Centrais Elétricas Brasileiras S.A. – Eletrobrás (NYSE:EBR) Q2 2023 Earnings Call Transcript

Centrais Elétricas Brasileiras S.A. – Eletrobrás (NYSE:EBR) Q2 2023 Earnings Call Transcript August 9, 2023

Operator: Ladies and gentlemen, thank you for waiting. Welcome to Eletrobras Q2 Earnings Call. Let me introduce the Eletrobras’ team. Mr. Wilson Ferreira Junior, Eletrobras CEO; Ms. Elvira Presta, VP of Finance and Investor Relations; Mr. Elio Wolff, VP of Strategy and Business Development; Mr. Rodrigo Limp, VP of Regulation and Institutional Relations; Mr. Renato Costa Santos Carrera, VP of Procurement and Services; and Mr. Marcelo de Siqueira Freitas from the Executive Legal Vice Presidency, are here with us today. This earnings call is being recorded, and it will be made available at the company’s IR website, where you can also find the presentation in both languages. [Operator Instructions]. Before proceeding, we would like to clarify that any statements that may be made during the teleconference regarding the company’s businesses, outlook, projections, operational and financial goals are based on beliefs and assumptions of the Eletrobras Management as well as information currently available to the company.

These future considerations are not a guarantee of performance because they involve risks and uncertainties, and they depend on circumstances that may or may not occur. Investors should understand that general economic conditions and other operational factors can influence the results expressed in these remarks. I’d like to turn the floor over to Mr. Wilson Ferreira, Eletrobras CEO. You may proceed now, sir.

Wilson Ferreira Junior: Thank you. I would like to welcome all of you. Can you please show the slides. I would like to welcome analysts, investors, thank you for attending our earnings call for the second quarter. Let me start. Please move on to the next slide, please. We’ll have a summary of six segments. That’s how we broke down the company’s highlights, an overview of the number one managerial indicator, which is PMSO, operational performance, generation, transmission, financial performance. Elvira will take over at this point in time. And then I’ll come back for the investments and next steps segments. Let me start with the highlights for the quarter. Next slide, please. Next one, please. Another one. Yes. These are the highlights for Q2.

First, collections and operations in the financial front have been concluded, given the exposure we had to the U.S. dollars. The hedging for the bonuses in yet another operation, that accounts for almost 96% have been covered, and we’ll be completing that in the next quarter. There won’t be any FX exposure from now on. Onto liability management operations. Let me start with the one that have already been approved and implemented at Electronorte, BRL1.9 billion. The goal is the same, to lower costs and extend the profile. Costs are 2.2% above CDI, and we have been able to extend that debt profile. We’ll be detailing that shortly. Elvira will be doing that. We paid BRL1.2 billion in dividends, and the average cost is CDI plus 2.5%. Amongst those operations, I would like to highlight, though, that one on the right, BRL680 million, the first credit note for exports.

One of the important covenants is the debt contract with the commitment to sustainability. Our number one goal here is the clean energy percentage. We are at 97%. Our commitment is to bring that down. We are at 97%, and the original commitment was 96%. So that’s a very important highlight because we are now introducing our second voluntary separation program. We had 1,473 that have applied. BRL513 million will be saved. We’ll be breaking that down for both the first VSP early last year. And the second VSP, we have already concluded the application phase now in the second quarter. We believe it’s important to share a couple of events for the second half of the year because they are really important to the company. First, liability management operations that are currently underway, and we were able to announce them through a market note.

We had the fourth debentures issuing of BRL7 billion and BRL3.5 billion in Furnas and the fourth issuing of debentures BRL250 million at CGT Eletrosul. All these operations aimed at addressing the liability management strategy, always aiming at lowering costs and extending the debt profile. The second important action was the annual readjustment of RAP for ’23, ’24. There is an ANEEL resolution that increased our RAP by 30%. It was BRL17.5 billion for the ’22, ’23 cycle. We’ve also received the authorization to be the trade agent of electric energy at CCEE. This will be allowing us to use some of the tax credits we have for the trading activities. And we’ve also received the announcement of our restructuring for the unprecedented net-zero for any energy company by 2030.

That’s going to be a pioneering effort. That’s why we have a sales structuring of our process of all our assets related to thermal, both using gas and non-gas. We use coal. We have gas, thermal plants and a combination of both. So these are the main highlights for the quarter — the second quarter of 2023. On to the next slide, please. We have an overview of our PMSO, people, materials, services and third parties and other. Next slide, please. The first PDV1, the first voluntary termination or separation program, BRL1.2 billion is the expected savings on an annual basis with an 11-month payback. The first thing we can see on the top chart is that we expect expenses reaching 2,494 people. People are leaving the company at a slower pace than expected for a couple of reasons.

Number one, we were very careful earlier this year. Let me remind you, we had those uncomfortable events as to the crumbling of a couple of towers, and we decided to be extra careful so that we could better manage that situation at that point in time. But we expect to have new people coming in. They are, again, at a slower pace than expected. And for that reason, our curve is the green, is the best estimate we can get, not the blue one. That will entail less savings for the year. Our estimate was BRL790 million. Originally, it would be BRL890 million of savings. As of next year, as a result of this activity alone, we’ll be bringing costs down by BRL1.2 billion a year. The payback would be about 11 months. There was that delay, but we are focused on taking good care of the company, especially its operations.

We believe that this BRL100 million can, of course, be offset by far, by the credibility of our operations because now we can be sure that we’ll be reaping that result next year as about to BRL1.2 billion, as I said. The same assessment of the VSP #2, that we introduced last year. Given the collective bargaining we had, our estimate was of about 1,475. We had 1,000 — or the expectation was 1,574. We had 1,475, a little less than expected. As most of it have been terminated by July, on August 31, over 500 employees will have left the company. So this program is somewhat quick because some employees could not join our VSP #1. So that’s why the process is now faster. Again, according to our Board, we have been very conservative to maintain the company’s operations and of course, its credibility to maintain that credibility intact despite these adjustments.

