Eneva S.A. (ENEV3) Earnings Call Transcript & Summary

Develop an infrastructure for gas, a gas hub. Within this context, the combination of imported LNG and onshore gas assures us the flexibility to acquire gas and develop a new client portfolio with industrial, transportation and energy projects. In the context of this transaction, we are acquiring 100% of the shares representative of Celsepar capital stock, a controlled company by Celse to the tune of BRL 6.1 billion and with a net debt of BRL 4.1 billion. I now turn the floor over to Marcelo Habibe, who will present an overview of the assets and the rationale behind this transaction.

Thank you, Pedro. Good morning, everyone. I'm now on Slide #4. The Celse asset is a thermal gas plant, so-called UTE Porto de Sergipe I, operational since March 2020 and a capacity of 1.6 gigawatts approximately. The plant is totally contracted in the regulated environment until December 2044 with a fixed annual revenue of BRL 1.9 billion. And in 2021, it posted an EBITDA of BRL 1.4 billion. The asset has a contract to supply LNG for 25 years with Ocean LNG, a construction firm by Qatar Petroleum and Exxon. And operation contract and maintenance for 25 years with GE and FSRU with the capacity of regassing of 21 million cubic meters during the PPA period. It's worth mentioning that the 15 million cubic meters of [ capacity -- idle ] capacity at the terminal can be used to monetize the growth pipeline at 3.2 gigawatts, which is also part of the transaction. We also anticipate the development of a potential demand for industrial consumption, demand from local distribution companies and also consumers who are now out of the grid, both new and existing consumers. Now moving on to Slide #5. UTE Porto de Sergipe I and the respective expansion projects have a strategic location on the coastline of Sergipe, 8 kilometers from the gas -- regassing terminal and standing by the [indiscernible] plant to receive the gas through the combination of imported LNG and natural gas on the local basin, the expansion of our thermal [ park ] will be very competitive in accessing this gas molecule. Now moving on to Slide 7. I'll be talking about the rationale of the transaction. Sergipe's gas has a differentiated attractiveness. In addition to a robust PPA, it's a strategic region for the supply of gas to the international market. Overall, we have acquired a large asset, well contracted with a fixed attractive revenue of long duration to the tune of BRL 1.9 billion. This will lead to a robust EBITDA and also predictable for the next 20 years. In addition, there's an interesting upside in terms of EBITDA when the company is dispatching outside the order of merit. Last year, for example, it was an atypical year because of Brazil's [ hydrological ] company, so it generated over BRL 200 million in results outside of the merit. That led the EBITDA to BRL 1.4 billion. Also important to note, we have opened new growth avenues to develop new greenfield projects, a total of 3.2 gigawatts in projects in plots of land with permits, and most of it already ensured in terms of energy. Those are projects which are more competitive than the other greenfields you have in Brazil. Since all the terminal structure and [indiscernible] have been amortized in Porto de Sergipe I. A third point, one of the most important point here is the location of the asset, very strategic here in Brazil. The Northeast is a very promising region for gas consumption and market in that region. In a few years we'll be very different from the one we have today. There is a potential consumption, which depends on supply. Once we connect the grid, we'll be able to supply that demand and competing in better conditions with the existing terminals in that region. In addition, the terminal is very close to the Sergipe-Alagoas Basin, as I said, known as SEAL Basin. So starting in 2026, it will start producing and treating gas at a very near processing station. Those projects -- we will be -- we serve as an anchor for the production and distribution of the gas. Lastly, we also see possibilities of acquiring synergies. So we understand that in the future, given the quality and the age of the plants, we have the option to renew the contracts for the -- after this current PPA expires. Now I turn the floor over to Lino, who will go into more detail about the strategic location of those assets.

Good morning, everyone. On Slide #8 now. To call your attention to the map that shows discoveries in the SEAL Basin, a significant volume of gas in Cumbe and also gas reserves in the other field, Barra. The plan to develop those reserves, which has already announced to the market by the state company includes flowing the gas to a [indiscernible] on the coast, close to Celse. So the expansion program will be natural candidates to consume the gas, which will flow through that production system. Now moving on to Slide #9. It's worth mentioning that investments made to develop those discoveries in deepwater in the SEAL Basin were one of the few projects outside of the pre-salt, which were prioritized for our -- for Petrobras' strategic planning for 2020. Part of that plan as highlighted there, according to what they announced in Petrobras, the contracting of the first [ RFSU ] started in 2021 and the first oil is expected to be extracted in 2026. The project anticipates an outflow-type pipeline for natural gas with a capacity of 18 million cubic meters a day at an initial production at 8 million cubic meters per day. Significant offshore production and disconnection with our land grid and also in combination with our LNG terminal, we will turn Sergipe, one of the main gas in Brazil with multiple possibilities of [ express gas supply ] that molecule and great opportunities to monetize that a large number of consumers and a large greenfield portfolio, including distributing companies, industrial clients, in Sergipe and in the neighboring states. I'll now turn the floor over to Marcelo Lopes, who will be talking about sales opportunities. Thank you.

