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

Good morning, ladies and gentlemen. Welcome to Auren Energia's conference call to discuss the results for the Second Quarter of 2026. This conference is being recorded, and the replay will be available on the company's Investor Relations website, ri.aurenenergia.com.br. The presentation is also available for download. [Operator Instructions] Before proceeding, I would like to remind you that any forward-looking statements are based on the beliefs and assumptions of Auren's management and on information currently available on the company. Such 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 should bear in mind that events related to the macroeconomic environment, the industry and other factors may cause actual results to differ materially from the expressed -- those expressed in such forward-looking statements. Joining us today are Mr. Fabio Zanfelice, CEO of Auren; Mr. Mateus Ferreira, CFO and Investor Relations Officer. Our Investor Relations team is also with us. At this time, I would like to turn the call to Mr. Fabio Zanfelice, who will begin the presentation. Fabio, please go ahead.

Good morning, ladies and gentlemen. It is a pleasure to have you here with us for our second quarter conference call. These are our highlights for the quarter. This is our next slide. This first highlight, as you probably have heard many times in our previous calls, it is the portfolio resilience. Now we can actually see the figures. We have modulation gains in this quarter of BRL 71 million, which brought a very important result in order to mitigate a significant portion of the curtailment impact and a total of BRL 98 million, almost 72% of the negative impact of curtailment. What is also important to highlight is that in the first quarter 2026, the modulation gains totaled BRL 168 million, and the curtailment impact was BRL 184 million with a net of only BRL 16 million, which shows that we were able to neutralize 91% of the negative impact of the curtailment through our benefits of modulation, especially on hydro sources. Moving forward, we will continue with our financial management discipline. We have reduced our indebtedness in BRL 194 million with regards to the first quarter 2026. The leverage is now 5.3x adjusted -- net adjusted EBITDA as we had already forwarded to you, stabilizing throughout 2026 with a reduction in the beginning of 2027. We have a slight increase in this quarter due to an EBITDA that is a bit lower, which we will refer to further down in this presentation. Another important impact is the corporate reorganization. We now have the corporate reorganization with the merger of Auren Participacoes into Auren Operacoes, the second phase, which is already approved, the assets will be concentrated under CESP. And this has already been approved by the company and remains subject to fulfillment conditions and regulatory approvals in order for us to finish by the end of the year this last phase of our corporate reorganization. We should also highlight another relevant topic has to do with the curtailment compensation from September 2023 and November 2025, and this was a commitment published through Ordinance 140 in July -- last July. The company will assess this document. And you know very well that until August 10, we will be showing our interest and intention of adhering to the commitment. This is not a binding decision. Today, the company will understand that the compensation for it approximately will be of around BRL 300 million. Another important topic for us is the construction of Cajuina 3. We have already concluded 88% of this project. Today, we already have 8 operators of the 19 are generating in a test phase. This is 112 megawatts of installed capacity, and our expectation is until December this year, we will already be in the commercial operation. And finally, which is very important for the whole of the company, we were given the Pro-Etica Seal. This is organized by CGU. It's the first time our company participated in this award, and it was already awarded. So we're very proud of this award and this recognition. Now following into the energy market, talking about the natural energy inflow, ENA, where you can see here in this chart that once we have concluded the second quarter, we have closed in the South region. And the South and Central West region, we have a natural energy of almost equal to the one we had in the previous quarters of '24 and '25. We observed the recovery of the flows in February and which actually impacted us in the storage of the interconnected system in general. And by the end of March, we have reached the same level of storage we had in 2025. These first 2 