This VSP has a cost of BRL513 million, savings of BRL688 million on an annualized basis, a better payback than that of first about 9 months. That, of course, is consistent with what we said before during the Eletrobras Day. We’re reducing our personnel costs that was BRL4.6 billion in 2022, and we expect to reach BRL2.6 billion, a reduction of almost 42% by 2026. And just to give you more color. These 2 voluntary separation programs with firing another 800 people. Our staff started out with 10,500. In Q2, we are at 8432. We’ll be reaching 7,727 by year’s end. We knew professionals coming in the company throughout the country, and we expect to reach in the second half of ’24 7,250. So as to this main activity to bring costs down, these two voluntary separation programs have already been implemented, and we are bringing costs down gradually.

On to the next slide, other activities related to MSO. Our expectation, we had about BRL4.1 billion with costs in MSO in 2022. We expected BRL200 million savings for the year. We’re actually moving ahead. We’re even moving that faster. We had additional savings of BRL100 million, given the realization of the plan by June. We expected BRL1.9 billion. So we exceeded our projections in BRL100 million. This is a whole set of activities. Number 1 is OBZ. But let me point out that the number one activity and the number one driver that brings cost down is to centralize our hiring process for all the companies, and then we can better estimate costs to have better services and materials synergies. We can better manage inventories through that centralized purchasing, which would give us more bargaining power and centralization of contracts for both insurance and facilities.

We brought cost down over by — over 40%. That’s the first time we did that. So we’re expecting additional results for 2024. And let me remind you that now the second half, we’re now starting the centralization of the 4 centralized or shared services in Recife. So throughout the second half, we’ll be concluding that centralization effort. We’ll be able to then expand cost reductions throughout the year 2024. As a result of this centralization effort I mentioned. Our estimates are on the left. We are, of course, working to bring that number by 42%, starting at BRL41 billion, BRL4.1 billion rather, bringing the number down to BRL2.5 billion in 2026. So these are the 2 main actions, 2 managerial actions that will mobilize the entire management team, and we have been able to show very positive results up to now.

Now moving on. So these are the financial highlights of Q2. So these are very promising results. Net profit was up by 4%, reaching BRL9,246 million for the second quarter. Our EBITDA was reaching BRL6.595 billion. Results shows net profit BRL1.619 billion, a 16% increase when compared to last year. At the bottom, you have the adjusted numbers. Let me point out the following. In the reported number, we have a very relevant effect, which is the consolidation of Santo Antonio Energia. This operation occurred after the privatization in the third quarter. So we have effects bringing BRL949 million, the additional BRL449 million of revenue through that consolidation. On top of that, we had a reduction of contractual results in for transmission systems.

Let me remind you that this revenue is booked based on economic indicators. IPCA is the most important one. In the second half of last year with higher inflation rates, we had 3.18%. It’s almost half now for the second quarter. So that brings a reduction of . We had another BRL674 million, or BRL764 million for transmission revenue due to regulatory changes in the period. We had a reduction in recurring PMSO, excluding PMSO of SAESA. Despite that negative impact, we had more salary increases of 2.13%. And with , we did that last year, another 4.18%, another million. We still have as a relevant for the quarter. SAESA PMSO reduction of 6 — rather an increase of BRL76 million for PMSO in SAESA and BRL332 million for costs and operational expenses.

These 2 figures have been included to those numbers, and Elvira will be explaining that in further detail. The quarter was very positive as compulsory loans. We reduced our remainder of over BRL2 billion and about BRL1.477 billion because of settlements. So it was a very important quarter. On the other hand, privatization took place in June last year. Since then, we incurred privatization costs. They amount to BRL1.5 billion by quarter, and they are referring to amortization of CDEs and other funds, BRL397 million of amortization. And an extra — and an additional BRL1.2 billion for those obligations I just mentioned. Of course, you have more revenue. It’s almost the cost of that transaction. It goes up as we move away from that stake when we compare quarter-on-quarter.

Nonrecurring highlights. We provisioned the second voluntary separation program, the second one introduced in July. So it includes BRL513 million for coverage of cost of 1,475 applications that will take place throughout time. Over 1/3 has already been completed in August alone. On the other hand, we had an increase of consulting services in the transformation office, so that all these transformation receive the necessary support, not only on the technology front, but also in the quality of consulting services so that they could be implemented smoothly. These are a one-off of BRL54 million for the quarter. Now we can talk about our operating performance. This entails generation and transmission. We ended this quarter with these numbers. So we went beyond 43,000 megawatts, representing 22% of generation in Brazil.

This is 20% of our installed capacity in Brazil, but actually 25% of the generation in this quarter. So 38,827 gigawatts hour is what we generated, which is important if we think about our economy. What is also very relevant is that we were able to generate that with 97% of clean energy sources. To your right, we see our PLD in each one of the submarkets. We see increases compared to last year, and this happens because of our costs with the voluntary dismissal plan. It also includes Itaipu. Below, we see the GSF curve. We see numbers for 2021, 2022 and 2023. Our GSF is important because we need to hedge for it in our operations. Next, we see information regarding costs and volumes for the trading of energy. This analysis is important. We basically have 4 products for sale in the free market.

So first, we have our quotas. We had a reduction in the volume or in the stakes of our company, and this happens because we are reducing our stake. This is something we are doing as we work on fundraising, but this 29% production represents only 7% of reduction in revenue from these products. Of course, this is also connected to inflation. This is something that we see for this quarter. So we go from 67.3 megawatt hour to 78 megawatt hour. The second important product is the regulated market. So we see not only effects of its growth, but also the consolidation of SAESA. So our energy volume in the regulated market grew 78% because of this consolidation. And we saw 46% of growth in the average tariffs for this market. Usually for SAESA, we had lower tariffs compared to other plants in our Eletrobras Group.

