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

Good morning, and welcome to the ENGIE Brasil Energia's Second Quarter '26 Earnings Results Video Conference. I'm Adriana Wagner, Investor Relations Analyst at the company, and I would like to make a few announcements before we begin the video conference. [Operator Instructions] Please keep in mind that this video conference is being recorded. We have made available on our website, www.engie.com.br/investors, the results presentation and the earnings release besides the complete interim financial statement and other documents filed at the CBM, analysis of financial statements, operational results, ESG indicators, among other highlights for the period. Before proceeding, we would like to clarify that all the statements made during this video conference regarding business outlook of the company should be treated as forecast depending on the country, macroeconomic conditions, the performance and regulation of the electric sector besides other variables, they are subject to changes. We remind you that journalists who wish to ask questions can do so by e-mail, sending them to the company's press office. To present ENGIE Brasil's Energia performance in the second quarter, we have here with us Mr. Eduardo Sattamini, Chief Executive Officer; Mr. Gustavo Labanca, Director of Power Networks; Mr. Gabriel Mann, Chief Regulation and Strategy Officer; and Mr. Leonardo Depine, Investor Relations Manager. I will now turn the floor over to Mr. Sattamini.

Good morning. I was opening my microphone. It is a pleasure to be with you another quarter to present the results of the second quarter of this year. It has a very interesting feature. You all know that we have the controlling company that has developed hydropower plants. The last one developed was Jirau. And in this last quarter, after years of enhancements and operational conditions at the plant, we have been able to bring this asset into ENGIE Brasil's Energia portfolio. There's a significant capital movement here in the electrical sector. This has always been the case. And the additional resources to the Jirau assets have been used to anticipate payments of the concession for the public asset use. And this, of course, with excellent results. The acquisition of the asset had a return of 10% real return, excellent for this asset contracted for the long term. It's a hydroelectric asset. It will add a great deal to the company's portfolio. And on the other hand, we have anticipated some payments, which also bring about interesting return for shareholders with a payback of 3 years or something similar. These are excellent opportunities, therefore, to create value for our shareholders. Now additionally to these 2 events, recently at the general extraordinary meeting, we had the merger of [ Jari ], the energy company of [ Jari ] with operational gains and operational simplifications. This company had already been acquired from another player 2 years ago, if I'm not mistaken. And this will enable us to simplify our organizational structure and gain efficiency. Another highlight, of course, is the discussion on interim dividends. We will begin paying them beginning on August 21st and the payment date, as you know, is defined by our Executive Board based on what we have in cash. On the next slide, our financial highlights, our growth strategy. As you can see, we have a growth of adjusted EBITDA of almost 17% quarter-on-quarter and 13% as a whole. These are the projects we put into operation last year and today represent a growth of cash generation for the company. Net income, we have a nonrecurring event of the public asset use. Of course, this from the expansion of concession, but we also have significant adjusted growth quarter-on-quarter. We have different allocation strategies as well as other components. But this is a very reasonable gain of about 7%. Now we're still undergoing a period of very high interest rates. And what is of interest here, of course, is our net results. We have a lucrative and very interesting operation indeed. Now which are the main drivers of this result? We have the Generation segment. with the growth of the segment, thanks to the investments carried out. The same holds true for transmission because of the growth. And this quarter, this is somewhat lower because of the results that we had with TAG. We go on to the next slide to speak about our ESG KPIs. We have reduced the intensity of emissions in our portfolio, growing ever more in renewable energy. Now this goes against what we see in the sector that is increasing its emissions because of thermal dispatch. We have been reducing our emissions intensity. Now health and safety, we have a specific reduction in some accidents, minor accidents in the operational area, and this has hampered our indicator somewhat, but we will repress this during the year and go back to our target of 0.9% in the frequency rate. Gender distribution, we have had evolution, perhaps less evolution that we wanted vis-a-vis last year because of the assets we have in Amapa. And we have a great deal of male participation in the works there because of the type of work. And because of that, we were not able to increase this KPI as we wanted. Investments in innovation continue to be stable. We invest in innovation, especially when it's geared to the enhancement of our assets, social responsibility investments, we have a certain seasonality here. And in the second half of this year, we should have considerably more incentivized resources allocated because of the extraordinary profit we have had with the public asset use strategy. Now in terms of engagements, we have a high rate. It continues on, and this points to our main interest in our stakeholders, of course. Next slide, please, generating and transmission uptime. We continue to have a growing uptime in our assets. When we acquire an asset, we always perceive the possibility of operational enhancements. And this is what we have done. We have acquired solar and wind assets. Now we have acquired hydroelectric assets. And as we acquire them, we implement continuous enhancement activities, allowing for the uptime of generating and transmission assets to always follow a growing curve. Next slide, please. energy generation. We have an increase in solar energy. This is basically organic growth because of the Assu Sol plant and in wind energy, this is also higher than in the second quarter of 2025. And we perceive this through the GSF that you will see through the graph to the left. So in terms of generation, we have had a good moment at this complex. Let's continue on. I will now give the floor to Mr. Depine, who will speak about the curtailment issue. We continue to suffer from this. Now we will have a reimbursement for this. So we would like to further detail the figures. We have some technologies with improvements, other technologies with a slowdown. Depine, you have the floor.

