Engie Brasil Energia S.A. (EGIE3.SA) Earnings Call Transcript & Summary

Good morning, and welcome to ENGIE Brasil Energia Second Quarter '25 Earnings Results Video Conference. I'm Adriana Wagner, Investor Relations analyst and would like to make a few announcements before we start the video conference. [Operator Instructions] This video conference is being recorded. At our website, www.engie.com.br/investors. The results of the presentations and earnings release are made available in addition to a complete financial statement and other documents filed at CVM where analysis of financial statements, operational results, ESG indicators and progress in the implementation of new projects are disclosed in detail among other highlights of the period. Before moving on, I would like to clarify that all statements made during this video conference regarding business outlook of the company should be treated as forecast depending on the country's macroeconomic conditions, performance and regulation of the electric sector in addition to other variables. Therefore, they are due to changes. We remind you that journalists who wish to ask questions can do so by e-mail and send them to the company's press office. Today with us, we have Mr. Eduardo Sattamini, CEO; Guilherme Ferrari, Managing Director, Renewables and Batteries; Mr. Gustavo Labanca, Director of Paulo Networks; Mr. Marcos Keller, Chief Supply and Management Officer; and Mr. Leonardo Depine, Investor Relations Manager. I now turn over to Mr. Sattamini.

Hello, everyone. It's a pleasure to be with you once again, and I wish you all a good morning. We continue navigating in this extremely challenging environment in the Brazilian electric sector. with regulatory actions that are controversial. But we move on with our pathway and long-term vision. I would now like to share our highlights with you to demonstrate our commitment with our future. Today, we have the Serra do Assuruá Wind Complex with 100% physical progress being 88% commercially operating and 12% under test. The requirements to start operation have been started by Umburanas and it's taken us a little longer for us to generate and start commercial operation. So these are some of the changes that we can see and the result from a more conservative approach for new capacity, as photovoltaic complex with 96% of fiscal progress, 24% of the plants under commercial operation and 63% under test. At the end of the third quarter, we are likely to have this plant fully operational and the declaration of the commercial operation will be obtained with the operator. In July, we also concluded the 15th debenture issue totaling BRL 2.2 billion. It is considered as a green debenture with a green debenture classification. And it demonstrates our capacity to obtain resources, our competitiveness in terms of obtaining capital. In the past quarter, we also had the restructuring of the Executive Board. We will talk about this in detail, but the idea is to align the Board of Directors to the main businesses of the group here in Brazil. We will talk in detail in Slide #7. The meeting we had with the Board of Directors, we had interim dividend distribution of BRL 719.2 million. And later we will have more definitions on the company's cash. Now in the next slide, we have the new composition of the Executive Board. Idea here is to include the business areas and put them ahead of the business with renewables storage and the whole spectrum from the development, construction, operation of the renewables just as with Gustavo Labanca in energy transmission with the 3 most important parts. With this, our business becomes more fluid. And we have a strategy for our portfolio. And these 3 business areas are supported by the financial area, Regulation, Strategy and Communication with Gabriel Mann, Sophie with Human Resources, Felipe Batista with Legal and Ethics. And we have an ongoing process, and we will soon inform you about our sustainability area. This is a new statutory position, which is being created. And it will be part of our extraordinary assembly where we will propose the creation of this statutory area. And so moving on and the financial highlights. We have our EBITDA above all, and I would like to remind you that we have some nonrecurring events, which cause a bit of a distortion. First of all, and the first remark we want to make is that when we compare quarter-over-quarter, this is very difficult for a company that generates and has different seasonality strategies for its resources. So this is the main -- the first comment. But when we remove the issue of nonrecurring events, we can see that our growth strategy is in place, and we have growth from one quarter to the other, even if the comparison is not the best one to make. We have 10% from the second quarter of '24 to the first of '25. Also when we talk about the accrued results for the year from '24 to the first half of '25. We reaffirm a sustainable and profitable growth of the company to generate cash. But of course, in terms of net profit with high interest rates and at a moment when we are investing, we still do not have an increased [indiscernible]. It will take some more time. With that, our financial results had a decrease, and this is the situation that we see when we talk about net profit after evaluating these aspects, including the interest rate and this lag between investment and return so that we have this decrease in our net profit. But moving on to ESG KPIs in the next slide. We can see that our emissions intensity is very low. When we look at the reference of NIS, it is 10x lower, and it is totally aligned with ESG. Safety indicators also show a significant control of the safety of our employees. We have evolved in terms of diversity in our workforce. We've made investments in innovation throughout the past years so that we can provide instructions and investments on operational safety. This is our main focus. In terms of social responsibility, of course, we have incentivated resources and they vary from year to year, but our goal is to invest 100% of the resources available, also engaging with the community, which is a very important element. And this is something we monitor, and it is very important for us so that we can have a positive impact on the largest number of people participating in our operations. In the next slide, we will talk about the operating highlights. And I will turn over to Guilherme Ferrari, so that he can talk about energy generation.