And we are still talking about a very relevant volume around, 3,800 gigawatts hour, BRL23.78. Now for the third project, or product, which is very promising for the future of our company is the volume that we’re trading in the free market. So this includes not only the reduction of stake, which we mentioned before, but the volume that we have for SAESA. We had a 14% reduction in volume and a 14% reduction in revenue from this market. So in this quarter, we had BRL198 for this. As I was saying, it’s around 14% of increase compared to the previous year. The volumes that are not treated here are settled at the CCEE. This is the lowest volume, as you can see in the chart. So the total energy that we sold this year, and this represents an increase of 8% year-over-year.

When we see the total revenue for this company, we see a growth that is actually 23%, not 8%. You go from BRL5.2 billion to BRL6.4 billion. So if we look at the product electricity sold by Eletrobras, that leads us to BRL211 per megawatt hour. This is relevant. This is good performance in this quarter. It takes into account the capitalization process, which allows for increase in volume, but also better pricing for the products that Eletrobras is offering both in the free and regulated markets. Now we have something that we’d like to clarify for analysts. It’s an important disclaimer. This is how our company works. We have our resources for the second quarter. And as you may recall, we have a few clients under the 13.182 Act. So it would be possible for some of these clients to be decommissioned.

In the third row, we see the volumes of decommissioning. We have a minimum term for the decommissioning period. So we go from 160 to 270. This is added to our resources. And now this is going to be made available to the market, and they will be sold according to the prices that the company can achieve. You can see the numbers here. We start with 9,571 and we get to 4,424 in 2027. So compared to the first quarter, we see growing numbers. This means that we’re selling more quarter-by-quarter. We sold 8,875 gigawatts hour for 2023. And in this quarter, we sold another 9,571. So the variation or the fluctuation in sales is shown in green. Now in blue, at the bottom, we see information based not only on volume, which we see at the top, but also on hedging.

This is why it is important for us to report on our GSF in our forecasts. We can’t just be caught offguard with a higher GSF. This is why we have a very structured process. But in the first quarter, for 2023, we had 18% or actually 11% of decommissioning. And for this quarter, we have only 6%. So from 11% to 6%. For every quarter, we have these products for sale up until 2027. And the volumes that are not sold in the second quarter are not as high as the ones that we had in the first quarter, which shows that we are getting to effective sales for every year, for which products are available. We also have average contract prices of BRL206. We even get to BRL207 by 2027. So this is something we’re monitoring weekly with my team so that we see the evolution of sales.

We want to get positive results, of course. We’re also taking into account delinquency fees or delinquency rates. There’s something else that we could have added here. The company ends up having a good perspective on the clients that we have. We already have 162 customers. These are different industries, different companies. So we are working hard on acquiring new clients. We’re working on sales contracts for our subsidiaries. We’re making products available. We have submarkets for each of the subsidiaries. And we’re working with the sales team so that we can better that. In the past, people would come to us, clients would come to us, but now we’re going to customers, and we’re making an energy offering based on our product portfolio. We even want to diversify our product portfolio.

So I’m really happy with everything we’re doing regarding energy trading. Now we can talk about transmission. One of the highlights is the 30% growth in transmission. Of course, we can think about inflation. We can think about IPCA at BRL479 million. We added more assets, BRL173 million. We had reinforcements and improvements, BRL123 million. We had minus BRL76 million for other adjustments, and we had BRL3,320 million with the new profile for RBSE. So for the ’23, ’24 cycle, we’re going to see growth revenue of around 30% compared to 2023. Please remember that Eletrobras has 73,000 kilometers, that leads to a 38% stake in the Brazilian market. In the Eletrobras Day, we talked about a CapEx that has been approved of 174 big-scale endeavors, BRL5.9 billion until 2027.

So as of ’27, this leads to BRL846 million, but BRL132 million will be realized in 2023. Now next, we have the financial performance. Elvira we’ll be talking about this. She’ll go into details regarding revenue and how we manage expenditures, EBITDA and our net income.

Elvira Presta: Thank you, Wilson. Good afternoon. So now we’re going to talk about our balance. We always talk about this every quarter. So to your left, you see the IFRS information. As you were saying, we had a 59% increase in our EBITDA, 16% increase in our net income. And to you’re right, still in the same table, we see a recurring basis. So we see that the EBITDA was basically the same, but the net results were below our results year-over-year. Now let me tell you why this is happening. In previous quarters, we would always, always show the recurring results, but we would exclude our provisions, especially for compulsory loans. Because in prior periods, before we started this work, this would increase provisions, therefore, reducing results.

If we use the same criteria, the reversals of these provisions, which are positive, are nonrecurring. This is why our EBITDA is capped at the same level, but we have a reduction in our net income. We have a few highlights to your right. Wilson mentioned some of them. We had around 4% growth in revenue. This has to do with Santo Antonio Energia in its consolidation. This is the last quarter where we still have to explain the effects of Santo Antonio. As of the next quarter, Santo Antonio will have been at the same base as the previous year. So we will no longer need to explain these effects because in the second quarter of last year, San Antonio had not been consolidated yet. This is why we’ve been explaining this effect. It represented BRL1.1 billion.

In the next slide, we’re going to talk about IFRS compared to our regulatory perspective. For the PMSO, we had a very positive quarter with a reduction of BRL144 million. We’re also excluding Santo Antonio, which adds BRL62 million. This is the fruit of our initiatives, not only with the voluntary dismissal program, but also other items in PMSO. This also has to do with collective bargaining agreements. For costs and operating expenses Santo Antonio Energia adds revenue, but it also adds costs. So we see this impact of BRL332 million. For construction, we are building transmission lines, so we have expenditures for that. For depreciation and repayments, once again, we see the consolidation of Santo Antonio with BRL204 million, and we have the impact of concessions or grants, which were renewed when we went private, so BRL193 million.

