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

Good morning, and thank you for joining us once again for our earnings call to announce the results of quarter 2 2024. I have here with me, Andrea Sztajn, our newest addition to the company; and Bernardo Bezzera, my long-time friend. We have come to the half of the year with an EBITDA of [ BRL 63 million ], 22% up compared to the first half of 2023 due to the reduced capacity compared to last year but still below what was planned, which together with projections for the second half of the year, the price projections and resource projections led us to adjust our guidance for the year, which is 5% down. And the important takeaway is that despite this change and the results of the first half being below what was expected, we have seen consistent results despite the less favorable period we had in '23/'24. If we combine the guidance that we provided in 2023/'24, [ BRL 3.5 billion ] in combined EBITDA. And with the new guidance of 2023, combined with the results from last year, which were above our guidance, we will continue to have [indiscernible] on a 2-year period with very consistent results, very much in line with our business. Nevertheless, and always looking forward to the future, we will continue to be focused and very diligently focused on initiatives that could improve the future results and the operating assets of the company. This is something we have been doing for 2 years now. But it's practically an obsession of ours to look for margin increments in the long term for our operating assets so that they can continue to be profitable, consistently and robustly profitable in the long term. So in 2024, to date, we have closed new offset agreements for our current operating assets, adding up to [ BRL 3.1 billion ] in revenues. And if we look at this element from a half-full glass perspective, these initiatives will have a good impact on the long-term profitability of the company and create additional value for the company looking forward. With a half-empty glass perspective, this creates an important security margin, which could offset 4 years with lower natural [indiscernible] just like we saw in '23/'24 because it was a year of losses, but we were still able to deliver results above the forecast for the year. In quarter 2, we also closed a very relevant operation, a very relevant [indiscernible] and this is a relevant milestone, which could be the first step to many other deals in the future as the top-of-mind supplier of energy to high-performance computing and artificial intelligence clients. We have been holding a lot of conversations in Brazil and in the U.S. with technology clients. And we believe that in both countries, in Brazil and in the U.S., we will have good opportunities in the future in this industry, which will certainly have an exponential increase in its energy consumption in the upcoming years. Also, in the U.S., [indiscernible] to hold a minor stake in Goodnight. We believe that in the second half of this year, not just with this new investor joining us but also with the launch of [indiscernible], we'll have great chances ahead. And finally, we will continue our positive trajectory for our financing plan. We had a decrease in the company's leverage quarter-over-quarter, comparing quarter 2 with quarter 1. And we have started to assess the possibility, considering that we already have a long-term dollar-based revenue, and this should increase in the next years, we are starting to look at the possibility of increasing our dollar-based financing, leading to nominal gains in terms of reducing our financial expenses. We will talk more about this later. So the first half was below plan due to low resources. Resources were 10% lower in general. Also, some delays in our projects, our projects are ready, but there have been some delays. And there was an impact of about BRL 23 million in the first half. The short-term energy price is lower in the U.S. It's important to highlight that it's low -- that it's short term because we have very good prospects for the long term. But in the short term, due to milder temperatures in Texas, prices are lower in the U.S. And finally, the net operating efficiency. There was an impact of BRL 7 million in the first quarter with a good technical performance and energy conversion in our wind systems, which was very good in the period. We continue with our services contracts. So we're very protected in this front in terms of availability. And we had this BRL 7 million net impact on our operating efficiency for the period. The Energy Platform had the best first half of its history and BRL 28 million lower in quarter 2 than in quarter 1, which also created -- well, in the first half -- in the first quarter, the production level was below that of quarter 2. But since the platform generated a lot of results and now the prices of the assets in quarter 1 had a higher price, this led to a higher EBITDA than in quarter 2. And in quarter 2, we produced more, 18% more. However, the unit price was lower due to the platform and the assets generating less of the high prices items. So we had a quarter 2 below quarter 1. But combining the results, we reached the BRL 703 million that I mentioned previously. It's always good to go back to the theme of resources. Bahia and Delta, our major sites in the northeast, have