Good morning, everyone. I would like to share some highlights with you in the first 6 months. Regarding hydroelectric generation, we had a decrease. There is seasonality, and there won't be a major impact on the company's results. But this is normal. Last year, we had a very large volume, which was not seen this year. I would like to talk a little bit about a project of modernization in one of our plants in Jaguara. We obtained it in an auction last year with Cemig. This is a process that we're starting now and will increase next year. Regarding the renewable energies, as mentioned before today, we had Santo Agostinho inclusion in the North and also Assurua where we are in the process of implementation. As mentioned, the regulatory aspects are delayed. Last year, we had the closing of the acquisition of the Atlas assets and that increases our solar energy. Also, Assu Sol which is something new. And last year, we had one in Paracatu. We are resuming this project with an expansion. Beyond the new projects, it is worthwhile to highlight the improved availability and performance of our wind assets. Today, we have the performance area working along with engineering so that we can leverage our assets. In the past years, this year, we saw significant improvement in performance, both in our wind and solar assets. Regarding our wind assets, this quarter, our profile was a bit more favorable and helped us to provide better wind generation or to further our wind generation. In the next slide, I think this is something that you're all familiar with, but I would like to share with you the impact on energy generation. For renewable energies, curtailment is one of the main challenges we have, and it has impacted generation quite significantly. I would like to reinforce that for us in renewables, curtailment had an impact of 14%, including wind and solar with an average of 14% for both of them. But the solar timing is more impacted. And it is aligned with what happens in the system in the national integrated system of 15%. And of course, when we analyze our portfolio, this impact is significantly reduced according to our technology diversification strategies and that leads to an impact of 5% at the end. And these are the highlights for generation in this first half of the year. I would now turn over to Keller.

Good morning, everyone. I'm now going to summarize our commercial activities for the quarter. On the left side, you can see that we've maintained our strategy for the portfolio with a lot of care regarding our risks, including hydrological risk. And so we have some energy available to sell in '26 and '27. And gradually, we will increase our availability, always following our strategy to sell energy in a continued manner with some mild fluctuations in the market. This is demonstrated on the right side graph. You can see the availability every quarter. And this was not a quarter where we had intensive sales. There was a trend towards price decrease in the whole quarter. This is being reverted now, but there was this trend, and it wasn't the best time for us to accelerate our sales. We also had the issue of submarket risks, and we have to pay a lot of attention to our sales position. Another factor to be highlighted is that the business team is focused on longer sales, which did not really happen. But we still have some concessions, but we are focusing on this aspect. Also, we paid more attention to the longer access according to our strategy shown on the left side graph on our availabilities. In terms of number of clients, we had a significant advance. We had an increase of almost 22% when compared to the previous year. In terms of consuming units, we've gone beyond over 4,000, an increase of 15% when compared to the second quarter of '24. And I would like to remind you that this does not yet include some of our assets, which will be closed throughout the quarter. I will now turn over for the continuation of this presentation.