For financial results, which we’ll go into details later. If we have a comparison quarter-over-quarter, we have a BRL1.8 million reduction. This is mainly due to 2 things. First, Santo Antonio. As we consolidated, we have a financial expense related to interest, so BRL741 million. The biggest impact here is related to our obligations regarding the privatization of Eletrobras. We have to pay fees over our CTE. We also have our projects related to basins and to renewable sources for the decarbonization of the Amazon, the Amazon. And as we mentioned, before, we were working with foreign exchange, we swapped to CDI because we don’t have revenue in dollar, and we invested our cash in CDI. So this brought us a noncash effect at BRL458 million. Now when it comes to changes in foreign exchange, we had positive results.

In the previous period from last year, we didn’t have protections. The dollar went up and we had negative results last year. So since this didn’t happen now when we compare it year-over-year, we get to these positive results related to foreign exchange rates. Now we can talk about our gross revenue. We had a 4% growth, as previously said. I’ve already mentioned Santo Antonio, which is the green column related to generation. But with transmission to your right, it is important to say that with the IFRS, revenue gets updated. The balance of our assets gets updated according to the IPCA rate, meaning inflation. Since it changed and it used to be over 3 last year, but it’s over 1 this year, we had a reduction here, BRL1,134 million. This was mitigated by our changes in OEM — O&M, adding BRL408 million, and also our construction assets adding BRL338 million.

This is why we have minus BRL388 million here, not BRL1.1 million or BRL1.1 billion, actually. Also, this year, we’re no longer responsible for Procel, so we don’t have the revenue that we had in the previous quarter, around BRL40 million, but we had both costs and revenues related to this, and we’re no longer responsible for Procel. We’ll now see the breakdown of PMSO. On the left, top left, that’s IFRS. And at the bottom, the recurring view with the adjustments. Two major adjustments basically. Number one, the second VSP provision, BRL500 million that we have already mentioned. And the Santo Antonio consolidation effect in the IFRS view is 1% increase. But when we we did not have Santo Antonio Energia last year and the VSP 2 provision is a one-off event.

In comparable basis, we had a 7% reduction, as you can see on the bottom chart at BRL144 million reduction. And on the right, these are the highlights. In staff, BRL134 million, an 11% reduction, which is significant, especially when we consider that we do not have ASP increases of 12% last year and 4% for the year and new people that have been hired. As to services in blue, nonrecurring has to do with the transformation office, effort. And in others, we had legal cases as a result of the work conducted by the legal department. And there’s another important activity Wilson has mentioned that in the strategy, which is centralizing the insurance hiring. So we have managed to reduce costs by BRL23 million. These are the highlights for PMSO. Now on to provisions.

On the right you see a summarized table, some provisions for the same period last year when compared to this year. In ’22, we had BRL2.2 billion in provisions, a reversal of BRL1.7 billion last year. Let me remind you that as far as compulsory loans was BRL242 million this year, almost to BRL1.5 billion. For cases that are not compulsory last year, we were at BRL475 million, an increase. And this year, a reversal of BRL184 million. This is one of the initiatives we mentioned during Eletrobras Day, just like we have been negotiating compulsory contracts. Our VP, Marcelo, is already heading that process for other cases to review risks, and we have been able to review that risk mitigation. That’s why we had that positive impact on to investments.

The second half of — second quarter of last year, we had to account the losses for San Antonio Energia. Already, we have reversed that with the consolidation. And PCLD, Amazonas Energia last year. So these were the highlights. So in the quarter, we had BRL1.7 billion, as positive effect, improving results by reversing our provisions. Let me break that down. As far as the compulsory loans are concerned, ever since we started that plan in Q3 of last year, on the right, you can see the table of provision inventory for compulsory was almost BRL26 billion, BRL25.8 billion to be exact. And we’re now at BRL22.1 billion. That reduction amount for BRL3.7 billion for these quarters. In the current quarter, we had an inclusion of BRL1.4 billion, just like I explained in the previous slide.

When we take into account other agreements or other settlements that have been negotiated, we’re just waiting for the final ratification of those settlements. They haven’t been booked in the quarter. We had an additional BRL1.7 billion. So we expect a reduction of — from BRL22 billion to about BRL20 billion. So for the year, it will amount to a BRL5.4 billion reduction, almost 20% reduction. In red, let me point that out, the monetary adjustment given our interest rates. As our inventory provision comes down, we also reduced the monetary impact for the quarter. And the last 2 highlights on your right. Since our negotiation strategy involves all compulsory processes or cases they have against us, we reduced off-balance contingencies that is BRL1.9 billion off balance and a release of BRL1.3 billion of connected cases, those that were used as guarantees.

So these are judicial deposits that amount to BRL1.3 billion. On to the EBITDA variation. In IFRS, we had a 59% increase, but we feel these reversals as nonrecurring in adjusted basis. Our EBITDA was along the lines of the number we had last year. On to the next slide. This is a net profit assessment. Since we removed compulsory events as nonrecurring, that’s why our net profit is reduced, therefore. But let me point out a couple of things. The financial results, the column in red, BRL1.8 billion. This is impacted. It’s on the right. So we have some important events. Number one, the privatization obligations, regional funds, CDE amounting to BRL1.1 billion. And then we had the hedge issue. I tried to break that down. Let me remind you of what we did.

We had 2 bonds, one is $500 million, maturing in 2025, and another USD 759 million for 2030. When we signed that operation late in May, FX was 5 54, and swap that to CDI. So the series is for 2025. It’s now 97.4% of CDI. And for the 2030, it was CDI plus 1.7. So these are the relevant information we would like to convey to you. So these are cheap debts when we compare to prices today. We wouldn’t be able to leverage that loan at this cost. We’re moving away from that foreign exchange risk because we’re protected by CDI, and that effect of BRL467 million, which is a noncash effect, is the result of the differences of these flows because once we concluded the operation, FX came down and our CDI was high. And for depreciation and amortization, another column in red, BRL400 million.

