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

Good morning, ladies and gentlemen. Welcome to Auren's conference call to discuss results regarding the third quarter of 2022. This conference is being recorded, and the replay can be accessed on the company's IR website, ri.aurenenergia.com.br. The presentation is also available for download. [Operator Instructions] Before proceeding, we would like to clarify that any forward-looking statements are based on the beliefs and assumptions of Auren's management and current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists must understand that events related to the macroeconomic environment, industry and other factors could cause results to differ materially from those expressed in the respective forward-looking statements. With us at this conference are Mr. Fabio Zanfelice, our CEO; and Mr. Mario Bertoncini, CFO and IRO. The Investor Relations team is also here with us. I would now like to turn the call over to Mr. Fabio Zanfelice who will start the presentation. You may proceed, sir.

Thank you. Good morning, ladies and gentlemen. It's an honor to have you here to discuss the results of the third quarter of this year. I'm going to start the presentation, so I would like you to move to Slide 3, where we show the agenda of the presentation. So we are going to discuss the highlights of the energy market, the rating performance, financial performance, growth strategy, our social environmental performance, and finally our closing remarks. So talking about the highlights for the third quarter. Let's move to Slide 4. This quarter was characterized by the increase of the hydroelectric generation in relation to the same quarter of last year, an increase of more than 100%, showing the better hydrological conditions in the Brazilian system, after it has gone through its worst crisis, hydro crisis of 2021. We would like to draw your attention to the generation of our wind farms. We added the generation of Ventos do Piauí I, II and III, so the generation of all our farms reached above the P90 in year-to-date. From the financial viewpoint, we reached an adjusted EBITDA of BRL 498 million with an EBITDA margin of 32% and our operational cash generation amounted to BRL 259 million from January to September this year, accounting for cash conversion ratio of 67%. As for growth and innovation, we are at the final stage of the construction of the wind farms Ventos do Piauí and we have already started the operation of 93 wind turbines of the project. I'm going to make more comments about the project along the presentation, and it will be ready on the schedule. And we are also going to talk about the negotiations for the construction with our suppliers and service providers of Jaíba V and Sol Do Piauí which will add 655 megawatts. And we are also going to talk about the investment we made in the startup Aquarela that will intensify our analytics and artificial intelligence. Very well. Now moving on to Slide 6. We are going to discuss the energy market. Here, we see what we have seen since the last months or since the beginning of the period of 2020. In 2020, in the beginning of 2020 and along with the year 2021, we can observe the worst hydro crisis that Brazil faced. We have a deficit of 26 gigawatts average in relation to the long term. Fortunately, as October 2021, the scenario was reversed. And today, in the past, considering the last 12 months, we have reached about 1 gigawatt -- average gigawatt in relation to the long-term average that represents a very significant recovery from the view point of the hydro in the energy system. And in the last quarter, from June, July to September, we observed that there was deficit of 8 average gigawatts, representing 21% [Indiscernible] but nothing compared to what we observed in the same quarter of last year when we had a higher deficit. And with it, as we said, in relation to the hydro energy, there has been a recovery, which was very significant. And all the scenario helped the recovery of their reservoir level. In May, we observed of '22, the highest level of storage capacity. In the last 10 years, we reached 75% of the storage level in the aggregated manner. This is a number that hasn't seen since 2011 when we reached 89% of storage level. Fortunately, we saw a recovery, which was very significant of the energy situation for the system. In the following slide, we are going to discuss on Slide 7, we are going to talk about the regulations. And in the last months, and new approved resolution related to the public hearing 39 related to the review and the calculation of TUST, which is the transmission tariff, and there has been a change that established that we would review the local signal of the transmission of the system. We'd like to remind you, before talking about the effects of those changes since we consider the transmission tariffs with the generators. Since 2013, all the generator tariffs were stabilized for a period of 10 years. The generators in the free market had a stabilization for 10 years. And this was applicable up to now. The generator companies have the tariffs, had their stabilization for the period of the grant. We no longer have the stabilization. The locational tariff has a higher weight in the calculation of the tariff for the distribution purposes. We are going to have a transition period during this process, and this is going to start just now when we are going to calculate the methodology, and we will consider both the old and the new methodology at 10% a year until we come to a combination of 50% of the tariff using the new methodology and 50% using the previous methodology. And this will happen in July 2027, in order to avoid a higher volatility, this would consider range of more or less 5%. So there's no major variation happened during those 5 years until the permanent period is reached in 2027. From the viewpoint of Auren, we -- on the right, we can see all the assets that have those transmission tariff already calculated, and the impact is going to be very minor for the time because the reasons we place on the table. Porto Primavera stabilized until 2029. So the tariff was recalculated and stabilized after [Indiscernible] has been rationalized and Ventos do Piauí I and II and Ventos do Araripe have the tariff also established during the grace period as well. VDP sells energy in the free market, but the term was defined last year. So it also has a stabilization for 10 years and our assets where we have some stake in a consortium, they have their tariffs also established in 2013 and they will end in 2023. But as we can see in the map, when we see the comparison between the weight of the locational signal, according to the methodology, we see that the assets are regions where the locational signal is going to have a lower weight so there will be some sort of neutrality and a reduction in the tariff cost according to the new methodology. So we wanted to show you this slide for you to learn and to provide you some context of to which degree this methodology will affect the results of Auren. And we can see that the impact is going to be very minor. Talking about operating performance on Slide 9. When we also address the energy scenarios, fortunately, we have a very important recovery in the hydro generation for the quarter. Duration was 11.4% higher when compared to the previous quarter of last year, GSF was 75% versus 51% that was observed in the third quarter of 2021, and there was a positive impact in the cost of purchase of energy for us to level the impact of GSF. So there was a reduction of 30% in the cost of the purchase of energy for the hydro assets, okay? On the following slide, we see the generation of the wind farm, as we mentioned before, for the quarter and we can see the details by asset, Ventos do Piauí I, Ventos do Piauí II and III, and Ventos do Araripe III and year-to-date, the generation of the asset was 5.9 higher than above the P90, which is the certification of those parts and about 2% below the P50. These numbers are very close to what we were observed year-to-date. It was 5% above the P90 and 5% below the P50. We had a reduction of generation in September, where we observed an effect below average, but was partially offset by a higher generation in June and very close to P50 in August. On the following slide, we show the inauguration of our portfolio of trading -- of or trading energy. We traded up to 2024 about 3.1 average megawatt. And this year, we are selling 3.4 average gigawatt and 90% is the level of contracting of this portfolio up to 2026. And up to 2032, the contracting level is 65%. And in the short term, the contracting level is very expensive considering the amount of energy that we have at our company, which is composed by the fiscal guarantee that we have with the assets. And this is in addition to the share of the fiscal guarantee that Auren has in the assets where it has a stake in the consortium. We reached more than 700 customers in our portfolio. And important information about this quarter is that we traded more than 5 million iRECs and more than 200,000 tons of carbon, which is initiative of our trader, and we see lots of opportunities going ahead in the market. And this market has been growing a lot in order to fight climate change. On the following slide, we are going to start talking about the financial performance. And now I will turn the call over to Mario so that he can discuss our financial performance.