undergone years with winds below the historical average. This can be clearly seen on the chart here. From 2012 to '17, we have winds much above the historical average. And then in 2016, we had our IPO. And after that, we have seen lower winds or weaker winds. But difficulty is what motivates us to improve. So this is what led us to pursue other mechanisms to improve our profitability. And this has compensated in terms of production results, including cost reduction and restructured assets such as Chui generating much more value than what was expected in the initial business plan. We are working with this security level with full-service contracts. So we have low impact in terms of availability on our results. And also these initiatives should increase margins and new long-term contracts, which altogether allow us to have very consistent result levels. And we have also been diversifying our portfolio. Today, we have Chui and we have Goodnight, which in our consolidated wind portfolio helped us decrease the effects of this higher natural variability of resources that we have in the northeast. We have some very good years and then very poor years under P50, which is what we have been seeing [indiscernible] Delta in the past few years. So overall, we are certain this regression to the average will take place. But diversification also helps us suffer less or have less volatility in our production for a specific year. And today, there are uncertainty assessment in terms of standard deviation in our consolidated portfolio, including hydro and solar, is slightly above 5%, which for a renewable energy company is a very good number. This chart here is to confirm the evolution of the EBITDA of the company. We were close to BRL 1.8 billion in the past 12 months. And our guidance was BRL 2.3 billion. So it's slightly lower than what we had projected originally, which was BRL 1.917 billion. So we look at the first half results, then we had a forecast of resources for the second half in prices and then we decided to be very transparent, as always, and adjust the guidance for the year due to these elements that I just mentioned to you. Now looking at new contracts in energy supply, we closed in the first half, 130-megawatt average in long-term contracts, most of them close to 10 years in duration. And these new agreements signed this year, which should start being effective next year, some of them already start in the second half of this year, but most of them next year. These agreements have the potential to increase our EBITDA margin by 3 points due to these new agreements, which are better than the agreements that we had previously. So it is hard work. But just like we said at the beginning, we can look at it from a half-full glass perspective, creating more value to our business plan, or a half-empty glass perspective, creating a security margin, which can compensate for lower resource years in our portfolio. We have been diligently pursuing the objective of becoming an energy supplier for the technology world, particularly in high-performance computing and artificial intelligence, large loads. In Brazil and in the U.S., we have a lot of conversations going on with potential clients. And about 1 month ago, we took a first step. Well, I wouldn't say a first step because we already had clients in this industry in data. But I would say we took a new step towards signing a new agreement to supply 20-megawatt average to a high-performance computing operation in Assuruá. And we expect this to become something recurrent in the coming months. And we are very positive in terms of the partnerships that we can establish with technology companies as a new business front, which will be very useful to us, not just to improve the profitability of our current assets but also to allow for new investments. Goodnight 2, for example, has a great chance of supplying energy to the technology world. Now in respect to the margin. I need to talk to Andrea about Goodnight. First of all, today, we have very good prospects that is booming in the demand for new energy, particularly from technology clients, will help us achieve better long-term prices, not just for [ Net 2 ] but also for [ Net 1 ], which can benefit from the favorable prices in Texas. Today, we have our operational project, which can, in the long term, be very favorable. We have two which are yet to be launched, which should be launched with a long-term contract at a very satisfactory price level to create value to our business case. And today, we have approximately another 800 megawatts being developed in the region. And this potential new capacity can be directed at important verticals, which show a large appetite for renewable energy. So we're very positive about this new work front in renewable energy in Texas, which will allow for new initiatives and will also help us maximize the profitability of our operations. Our other work front relative to Goodnight, we have seen good advancements in the attraction of a consortium for Goodnight. And we believe that in the second half, we will be able to consolidate this operation under a model in which Goodnight 1 and Goodnight 2 will be under a holding, and we will have a new partner, which will hold a minority stake. And this new capital will be used for investments in Phase 2. And what is the timeline, what is the timeframe we expect?