Good morning. Let's move to Slide #10, if you will. First, it's important to highlight that we are now implementing and connecting the regassing terminal and the local pipeline, which is part of TAG's pipeline network, which is part of the Catu Carmpols system and also the remaining pipelines in the area. So the LNG terminal has an idle capacity in addition to what has been contracted of around 14 million, 15 million cubic meters of gas a day. Once we connect the to TAG's pipeline rig. We'll be looking ahead of the pack and creating other options for our industrial clients. We'll be able to have a more sustainable and cheaper access to gas and with assured supply as well. Now Pedro Zinner will take over to continue to make his final remarks.

Thank you, Marcelo. Well, moving on to Slide #12, if you will. I think it's important to say that with the acquisition of Celse, the representativeness of the gas source in our generation mix will increase, reaching now 72%, which reinforces our view that natural gas will play a very important role in this energy transition. As we conclude this transaction, ENEVA and Celse reach a combined capacity of 6 gigawatts with a project pipeline of another 8 gigawatts. If we combine the EBITDAs of 2 companies for 2021, we'll reach the figure of BRL 3.6 billion. Now moving on to Slide #13. On the map, we can see that with the acquisition of Celse, that represents an important landmark in our strategic challenge to access gas molecules across different regions of the country. And so we will advance our objective of supplying integrated solutions for energy consumption to our clients. With the acquisition, ENEVA now has 3 clusters of gas generation in the area with strategic positioning for -- to supply to different markets. Access to onshore molecule in the Parnaíba Cluster, 1.9 megawatts of capacity of thermal generation, a plant of gas liquefaction to distribute to industrial clients and an exploratory potential that might lead to other projects and also lead to the renewal of contracts of existing assets. As for the Amazonas/Solimões Cluster, we have 436 megawatts, which have already been contracted through the Jaguatirica II and Azulão [ II ] thermal plants. And another LNG plant with the capacity to process 450,000 cubic meters and a exploratory potential which will be able to lead to new projects as new reserves are discovered. And lastly, we have the SEAL Cluster, which allows us to access gas through our LNG terminal, either via TAG's pipeline system or via deepwater reserves from the SEAL Basin, adding to that 3.2 gigawatts in thermoelectric potential and also a pipeline of 3.2 gigawatts. Lastly, it's worth mentioning that the pipeline run by TAG can generate a potential synergy with the Bahia [ Terra ] Hub as well. Well, I'd like to thank you all and thank my team, actually. They've been working very hard tirelessly to complete this transaction. And this team is a key component as we build our new company. I'd like now to go for the Q&A session, if you will.

[Operator Instructions] First question. Can you please give a little bit more color about the stage of that pipeline of 3.2 gigawatts what permits have you already obtained? And what would be your contracting strategy for that pipeline? Can you explore auctions run by Eletrobras, when would those contracting processes start?

The pipeline that we bought together with the Celse project already has the permits or the necessary licenses to participate in the auctions. Part of this pipeline has access to connection and flow margins. And the idea is to participate in the upcoming auctions that will take place as of the end of the year and the beginning of next year now, specifically the Eletrobras auction. The way it has been defined in the ordinance and then the law, Sergipe is now 1 of the states that will receive TPPs from this auction. So this wouldn't be the case. Habibe, if you would like to say something.

There is another interesting aspect that 3.2 giga are 2 major projects -- they're not 2 major projects, these are 5 projects. One with 400 mega, there's another with [ 617 ], Sergipe with 300 mega. And there is another major project that has 1.2 giga and [indiscernible] with 617 [ giga ]. With this, we have flexibility. We can register these projects depending -- if this is a big auction, we can hire bigger and competitive projects and smaller projects. We can fit them within the auction demand. This provides us interesting flexibility when we participate in the upcoming auctions.

Now our next question. Did you -- will you have to use imported gas terminal to develop the pipeline, or can you use gas via TAG or SEAL? Could you use Eneva's gas by TAG to develop the pipeline, could you send gas through Bahia Terra.

Marcelo?

Okay, as we have seen with the contract of the LNG supplier, there is no obligation to use the imported LNG to develop the pipeline. The contract is for the existing TPPs and we have to use it with Ocean LNG. In the pipeline, we will explore gas -- national gas opportunities developed from SEAL. Yes, we will be able to assess gas opportunities that we may develop in Bahia Terra as well as other sources of imported gases, be it from Ocean or from other suppliers. We have flexibility and liberty to develop our pipeline through different gas supply sources.