Thank you, Fabio. On Page 13, we have a highlight of the revenue and EBITDA. For the quarter, we ended with a net revenue of BRL 1.539 billion, and there was a drop in our revenue. That is not -- does not reflect the drop in margin. We had an increase in the margin. This drop has to do with the average prices of the market. There has been a significant increase in our margins. Now talking about EBITDA on the right, as Fabio mentioned in the opening remarks, we ended the third quarter '22 with an EBITDA of BRL 498 million and an EBITDA margin of 32.4%. It's quite significant for us. In relation to this third quarter, I would say that the first aspect to be mentioned is that with the overcoming the hydro crisis, and as Fabio mentioned before, and with the convergence of the reservoirs to get -- which are getting closer to the long-term average, we had an adjustment of the energy price in the short and medium term. So we had a reduction in the energy cost. And this favored our business as to the cost of energy when we purchase in order to level our energy balance. This cost dropped to 39%, as we mentioned before, and has a very important impact on the EBITDA of this quarter. In addition, we'd like to mention that with the operation -- the partial operation of Ventos do Piauí II and III, we see that the ramp up that's going to be completed in November. But in the third quarter, it has already caused a very good impact of sales of energy in the free market and also in the test process as to the spot prices, and this was important to the EBITDA. In addition to Ventos do Araripe III that started operating at full capacity after the problems we had last year. The wind segment in the third quarter of 2022, contributed with BRL 90 million in addition to what we had in the third quarter of last year. It's a natural effect on the margins as a result of the correction of the agreement. Moving on to Page 14, we can see the highlights of capital structure and cash flow. We ended the quarter on September 3, with a net debt of BRL 2.7 billion, a gross of BRL 5.7 billion and the leverage is 1.7x net debt over adjusted EBITDA. Our gross debt profile can be observed in this pie chart, 40% account for debentures -- above all infrastructure debentures and 52% are related to BNDES proceedings for the long term. The amortization schedule can be seen on the right at the top. And our cash position is at BRL 3.1 billion, and no question whatsoever on the medium, short terms in terms of maturity date. So we had an average term of debt of 7 years, and we continue with the process of extending the debt. As to the cash flow, and here we show the numbers year-to-date, 9 months of the year because I think there's more complete information as of the adjusted EBITDA of 9 months, we had a cash conversion ratio of 67%. In other words, the cash -- the operating cash flow, including debt service, debt interest was BRL 846 million, therefore, 67% of the EBITDA of the period. Based on this operating cash, we see what was invested as CapEx. And also in relation to payments of litigation, funding and amortization of BRL 842 million that were raised in the quarter that has to do with Ventos do Piauí in addition to the capital increase by the controlling shareholder. And in this quarter, as Fabio mentioned, we used BRL 306 million for the migration of the participants of investor for the related to the pension fund VIVEST. So I'll turn the call back to Fabio so that we can move on with our presentation.

