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

Good morning, and welcome to the earnings conference call of Omega Energia for the second quarter of 2022. After the first 6 months of the year, we ended this period with BRL 476.4 million of adjusted EBITDA, an amount of 14% higher than the same period in 2021 and slightly above our expectations by around BRL 9.8 million. We achieved this result even with the second quarter of wins below the historical average. It was a weak second quarter, and we are in another year of La Nina. In recent years, we have seen deleverage wins due to the predominance of La Nina and negative dipole phenomena, which affects volumes in the first half, but we have managed to maintain our annual performance in line with our business plan. This last quarter was no different. As we already anticipated with resources, we were able to buy energy close to the regulatory floor of BRL 55.7 per megawatt hour, which led to an adjusted gross profit of BRL 322.5 million and about 11% below the plan, while production was 19% lower. We also received contractual indemnification from the former owners of Delta 5 and 6 for production below [ p 15 ], the 3-year period following the purchase of these complexes, totaling BRL 34.9 million, breaking the adjusted gross profit from energy to BRL 357.5 million. We are also focused on adapting our cost and expense structure to a weaker quarter of resources and reduced BRL 17.4 million compared to budget. Added to these impacts, our adjusted EBITDA in the quarter reached BRL 244.1 million, 8.8% lower than expected. But considering that in the first quarter, our result was 16.8% higher. We reached a good number for the first half of the year.

Linhares, can you add a little color to the operating performance of this quarter?

Thanks, Andrea. Sure. Unlike the first quarter, which presented resources above the historical average despite La Nina. In the second quarter, the resources were affected by this phenomenon. And by Atlantic dipole, the 2 phenomena that most define the incidence of resources on our sites in the Northeast. However, as Andrea explained, once again, we managed to actively manage the energy balance make hedges and manage costs and expenses offsetting the resources below historic averages. Let me give more details about the resources. In the first quarter of the year, we observed a delay in the beginning of the rainy season in the Northeast due to transient phenomenon that offset the effect of the La Nina and the negative South-Atlantic dipole and led us to a robust first 3 months. These 3 same phenomena were not repeated in the second quarter of the Northeast, and we had resources below historical averages, especially in the Deltas. In addition, in ChuÃ, the passage of below average code front led to a resource that was 14% lower than expected. Moving on to operational performance. We had availability slightly below expectations, mainly due to the execution of a corrective maintenance campaign to ensure high performance in the winning season. Corrective maintenance impacted our results by approximately BRL 5 million, with 70% of this impact reimbursable through our full service contracts. Additionally, we had the shutdown of the Assuruá 3 project with 20 wind turbines for the electrical integration of our expansion in Bahia, with Assuruá 4 with an impact of approximately BRL 3.5 million. As a result, our adjusted energy gross profit was BRL 357.4 million in the second quarter '22, and adjusted EBITDA totaled BRL 244.1 million in the quarter, 5% higher than the first quarter of '22 and 36% higher than the second quarter of '21. Based on the results of this first semester, we continued with our EBITDA guidance for the 2022 in view of the expectation of high production and low volatility in the wind harvest in the Brazilian Northeast, in addition to our discipline in managing costs and expenses and active management of the energy balance portfolios, which can replicate in general, the financial performance of the quarters observed in 2021. Closing the financial part, and always remembering the seasonal effects that increased our profit in the second half, we had a loss of BRL 93.3 million in the second quarter, 3% better when compared to the first quarter of '22. On an annual basis, the improvement was 42%, mainly due to the better operating results and the extraordinary expense of BRL 46 million incurred in the second quarter of '21 related to the optimization of the capital structure of Santa Vitória do Palmar. Adjusted net debt was BRL 6.4 billion, 13% higher than the previous quarter mainly due to the BRL 1 billion increase in indebtedness resulting from the implementation in progress. I want to take advantage of these release of results to also confirm the news over the last few months, as they were very busy and that we -- and what they can represent for our future. Overall, we were able to show in the second quarter the full potential that a single Omega, the unified Omega has, initiating promising new capital allocations, launching new products and bringing in new funding sources. The entry of Actis in our investor base after acquiring a stake of around 20% on the stock exchange brings us the support of one of the best investors in the sector in the world as well as the prospect of a new equity round of BRL 850 million at a price of BRL 16 per share. Just as this opportunity to reinforce that -- welcome to the new members of our Board of Directors appointed by Actis, [ Michael and Michael ], and to congratulate the entire Actis team that was involved in the transaction. In June, we launched our first deployment in the United States, the Goodnight 1 project, which should begin construction in mid-September. Our plan is to bring this first 265.5 megawatts in Texas to full operation by the end of 2023. We will invest approximately $420 million, and we are already working on expansion in the same region, including Goodnight 2, another 265.5 megawatts, another more embryonic projects, but which -- with good potential and synergies. Adding together Good Night 1, Assuruá 4 and Assuruá 5, we arrived a total of 720.6 megawatts in large-scale projects coming onstream in 2022 and 2023, which should lead our normalized EBITDA to exceed BRL 2 billion.

Linhares, you were in Assuruá 1 a few days ago, how are the works there?

