic. It's a very controversial topic. So the only thing that we can say is that we don't comment on our negotiations because they involve the federal government. So we don't disclose information about our negotiations in addition to the litigation that you already know about. And I'm sure you are aware of the progress of that loss. Regarding the capital allocation, the company can continue to grow organically through greenfield projects like the ones we announced and also inorganically by acquiring other assets. So the company will continue to develop its projects and having its pipelines. We have projects such as the Elios project that we also announced when the company was formed. So we continue to develop and look for other green project opportunities, and we are also actively searching for opportunities for inorganic growth. And we must highlight with that we always do this with very strict discipline and strict monitoring of the return of these projects. And with a lot of financial discipline, and we are always looking for projects that can add value with the experience acquired by the company in its history. Regarding VIVEST, I'm going to -- well, Mario is the specialist, so he's going to answer your question about the VIVEST.

Regarding, VIVEST, we just completed the migration process. If you remember, we started this process. We had the buying of 17.6% of our equity of the defined benefit funds. They were migrated. And in August 1, the company finished paying the BRL 303 million that will fund these participants that migrated to our defined contribution fund. So we no longer have a deficit. This deficit has been covered. There was a reduction of the accumulated deficit of BRL 326 million. We paid BRL 303 million, so we reduced to BRL 326 million. And yes, there will be an adjustment in the accounting basis for the deficit. If you look in our financial statements, you'll see that the adjustment made as of August will be adjusted in minus BRL 326 million to be more precise. Now about the next front. So just to add, after we migrate after we complete this migration, the next work front, which was actually happening in parallel is the potential change of the indices. Today, we are fully indexed with IGPM, and we are negotiating and looking for a consensus with all the stakeholders to migrate to a different index to IPCA or to a temporary hybrid formula between the 2 indices. This -- we don't have that formula yet, but the conversations are going well, and we are also waiting for some court decisions before, and then we're going to change the index.

The next question is from Mr. Andres [indiscernible].

I have a question about your new projects, the CapEx for your new projects. I want to understand the difference between the CapEx of the 2 projects in terms of millions per megawatt peak. Is this just because it's a hybrid project? What's the reason for this difference? And my second question is about the risk for this CapEx. We saw that some companies in your industry had difficulty having suppliers deliver equipment in the price they were originally contracted in the case of solar, we didn't see that for wind. Can you comment on this risk and how the company is protecting itself from these complexities relative to new commodity price increases.

Thank you, Andre, for your question. As for the difference in the price, a good reference here is the scale. For the hybrid project, Sol do Piauí, it is 10% of the size of Jaíba V. So the scale is one of the factors here that accounts for most of the difference between the 2 projects. Now as for the CapEx, we are very confident. First, due to the scale of the project, which also helps reduce the CapEx per capacity unit, and also because when we acquired this project, we studied in depth, and we found it very competitive. And the acquisition also had some positive factors for Auren, that also helped us make this CapEx very competitive. Looking forward, we are studying and following the cost of the panels, also the variables that are influencing and increasing the price of the panels, both in terms of logistics and also raw materials for construction. We have been doing this practically on a weekly basis. And now the cost is somewhat stable according to our analysis. And looking forward, we still -- we'll see some stability in the cost of the panels looking forward. So in our planning, we are not expecting any new increases we really studied why this price increase took place in the last months and in the last year. This was due to COVID and due to raw materials. And -- so we are not expecting new price increases for panels, at least not within the time frame of the project. Of course, this project is totally different from wind power. It is a project that will be built over time. So logistics makes a very large difference here. And of course, logistics is more exposed to price variations. Also the construction -- but on the other hand, the construction risk is lower. So these two things offset each other in the evolution of the project. And also, we have a lot of experience building these types of projects, so we are using our expertise in the construction of wind power projects, and we're using this expertise to buy equipment, to manage the works and to manage the contingencies for the solar project.

I have another question. Can you please comment on the contracting of energy in quarter 2 both in terms of the value, the amount and the price because it really contributed to the differences in the way you publicated your energy balance -- in the way you published your energy balance comparing quarter 1 and quarter 2.

Yes, there was a change we saw a quick recovery of the reservoirs which quickly improves the energy conditions as you could see on our slide. We understand that this is the right time to contract and sell, and now we expect prices to remain at the same levels in the coming year or even lower. So the idea here was to manage the next 3 years from the standpoint of our energy balance, close to the total contracting. This also gives us freedom. It gives freedom to the trader to go about its natural trading, which is actually the nature of Auren trader, and strengthen the position of Auren generation. So as we said, we have, we showed you the numbers of stored energy that we have. So it's 2.5x what we have in physical guarantee. So this demonstrates again that our exposure to price in the next 3 years, at least for our generation unit is very good, and we will continue to explore market opportunities. Of course, the market has some volatility and has buy-and-sell windows and our trader will continue to operate with its expertise in trading. In our results release on Page 14, we give some more details about the prices of our own assets. So what is the average ACR price, CECL price and a price for our portfolio as a whole. So there, we talk about the sale of generation assets. We are not giving any details about Auren trading sales. But in terms of the market, what we see for the next few months is stability or maybe even a reduction in price. So our generation business is protected. And if there is any change in our scenario, a trading company will benefit from that exploring the price volatility windows.