Our next question to Habibe, I would like to know how you are funding the acquisition? What is your level of leverage after the deal? And what is your deleverage expectation throughout [ time ]? What do you -- what are you expecting for the future?

I will start in the future. The approval to conclude the deal are common approvals when you purchase something. We will have the Eneva shareholders' meeting. We need the approval of creditors. We need the approval of the antitrust agency and we expect this at the end of the quarter of 2022. There is a long way to go, but we see no obstacles in these approvals. This is just a matter of paperwork and approvals regarding the company's leverage position. Our capital structure or capital stock, we will announce this. We're working on this, but I [ come ] with the possibility of [ equity -- of almost equity ]. So as soon as this is refined -- the information is refined, we will disclose this to the market. Now regarding our leverage position, this is a result of the acquisition structure, the capital structure because we don't want to have high leverage [ than ] Celse. Although this is a big transaction, it helps the company to deleverage itself. Celse this year 2022, well, there is an expectation of an EBITDA of BRL 1.2 billion. So Celse ended 2022 with a net debt of BRL 4.1 billion and Celse is deleveraging. And last year was the second year of operation. This year is a third year. They have a strong cash flow. So Celse will deleverage throughout [ 2020 ], Celse will deleverage even more. At the end of the year, there will be a deleverage below 3.5x net debt over EBITDA that the weighted average of the new company post deal tends to be lower. So it is driven lower. By and large, the deleveraging process of the company [ for ] Celse accelerates even more and that accelerates Eneva's deleveraging position.

Now, Lino, could you give us details regarding the synergies with [ Porto ] Bahia. I believe that gas production isn't very high for the time being. Could [ Porto ] Bahia send gas directly to end consumers through TAG network and they don't need TPPs?

Well, I believe that this is a correct statement with -- as the production of the gas is high in the Recôncavo. Now all the assets that used to belong to Petrobras and are part of the development projects are sold to operators that want to revamp the production. So we do expect an increase in production when in the Bahia, Recôncavo. And then with the infrastructure, we will have the opportunity to understand the production and how to better place that in the market. It won't be necessarily be done through TPP, but we have a possibility of synergies between this complex and Sergipe. What is important to highlight is a mix of national gas that tends to be more competitive and imported LNG broadens the sales possibility and we can reach more customers at lower cost or at competitive cost as if we would have only LNG, therefore, we will service more customers because we have the terminal in a competitive fashion because the -- because of the onshore gas production in Bahia.

Now our next question, I would like to better understand the level of competitive of the gas of Bahia Terra vis-a-vis LNG? What would be your situation of gas transportation and cost?

If we talk about the cost of gas and transportation, it's very premature because Bahia Terra is a non-concluded transaction; and Celse, it will be concluded. And I go back to Marcelo's answer. What we see is a possibility of an average price. We will have access to different sources of gas, different costs and we will have an average price that will be more competitive to Eneva. And well, we will see different opportunities in the future. Would you like to say something, Marcelo?

I had already mentioned this and probably gas from [ Porto ] Bahia is not the most likely monetization way. We -- with this, we won't increase the capacity of thermal generation. It can help us. But what is important is the sale to the end customer or to the local distributors through our pipeline network. It would be too premature to see the cost and what -- and if it will be competitive or not, I believe if we have a specific portfolio, we will be able to be more competitive.

Now our next question for Habibe was about the gas contract for the TPP. Is there a variable margin in your TPP?

Now gas supply is a 5-year contract with Ocean that is partnership with Exxon and Qatar. There are a number of -- there is a take-or-pay minimum per year in cargo and if the plant does not consume, it is redirected to the international market. Today, the price of purchase of this gas is lower than what the international market pays. Ocean, when they send this load to other potential purchasers, and there can be profit on this loan, and there will be no penalties on Celse's side in [ turn ] in CVU. The CVU of the plant has already been calculated in order to match the costs, the variable costs, the costs to acquire the molecule and the variable cost of the plant dispatch. This is not a perfect match. This reminds of our coal plant in the long term has a neutral CVU, but in certain moments, there can be a mismatch in working capital when you buy coal, when you buy gas. Here, when you buy gas and when you consume gas that in certain moments in time can generate margins that are marginally positive or negative. But in the long run is 0, is to have a dispatch within merit with margin 0.

The next question is for you, the disbursement of the equity is 100% in cash. Could we optimize and releverage your guarantees? Is there a fiscal monetization from Celse? Will they use their fiscal credits from the holding?