Well, today, we are conducting the competitive process and the due diligence. And in the next few months, we will reach the final stage. So I'd say that by the end of the year, we expect to have good news to share with you.

We have received formally and in writing, we have received seven proposals. And today, we're left with three proposals that we're still analyzing. And we should make a decision in quarter 3. But we already selected those who were more in line with what we need. And we are now in deal mode to try to complete this operation. And as soon as we have news to share, we will let you know. Andrea, would you like to talk now about our financing plan? I think there are some important points. One is the prolonging of our dollar-based line.

Yes, everything is going according to what was planned. I think the news here is that we have reduced our net debt over EBITDA ratio. In quarter 1, it was 5x and now it's 4.8x. And as you heard from Antonio, we had maturations now in August. And we were able to postpone that in 2 years to have time to make a decision about capitalization or sell-down for Serena Power.

Yes, the conclusion of that investment in the primary and the holding will impact the deal need we have for financing looking forward. We were able to extend that to have time. This will give us time so that we can make the right decision when the time comes.

Whether we will continue with a very attractive -- we continue with a very attractive cost, we're talking about 8.8% nominal in reais and more than 5-year maturation for our debt.

And Andrea, in the past few months, we have been looking at the possibility of having greater exposure to dollar-based financing. So what is the rationale for that?

Not just for Goodnight, but we are also closing PPAs in Brazil, dollar-linked. And of course, this opens up a new front to us. We have been coming across varying interesting opportunities of dollar-based financing lines, very competitive. And we see potential savings in expenses with interest that can go from 10% to 15%. So compared with the Brazilian real baseline, this is very competitive. And also, we are looking carefully at the possibility of pursuing this in the next months. Yes, it's an opportunity in terms of diversification and value creation.

Very interesting. And just like we did in the past quarters, we have some frequent questions about specific topics that come up in the questions from investors and analysts. So let's start with curtailment, which is a very frequent topic in the questions that we received, if you want to explain what happened since the last time we talked about this topic and the plans for the future.

Well, since our last conversation in quarter 1, we have seen an increase. We closed the first half with 2% of our total portfolio. Serena sales -- well, 2% of energy volume, but the impact on the gross profit was 1%. And we stand out particularly because we have very well-located assets. And this curtailment takes place particularly where we are exposed to the free market. So the values are much below than what was contracted. And that's why the impact on the gross profit is much lower than the impact on the energy volume itself. And comparing with other energy generation companies that suffer a lot with curtailment, our geographic position leads us to have very low impact in Chui and very low impact in the locations that we have in the state of Maranhão. Compared with the portfolio, the greatest impact has been seen in Bahia. And this is very much related to what happened in the last quarter. We had some events of connection of new lines and new generators, which caused an impact on the localized transmission network and of the short-term events that have already been solved and also an increase in the export of energy from the northeast. And this is something that, looking forward, we expect to decrease for two reasons. The first reason for this reduction is the expansion of the transmission capacity. So we already projecting that we'll have a new transmission line that will be ready by the end of this month or maybe in September to increase the exchange capacity to 13,000 megawatt exports, going back to levels before the blackout in August 15. And also, the generators, the energy generation companies are working to deliver some models that will allow and as to take down a lot of restrictions to grocery stores. And this will allow us to project lower curtailment values by the end of the year. And next year, we'll also have new transmission lines and will also increase this export capacity in the northeast.

Another point, Bernardo, still talking about short-term prices in Texas versus long-term prices is here versus the forward curve, we had lower observed prices because of the milder temperatures in Texas, like I mentioned in the beginning. And the important takeaway here is that this is not related with the long-term prices for which we are still optimistic that they still have substantial room to grow.

Yes, you said it very well, Antonio. The market in the start of this year was expecting higher values than those of 2023. For 2024, specifically looking at the first half of the year, what we saw was that with milder temperatures than what was initially expected, we are seeing lower prices than what was expected. And this is something common in this market. Because this market is quite dependent on temperatures, so the lower temperatures led to this decrease. Another point looking forward is that the prices that we are seeing now in August for the long term are still very high, so 20% higher than the long-term prices that we saw last year. So if we look at the prices that are being practiced from 2025 to 2034, the average price is 20% higher than last year's, which is actually a response to this higher demand and this very positive perspective, driven by the growth in data centers. Yes, the ERCOT published a new projection with a 40-gigawatt increase by 2030.

It's important to make this very clear. For short-term prices, we are in a good position, but with lower numbers due to the milder temperatures. But we are very optimistic about how we will be able to sustain for long-term prices, particularly for new energy contracts and subcontracted. Just to add to what Bernardo just explained, in Goodnight, we are seeing solid production close to our P50. So we're not just excited about the possibilities of new investments, but we are also very confident that we have good assets in an important location with a lot of clients like ERCOT. And this speaks a lot of opportunities for good contracts for Goodnight 1, considering the higher long-term prices of energy due to new demands. And then we have AI and data, electric mobility, not as much as we wish there was, but there are a few areas that are already impacting the prices looking forward.

