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

Good morning, everyone. Thank you for being with us at the earnings conference call for Serena for the year of 2024 and also referring to the last quarter of 2024. We had -- we closed the year with a production 18% higher than in 2023. The EBITDA reached almost BRL 2 billion, BRL 1.95 billion. This good performance was substantially supported by the increase in commercialization margins by 20% in the year, year-on-year, 2024 against 2023, reaching 322.7 per megawatt hour and also due to a good management of costs and optimizations, which reduced our cost by approximately BRL 90 million. These 2 things were able to neutralize the impacts that still persist of resources of below P50, curtailment above plan, delay in the connections of distributed generation and short-term prices lower than our plan in Texas as discussed during the year. We continue to be well disciplined in the financial area. We ended the year with a debt -- net debt of -- over EBITDA of 4.4x, which is below our goal announced in the last 2 years of ending 2024 below 4.5. And this debt of 4.4 is 2.4x lower than the 6.8 peak reached in 2023 when our investment program included the construction of Goodnight 1, Assuruá 4 and Assuruá 5. In terms of prospects for 2025 and as '24 is connected to '25, we had in December an important fact. We signed preliminary contracts to provide a long-term energy for a technology company in the U.S., with Goodnight 1 and 2. And now we have to organize the structure, a capital structure that's efficient for the project, bringing investors so that we can make this project feasible and launch it in coming months. Despite the curtailment having a relatively low impact in our portfolio compared to the average in the market, we have worked to -- with one more curtailment in the year and have worked with portfolio management and some regulatory optimizations to try to mitigate this event. Our distributed generation that had a delay last year due to the connection with distribution companies are almost -- are connected, 83% of them connected. So this will have a lower impact in '25 and in addition, for the year, we decided to make some adjustments to our reporting and capital structure approach and will explain how this will happen in the next slide. Overall, the production economic was 10% below plan, 6.5% resulting from B50, 6.5% generation below P50, 1% regarding the distributed generation delay and the rest resulting from curtailment. It's always important to highlight that the economic impact of these effects is less than the impact in volume because we're able to make hedges and so we have the energy prices lower than our contracts. So the effect of generation below plan is lessened. One of the main KPIs that we ended the year at the production 80 above, 237 gigawatt hour, above 10,000, a gross profit in the next quarter of almost BRL 1 billion is a very strong quarter and the year of BRL 275 million for an EBITDA of BRL 1.5 billion and a cash earnings of BRL 237 million for the year, with the earnings yield that was very good for the year. Regarding EBITDA, translating out these figures into the building blocks of EBITDA, curtailment of production have an impact -- had an impact on EBITDA of BRL 180 million downwards. Our sales in -- savings in OEM and costs have offset BRL 86 million of that. So BRL 86 million were managed through expenses and costs. And the good results on sales energy and the platform had a very good year of almost BRL 100 million in gross profit reached -- led to EBITDA of BRL 1.95 billion for the year. We have -- since 2022, we have made important relationships in energy sales with the platform, with the gross profit of BRL 86 million in 2024 as well as at the asset level. An asset level, transactions had an NPV of BRL 380 million, with agreements announced last year with Gargaú Odata land, mine, Scala, et cetera, of which a portion is absolutely additional to our business plan. None of these values were included in the budget and BRL 180 million have already impacted the EBITDA in 2024. And I would like to highlight a transaction that was very good. In December, we closed a sales agreement, which changed the revenue in reals -- in dollars for revenues in reals in 2024 because the exchange rate reached the very high peak at the end of the year. And we decided to make this transaction so we sold this future position in dollars with the commercialization agreement and had a result in reals, in exchange for result in reals in 2024. The average exchange rate, it's at 9.51%. It seems a very good rate. And if you consider the rates, so if you were to make a right calculation in terms of trade, it created a lot of value because in practice, last year, we had a negative taxable base. So this trade had an impact of 7.5% in real terms with -- in terms of BRL cost below our marginal capital cost. So it was a very positive transaction. It's important to highlight that we have made some transactions to that purpose, which has nothing to do with securitizations of receivables. It has no impact on the balance sheet. We have closed long PPAs in dollars in the middle of the year, incremental to the budget of the year or to the business plan, so they were not budgeted. And at the end of the year, we were able to exchange this long-term revenue in dollars for revenue in reals in 2024 that were advantageous in the point of view of exchange rate and energy link, which created results in reals, way above the earnings we -- that were expected in dollars. So this is a good deal because the purpose of the company is to maximize its margin when in selling energy. So this diverse asset base with 17 years of experience selling energy here in the United States has increased results for the company every year in 2022, 2023, 347 added value and 280 in 2024. So we believe that this is a recurring business for the company that will help us distinguish our profitability along the years due to this type of transaction. In terms of curtailment, there was a curtailment of gross profit of 2.9%, and that was below the market average, which was restricted to the