months of the year are especially with January, one of the worst months in history with regards to the reservoirs, bringing some stability, especially with the protection of prices in the year. At the end of this month, the month of March, we have the Southeast and Central West systems already recovered. And the subsystem was 30%. This was another point of attention for the sector. But with the effects of El Nino, we have important action on this system, reaching almost 65% at the end of June. And today, we already have 85% of the maximum volume of that subsystem. So it is a very comfortable situation considering that we had -- compared with what we had at the beginning of the year. So now on this quarter, we will probably observe what El Nino will bring us in terms of an impact on our inflow and also on the demand with an expectation of an increase in temperatures. On the next slide, now considering the demand of GSF, we have a second quarter of '26 with an increase in our load and 3.2% with now an average consumption of different from what we had in the first quarter, even though there was a growth, this was a growth -- the greatest growth we've had since the first quarter of 2024 when the -- '25 compared to '24 when we had a 4.2% growth. And you can observe here that all the 2 quarters, we have an assessment. And even in some quarters, we have a difference of load between quarters. So this is an interesting characteristic even though the average temperature for the Southeast was below expectations, we already see a recovery for the demand. And obviously, this is below of the ENA that was projected. And this is already an indication of the impact of El Nino on our consumption. On the GSF side, we have 99% in the second quarter of 2026 against 96% in the second quarter of '25. So 3 percentage points higher in GSF, which contributes to our results and a positive result for hydro generation being greater this quarter when compared to the second quarter of 2025. On the next slide, in order to talk about prices, as I said, we have now 3 charts representing some volatility in price and especially this year, quite interesting with the execution of the full period that not as usual or common as the previous years, we started the year. If we look into the chart on the left, we see the price evolution in 2026. And you have the dotted line with the January market and the red line is the executed PLD. So the market was actually seeing prices that were higher for the year. That was what was expected, and we already talked about there was a delay in the period. And for instance, July here, we had almost BRL 350 per megawatt hour and the price expectation for the month of June. And here on January when we forecasted the PLD was an increase in February, but what we actually see is what the company already said in the first quarter, when we closed the 2026 first quarter, we had already 2 important components and 2 stresses for the price. One would be the reservoirs that were strong with a better inflow and also a liquidity premium, which was included in this curve when we were executing our models. We were seeing that there was no way to reach this price given the hydro trend that was actually happening throughout the first quarter. So this is exactly what happened. We see an important drop, reaching almost the price of July '26 with BRL 214 drop. This is also seen in the chart in the middle, where we see the long-term curve with the annual average, an important factor here, which is the price expectation for 2026 and the actual PLD. And now with the projection of the drop until the end of the year, we have BRL 234 as an expectation with the beginning of the year. We have BRL 108 lower. What matters here is that the curve for the following years did not follow the same trend. Quite the contrary, it is still stable with an important increase or a slight increase in 2027. For the company, this is important with our projections, our short projections throughout 2026, we remain stable in 2027 and then in 2028. The positions today of our energy balance are quite favorable with regards to price variations with -- we see the -- on the right, we see the comparison between the 2 quarters. We see BRL 216 megawatt hour, practically BRL 9 below the same period of the previous year. And the volatility is very close to 42% measured by the standard deviation. But with one important feature that will be interesting in terms of our time of day prices, which we will see in the next slide. With regards to the displacement in the market, the price displacement, we have the displacement for this quarter compared with what we've seen in the North/Northeast system with regards to the