Serena Energia S.A. (SRNA3) Earnings Call Transcript & Summary

Good morning, and thank you for holding. Welcome to Omega Geração conference call for its earnings release regarding the second quarter of 2020. We'd like to inform you that this event is being recorded. [Operator Instructions] This event will be available after it's concluded for 1 week. Before we continue, we would like to clarify that any statements made during this conference call regarding business perspectives for Omega Geração projections and operational goals, our beliefs and premises of the company's Board of Directors based on currently available information. Future considerations are not a performance guarantee. They involve risks and uncertainties because they refer to future events and are, therefore, subject to change. Investors should understand that the economic conditions, industry conditions and other operational factors may affect Omega Geração's future performance and can lead to results that differ materially from those in these forward-looking statements. Now we would like to give the floor to Mr. Antonio Bastos, CEO of the company. You may proceed, sir.

Good morning, everyone, and thank you for listening into our conference call about the second quarter of 2020. We've been quite happy for the past few days because of the transaction, the acquisition of the Complex Chui area in the south. It was a very long effort by our team, but we came to a very pleasing result. This is the biggest individual transaction ever carried out by Omega. As a reference, it's gross energy profits is equivalent to all the Assuruá Complex. So it will have a relevant comp impact to our scale and our results in the next years. The operation is made up of 2 batches acquired after an auction from Eletrobras to -- for its divestment. The first one is a 78% stake, and batch 2 has a 99.9% stake. So total enterprise value in this transaction was BRL 1.72 billion, which is made up of BRL 578 million in cash, and the remainder in long-term debt. Besides that transaction with Eletrobras, we also had a pre-agreement with Brave Winds, the company that holds the remaining 22% in batch #1. They are conditioned to a number of stages and elements to be carried out in the next 2 years. And they can culminate in an acquisition of the 22% stake, which would take our total stake to 100% of the batch. The idea is to operate both of them in integration. We have a plan for that, which we will go further into detail later on. Our assets, as I said, represent 572 million megawatts distributed in 2 Siemens IGE turbines. The fact that they are -- this model is quite positive because we already have experience with these turbines, and we have a close relationship with both suppliers. So we believe we can start with good momentum regarding how we understand the equipment, how it performs and any performance improvement measures that we might take. Moreover, one of the most important highlights of this transaction is that we are going to have a different wind regime than what we have in the Northeast. There's basically no correlation. Our weather studies and our statistics team have shown that this will reduce our yearly uncertainty because there's no correlation between both areas in the Northeast, where we're present and in the South in this new complex. It's estimated that it can reduce 25% of our gross annual generation uncertainty. So 5% gross annual generation uncertainty after the Chui acquisition. Along with the acquisition, we are implementing a new business plan for the complex. And it's made up of a number of initiatives, which I'd like to highlight. First, we have a group of initiatives to increase the availability of our farms and their performance. This may involve some investments in equipment improvement and new turbines. We have some space for that in our engineering department. And we also want to improve our operation and management regime, which can increase our net availability, for example. So we will have better real-time forecasting and we can do better management activities, maintenance activities in moments, which are more appropriate. So we're also reducing costs. There's a basic element for that, which is joining both batches in their operation and management. Right now, they're dealt with separately because Eletrobras had historical differences between these 2 batches. But now that they are under the same owner, the idea is to combine their management and operation so that it's managed as a single complex, the Chui complex, and this can generate cost and expense savings in the next quarters. Last but not least, another highlight that we have is that our capital structure can also be optimized. We have several debts with BNDES, the National Development Bank, but they're more expensive than other that we had from the same time. So we believe we can optimize our capital structure, which will also create value for the asset. So now we continue with the next item but I'd just like to reinforce once again that this is a very beneficial operation, which will certainly be good news for the company in the near future. In the second quarter, we also had an operation in line with our 2.0 balance optimization program after the pandemic. We prepaid the BNDES debt lndaiás with a new financing plan connected to that asset, which increased our debt versus capacity by BRL 30 million and also reduced cost long term. Although it's only BRL 70 million, it's a good proxy for what we can -- what other capital optimization initiatives we can have in the next quarters. Our performance for the second quarter, while our EBITDA was BRL 135 million, which is 33% higher than the first quarter, which had been very low. But even with that level of EBITDA, we are still seeing low winds below our historical average, and we're very close to the worst year in our historical series, which was 1985. So with that, we think that we will still have a better year than 2019 because of our growth and because of the perspectives in the wind regime in the second half of the year. But on a consolidated basis, we are having one of the worst years in terms of wind resources of all our historical series. So it's hard to say that for sure, but it will be difficult to have a worse year than this. But even though we have such a tough year, we hope to have consistent results higher than last years. Another important piece of news this quarter was that we formalized the third management -- managing partner program, expanding it to 13 leaders, representing 2.5% of the company's capital. We really believe in the partnership model. This is the third time we've done this plan. And this time, we did it carefully by analyzing people very well, their performance, how engaged they are with the company and with our long-term goals. That's how we selected them and put together an interesting mechanism, which generates a lot of convergence from the society plan and our 5-year plan, which will mature on December 2024. So everything is well connected to our long-term goals. The program itself will only have liquidity from 2025 on. So it's a very long program which will help us have a close alignment between the company's leaders and creating long-term value. We're sure that the ownership spirit and entrepreneurship are deeply connected to the company's values, and this is another step in line with that. We're very happy to have 13 leaders from the company with us owning it even more and working even harder to make renewable energy into something more common around the world. Another interesting point is our sustainability report, which is a new approach we are now taking with regard to sustainability. Our company is intrinsically linked to sustainability. This is deeply connected to our values. We've always had sustainability as a guiding element for all our actions here in the company. But now we're taking an additional step to make it more scientific. This is a growing demand that we have from investors. So we put out this report using the GRI framework and including the UN sustainable development goals. So now we're going to have metrics in an action plan which will ensure not only that we continue our sustainable social initiatives, but also make it broader so that we have sustainability in our work in everything we do. Just a small side note on that. In 2008, when the company was started, it was not commonplace to bet on a company that was new that was 100% focused on renewable energy and that followed a rigorous compliance regulations without facilitators, so to say. We've always stood our ground on that. Values are close to our heart, and we are not flexible on our values. In over years, we've shown that being close to our values to ethics and sustainability, it does pay. So the results we have are evidence that if you are really sustainable, if you're really providing value for all of your stakeholders in a clean and honest way, you can go very far. And this report is a proof of that, we are now showing that much more clearly to the world, and we're going to use these parameters to challenge ourselves even more to be more sustainable. That concludes my presentation, and we are now open for questions. Thank you.