region in Bahia where the incidence is higher, and it's good that the fact of Assuruá is focused on the evening and night period. So we are less exposed to the critical curtailment during the day. So this exposure to free market agreements enables us to reorganize that at an advantageous position, but we have taken measures to mitigate that in two fronts. One is to take the demand of customers to close -- closer to our projects so that we are not exposed to transmission costs. So we closed the year with 20 megawatts of data processing capacity in Bahia and we want to reach 100 megawatts until the first quarter of '26 and we're going to reduce -- that reduces curtailment. And there are adjustments to the regulatory framework that we'll be able to promote in the coming months as an industry that will decrease the curtailment effects. For example, we believe that it doesn't make any sense to have curtailment or reserve energy because the role of reserve energies to be backup for the system. So we have worked on that. So we believe that in the medium term, the effects will be zero in our EBITDA. We are considering an impact in the curtailment still, but there is a prospect of eliminating that in coming years. So we also decided after talking to our Board and maturing this idea, we decided to discontinue the practice of giving guidance being in line with the renewable energy companies worldwide. This doesn't mean that we have performed poorly. On the contrary, we provided guidance and if we compare the guidance in our deliveries, we delivered above the guidance. But we believe in a model that we can report the results and explain the variations and the differences year-on-year is a more consistent and better way to provide information. So we work on having an analysis of production and more in-depth analysis of everything financial production and keeping track of the company development through time. For 2025, it's not a guidance, but the EBITDA should be probably higher than 2024. So it was a good time to make this transaction of no longer giving guidance. Our analyst program of investment started in 2022 in investments at Assuruá 4 and 5, and we brought Actis. To complete the cash, we were short of. It's natural in an infrastructure company to have an initial funding, which impacts the balance sheet. So net debt over EBITDA goes up. But in terms of expenses, the company has always been well structured as proven. And as you start to generate revenue from these new assets, then you go back to the convergence and long-term convergence lever for an operational portfolio. So in order to have more clarity on these mechanics also based on other companies with a benchmark made based on companies outside Brazil, the capital structure we want to formalize that, which is already practiced in in-house to provide a leverage range, which is a base level 3.75x net debt over EBITDA with more or less 10% range for cruise leverage ratio and but of course, once the Board approves our future investment program, if it is the case, to be able to increase the leverage up to 1.75x for specific investment that will be a convergence for in the plan. And after this new assets are built, the ratio would go back to the range that we established for the long term. So we have formalized this policy. We have ended the year below 4.5. So we want to be within this year, within this range, and this will start as of now. About details for 2025, some highlights. We are a bit conservative. We believe that the EBITDA will be pretty much in line compared to 2024. We're more conservative regarding resources in the Northeast. But the prices in Texas are on a forward curve, and that is at good levels and the variability of prices in Texas, as of 2026, will be decreased. So we probably have a good, stable year and in terms of new investments, we are focused on enabling Goodnight 1 and 2 with the correct capital structure. Last year, we made a capital structure, closed with one investor. Unfortunately, it didn't work out. So we funded the -- we ended the process in December. And to be -- want to be able to launch Goodnight 2 as quickly as possible. And now we have high prices in the U.S. for energy. So there is a very high return potential after the rerating, especially because it's a derisked project since this funding structure we are organizing. There is a tax equity, Japanese funders, et cetera. So we are pursuing that. And as long as we have some material information, we'll share with you. With regards to the amortization curve for the year, we have significant maturity, which is DS 11 debenture that's in the middle of the year that matures in the middle of the year. We have contracted a long-term funding structure that will replace that and the outlook of this amortization will be close to the chart on the right side of the slide to totally solved in terms of cash. And there is a very high appetite in the Brazilian capital market to support us, December and January was a tougher market, but we're able -- there are several investors that want to take part in this transaction that is closed and therefore this is not something that will take more of our time. So just to wrap up, the company remains loyal to its investment pieces, supported by consistent performance. If we look at the last 2 years, 2023 and '24, we delivered an EBITDA slightly above our guidance, our initial guidance at 3.5, and we delivered 3.6 both for both years and the fact that we are -- we have contracts 10 years forward with high-quality customers. Nevertheless, we're looking for good sales opportunities that we can realize and then create margins and good results for the company, as I mentioned. So this sales rate have -- has helped us to distinguish our earnings when compared to the competition. And the financial discipline, which is something we have always followed since the foundation of the company, following good financial practices with a rate that is close to convergence within the range of our policy, which is close to 4x or below 4x throughout 2025. I thank you all for your attention, and this ends my presentation, and now we'll open for questions. Thank you.