Southwest -- Southeast, sorry, was lower than the first quarter of 2025 and BRL 62. If we see the first quarter of 2026, the displacement was impacted by the increase of prices, which reduced the difference in the market. On the next page, the curtailment. We had curtailment of 16% for wind generation, 26% for solar energy or generation. If we see the quarter average, it was a total cut of 2.2 in the second quarter was around 2.6 giga average, the total curtailment. So a slight increase with what we observed in '25. And also a change in the profile also with an increase of energy curtailment and a reduction of curtailment due to reliability. And a slight increase also in the curtailment for external unavailability. So during that quarter, we have a curtailment due to energy. On the next slide, we will talk about operational performance. With regards to what we said before, our GSF was favorable this quarter, which also impacted our hydro generation -- wind generation with 10% below the second quarter 2025, especially because of the wind resources. The company still have a high availability with its wind assets. However, unfortunately, wind resources were not as good as in the second quarter 2025. And in solar, we have a 7% increase with regards to the second quarter 2025. But as you know, it only represents 10% of our capacity, as you all know. So the impact is quite marginal over our results. In terms of our commercial performance, our next slide, we can share with you the calculation that the price we had in PLD and what we repurchased in terms of energy to cover our curtailments, especially in our free market assets. You can see that in the Southeast, where we have our solar projects. In the Northeast where we have solar and also wind power, we see there is an important reduction in the cost of purchasing for curtailment. And the average in the Southeast in the first quarter 2025, the average would be BRL 128 per megawatt hour. And in the second quarter 2025 and '26 will be BRL 83. So there is an important reduction. However, the greatest reduction was in the Northeast market and in the second quarter of 2025 to cover our position of our wind position, it would be an average of BRL 167, and in the second quarter 2026 was BRL 102. And this is related to what we've seen on the same page on the chart, on the lower part of your chart, where we see the average price for the market and a behavior of January of 2025 and January to June 2026. We can see that 2025 is the lowest point here. In the Southeast, we have BRL 128 with 222 megawatt hour. So 80% -- the price was 80% higher than the average during the day. And 2026, we go from BRL 124 to [ 260% ] above. So this explains in a certain way, both the modulation gain, a greater modulation gain as well as a lower cost and the curtailment. And this always happens in this time of the day where you have a greater impact, especially the impact of the mini generation. On this next slide, already now making this connection with the modulation curtailment, we have -- how much we have modulation per source. We can see that in the wind, it was positive in BRL 27 as compared to 0 on what we had in 2025. And for wind, it increased BRL 8. And in solar, there was a worsening of BRL 26 to BRL 53. But as we said, solar power in our portfolio only contributed to 10% of our capacity. So it's a very small impact in our results. And here, we also would like to show how the curtailment evolved the financial impact throughout the semester. And we saw here in the third quarter an impact and with BRL 71 million of the benefit of modulation. If we look into the previous quarters, we can see there is an important balance between these 2 benefits with the impact of curtailment. And of course, the third quarter is a quarter with the greatest curtailment because of the wind power seasonality, but we see an important modulation -- important profile, which has contributed to reduce the curtailment impact, as we mentioned before in the beginning of our presentation. On the slide here, we have energy balance. And basically, the company had intense change without an impact in its longer term. Now our commercial activity and in 2026, we have 800 megawatts and our position in the long term was basically intact. So this has to do with the result of our trade, and we were able to meet our clients also purchasing energy in the market with a positive energy. So this -- the idea of the company is not -- is to compete, of course, meeting the demand of our clients. We will be talking about energy. And with the strategy of given the price curve with a higher long-term price curve, the company will also preserve today its position higher based on 2028.