Yes. And because these clients have a demand for the next few years and its various cars assets, this possibility of using renewable energy, this is what makes Goodnight to be in a very good position and stand out compared with other projects that are in the connection line for ERCOT. There are many projects but very few have the same capacity that we have.

And other points that are worth noting today have to do with the article that you wrote for a newspaper, Globo, 2 weeks ago about the opportunity that we have to develop for storage systems and batteries in Brazil.

Yes, in Brazil, we see that the world is greatly advancing in the [indiscernible] with a lot of growth in each of the continents. ERCOT, specifically, which today has an installed capacity of 5.3 gigawatt, by the end of the year, will be at more than 11 gigawatt. And they are at advanced construction stages and more than doubling the installed capacity with batteries that will supply reliability and also supplying the needs of the customer end. In the United States, there's a reduction in the level of cost of batteries, more than 80% in the past decade, more than 80% reduction. And they are already a very competitive resource. And they're very competitive compared with thermoelectrical. Because in Brazil, you can use the excess energy that is produced over the course of the day with solar at lunch time, and you don't have high demand to absorb the excess production. And you can shift this energy to the customer end, supply in moments of the day where there's low capacity or the capacity is not enough.

It's 30% more economic than thermoelectrical, 30% today, right?

Yes. And this is clean energy. There is no increase in emissions. And this will allow you to meet the needs of the end client. So what Brazil needs is to develop these resources to be able to compete with thermoelectrical in auctions. So these energy sources [indiscernible] by merit. And the winner will be able to supply this demand.

When will the auction take place?

Probably in December this year.

We are available if you have any questions.

So the floor is now open for questions. We have received a few of them while we were announcing the results of quarter 2. So let me start with the first question about operating performance. This is a question from Ramon. Ramon says congratulations on your results. In Chui, we saw significant improvement in the performance of air generators. So he is asking us to explain whether these improvements were through with ETPO wind power. If you're not familiar, ETPO is a term for enhanced turbine performance optimization, ETPO. Antonio, can you answer this one?

Yes, our asset management team is tirelessly working and always trying to do two main things, one, to maintain high availability levels. And we have very reasonable availability levels, 96%. And it will increase to 97% with our minimum availability agreements. So if our supplier does not meet the contracted availability, there will be protection for that. So we are at a very safe position now in terms of availability in our wind portfolio. And the other front is to always look for a place in the same generation system -- of the same generation system delivering higher production with the current investments. So in some of our projects, and the one that you mentioned, Ramon, is one of them, we are working on improvements in terms of increasing the power of our machines or changing the machines' power curve to favor generation. And this is what we saw this quarter. We were able to compensate for nearly half of the curtailment impact in the quarter due to these improvements in the productivity of our generation system. So minimum availability was achieved with some indemnity from our suppliers, and we continue to work towards a point where we no longer need to be indemnified for an availability. And another one that was important this quarter was that we improved productivity of the generation system without new investments, just improving it technically so that you can compensate for other effects. So this quarter, this was very clear, we were able to reduce half of the curtailment effect with these improvements, ETPO and power improvements.

Now the next question is about price. Francisco from Nubank is asking whether we can give some color or more details about the price level at which we have been closing our new offset agreements that we're talking about.

Unfortunately, these agreements are confidential, so we can't really talk about the specific price of the transactions. But I think the takeaway is that, one, we are still highly contracted. So we believe that price exposure in Brazil, at least in the next 5 years, is not something that is concerning to us. So 96% of our 10-year production is contracted already. And we are increasing the level of contracting with transactions at a margin that is higher than our average. And of course, this will be confirmed over the next 10 years. But we've been implementing our EBITDA margin. And if everything stays constant, I'd say about 3 points, which is very relevant.