Okay. So I will come back now and talk a little bit about our expansions. As Marcos Keller just commented and as informed to the market, we had the signing of this contract in March. And we expect that in the next few days, we will be informing you of the closing of this operation we do believe that in the short term, we will be -- we will get there. We have hired 100% and they are safe and for the long term. This is very important for us because it enables us to elongate a little bit our deadlines. And because of our very large hydric park, we will try to extract as much value as possible. It is well adjusted to our portfolio of projects in ENGIE Brasil Energy. A very important aspect I would like to highlight for the strategic aspects. We're always trying to balance different types of assets. And we also have the opportunities that will arise in the market. And therefore, we always pay close attention to the opportunities that may be added and that we will keep on analyzing and moving on with our projects. We've had some information on the Serra do Assuruá Wind Complex and the main aspect today has to do with the delay in obtaining the declaration of studies that are required today. The requirements are higher than they were in the past. We do believe, however, that all of the SPEs will have their commercial operation approved in the near future. This was a very challenging implementation due to its size 68 were generators, but everything went really fine. All of the indicators were met, CapEx, the schedule, safety and health, our license to operate. So everything went fine in all regards and a very important thing to mention, as you know, the performance of these machines has been very good and above what was expected, which is very important for Serra do Assuruá Wind Complex. And then in the next one, we have a photovoltaic complex where we already have an ongoing process where we have energized 14 of the 16 units. And we do believe that in this process, along with A&S, we will be able to obtain in the next months to obtain all of the declarations because we will start business operation. Also a project that is going really well according to the anticipated CapEx and schedule, which is very interesting and within our expectations. These assets have a good performance with providers. And so the performance of the asset has proven to be very positive for the business. And these are some of the highlights for photovoltaic process. And Gustavo will talk about the transmission project.

Thank you very much. It's a pleasure to be able to be here with you with an update of this project, which is being implemented for energy transmission. We have the Asa Branca project. It is very important for the country. We're talking about 1,000 kilometers from the center south of Bahia all the way to the state of Espirito Santos, which is key for the expansion we see in the Northeast. The project is updated and the main highlights to share now is that we're doing really well in the first area. It represents 1/3 of the IP, and we will start operating early this year. We're talking about an IP of BRL 9 million per year. We also have 3 segments where we had the issuance of the environmental license at the end of June. And the teams are working together so that we can have the license issued with authorization to start in the beginning of next year. And of course, we're talking about a project with BRL 2.7 billion CapEx. And the next one to be implemented is the Grauna project. It is also very important, and we have a lot of synergies with our Gralha Azul project in the state of Santa Catarina and Paraná. But we also have brownfield asset located in the state of Espirito Santo. It was already operating, but the license was due to expire. So this is very important news we're sharing. We are already operating the asset 100%, and we've been doing it since July 18, which is really nice in terms of revenue, it represents 5% of our total for the plant. And if we add it to 90% of the first Asa Branca plant, we will have BRL 100 million of additional revenue for our transmission assets, which is very important. We have some important updates also. We have RAP updated for the new cycle and the total project CapEx of about BRL 2.9 billion and BRL 268 million of RAP. Now the environmental licensee has moved on well so that we can comply with our schedule and also follow Enel program, which is anticipated to be for 2029. We have the October 31 auction. We're talking about BRL 8 billion in CapEx, and we are analyzing the lot that we should be looking at more carefully and participate on the 31st. I will return to talk about the expansion. You all know that Jirau is very important for our group. Today, it's not within the network. We have overcome different technical challenges. This year, we obtained approval of the expanded quota. And then after that, the constant quota eventual transfer to Brazil Energy. We will be monitoring today. You know we have ENGIE and Mitsui. Everything is done together, but we might have to incorporate it later. And if we do that, we will inform the market. And moving on to the next slide regarding our expansion capacity. As we mentioned before, we have 2 projects under construction, Assuruá and Assu. And we have 2 projects that are being developed in our portfolio. These are options that we have Santo Agostinho in Phase 2, the solar complex in Santo Agostinho for a hybrid project in Umburanas, we also have a capacity for expansion. An important aspect I would like to mention, and it's nothing new for you. We will maintain our pipeline for the future. Today, we do not think that we will implement new parks because of the low energy offer in upcoming years. Some regulatory measures have to be taken so that we can make new investments without harming the sector as a whole. I will now turn over to Leonardo for the financial performance presentation.