Thank you, Mario. So let's move on to the growth strategy on Slide 16. We have already mentioned our assets Ventos do Piauí II and III, and we see the budgets and the schedule in the next quarter when we talk about the closing of the year, we are going to talk about Ventos do Piauí II and III in collaboration, plan to happen in November. This was a project that was funded by BNDES, BRL 1.6 billion that will be paid in 24 years at a very competitive rate. And 70% of the energy has been sold up to 2032. As we have mentioned, 90% of the turbines are ready in operation. And the performance is very interesting of those turbines. And the assets, which is very close to P50 and sometimes even above the P50 in the first month of operation. And in the next slide, we're going to continue talking about growth. And Jaíba V and Sol do Piauí are the assets that we announced in the last quarter. And I would like to say that when we announced the operation of those projects, it was approved with a CapEx of BRL 2 billion. This was market estimates that we had raised at the time before approving the project, and we are in the final phase of negotiation and acquisition of equipment and services for the installation. And we are also maintaining this estimated CapEx, so -- which is very much in line with what we had estimated. So there are no surprises in the construction of those 2 assets. The news is that we have already hired for Sol do Piauí nearly all the fund for the project. So 75% of the BRL 255 million of investment have already been funded by BNDES at the rate of IPCA plus 3.65% per year. And for Jaíba V, we have already hired the funding with BND, and both funds have a term of 24 years. On the following page, we are going to talk about investments in asset light. In the past few months, we acquired the share in Aquarela. Aquarela is a start-up, using artificial intelligence, not only in energy, but also used for agri business, education, oil and gas and aerospace projects. And Aquarela has been taking part in the Auren portfolio to help us to optimize our business of trading and especially to help us go deeper into a knowledge of the behavior and the profile of consumers in the free market. So we understand with the market opening, it's essential that we should know the profile of consumers ever more deeply and in a quick way based on technology so that we can be successful in this new scenario. Of course, in addition to Aquarela, in this partnership Auren also contributes with our knowledge to Aquarela in the development of their new products that will help not only Auren, but other products and services based on analytics and artificial intelligence that can be used in other agents and also to consumers in the sector. Okay. Very well then. Our next item is the social environment performance and something that I'm very pleased to discuss. On Slide 20, we can see as always the social environmental projects of which Auren participate. And this special -- this is a product that makes us especially proud of. This is related to strong women. And this is a product we developed in Serra do Inácio together with BNDES and Votorantim Institute, and this is for the development of income and entrepreneurship in the areas, we provide technical support to the communities where we operate in order to encourage production chain and also to qualify and train entrepreneurs that operate with us in the regions where we have energy production. We started this project in 2017, and we were very happy with how it progressed. We had some photographs of those entrepreneurs, and they have worked with us in the region. Very well. For the closing remarks. Okay. Let's move on now to Slide 22. For the final remarks, we show the highlights for the quarter what has been happening along the year, and we I'd like to talk about our management in the energy balance. We made a decision right in the beginning of this year to hire 25% of the resources of energy. So we maintain a high level of contracting so as to mitigate any risks that the company can run. So -- and we had seen betterment in the energy conditions. Another highlight is that we created an ecosystem for trading. Now with Aquarela helping us in our portfolio, we continue working in order to increase the capillarity of Auren in the market. Another important highlight that we announced in the prior release is the wind project Serra de Ibiapaba of Auren. And if you know what we are talking about, as we announced last year, when we announced the construction of Auren, we also announced that we would have a partnership with our controlling companies with CPP and Votorantim with initiative to have early-stage products related to energy transmission. In the consolidation project, this asset was acquired by the old VTRM that was CPP and Votorantim projects. And [Indiscernible] was a project that would be connected to this initiative, because this project was still in the development project, is still in the project of obtaining grant and permitting. And along the time, it will happen that this project progressed quickly and now it has a level of maturity that is according to the strategy of Auren. So with this, the decision was to maintain the project that now incorporates our greenfield initiatives in portfolio for generation that we announced as 1.5 giga. And we also added this asset which is 380 [Indiscernible] capacity projects. We would also like to talk about the increase of 25% of current fiscal guarantee after the conclusion of the Ventos do o Piauí II and III, Jaíba V and Sol do Piauí. So the fiscal guarantee has increased. And in terms of power, it would account for 36%. And lastly, we continue with a capture structure, which is very solid for the company's growth, and we reiterate our discipline and focus on adding value. We continue looking for opportunities, also for inorganic growth. And the team is very enthusiastic to use and allocate the cash at levels of return and risk compliant with expectations of our shareholders. This is what we had to present to you, and we are now going to open the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Antonio Junqueira from Citi.