George [indiscernible]. And I'm sure the translation is working. So I'll ask the question in Portugese. George [indiscernible], thanks for the detailed presentation. He wants us to explain about our prospects in terms of the pricing environment here in Brazil and in Texas that he's been seeing PPAs falling in both markets despite the boost in energy demand. Can this affect the plans for Goodnight 2? And are we anticipating any negative impact on our EBITDA or EBITDA margins in the close future?

Well, as I just said, in Brazil, which is our main business today, we have a lot of contracts with 96% in the next 10 years. So our price exposure is quite low. But to give you more details about Brazilian market, we're still conservative in terms of how prices will be go back to prices closer to the marginal expansion costs in the next few years. I think that is the timeframe in which the market will become healthier. And we are highly contracted and with low exposure to energy prices. We saw some recovery of the short-term prices in Brazil. But we think this is not yet structural. Structurally, this will take place later in the future due to the new demands and the natural increase in consumption in Brazil. I'd say, more towards 2027 and not '25 or '26, we will go back to prices closer to the expansion cost. In the U.S., it's quite different. Prices were substantially lower in Texas due to the milder temperatures. Prices are much more volatile in Brazil. There's no hydropower, so prices fluctuate much more. There's no intervention from hydro. And this is what causes these fluctuations. But in the long term, as we showed, the curve is 20% higher than last year's and it's the second consecutive year we see an increase in this curve. And in our conversations with clients, everything points to higher prices than when we started to look for investments in Texas. So these are -- it's different situations that we have in Brazil and the U.S., which makes us more positive for greenfields in the U.S. in the short term and in Brazil, looking for operations that can optimize our margin. This is what makes sense to create value but not so much sense to have greenfield in Brazil. This is our assessment.

Now linking with the portfolio optimization, we have a question from Fillipe from Itaú BBA. About the portfolio optimization, what is the potential that we still have for this type of approach? And this increased EBITDA, increased margin is due to what? And he has another question relative to GD, Bernardo.

So this first question is very simple. We have done a lot. And overall, we can even define the volume that we can -- maybe we can double what we made this year in terms of the current assets. And then we cover all the opportunities that we have for this type of optimization. We still have opportunities for technical optimization. But for portfolio optimization in Brazil, I think this is the limit. And it's about 3 points maybe -- of the 3 points that we already increased, maybe we can increase another 1.5. It's a possibility. But we still have to confirm whether this is possible in the next few months. We're very excited with some opportunities and negotiation opportunities that we see ahead. But I don't have much to share with you. We have achieved these 3 points. And I think things are already at a good situation.

And his second question about GD, he's asking about the impact of the delays in the connection of GD assets and whether we want to revisit the growth strategy for this segment, the 2025 strategy. And there's another question here asking us to explain the reasons for these delays in connections.

So first, it's important to highlight that we are monitoring closely the distributors with monthly meetings to monitor how they are meeting their commitments, considering the dates established for delivery of the transmission lines to start connection. And we were surprised with some major delays in these works. Some of them have not yet been started. Today, we have 37 plants that are ready to start operating, which were delivered on time. But of these, only 21...

Just a comment. We met actually the timeframe for all our plants. We met the deadline.

But the delays -- yes, 21 plants that are ready but cannot be connected due to delays in the distributor and, in some cases, a 1-year delay and sometimes they haven't even started the works for connection. So the first step was go to court for these distributors to start the works. Because they weren't correctly prioritized, despite the monthly meetings and despite the requirements from the regulatory agency. And also Antonio, we will be compensated for this energy. We will be indemnified for the energy that's not being injected in the system. So these are the two fronts. And now we will be even-structured in terms of the progress of the works of these plants that are still to be connected.

Now in terms of viability and whether it impacts or [indiscernible] by the end of next year, all the sales of energy for this batch that is already built but not yet connected will be sold with margins in line with what was expected and the CAC also expecting our business plan. So the returns will be good, positive comparing with other [indiscernible] opportunities. In Brazil, these are the best returns that we can get. Now the question that I have always shared with you whether it is scalable? Can we do 1,000 megawatts? I don't know. I think it will be difficult. But if we do a thorough analysis and if we have firmer conversations with distributors, I think we can continue to invest, provided we are careful and we consider security margin when we talk to our distributors.

There's a lot of interest about artificial intelligence. We talked about high-performance computing. We have a lot of questions here about how we see the future of this market in Brazil, whether we have been assessing opportunities in this segment and how can we make a parallel about the market and the opportunities that exist in the U.S. because we're already present there and we can explore this industry there as well.