We have 2 highlights. And good morning, everyone. We had a decrease in ROI and part of it ROE and ROIC. We had inflated revenues as we add new assets, the ROIC goes back to a more normal pattern because the assets are new, they're not all operating and therefore, they are not delivering the expected results for wind and solar energy, also for the transmission units under construction. On the line below, we can see that in 2016, we were 100% generation. And today, we have 25% outside generation with the 2 transmitters and 9% representing gas transportation. And moving on to the next slide, we can see the changes in our operating revenue. We had an increase of 10%. Even with the indemnity for Santo Agostinho. Also we have the transmission assets and quarter-over-quarter, we can see the significant 10% increase. In the next slide, we can see the results for equity income. This is TAG's second isolated quarter. The profit was, as you can see here on the slide, and there was a stake of 17.5% in TAG resulting in the contribution of BRL 199 million through equity income to the company's EBITDA in the second quarter. The result was strong. And moving on to the EBITDA evolution. This is a more complex graph to analyze. We can see the EBITDA as published by accounting on the -- and then we have the adjusted EBITDA. We removed the nonrecurring events. We also removed IFRS and financial and transmission assets. So when we get to the columns in the center, our results, which are closer to regulatory. We can see a result of minus 8%, but we have the Santo Agostinho aspect. And if we do not take it into account, adjusted EBITDA would have increased 7%, which represents better organic movement for the period. And then in blue, we can see tax improvement compared to the same quarter last year. And now talking about the net income, we can see nonrecurring with a 25% decrease and nonrecurring with BRL 34 million. Even though we call it nonrecurring, we also had a strong impact because of Santo Agostinho, which is included in the adjusted EBITDA. We also had a very specific event, which harmed us now. It has to do with a noncash event, which impacted our financial result, but it will be adjusted in the near future. And if we adjust it, the results would have been very similar to the past quarter. And so moving on to the balanced debt because of the CapEx cycle, our debt is increasing. We have a net debt of 2.9x the EBITDA. It is still healthy. The gross debt, you can also see our cash position is at BRL 6.6 billion because of the CapEx, especially of transmission to be obtained in the future and then also, which will take place within the next week, and this will be adjusted in Q3. The debt profile remains healthy. We can see that the situation is healthy. The mean time remains 7 years. Today, we have interest rates of 15% and inflation rates of 5%, 5.5%. So we went from 9.5% to 11%. And the composition of this debt. You can see here a nominal cost of debt of 11.8% annually equivalent to IPCA plus 6%. And we are also protected by our cash. The indexation of energy sales contracts mitigates exposure of debt to IPCA and cash position mitigates part of the CDI exposure. Regarding CapEx, I've already talked about it. This year, we had about BRL 6.5 billion, some of it for the acquisition of Jari and [indiscernible] and the main ramp in Asa Branca. For '27, we will have the conclusion of Grauna and Asa Branca. And this is what we have for the future. Regarding dividends, we maintained the 55% as expected. With the leverage going up, it's reasonable that we hold our results to keep it in healthier terms. So for this quarter, I told you already, we had a payout -- and I will now turn over to Adriana because we're starting our Q&A.

Well, perfect. Thank you very much. We're going to start our Q&A now. [Operator Instructions] Our first question is from Victor from Itau, and he has 2 questions. Could you give some more visibility regarding the PMSO increase in the quarter, especially in the line of material third-party services. Given this leveraging higher next year, what is the company's strategy for growth? Can we expect capital allocation in transmission and/or generation?