And the number one reason behind it is due to the new concession contracts. We have been depreciating ever since the privatization and again, the consolidation of Santo Antonio Energia. Moving on to the end of my presentation, on to the next slide. This is the net debt adjusted EBITDA ratio. According to our financial discipline, we have been able to maintain our 2x indebtedness level, as you can see on the left. And on the right, you can see detailed information of our debt profile, BRL57 billion. Consolidated cash was BRL18.6 billion. Net debt is about BRL38 billion. Let me point out what I wrote at the bottom, on your right. According to our explain — explanation notes, in late June, we converted BRL4.1 billion through AFAC and intercompany debentures.

As of July, we’ll be able to see the results of the fiscal savings of that operation. We expect BRL180 million savings for the year. Since this year, we only have half of the year, we’ll be achieving half of that amount. I have my final slide of investments, and then I’ll turn over the presentation to Wilson. So as we show every quarter, we show you the investment curve. In blue, investments by June, amounting to BRL2.5 billion. And in green, the same period of last year, not including San Antonio allocations for the CapEx was BRL1 billion. So we have this major increase. And on the right, two highlights. We have that impact of construction in Coxilha Negra, investments amounted to BRL279 million. And also here, the SPEs, we resumed Transnorte Energia, a very important project, to connect Roraima, the state of Roraima.

We had another or an extra BRL29 million of allocations there. So these are the highlights for the quarter. I’ll turn it over back to Wilson.

Wilson Ferreira Junior: Thank you, Elvira. Let’s move on to the next slide, please. Let me point out a couple of investments we made. And we announced that right after Eletrobras Day, BRL17 billion in contracted investments for the period ’23, ’27, BRL6.7 billion in transmission assets. We were talking about that these are assets for improvements that have been approved by ANEEL, which have guaranteed revenue. We also have for improvements set of mills or plants operating in the quota system, with an additional BRL4.6 billion there. BRL2.9 billion for infrastructure and environment. The first BRL1 billion is related to environmental investments. A little over BRL500 million for the social environment programs that have already been commissioned for Santo Antonio and BRL1.9 billion for infrastructure.

These are optimization efforts of our costs that can be ranked as operational investments, but they are actually necessary investments through automation, robotization of a couple of processes with intelligent networks, AI, BRL2.4 billion for generation assets with new sources of revenue that have been commissioned Elvira mentioned. That’s the wind process in Coxilha Negra and BRL0.7 billion in contracted M&As: Teles Pires Baguari, Retiro Baixo, SAESA and Baguari Energia. These are assets will incur in cash outflow of BRL0.9 million. That’s not all. We have the outlook for growth. We have additional firepower. These are alternative sources of growth. Number one is the transmission auctions, several auctions that are scheduled for this year and next year, BRL35 billion in total.

The company was very competitive. The only company that was present for every lot. This is an important growth avenue that is interesting for the company. We do have M&A operations, not only for that the reversal of cross-ownership. We had that goal, and that has to go through that reversal, just like ANEEL Energia, but also M&A operations. We are considering renewable sources, transmission assets, with the analysis of [indiscernible] team and another BRL10 billion addition of investments to improve transmission system. We had BRL6 billion that have been approved in the previous slide, and we have that potential, given the age of assets, an additional BRL10 billion, that would bring in an additional BRL1.2 billion of revenue. And Ito will be leading the effort analyzing the quality of the asset.

In partnership with [indiscernible], we are, of course, focusing our efforts to submit that for ANEEL’s approval. Every single investment will have to be subjected to that risk return assessment submitted by our committees and our Board and everyone, of course, using the services of a rating company so that we can generate value from that asset because the rate of return has to be above that cost of capital. On to the next steps. This is our final message to you. We’re going through a transformation phase. This is the third quarter I’m reporting. My Team has been working for almost a quarter together, but we’re making a difference already. First one is the reversal of cross-ownership strategy. Our goal is to reach 31 SPEs. We had 74 earlier this year.

We are at 68 now. And we’re working towards that goal as early as the beginning of next year. A second effort, we are advancing compulsory loans, negotiations. We have BRL400 million under negotiation. BRL1.7 billion have been commissioned. We had BRL22 billion of provisions. Early last year, we were at BRL26 billion. By this effort alone, we’ll be able to bring those numbers down by BRL20 billion. We’ll be reducing or completing the — or eliminating the FX exposure. We do — we are speeding up our tax strategy. We do have credits above BRL13 billion. So there are several activities that have been shared since Eletrobras Day, almost about BRL1 billion in 4 years. It can be even more. We had a trading strategy once we have that trading company.

We better structuring our sales teams. We also have a trading desk. We do have all the elements in place so that we can become a very good company in trading effort too. We are boosting the number of customers and people are coming to look for our products. And we’re also developing new products so that we can become even more competitive in this new market. Of course, our focus is on PMSO savings. That’s the number one asset that can be managed, that can deliver results on a short-term basis, a BRL990 million savings for this year alone. 39% has been realized already. Second half, this is even more heated, if I can put it that way. And Renato Carreira is leading this next activity. We have a whole set of real estate assets. They cost money, operational and maintenance tax-related costs.

So we have a team looking at this issue so that we can bring an additional BRL450 million by next year. So these are some of the activities that have already beginning to — that are already beginning to show some results: compulsory loans, among others. And I remain optimistic about these initiatives, and we’ll be able to deliver very good results in the next quarters. I just would like to conclude by thank — for all the awards we have, and I speak on behalf of the Board. The best CEO, the best CFO team, the best IR professionals, Paula, thank you very much for your effort. So this is yet another incentive to help us keep working harder and harder under Elvira’s and myself leadership. Let’s get started with the Q&A session.

Q&A Session

Operator: [Operator Instructions]. Our first question is from Andre Sampaio from Santander.

Andre Sampaio: I have two questions. Let’s start with Angra. We saw a number of articles this week regarding whether or not the government is moving ahead with this project. Could you please comment on your expectations regarding including this in the growth acceleration program? Now let’s say this project is not built, what would be the impact for Eletrobras?