Well, we don't have this data publicly available. But we are under the impression that in the past few years, we have become the largest supplier of energy for data in Brazil. But the data market in Brazil is still very [indiscernible], about 500 megawatts. And I think 30% to 40% of this market is ours already. So we see a possibility to expand -- for demand to expand in Brazil, yes, we do. We do see that possibility. And I don't mean to spoil, but we're very close to announcing a very relevant operation in Brazil in data. And also, we have been proactively working with other clients to show that Brazil is highly competitive for data processing, high-performance computing and AI to try to attract these clients to buy our solutions. We have taken a first step. And for one of these customers in Assuruá, we started to supply with 20 megawatts. So the prospects for Brazil are positive. But in this first wave, this exponential boom in the demand for renewable energy in AI, we believe that it will take place particularly in the United States. So the fact that we are already present there with the competitive products will help us have interesting results in the U.S. in this first moment and also will bring us technology and relationship with clients that in the future may work with us in Brazil as well. So it is something that we have been truly exploring. We have three people in our sales team dedicated to exploring that because we truly believe this is a work front that can be very helpful and positive in the future and help create new levels of expansion and strengthen our relationship with our clients.

We have a question here about technologies, a question to Bernardo about batteries, about storage systems that could supply energy at peak hours 30% cheaper than thermoelectric. Can you talk more about that and if it's something Brazil should be paying more attention to?

Yes, we just talked about this. But it's an interesting topic. Brazil really needs to defend which product it needs. And according to our assessment, what we need to take in Brazil is a resource that can supply 4 hours of increased load, which happens at peak hours in the late afternoon and early evening. After we defined what we need in terms of product, we have no doubt that batteries are a great resource to supply to meet that need. Today, we have this discussion whether Brazil needs power, a lot of [ agents that starts ] and then what we need is thermal plants delivering energy 24 hours a day. And in our opinion, our renewables and our hydropower plants are able to meet the demand. They have excess power for that at a certain point of the day. And batteries are the best resource for peak hours. So we are requesting a -- we want to create the regulatory framework, which is very easy in our opinion because the public consultation period is over to allow this source of energy to compete equally with thermoelectric.

So 30% cheaper today, right, but the price will continue to drop in the future and it will be a greater difference in the future.

And the last question from [indiscernible]. Considering that the company starting a higher cash generation due to the entry to production of a few assets after a long cycle of investments, this question is whether we plan to stabilize our capital structure. And what level of net debt-to-EBITDA ratio, if it's lower, what will it be, or if we intend to keep the current leverage the company has? And if we continue to invest, what is the expected return for the new investments, considering the capital cost?

We have a history of capital allocation. And the history is always the best argument that proves we are a good capital allocator. We're very diligent about this. We understand the interest rate context and the risk in Brazil today. So we're very strict. We monitor our hurdles. We ensure security margin in new capital allocations. This is the premise for everything that we do. And we will continue to work like that. In terms of opportunities, like I said, we see more opportunities for greenfield in the U.S. today due to this price, which has detached from costs. And the profitability of new developments in the U.S. is much more attractive. So very selectively, we are working -- we're prioritizing Goodnight to today. Because at today's prices with the long-term prices in the U.S., this is where we see the best return, appropriate return and above the top 10% in the U.S. So this is the main focus today. And then moving forward, based on this logic of exploring new business verticals, such as data centers, artificial intelligence, we will continue this trajectory in the U.S. And this seems to be a very convenient plan. And of course, there, we have a model of recycled capital. Because at the same time, you will start new greenfields to bring new investors, just like we're doing for Goodnight 1 and 2. We are at the final stages of bringing a new investor to hold a minority stake. Greenfields in Brazil, we are a little more skeptical right now. Of course, this can change. Looking forward, '26, '27 is when we expect this to change, the conjuncture to change. We have been trying to bring new customers, new ideas, new models to speed this up and always pursuing higher returns. And in the U.S. today, we have investors with an appetite to co-invest with us and returns -- better returns due to higher prices. It is our main focus for greenfield projects.

Thank you very much for attending. We remain available, should you have any questions. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]