Let's go by parts here. Well, the payment of the equity is 100% cash. When we closed the transaction, we expected for Q4 this year and with the approvals and the acceptances, right? Now although the acceptance comes before the minimum date of disbursement would be the last quarter of this year. Now regarding the funding or financing. Well, basically, there are some financing lines that are interesting because these are different creditors, IFCID [ B ] with China Fund, with [indiscernible] and KCA in Switzerland. These are more expensive debts than what we're used to. On one side, we have access to another area. I don't stress and have a credit limit because we have credits where we don't have exposure. But yes, there is an opportunity to renegotiate or reset this day. There are, for example, IDB, IFC, [ IPC plus 9 ], that wasn't part of our math in the assessment, but it is an upside once we sit down, we settle. And once we understand that the conditions of anticipated amortization is positive. There is an uncertainty of optimization. This is a matter of liability management.

And the next question would be the new contract to supply part of the pipeline with [indiscernible] the expenses with FSRU or does the project already compensate this?

The current project pays 100% of the costs from the leasing until the other fixed cost of FSRU, then the upcoming projects will piggyback on the first terminal that is Sergipe I. This is why there is competitiveness not only in our new projects, but also for commercialization. We have other terminals in the Northeast. And they -- and the molecule that is traded there, it pays for the use of the terminal. Here, we have a competitive advantage, who pays for use of this terminal is Sergipe I. Further competitive -- our future competitiveness in the molecule already starts with disadvantage vis-a-vis the other terminals.

The next question would be to break out the EBITDA of Celse on 2021. I would like to confirm that the [ EBIT ] of 2021 [ BRL 0.2 billion ] via fix contract. And then we had via dispatch, [ BRL 0.4 billion ].

There are major figures here. [indiscernible] and idle capacity in reality, it is to cover the thermal plant. This covers 6 million cubic meters. Ocean has no preference right as is to occupy those 15 million cubic meters. So when we're able to monetize that potential be it through trading, be it through new thermal plants. We're going to need a new contract with the best price and best conditions offered.

How can this contract protect against force majeure, an increase of risk because of a war, for example, through a penalty? Clear penalties have been established that will cover any cost the company may incur because of the lack of availability to deliver energy. This dispatch is outside of the order merit. Does this generate margins? What's the expectation of those dispatches now?

The dispatch outside the order merit as I answered in the long run, it tends to be 0. There might be a variation in working capital because -- between the time when you buy and you sell the gas and when you establish the number and the currency of foreign exchange currency might change, very close to what we already see today last year. We had very positive margins for coal, 2 years ago, it was marginally negative. So that's part of the business. But in the long run, it tends to be 0 -- to some total tends to be 0. This is an interesting lever that we have, the anticipated dispatch. How does that work? It is called to dispatch the -- its PPA contract. It happens 60 days in advance. So I'll give an example to try to contextualize that. The ONS, the national [ system ] operator on June 1, hypothetical, of course, as an example. It didn't happen, just be sure. On June 1, the dispatch Porto de Sergipe I. That dispatch has to start 60 days down the road after June 1. In other words, August 1. So on August 1, the plant has to be dispatching and will be remunerated at CVU levels. The gas load will take some time, about 10 days, 15 days to reach the UTE, the thermo plant. So on first of -- June 1, we are called upon that. We commissioned the load in our example, just as an illustration, then on June 10 -- between June 10 and August 1, we have the plant supply, and they may dispatch but only within the merit. And in this period, from June 10 to August 1, if you know the area, you will know, that's the period where the spot price is going up. When we start the dry period in Brazil, we start to lead the minimum levels of the spot price. There is a growth, and which is the maximum by September. October, we start to see a drop in spot prices. So throughout those 50 days, where we have the plant total supply, spot prices are going up between the time when we called until the time it goes operational, there is a trend or a track record that, that number will go up during the period. So throughout those 50 days, we may dispatch the thermal plant having bought gas at the CVU level, but the spot price will have been higher as we dispatch thermal plants outside the order of merit before August 1. We received the spot price. So we do have a positive margin there during that 45, 50-day period, which is the difference between the CVU and the spot price. And that's why last year, it was an atypical year where we had dispatches and the spot price curve went up steeply. That generated approximately BRL 200 million. Looking forward, we believe that there will be opportunities coming up, which will be similar to those that we had last year. Maybe not this year, almost seasonally not in 2022. But as of 2023, we are likely to have that and further down the road, if everything converges to previous track records, I'd say, for sure. So there is a potential upside there in the ability we have of managing gas purchase contracts that might generate an added cash flow revenue. If I may complement [indiscernible], when we combine that with the existing portfolio, including Parnaíba, that increases the potential, that happening -- have an even higher number of levers to generate value from those arbitrations and exceptionality.

Next question for Habibe. Will there be fiscal benefits to amortize premiums for the transaction?

Yes. The answer is yes. And I forgot to mention before, -- just going back a little bit, I was asked if there were tax benefits from [ Sudan ], yes, that will be good until 2030. Tax benefits -- the tax losses cannot be used for Celse. So there will be a possibility to explore the surplus, yes.

[Operator Instructions] I'd like to thank you all for participating in our call today. We are now closing. Have a good day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]