These are the 2 factors. The first one, as Fabio said during his presentation, this is a smaller wind power around 10% and also the result was weaker due to the trading issues. It's important also to highlight that the maintenance of the expenses was very controlled. We had number in the first quarter of 2026 and an increase of 9% in relation of the second quarter of '25. A large part of this increase is related to the beginning of the consolidation of a subsidiary of the company, which is E2. In the next page, we show that this quarter was not very active due to the liability management. As we said, this has already been realized during the year of '25, and we continue with indebtedness about 5x. We had a small increase in relation to March '26. As was already mentioned, we're going to have the maintenance of these levels during the year of '26. And then from '27 on, we will have a leverage process, which will be stronger. From the activities of the quarter, we had the prepayment of BRL 200 million, more or less BRL 200 million, a debt of the company that is due in March '27. In July, we had a post-closure event, we paid more or less BRL 100 million of the same debt. The schedule of amortization is quite controlled. We don't have any news here. We have -- we don't have a lot of need up to '27. We won't need funds during this turbulent time. The debt is very similar to the last quarter. 60% is linked to the IPCA, the same rate of conversion as the revenue of the company and 20% for the CDI. Now we can move to the next slide. I'm going to give the floor to you again, Fabio.

Well, we're now going to talk a little bit about the regulatory issues in reference to the curtailment. As you know, the number 140/2026 was published talking about the conditions to receive the period of September '23 to November '25. Then we have the cuts and external unavailability of the wind farms and solar energy. This was established in the law [ 2015/69 ]. It's still the discussions about this energy. This was not considered by the law. We recognize this, but it is something that the sector will have to deal with. When we talk about the energy curtailment, the company contributes also to these impacts, not only the centralized generation, we also have doubts about the regulatory treatment from November '25 on. You probably remember that after November '25, the wind farms can receive funds back. This also should be regulated by ANEEL. It still hasn't been regulated. And another thing that happens, the different steps that will have to be followed for the different commitments. These end according to our estimate in the second semester of 2027. We're going to have the recalculation of the impact, the presentation of the agents and also the adhesion. This is going to be a process which, in fact, takes time. We understand the schedule, which is a bit longer. We imagine that we have BRL 300 million to receive during this process. We are evaluating the intent declaration, which is not bonding. This should be done until the next 10th of August. We're still evaluating if we -- the signature. But the summary in relation to this, we think we're aligned to the law and we're following strictly what the legislation says. So I think there's a positive point that the market was expecting. The publication of the commitment term, this was published, and we see this as a favorable point in advancing the solutions of the impact of curtailment so that we can recover the sustainability of the renewable sector. It's very important for the maintenance and for the expansion of the electrical sector. So it's very important. In the next slide, we're going to talk about the reorganization, society reorganization. This has already has been an incorporation of Auren Participacoes or Auren Operacoes. Now, the second phase is to consolidate all these assets below CESP, it's going to simplify things a lot for the company. Everyone knows that the number of SPEs, the company numbers always generate a lot of work. This can help a lot. And here, we have our main goals to concentrate all the hydroelectric assets in one place, make the society simpler, the group and also a reduction of the listed companies, and it also brings us for the cash generation management, and it gives us space to be more efficient. In the next slide, we are going to our final considerations. So what are the main takeaways? Looking at 2026, the company is very focused in revising cost. We had very good integration with AES with synergy of BRL 280 million. The company continues working optimizing processes and reducing costs. We're working here in the company called OBZ with very positive results. And besides the reorganization that I mentioned, advancing our strategy of artificial intelligence. The company is very well positioned to take opportunity of the opportunities of the market. As I said, our energy balance is very adherent to the movement of the market. We are short term when the price has a trend to drop and long term where the price maintained itself higher. So the deleveraging is constant in '26, '27. And when the investments stop, the company will continue generating cash in the same way and the decreasing trajectory, we will reach the level -- medium level of the sector. As for the regulatory issue, we have the publication of the Law 140. We see this positively. This is a sign for the sector, which refers to the curtailment. We still have a lot to do in terms of the energy curtailment. But I think this will already give us a goal to follow. This is a topic which is very much aligned with what the legislation defines. We will evaluate in the next few days, the adhesion of the manifestation of interest. We continue also working to receive the investments of CESP. And perhaps we're close to a solution. We have to consult the public hearing. We already have part of the result when ANEEL recognized the amount of investments, and now we have the other recognition that has to be done with monetary connection. So these are the topics that we wanted to talk about during this semester. We are available to you for the session of questions and answers.

[Operator Instructions] Our first question comes from Daniel Travitzky from Safra Bank.

I have 2 questions. The first question is about curtailment. I would like to talk a little bit about this. But how and when do you expect the discussion about curtailment or future curtailment will evolve? And then still on this topic about the provisions about the curtailment, at what moment do you think that you will be able to deal with this topic and you will pay this reimbursement of this value. When will you deal with these reimbursements? And the second question is about the reorganization. I would like you to talk about the games of taxes, fiscal games, the corporate reorganization that you're going to have, what impact this can have on the results?

Thank you, Daniel, for your question. Well, the curtailment is the topic that we have to dialogue with Congress again because the law has to do with the past. This was already -- the legislation already takes this into consideration. And this occurs next year because now we have elections, and there will be a change in relation to the Congressmen. So this is a topic that for sure will be discussed again in 2027. As for the reimbursement, our decision here, once demonstrated the interest of participating, then we will have a discussion with the Board and with the shareholders about the definitive action. The reimbursements and compensation are forecast is that will happen in the second semester of 2027. It can occur during the year, perhaps in 2028. Those who are going to receive the reimbursement of the regulated contracts, and these regulated contracts, they also have a limitation to be disbursed, which is the revenue of each one of the parts. So this is going to be phased out in time. So there is this payment limitation because that's what the regulated contract says. So from the second or third quarter of 2027, we'll have the settlement of these values based on the schedule that we've been working on. As for the corporate reorganization, I'm going to pass the word to Mateus.