Wilson Ferreira Junior: Thank you for your questions, Andre. Let me start answering regarding Angra. Of course, this is a part of our fundraising process. So we’re always working on the assumption that since this project is important for Brazil, they will move ahead with it. This is what we expect to see. We’ve seen speculation. But just a while ago, I was seeing the opposite. I was seeing that, yes, this project will most likely be included in the growth acceleration program. So we have to wait and see, of course. But we need to remember that moving ahead with this project does not really depend on the growth acceleration program. Of course, we were waiting for the BNDES, the Brazilian Development Bank, to finish its studies, its research.

And after they’re done with their research, then they’ll think about the continuity of this project. We are working on the assumption that they are going to move ahead with this project. This is our hypothesis because this is the subject matter of this act. And we don’t necessarily think that it needs to be a part of the growth acceleration program for them to move ahead with it. Now regarding the option you mentioned, let me hand it over to Limp and to Helio because they may have comments. Let’s talk about your option, which is not ours.

Unidentified Company Representative: Thank you, Wilson. Well said. Indeed, the articles that we saw in the last couple of weeks were not even regarding whether or not Angra shares will continue or not. They were talking about the growth acceleration program, and these things are not linked. So this is a part of this act. It is a part of the PPI, the CNPE, the privatization program, the separation program for electricity and nuclear. So right now, we are doing everything and we are seeing everything be done as intended. For example, they are finishing their research and they are working on the CNPE. Now should they stop working on Angra, Eletrobras as a shareholder, in the case of financing, we are the guarantors of this debt, around BRL6 billion.

But we are not the main debtor. This responsibility goes to Electronuclear, and it goes up to shareholders depending on the circumstances. In the case of their debt, we are providing the collateral for that. So it’s possible that we’d have to reimburse it. We do not believe that they’re not going to move ahead with Angra 3. But should that happen, we definitely make an assessment of all potential impacts for Eletrobras. But we do believe they are going to move ahead with it. All right. By the way, let me stress something. We’ve been working according to the privatization rules. According to these rules, not only do they talk about moving ahead with Angra 3, but they also talk about governance rules for Electronuclear. Their CFO, two Board members, members from the Auditing Committee, members from co-Angra, which is the committee responsible for overseeing Angra 3 works, all of them are aware of it.

So we’re close to them. And this has to do with the management of Electronuclear. Of course, they are taking into account everything that is in their best interest, both for the company and the shareholders. Yes. And here we have Mr. Elio Wolff and Ms. Camila Araujo, who are representing us. And Eletrobras really values this topic. We have two VPs working on it.

Operator: Our next question is from Mr. Daniel Almeida from [indiscernible].

Unidentified Analyst: Regarding your next issuances, what would the rate be? Do you expect to reduce your capital cost?

Unidentified Company Representative: This is our goal. Not only do we want to make it longer, but also to reduce costs. What happened with Eletronorte is something that teaches us even though we need to think about the debt scenario that we have right now. Somebody else may have a comment like Elvira. And I think it is important to talk about what we’re doing.

Elvira Presta: Yes, unfortunately, Daniel, we can’t convey any information about this because we cannot legally speaking. We issued a material fact, but this is regulated by the Brazilian Securities Committee. And this is only the beginning of their proceedings, so we’re unable to share any preliminary information. We need to wait for the Securities Commission to do their work, to do their job and then we’ll be able to talk about it, but this is regarding Eletronorte as reported in June.

Operator: Our next question is from Mr. Daniel Travitzky from Safra.

Daniel Travitzky: I actually have two questions. First, I have a question regarding energy trading. We saw implicit prices for trading in 2023, and they were very high, BRL179, which is very — which is above the spot price. And it’s even above the price curves that you showed us. How did you get to these results? Could you please talk about the rationale behind your strategy? My second question is related to capital allocation. Wilson, you mentioned transmission auctions to be held soon. Now if we think about direct current, and we have an auction for that in December, what kind of opportunity do we see there? What do you think about the competition? What would be your technology challenges to put this project together?

Wilson Ferreira Junior: Thank you, Daniel. So let’s talk about trading first. When it comes to these implicit numbers, these are the result of a strategy that we actually deployed last year. Trading is something that requires planning. It requires a specific view. We have a strategic committee to work on that. They think about the evolution of demand and the potential scenarios that we may see in the system. Additionally, they also think about deliverables from assets with more or less flexibility vis-a-vis the electricity system. All these three factors have an impact on pricing. So if you look at these prices 1 year ago, you have a more favorable scenario, but the economy is not as dynamic. So you sell forward. This is what happened with Eletrobras.

So the first answer is to get to these prices, we actually designed this strategy last year, and we sold forward. But as I was saying, we were successful. It’s important to highlight that this is not the only strategy to get to higher prices, in the case of Eletrobras, Eletrobras is one of the few companies with energy volumes that could be traded not only in the short term, but also in the long term. We retain our rights over these volumes over 30 years. So we are one of the few companies who are able to do that, to offer different offerings to customers in the long term with different propositions regarding curves or flexibility. So with our volumes, we definitely have more flexibility to customize our supply to specific customers, which we believe is important.

Number three, we changed our strategy compared to last year. We were basically operating based on generators and traders, but the open market right now is 10,000 to 12,000 customers. They are what we call the A group, the high-voltage group, 32% of volumes. But this market will be expanded as of January of 2024, with over 100,000 customers becoming a part of it. So we are customizing this B2B market with all of its specificities. We have advisory services behind us. We are working with very smart people who are trying to prepare us so that we have the right tools in our trading table in order to create more value and offer offerings that stand out and add value to customers. So for the numbers we have for this year, they are definitely the result of a strategy that we started deploying last year, which was really successful.