Good morning, everyone. Thank you for attending the earnings call of Serena. We have Antonio Bastos and Bernardo, and I and Raul will cover this in the Head of Investor Relations. Before we start receiving your questions, I would like to mention some highlights or some points, some questions that -- it's good to ask you, Bernardo. Regarding curtailment, there are 2 topics that are worth going more in depth into. How do we see the impacts of curtailment in the long run for the Serena portfolio? What are the dynamics that we see here and try to measure in order to see how to navigate this topic that affects the industry? And also an update from you on how these developments of the Belo Monte and effect and the impact of that and how it's now.

Before Bernardo starts to answer, it's important to decrease that this drop in Belo Monte has impacted the Belo Monte line drop in the beginning of the year, has impacted our production in 3 weeks. It has nothing to do with curtailment. It's a structural issue that we have discussed. So the transmission issue that has been corrected as of February 3. So it's important to separate both things.

Okay. So let me start with this effect. This event from January 22 to February 13, there was a drop of one pole of Belo Monte that has a capacity of 4,000 megawatts, but it reduces the capacity of exports of the system went by 6,000 megawatts. So there was a period in which there were good outflows in the north of the country, which created a competition for renewable resources in the region, reducing cuts in our assets, especially in Bahia and Maranhão. In total, this drop of the outage of the line caused the decrease of 337 megawatts hours and will be refunded for a portion of that. Because our -- on February 3 in Bahia, so there was a loss of 68 gigawatts hour. And the topic of this franchise will be discussed in the regulatory for companies related to this franchise. In order to reduce this impact, we have worked with ONS along with other agents, you have a more balanced approach to hydro and wind solar curtailment due to the transmission outage. And we have monitored closely our per hour, the cuts by ONS to make sure that all pricings will be classified by electric outage. Therefore, we can be refunded. As for our overview for curtailments, 2025 is a year in which we see a strong reduction in cuts or outage due to reliability. There are 2 main lines that will become effective or operational in March, which includes -- increases the capacity of the Northeast and that will increase the export capacity from Northeast to Southeast and [indiscernible] that will increase, they will become operational in October 2025. So our asset in Bahia will be favored, which are the assets that are subject to actual curtailment. The year of 2025 will be a year that we have energy outages or curtailments. As most of our assets in Bahia are in the free market, so we're able to reorganize this energy at lower prices. And it's -- in the long run, also we have our year budget and 3% of EBITDA with curtailment. So we believe we can have positive surprises that's somewhat offset the part, Belo Monte, that was mentioned. Initially, the -- will be energy curtailments with restructural reduction, with the growth of demand and a reduction of new projects coming in, for example, 2027, only 300 megawatts of wind energy will increase the system. So the growth of the system is being reduced.

Thank you, Bernardo. Now we'll open for the first question that comes from [Hugo Deborah Antonio ], he is asking whether we could comment on the advances on the discussions for Goodnight and the sale of portfolio in the U.S. in PPAs.

Well, as I said in the presentation, we have a preliminary contract signed to sell energy to a U.S. technology company for a 15 years term that could be extended for up to 40 years for 5-year terms. And a substantial amount of this agreement is adjusted for inflation, CPI. So it's not yet closed because we need a good -- we need a funding structure for Goodnight 2. And we have invested a lot time last year and a transaction that didn't work out. We decided not to sign it. And so we restarted the process with the other participants. And we expect to have a definition about the launch of Goodnight 2, and therefore, the activation of this long-term contract in the coming weeks. Since we're talking about the U.S., it's also a good time to give an update about the price -- power prices behavior. Well, the forward price curve remains with high prices. Structurally, we believe that Trump Administration is -- will generate inflation, and of course, energy is the key item in this process. There will be higher demand due to AI and other factors and also because this production coming back to the United States of some chains will increase the demand for energy. So any kind of supply we'll be welcome and well priced. So we see prices both in short and long terms. The sense for prices are good.

There was a question from João Pimentel about curtailment. He is asking, we've seen a significant increase in energy curtailment in recent months. We've heard that there was a reclassification by ONS that explains that. Is that true?

Well, in recent ones, no. João, If you need more explanation, please call us. But the increase in curtailment essentially in the last weeks was due to the outage in Belo Monte, it has not to do with energy. In the beginning of the year, there was an increase in energy due to the holidays, there was an extended weekend, and therefore, a reduction in demand.

Yes. Perfect. There are no further questions for today. So we would like to thank you for attending the call of Serena and see you next time. Thank you.