It continues to progress well. And soon, we'll have more than 800 megawatts operational in that region. On August 2, we finished the assembly of the first wind turbine in Assuruá 4. And from now on, the objective is to assemble 3 per week. I'll walk -- talk to Gustavo Mattos, and the expectation of the implementation team is that we start producing energy in early September. Assuruá 5 is progressing well, too. We already have 30 foundations excavated and 7 concreted out of a total of 42 turbines. The start-up is expected in the third quarter of 2023.

Continuing with the new transactions. A few weeks ago, we announced a preliminary co-investment agreement of up to BRL 250 million for the new solar developments in Brazil with Apollo. Apollo is an experienced developer in solar projects, and the idea is to expand our customer universe as early as 2023 with the offer of distributed energy following the new regulation approved in the beginning of the year. Also on the product front, we have launched a decarbonization product that is the first 100% digital clean energy certificates sold by renewable assets to any energy consumer in Brazil. Now let's share some continuous improvement initiatives, which aim to create value in the existing portfolio. I'll turn the floor over to Linhares, so he can tell what are the main initiatives on productivity and availability carried out in recent months.

Andrea, I'll start with the blade repair and strengthening program done with GE aiming at greater productivity and fleet availability. Our fleet has more than 2,000 blades monitored and maintained through our management system based on artificial intelligence and images captured by drones. We also carried out a turnaround on Delta 1, which brought the level of availability to 97.5%, approximately 2 percentage points above the 2021 average by improving preventive and predictive maintenance. I emphasize that the Delta 1 is one of the Omega's oldest assets. We also have projects that increased installed capacity of some assets through control software, promoting generation of additional energy with the same asset base as done in Delta 2 where we have already increased energy generation by 1.2% for next year.

And on the energy commercialization front, what are the initiatives?

We structured products involving energy for existing assets and market opportunities, generating value for customers and assets as we saw in the transactions announced with [ MGS Branco ].

Very good. Now we're going to take a quick break, and we come back to our live sessions for the Q&A part. You can send your questions now. See you there. [Break]

Good morning, everyone. As you can see, we have more people here with us to help us in the Q&A session. Thiago Linhares was in the presentation. He is our Asset Management Officer, and [ Bernard Bisera ] is the officer of the sales unit. And so we have to answer any questions you may have. Feel free to send your questions.

I'll start with Ramon question. He asked us to detail the program to implement efficiency and increased availability of blades, and the changes in Delta [ PRV ] to increase availability.

Thank you for your question, Ramon. Well, starting with GE, we use drones images and an artificial intelligence system to monitor our blades, both for failures and degradation -- degrading blades. We saw that they were beginning to degrade. And although that could have an impact on the structure of the blade, it also impacts the generation capacity. So we have repairs made with GE. In addition, we use a protection strip, which is very widely used in the offshore industry. So increase the longevity of blades and productivity for the next 5 or 10 years. So instead of having new maintenance cycles, we'll have longevity that increases availability and productivity. Going to the turnaround of Delta 1, we have a failure prediction platform in which we use this prediction system to analyze the failure modes for the equipment and integrate that in the preventive maintenance schedule. So when we use the manufacturers' schedule plus our predictive system, we use the annual maintenance of 2021 to first half of 2022. And now we're working at 97.5 levels that Delta 1 as released.

A question from [ Flavio deBernardo ]. He's an investor. He wants to know why the A-6 auction was canceled that was on today's news?

For the question. This auction, this is a challenge for energy distribution companies because they have to predict the demand 6 years from now. And in a moment that there's a great uncertainty, both in terms of the growth -- economic growth of Brazil. In addition to this uncertainty, we're not certain about the development of the distributed generation as well as the opening of the market. And right now, there is a public consultation about the opening of the high-voltage market. So right now, it's a great uncertainty moment. So it's normal for energy distributors to state a demand that is lower. That doesn't mean that there's no need for more supply, but distributors are using flexibility that they are entitled to not to declare the demand for this year, A-6 and wait until next year for A-5 when distribution companies will have more certainty about the demand and will be more assertive.

It's good that we had a question about this public consultation. Let's ask a question to Linhares. [ Ricardo Pecino ] asks about the change in GE. They will stop manufacturing wind turbines in Brazil. How does that impact Omega?

Well, what happened at GE is that it continues to provide services, and wind turbines to Brazil. The difference is that it's no longer assembling them locally. GE is assembling a sales for the U.S. market. For Omega, there few changes because we have long-term contracts, and GE will continue to comply with those contracts as expected.

Wonderful. One more question for you, from Roberto. He would like to understand more about the work we've done in terms of [ Power Boost ] at Delta 2.

Thank you for your question. A [ Power Boost ] is a software solution. Before adjusting and developing the software, we took it to attend several mechanical studies of loads and wind. But after adjusted, the software can be replicated to the same turbine model. So Delta 2 uses this -- the same turbine model that Delta [indiscernible]. That has 62 machines, and a significant part of Assuruá, 102 turbines. So we have more than 370 turbines with a potential to have this initiative rolled out.

We don't have so many questions today, but the Omega team, not only the Investor Relations team, but the entire team is available to answer any questions you may have. And I'll ask you to stay with us for a few more minutes. We have a very nice video about the highlights of last month, especially our performance that the market opening could become real for all of us. See you soon.