You can see that in the second quarter, the total curtailment of ENGIE reached 20%. Wind and solar energy very similar to the system we had that was 19% higher than last year when they reached 15% and 16%. Now during that period, the total generation reported was 7%, which is a 20% allocated throughout our portfolio. Solar, very close, 26% compared to 27%. And the difference is in wind that went from 12% to 17%. We do have important regulatory news here published in measure 140 that will allow for the compensation of gas curtailment between September of '23 until November of '25. This was published only 15 years ago, and we have a certain term to manifest our interest. This is nonbinding interest and this will continue on for some quarters until mid-2027 until it is reserved. When we speak about the energy commercial strategy, no great surprises. We have a great deal contracted in the short term. The price fluctuation is going downward, but we're protected against these effects. And in the long term, we are able to capture price increases, which we see through time, especially in the prices contracted for longer terms. If you look at 2026, only 1% is uncontracted, goes up to 5% in '27, 11% and almost 37% in 2029 and 30% evolution in the number of free customers and consumer units. This is part of our commercial strategy, 43% of consumers or almost 22% growth in consumer units served. Let's go on with greater details in our financial performance. Our net operating revenue had a change of 14% during the period of growth, of course, all of the lines, price and sales volume, free energy and others that are part of the Generation segment as well as trading, a slight decrease in transmission because of an accounting effect, a margin on the revenue of construction for Asa Branca. We have less CapEx and the construction revenue is somewhat lower, almost 14% for the period increase, as you can see. If we speak about the results of TAG in detail, last year, they had a bit more than BRL 1 billion in profit. This year, BRL 743 million. And you can see that TAG is undergoing a process of tariff review. This process should be concluded until the end of the year, perhaps this year. All of this depends on the regulator. Now when this process is over, TAG will review their tariffs and probably have a different result if compared to what we see at present. Now finally, the EBITDA evolution. We have a growth of 16% for adjusted EBITDA. And when we carry out a new cycle of adjustment because of GFRS, we have a sound growth of 13%, especially for generation and training, especially generation and TAG with a negative contribution this quarter, but with robust results of 13% when we look at this from a regulatory perspective. Now before we get to our profit, the prepayment of the public asset use, we began this operation last year. At the end of June, the balance represented BRL 4.2 billion. We prepaid BRL 2.2 billion. This generated capital gain of approximately BRL 2 billion, BRL 0.7 billion went to taxes, BRL 1.3 billion to the net gain, which you will see in the adjustment on the next slide. Until the second quarter, we had 6 concessions with public asset use. They would total BRL 773 million per year. This payment has been settled through this operation, and we continue to pay Cana Brava and Cachoeira BRL 105 million a year. So the cash flow of those BRL 773 million is something we will only see as of the third quarter, not only the cash flow, but interest rates and service on the liabilities. Now this operation will begin to appear in the third and fourth quarters. Now with this, it's easier to explain this slide, nominal change going from BRL 567 million to almost BRL 2 billion, once again, thanks to that operation of the public asset use. We have a robust growth of 23%, thanks to the increase in EBITDA, offset by depreciation of assets, financial results and of course, coming to BRL 694 million adjusted net income for the quarter. Now with this, our debt continues that trajectory of remaining at 3x with a minor drop. We were at 3.2x last year at 3.3x. We are now at 3.1x. Total debt of BRL 25 billion without major surprises. Of course, we continue at an appropriate level of leverage for the company. On the following slide, we see the debt profile. You can see it is quite soft, an average term of somewhat more than 7 years, very similar to last year and other quarters. Presently, we're at 40% of CDI and 54% of IPCA plus something and a small part of IPCA, [ a tad ] of 11% nominally. We go on to our last slide to show you our dividend policy. And while our leverage is close to 3, we continue with a payout -- minimum payout of 55%. We have several cycles of investment. In this first quarter, we have BRL 0.54, 50% of distributable profit for the first half and the extraordinary profit of the public asset use will not be distributed. So we stand at BRL 0.54. Now let's speak a bit about expansion. Simply, we see the conclusion of the Jirau process that has been thoroughly disclosed. The general assembly was held on July 2nd, held only by majority shareholders, the pricing. So this process is concluded. It was concluded on our part. On the next slide, you can see the figures of the Jirau Hydro plant. The concession term was extended until 2047. I think this happened on July 14th, a few weeks ago. Now it's working very well. The growth generation for the plant is growing. And ENGIE Brasil Energia is a shareholder since July 17th. Hydro plants -- okay. I'm sorry, I had a freeze. I'm back. The capacity reserve auction for Jaguara to conclude our slides on hydro plants. The only highlight here refers to executive activities, and we're going to follow up on this project for the next 3 or 4 years. So no additional novelties for the time being. Now let's speak a bit about transmission, and I will turn the floor over to Gustavo Mann -- Gustavo Labanca, I'm sorry.