As I was saying, we made a few improvements this year as well, especially when it comes to our sales team. They’ve been looking for customers instead of waiting to be approached. Regarding capital allocation, Elio Wolff is going to add something to this, but I’d like to say something about transmissions. We clearly see advantages because we are scattered all over the country. We have a structure in every state in the country, and that’s a perk. We were a very large company in the past. There was too much. But now oftentimes, we’re able to purchase equipment at a bigger scale. We also see how important it is to look at our operations structure from up close. So if we have an asset in the Northeast, of course, people from Chesf is going to be on top of it because this is going to be a better utilization of this asset.

It will be easier for us to hire third parties at a better scale for this kind of operation through this kind of approach. So if you look at results from the previous auction, we were very competitive. And at the time, the team had been on it for under 3 months. I’m really hopeful that we’ll keep on making progress here. I believe we’ll be even more competitive in the next auction. Now regarding direct currents. We could talk about a technology upgrade, and we’ll need it in Brazil, and we’re ready for it. We have partnerships with the state grid for Belo Monte with [indiscernible] for the Madeira River. We are the operators of the direct current coming from Itaipu. So we need to increase the reliability of our system and to reduce losses, and this is the technology that will be used.

Elio may have something to add to it. So our team is looking for this kind of partnership so that we’re very competitive.

Elio Wolff: I agree. Let me add something. I think the last auction was just the beginning. We’re working on it, and we’re studying. We’re doing our research for December. In December, they’re going to focus on a batch of around 18 billion to 19 billion. And there was a change recently. You may have seen it. Looking for better competitiveness, the regulator decided to have bids split into four sub batches. We have the converter with the main batch and four sub batches. Well, this bid is going to happen in December. As Wilson said, we’ve been talking to partnerships and suppliers. We have an ongoing conversation with them. We also have preliminary research trying to identify routes and the best paths. We’re also trying to figure out the best structure as far as cabling goes.

So we’re getting ready for this auction, not only for the big batch split into four, but the other batches as well, batches 2 and 3. So for December, we are proactively preparing ourselves to send our bids.

Operator: Our next question is from Mr. Henrique Peretti from JPMorgan. Mr. Junqueira asks the next question.

Antonio Junqueira: Let me talk about Angra 3. Part of the reason why this discussion comes up and it’s a recurring topic, the market is very fearful of this topic. If it is decommissioned, the company would be losing BRL10 billion, BRL12 billion, BRL14 billion. You hear the kind of comment left and right. I may be completely wrong, but I have the impression that is due to communication problem. So once again, I would like to take this opportunity to ask your opinion, if there is a decommissioning happening, what is your take on those debt? Electronuclear would default two debts, BRL6 billion. That seems to be a very radical or extreme result. But could you explain how these costs would be broken down, how they were calculated if it happens? Along the same lines, can the company provide any kind of guarantee? Or would Eletrobras would have to collect or increase its capital? Would the company have to do that, too?

Unidentified Company Representative: We know it is mandatory in the case of the construction portion of the project. So I think it would be interesting so that we could all share the same opinion because that volatility is not helpful to anyone. I’m positive. You are right. I would like to take this opportunity to clarify this issue. Despite the importance of this asset, so the basic scenario is that of continuity. And I’ll remind you of two things: the controller of the company is the Brazilian stent, [indiscernible]. They have an almost 70% of common stock. Eletrobras has more — a bigger stake of the capital. It has less than 40% of the common stock. Well, this company, when we operated it, it was a company that ran at a loss.

It’s no longer the case with Angra 1 and 2. The EBITDA is robust and positive. So it can cover for any adverse effects. It won’t be able to clearly withstand all of those negative effects. And Limpy and Elvira, you can also provide more detail about the financing. And according to the law and based on the agreement that we signed.

Rodrigo Limp: I was trying to unmute myself. Well, on to the debt, BRL6 billion. Eletrobras is the guarantor of the debt. So if they cannot cover, Eletrobras can become sued. But legally speaking, we are entitled to look for compensation from Electronuclear, if we are executed. As to the demobilization costs, there’s no direct guarantee from Eletrobras. It’s up to Electronuclear. If Electronuclear is not able to cover for that cost that can reach shareholders, but not Eletrobras alone, that is also valid for the controller. If you increase the capital, we would have to make an assessment, but that would involve the entire legislation of Eletrobras. As a shareholder, I wouldn’t be able to tell you whether Eletrobras would be forced to allocate resources there.

If it’s not related to the construction part, but we have to take a deeper dive to better understand this topic. And there are no exact answers. You cannot quantify the impact in numbers. It’s not a recipe. Given the current situation, we are the guarantors, but we can find compensation. All the other costs as Electronuclear, but there’s a direct guarantee as we said. But if Electronuclear is not able to do that, that can impact shareholders, not only Eletrobras.

Antonio Junqueira: But when you say impacting shareholders, would that mean the equity? So your equity at Electronuclear would be worth less. If you increase capital to decommission, would you have to follow the 36% rule? Or that’s not the case?

Unidentified Company Representative: Well, we do not have that answer. We have to analyze the scenario because that’s not the scenario we’re working with. But we have to take a deeper analysis if that’s the case. You cannot guarantee anything. You’ll not be purchasing equipment, the commissioning costs ex debt. The company is not — we’re not creditors, no. And that decision of decommissioning is not taken by Eletrobras, that would be the burden of those that make the decision. In such a case, this is going to be assessed by the controller. As a controller itself, we’ll be answering according to our participation. Electronuclear has debt net to EBITDA about 3-odd. But the entire debt is from Angra 3. Yes, the rest is net cash.

It’s a very solid company, generating EBITDA. It’s a 3x budget. It’s a company owned by the state, but you’re talking about the state defaulting of debt. A state that would be BRL1 trillion worth of debt. It would default that debt, I think the stress is due to lack of information. That’s not your base scenario, but I think it’s worth further explaining it on a step-by-step basis so that everyone would speak the same language. You’re right. You’re right. We’re working in that direction with [indiscernible]. The Board will be addressing that issue.