Well, this is what the company -- or the impact of the company in the last 8 months with the new assets last year. This time, Santo Agostinho was not fully operating. We also have Atlas assets that were acquired in the second quarter of last year. Since then, Assurua and Assu Sol also added PMSO as they started operating. So this was due to a scope variation. In addition to that, the organic variation was very low in line with what was to be expected and according to the inflation rates of the period. So we did not have any MSO highlights. Yes. And the trend is that we will have operational improvements to be made, and they will end up demanding in the first or second year of operations, investments and operational improvements. This is the added value when we purchase assets. Regarding capital allocation, the trend with excess offer right now is not to invest in greenfield and renewables until we have better visibility. For renewables, eventually, we could invest according to the higher M&A, which is the [indiscernible] case and the 2 plants that we acquired from ADP with the financial closing to be performed in the next few weeks. We will continue investing in greenfield in transmission, which has been very successful, and we will gradually increase our portfolio with transmission lines. Gustavo is heading this team. He will look at the auctions in the second quarter.

Thank you very much. Moving on with the questions. We have a question from Maria [indiscernible]. She has 2 questions. The curtailment pressure remains strong in the sector. Does it change the way you view resource allocation in this segment and the assets that you have today in your portfolio? And I would also like to know if you think that this problem can be solved in the short term. We've seen that you sold some energy for longer uses. What is liquidity like in the market?

Well, regarding curtailment, this is what Sattamini and myself had already mentioned. The environment today for new investments remain favorable. And it does impact the generation of renewables. The impact is quite significant regarding curtailment. Actions for reduction, this is something that we analyze the whole time. We are trying to find other solutions so that we can have a decrease with a lower impact. Well, Guilherme, this is something very important that I would like to mention. We have a distributed generation, which is a main problem for the electric sector with the development of the generation capacity and the distribution network and the pocket of our consumers, this ends up generating distortions and problems to all agents. So the contention is very important. We've been talking about this. We're trying to discuss it with the sector, but this is something that has to be discussed by our Congress, and we have to raise awareness of the legislative branch. This is something that we insist on, and it will be very important for us to be able to reduce curtailment from now on. If things remain as they are, curtailment will end up with this industry in the country and create so much complexity and cost for the society, which will be absurd.

I think this is it. So do we have another part of the question? Well, the second aspect is that we've seen that you've sold energy for longer terms and what is liquidity like.

Well, I'm going to answer this one, but I would like to make a comment regarding curtailment in addition to what was already said from the point of view of portfolio effect, there was a partial compensation of the effect on the day between wind, solar generation and hydroelectric generation. It is what Guilherme showed in his first slide. When we look at the portfolio as a whole, of course, the impact of curtailment is lower when we have a more diversified approach. In addition to that, we have different effects. The operation among the different sources go from -- move back and forth, but it has to do with portfolio management. Regarding sales, yes, a little bit more in the longer purchases in the shorter ones. I've already explained it. We have little energy to sell. We have to be more careful with prices. Yes, there is liquidity. Of course, it's not as good as it is for the shorter access, but we have a very large scope of clients. So we have some sales for '28 and '29. And regarding sales, I would like to add that we can see a movement of consumers trying to obtain generators, which have the competence and capacity to deliver. When the generator has problems with generation, there is a challenge in developing the promised energy to buyers, and that has an impact. It's important to have generators with ENGIE's quality with a balanced portfolio.

Well, thank you very much. I will now combine some related questions regarding payout and dividends. The first one by Felipe and then Ramos, physical persons. Could the company enable payout increase for next year? Or will it focus on this leveraging? In addition to that, do you intend to change the payout policy?

What was the question of , Felipe [indiscernible]. Well, Felipe, by the end of the year, we are likely to conclude the cycle of renewables with Assurua and Assu Sol. So our leveraging today is below 3. It will be over 3 as soon as we conclude the purchase of [indiscernible] assets, and we will see that in the first half of next year. So according to what we have today, it's not prudent to increase dividends. And also in this environment with high interest rates, which impact our leverage and to keep it controlled between 3 and 3.5, this level of 55 seems to be good. Was there anything else on dividends?

Well, I think that there is another one -- yes, there's another one that we've addressed with your answer. We have one by João Pimentel, sell-side analyst from Citibank. The conclusion of the increase of Jirau's physical guarantee would be the last pending aspect to consider the transfer of this asset to ENGIE Brasil and considering into account the relevant volume of resources required for the acquisition, how does it behave in the balance sheet, which seems to be restrictive.