Well, good morning, everybody. Here, we show you the evolution of our projects of Asa Branca and Grauna. Asa Branca as a highlight, has the first sector already energized. It corresponds to 1/3 of the total project and the revenues as well. We're speaking of BRL 100 million that are already operational, therefore, with a significant ramp. And the second and third sectors, we have obtained the environmental license in April and work is underway according to what was scheduled, advancing in a positive way. We're quite optimistic when it comes to the results. Now when it comes to Grauna to the right of the slide, we have had a very good evolution. This is all very recent. The main point today differently from Asa Branca, we're concluding 2 or 3 sectors for Asa Branca and Grauna, this has been delegated to the state. Minas Gerais has not been included here because last year, we were able to obtain the license for that sector in Minas Gerais. In the case of Santa Catarina, we have a prior license, and we're working on the request for installation. And in the case of Parana, we have a preliminary license as well, and we're awaiting the installation. Part of this is already under operation, the part that we obtained at the auction. What is important to underscore here is that once all of these projects are operating, and I will speak about the asset we obtained in March, we will have BRL 1.6 billion of RAB, BRL 600 million for the construction and BRL 170 million under operation. The asset Colibri is a project we acquired in the auction in March. There's a part in the south of Brazil, Lot 2 and a part in the Northeast. The part in the South -- it's worthwhile reinforcing the issue of synergies with our project. It connects to the Ponta Grossa substation, Gralha Azul. It's 100% parallel to a line that is also under our ownership, and it will bring some synergies with the implementation of the Grauna project. And we're managing this project in the South. Presently, we're in the contracting phase that is advancing very well. Now if we think about the budget in general, if we look at the contracted part in the promised part, we're getting to 80% to 90%. And for the part in the South, we are at 2/3 of our budget. So everything is moving ahead positively according to what we had imagined in our schedule. And as I mentioned, as soon as this project comes into operation, we will be adding BRL 123 million in revenues to the ENGIE Brasil portfolio. Very well. With this, we conclude our presentation. I, thank you for your attention.

[Operator Instructions]. Our first question comes from William [indiscernible] an Investor. He asks, your projection of profit per share after Jirau seems to have dropped significantly. I would like to know when we will recover the former levels before this asset is incorporated.

I will begin by responding here. While we can't give you guidance for our profitability, the profitability will be recovered. What we can say is that Jirau since the 17th of July has begun to contribute to ENGIE's results. And as a consequence, of course, we will have increases. And as of July, we will have all of the positive effects of the prepayment. We have BRL 4.2 billion in liabilities that cease to exist. They were at a cost of 10% plus depreciation, 14% to 15% IPCA per year. All of this ceases to exist and will generate higher profits going forward. This is something we will observe as of the third quarter and subsequent quarters. Now perhaps I can complement here and remind you that during the acquisition process for Jirau, we carried out all of the analysis and the forecast was that the profit per share would have an evolution. Of course, I think it's important to await the profitability of Jirau for this to materialize so that we can pay our dividends, and we will add these dividends to the total gains we have. And with this, we could have a higher gain per share. It's simply a matter of time. Now there is a limited cost for shares. All of this will be reflected in the future of the company according to our calculations, it will be a positive result even for those who have not accompanied our capital gains.

Very good. Our second question comes from Ricardo Bello, a sell-side analyst from Safra, which is your forecast in terms of capital going forward? And transmission and batteries, are they still interesting? Which are the opportunities to look for? And what is happening with competition, which is the margin update that we should expect because of all of these assets?