[Operator Instructions] Our first question comes from Gabriel Francisco from XP Investimentos.

Congratulations on your acquisition. If you can, could you please give us some color on how you can extract and promote turnaround in the new complex as you've acquired, especially regarding the cost structure? Can there be an upside from repowering CapEx or maybe since this is an older asset, your CapEx might be necessary? So that's my question.

Thank you. So first of all, I think it's important to share something with you. We acquired this asset with a base case considering how it's being run today, it's current reality. But we put together a very comprehensive business program with several fronts to try to upsize and improve the performance of these assets. There's going to be a capital cost. So we're changing -- we're exchanging the previous debt but had for a better debt. There's an expense. And of course, there are engineering fronts who are going to repower and improve the power there, we can use for taxes and so on. So that's basically it.

Okay. I understand. If you'll allow me a follow-up question since you mentioned it, not only looking at the indebtedness with the National Development Bank with the Chui acquisition, what is your plan for your debt with the BNDES for the company as a whole? Can you prepay your debt? Can you go to the market and get more attractive debt? We understand that you took the step at a different moment, considering liability management. So what kind of upside are you considering again not only for this new area but for the company as a whole? Maybe this is a better question for Andrea, but please feel free to answer.

Well, I mentioned it maybe I was too quick to mention it, but we just paid BNDES the debt we had with the National Development Bank. And I think the policy we had in the past and the approach they're currently having are quite pragmatic. So this process went well under the terms we had imagined. And I think that this is a positive sign, that shows that you can have greater operations like that. But of course, this is not a simple operation. It needs to be built up. So it's definitely an upside that we'll pursue because specifically for the Chui assets, we believe the financial costs are high. But they're high because there were delays in the works in the past, and there was negotiation, which made the cost of the debt go higher. That's why we got the credit line from the National Development Bank, which is historically cheaper, but it was more expensive because of the asset. So of course, we're going to respect market conditions. We're going to respect everyone involved in the process so that the operation can be approved. But I do believe there is some space for that. Interest rates are at historical low, so there is some value to pursue there.

[Operator Instructions] Our next question comes from João Pimentel from BTG Pactual Bank.

So when you announced the acquisition of the Eletrobras assets, you also announced a subsequent follow-on. But now from what we see in the company, it would not be necessary due to the acquisition. So it seems like it would be a follow-on for future acquisitions. So my question is what do you foresee for the short term? Do you see any other opportunities for the next months? Do you think anything can happen until the end of the year? If you could give us an update, that would be great?

Thank you, João. We're being very careful. So when the pandemic started when we had a higher level of uncertainty, we put out a material fact for our investors saying that for now, investments are on hold because we are in an uncertain scenario and no one can foresee anything. So we said that to our investors, although we still had a high cash volume from the past follow-on. So we continue to monitor the market. And once again in Brazil, we confirmed that regulatory stability was very important. The way in which the government dealt with the COVID pandemic was very consistent. So that helped us feel at ease knowing that things would be well. Secondly, in the past weeks, we also saw similar charges in the system as we had in 2019. So probably it was not hit as hard in terms of power. So that gives us a better projection than what we had in March. And interest rates stayed the same or went even lower. So we're an investment company. We work with operational renewable assets. So we had to restart the conversations that we had before the pandemic. The quickest one to mature was with Eletrobras because they had a date -- a conclusion date. But I do think that we started considering other options and pursuing other opportunities. That's our mission, and that's our work. And we're seeing that conversations are starting up again, and we are gearing up for that. So this fundraising is essentially to take us to a better cash level, allowing us to have at least one more operation if it does take place. But it's like soccer. You never know what's going to happen. The idea is to have a little bit more liquidity so that if we have a good opportunity in the next few months that we can take it without having to go back to the market. So that's the rationale behind it.

[Operator Instructions] As there are no further questions, this concludes our question-and-answer session. Now I would like to give the floor to Mr. Antonio Bastos for his closing remarks.

Well, thank you, everyone. Andrea and I are available if you need anything, and we're happy to share any information with you and answer the questions you might have. Thank you, and have a great weekend.

This concludes Omega Geração's earnings call. Thank you for listening, and have a good day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]