I have two question. The first one is related to the crisis that we went through. So we prepared for a more difficult scenario for this year. And of course, this involves costs along the quarter. Could you estimate how much better could be the EBITDA if the company hadn't had a hedge for this year? The second question, when we look at the release of results of the second quarter and compared to the third quarter, we see that there is a small decontracting level about 20 to 25 average megawatts from [Indiscernible] So there is a small level -- in relation to the level of contracting that was applied for the previous period.

Junqueira, thank you for the question. So we have to make some calculations in relation to the average price, but it's a bit more difficult to get to an accurate value. Now right now, I'm looking at the consolidated amount. So our contracting level as a whole has a unified management considering all the assets of Auren regardless of how the decision was made last year when the assets or had independent management. So this is the detail. And now talking about the predictability for this year, we'd like to say that the decision made for contracting energy in order to level the hydraulic -- hydrological risk for this year was the decision made back then based on the best risk methodologies. And when we observed a higher level.

Yes, the decision was quite correct. I just wanted to know the numbers. I'm not questioning the decision.

So we are well aligned. We could have different assumptions because the company has been consolidated. If the company was consolidated back then, it would have been easier, but we can try to make the calculations and then I'll ask the IR team to send you the calculation. We would have to elaborate on the answer because we are not only talking about the price of the energy, okay?