Operator: Mr. Marcelo Sa, Itau BBA, asks the next question.

Marcelo Sa: Could you please elaborate on the CapEx? You break that down by segment. But out of this commission CapEx, what part of it does not generate revenue? It’s 1.5% worth of revenue generation, but there was an additional CapEx that is nonrecurring. But should we consider that BRL1.5 billion. For maintenance purposes, that wouldn’t be generating revenue necessarily. And could you please elaborate on the capacity auction that is scheduled to be held in Q1 of next year? And competitors are not looking for a hydro-only solution. So what’s your take on this next auction? Are there any projects willing to take part? What would be the amount available? And what is your estimate as far as capacity hiring is concerned?

Wilson Ferreira Junior: I’ll turn it over to Elio Wolff, and then Limp can jump in to talk about CapEx and the capacity auction. Over to you, Elio.

Elio Wolff: Hello, Marcelo. The first block is related to revenue, and I mean transmission. The second block, the maintenance CapEx. And this should be regarded as recurring CapEx that is nonrevenue-generating. It’s BRL1.5 billion or BRL0.75 billion in 3 years. So that’s the maintenance recurring CapEx that will — this is the nonrevenue generating, right?

Rodrigo Limp: Yes, exactly. The BRL3 billion is a mix. Part of it should generate revenue from improvements and there’s a part from modernizing equipment. And I think it’s important to speed up that process of MSO. But this is a one-off event. As far as the environment, most of it coming from size, these obligations would be dwindling. As years go by, these are nonrevenue generating, but there’s a progressive phasing out of that process. And the [indiscernible] is a new asset, and then there’s M&A. So in essence, as far as modeling is concerned, BRL1.5 billion is nonrecurring — rather is recurring, non-revenue generating. This is the best answer I can give you for your model and for the auction.

Marcelo Sa: Well, let me clarify one thing about CapEx. As you’re showing, you said that nonrecurring for generation, there’s a little bit of improvement. But in 30 years, would there be any leaps for modernization efforts that would be outside those BRL1.5 billion? Are there any surprises looking ahead?

Unidentified Company Representative: No, there are no relevant surprises further down the road. Well, if we detect any opportunities to modernize or maybe repower our units that could generate important revenue, of course, we’ll take that into consideration, but we don’t envision any of those surprises as we speak. On to the auctions. We have projects of renewable sources. As far as thermal plants, we are divesting or divesting from those operations. It’s currently underway. There’s a teaser in the marketplace about it. So we are divesting in those areas. But of course, we’ll be addressing the capacity depending on how EPE designs it. We’ll be looking for opportunities not only to sell energy, but also to come up with new projects to make that opportunity possible for the group to grow even further.

But we have no volumes set aside, specifically for the auction. We have to learn how the government will be defining that auction, the types of modalities, direct participation, whether it’s a possibility, hybrid services. So these are possibilities we have to take into consideration so that we can define how we are going to be part of that auction.

Operator: [Indiscernible] from Trulia investments is asking the next question.

Unidentified Analyst: Can you elaborate on your interest in the capacity auction for next year?

Wilson Ferreira Junior: That’s the question we have just answered. I think he read Marcelo’s mind. Would you like to say anything else, Limp?

Rodrigo Limp: No, that’s it. We have to better learn about the premises and how the rules will be detailed just like the previous auction. Only for thermal plants, that would be completely the opposite of our directions today.

Operator: We turn over the floor to Mr. Wilson Ferreira for his final remarks.

Wilson Ferreira Junior: Well, thank you for attending our Q2 earnings call. I’m very pleased, as well as the team is, as to the start of the realization of the results after the privatization process. Some benefits are evident. We’re talking about more revenue from the free market. This is the result of that decommissioning. And we have better benefits to extract once we have the trading company set in place. Last year, the company was reduced through to a series of voluntary termination program. We have had two of these programs. We are hiring new people, some people are leaving the company and we do have to have a mix in place that can provide more productivity and cost reductions and being more productive in the marketplace.

We have a very experienced team as far as MSO head — or led by Renato Carreira. He has a lot of experience, even abroad, but we brought in several people from or to Renato’s team to be able to better negotiate materials, third-party services inventory. We have 95 warehouses. We have 7 data centers, 4 shared services centers. So we have been working hard to optimize these assets. These are currently underway. And once again, we have advanced significantly our liability management strategies. We’ll be able to show those results in the near future. We’ve done that at Electronorte. So this is just the beginning of that effort. We still have a lot of homework to do as far as tax and fiscal optimization. That’s our focus. This is our priority. And absolutely, we not only have to operate efficiently and with safety, but also remaining competitive and focusing our opportunities on transmission.

I’d say it’s a need for the country. That’s exactly where we can contribute substantially and also generating value and being competitive. And our reversal of cross-ownership, especially taking opportunity of M&A opportunities in the marketplace. So I’m certain we are heading in the right direction. We’ve been here only for 3 quarters. But for the first time, we have a clear vision of the entire team. I would like to thank the entire team. I failed to mention the nonrecurring of compulsory loans. And we have managed to evolve dramatically after 6, 7 months, an effort led by Paula and Marcelo Siqueira. I think there’s important road ahead of us, but over 20% of provisions have been brought down in record times. We’re gaining — or we’re gaining traction.

Processes are better structured. There is no other company in the energy industry with our size with our possibility to reduce costs and generate value, reducing financial costs and at the same time, creating value to optimize our tax expenses and also have the possibility to grow. No other company can do that. It’s a unique asset at a time in which our target price is much bigger, the upside is very relevant. It’s important to mention that. The team is committed to realize those possibilities, and we’ll be seeing those results coming in, in the near future. Once again, thank you for attending our earnings call. I wish everyone a great day.

Operator: This concludes Eletrobras earnings call. Thank you for attending. Have a good afternoon.