Okay, adjustment. So in the balance. You mentioned about 30 average megawatts of adjustment, in the balance in relation to what we had in the past.

So this is the calculation of the traders. So this is according to the adjustments of the commercialization activity. And I don't know the accurate number in detail, but we can have the net of the agreement also because of the consolidation, remember that now we are making the consolidation of the trader. So it's like of merge of [VTRM] Energia in the past and CESP, and we're not creating the Auren trader. So in this consolidation process, we made some agreements. There was also -- we have to evaluate some eliminations according to the agreement of some companies. So there were some adjustments, there were agreement of CESP, [Indiscernible] Energy that -- and now it doesn't make too much sense as we consolidate the structure. So we can detect the detail of when each thing happened. But this is the effect of all the consolidation that is happening now. Yes, it's a very marginal change. And by the way, I mentioned the year wrong because I mentioned -- I should have said 2024. So I can see the aggregate number even increased.

Our next question comes from Carolina Carneiro with Credit Suisse.

I have also two questions. I would like to go back about the energy balance. Talking about the new agreements that you made comparing the energy balance that we used to have which much more complete in the release that you published. We had a feeling that some agreements were closed with 42, 43 average megawatts versus the previous energy balance. So was there a negotiation of new agreements? And if so, what would be the term so that we can have an idea of the price levels of those questions? And another question would also go back to the trader company. And it would be useful if you could share the information with us. Obviously, the MTM helped mark-to-market. And as you mentioned, Fabio, when we swap the contract from CESP to a single platform for the trading of your company. But this is just so I shouldn't have it to have more clarity so that you can disclose any information for the future quarters. If there's anything that is about to happen, if there's anything missing, we understand that market to market is something that is difficult to anticipate because it depends on the price curve specification. So I would like to understand whether there's still an adjustment between the companies and the allocation of the agreement in a single vehicle or if everything has been included in this quarter?

Okay, Carol. Yes, we made new agreements. We executed new agreements in this quarter. Now about prices, since we had already closed the balance of Auren, the prices were very aligned with what we observe in the market now. So we are using the volatility windows and in order to do the closing. So everything is aligned with the market price that we have been observing now. And it's within the margin levels of commercialization and the terms of 3 and 4 years as we have done in the other activities. And this is aligned with our strategy. We see that we can add more value with that when we have those trading activities. MTM had its highest adjustment now, and this was a result of the consolidation of two or three traders and there are other details involved in the process. As I mentioned in the answer I gave to Junqueira. For the next quarter, we estimate that if there is any adjustments of MTM, we'll be at about 15%, a marginal change. We do not expect anything major in terms of MTM. And we are going to get into the natural process of making adjustments according to the market price or if the company adopted different positions, you would also -- and in that case, we would enter into the permanent regime normal activities. And this month, it was different because of the consolidation.

Our next question comes from [Indiscernible] with Itau Corretora.

My question is more related to the growth strategy. I would like to understand if your idea is to continue growing in renewables via M&A or developing the greenfield pipeline? Or does the company have plans get into the transmission segment, if you're analyzing the next auctions, especially into 2023? And also, I would like to know if you analyze the [Indiscernible] renewables that were sell to [Indiscernible] recently?

Our idea is to continue growing with renewables. Greenfield is a little bit of our tradition since [Indiscernible] and we have 1.9 giga to be constructed. So in fact, it's greenfield and also inorganic growth by means of acquisition. And Mario and his team been working on this, identifying growth opportunities so that we can go to the inorganic dimension. And we have the opportunities to take part of [Indiscernible] and we were not winners in the action, but we showed interest for the company to grow inorganically. We did not take part in the process of the sale of EDP. And in relation to transmission segment, we understand it's a very interesting asset for the company. And according to our strategy, it would make sense to have them considering the characteristics of the asset. But of this, we are going to be looking at return that would make sense to the company. You know that generation has a higher return than transmission. And but we spot assets that would be aligned with the return that we're expecting, so it would of course, be an asset that would make sense to the company. We are soon evaluating whether or not we are going to take part in the auctions next year. We haven't made a final decision as yet.