UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 1-U
 
CURRENT REPORT PURSUANT TO REGULATION A
 
February 1, 2023
(Date of Report (Date of earliest event reported))
 
ENERGEA PORTFOLIO 2 LLC
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
84-4611704
(I.R.S. Employer Identification No.)
 
62 Clementel Drive, Durham, CT 06422
(Full mailing address of principal executive offices)
 
860-316-7466
(Issuer's telephone number, including area code)
 
Class A Investor Shares
(Title of each class of securities issued pursuant to Regulation A)
 
 
This IC Memo includes projections and forward-looking information that represent Energea's assumptions and expectations in light of currently available information. Except for statements of historical fact, the information contained herein constitutes forward-looking statements and they are provided to allow potential investors the opportunity to understand management's beliefs and opinions in respect of the future so that they may use such beliefs and opinions as one factor in evaluating an investment. These forward-looking statements are not guarantees of future performance and necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance.
 
 
Executive Summary
 
São Francisco de Itabapoana is a 3.13 MWp solar power plant to be located at Areia, Areia Areia Farm in the São Francisco de Itabapoana municipality, Rio de Janeiro State ("Project"). The Project will be connected to the Enel-RJ electricity distribution grid, as established through the Brazilian Federal Law 14.300/2022 and Normative Resolution (REN) No 1000/2021 of ANEEL (National Electrical Energy Agency).
 
This solar plant will be rented to a consortium, made up of residential and commercial customers for a period of 25 years.
 
The project is at Development Stage with Interconnection secured and a Land Lease fully executed with a 25-year term. This IC Memo refers to the approval of investment of 500,000 BRL ($96,724) for the development of the Project.
 
The estimated total cost of the project is 19.584.566 BRL (3.756.699 USD) with a projected IRR of 17.74% ($USD).
 
 
Key Information
 
General Info
 
Project Owner
Energea Portfolio 2 LLC.
Project Location
São Francisco de Itabapoana/RJ, Brazil
Technology
Ground-Mounted Solar
System Size (AC/DC)
2.50 MW/ 3.13 MWp
Estimated Year 1 Production
6,325 MWh
Coordinates
21.499576° S 41.08733° W
Land Status
Rented
Project Status
Notice to Proceed
Useful Equipment Life (Years)
25
 
Stakeholders
 
SPE
Energea Itabapoana Ltda.
Offtaker
Consorcio II de Geracao Compartilhada de Energia Elétrica Energea
EPC Contractor
T.B.D.
O&M Contractor
T.B.D.
Land Owner
Rafael da Silva Imobiliária - ME
 
Uses of Capital and Project Economics
 
Project Hard Costs
17.887.500 BRL
Project Soft Costs
1.033.025 BRL
Developer Fee
500.000 BRL
Total Project Financing
19.584.566 BRL
Debt Funding
N/A
Equity Funding
19.584.566 BRL
Project IRR (USD)
17,74%
 
 
Project Review
 
SPE
 
The Project's Special Purpose Entity (SPE) was fully formed on March 09, 2022, Energea Portfolio 2 LLC. being the sole member of the company. The SPE General Information is described on Table 1.
 
Table 1 - SPE General Information
SPE
Energea Itabapoana Ltda.
Registered Office
280 Barão de Jaguaripe Street, room 501, Ipanema, Rio de Janeiro - RJ, Zip Code: 22.421-000
CNPJ
45.575.582/0001-72
 
Site
 
Rafael da Silva Imobiliária - ME ("Land Owner") owns the site for the project. The SPE entered into a Site Lease Agreement with the Land Owner to secure approximately 6,0 hectares of the site on March 17th, 2022. The agreed monthly lease payment is 7,200 BRL from the beginning of operation and going forward. The values are adjusted on each contract year in accordance with the IPCA.
 
Design
 
The Project final design has not been defined yet. Nevertheless, it is expected to employ Energea's standard solution with bifacial solar modules manufactured by Longi, a Tier 1 solar manufacturer based in China and SMA String inverters.
 
According to the initial Energy Production Assessment, the Project is estimated to produce around 6,325 MWh/year with an AC Capacity Factor of 28.9%.
 
Interconnection
 
The Interconnection for the project is secured through the Parecer de Acesso issued in November 07th, 2022 by Ampla Energia e Servicos S.A. ("Enel-RJ" or "Utility Company") to the Offtaker.
 
On a distribution grid level, system modifications priced at 422,913 BRL by ENEL-RJ will be necessary for the project's interconnection. The grid works scope involves the cable replacement of 0.5 km and 1.2 km extension of 1.2 km of a new distribution line. The works will be performed by Light with a 12-month schedule.
 
Offtaker
 
The Offtaker will be Consorcio II de Geracao Compartilhada de Energia Elétrica Energea. The SPE and the Offtaker will sign an Equipment Rental Agreement, which determines a monthly fixed price to be paid to the SPE. Both parties will also execute an O&M Agreement, that stipulates a variable remuneration to the SPE.
 
The consortium will be made up of residential and commercial customers known as "subscribers". They may opt into and out of the program without penalty. In the case any subscriber does not make a payment, the Offtaker may replace them with another subscriber from the waiting list.
 
Table 2 - PPA Main Terms
Revenue Contract Term
25 years
Equipment Rental Price
330,000 BRL/mth
O&M Price
Variable
Resulting Energy Credit
794,23 BRL/MWh
 
EPC
 
The EPC contractor has not been selected yet. The SPE will do an RFP to price and scope the necessary works and, consequently, to select the EPC partner for the project.
 
O&M
 
The final O&M service provider has not been selected yet. The Contractor will be chosen and contracted in duly time, prior to the Project's COD.
 
 
Financial Analysis
 
The resulting nominal IRR, in US Dollars, of each individual Micro is projected to be 17.74%, with an estimated payback of 6 years, 8 months, and 19 days from the NTP date. The income statement, cash flow statement and balance sheet up until 2030 (shown annually) are presented on Exhibit I in the website IC Memo.
 
The project's nominal IRR was stress tested on scenarios with a range of variations applied to the discounted price. The resulted average was an impact of negative 24.1 basis points per percentage point increased. Another test was conducted on the effects of the devaluation of the Brazilian Real currency towards the U.S. dollar, with it resulting in a negative 105.0 basis points per percentage point devalued.
 
Two macroeconomic assumptions are assumed within the financial model to better reflect the reality of Brazil's regional condition. For currency inflation, it was assumed a 4.00% year-to-year price readjustments for all years, apart from year 2022, which was defined at a 10.00% rate. On Foreign Exchange ("FX"), this model assumes a base rate of 5.18 $BRL / $USD in the month of June, resulted from the last 12-month average, being devalued month-to-month at a yearly 2.00% compounded rate.
 
Revenue
 
The source of the project's revenue is split in between two 25-year term contracts with Consórcio RJ de Geração Compartilhada de Energia Elétrica Energea, an Equipment Rental Contract, with a fixed monthly price, with its value defined in Table 4, and an O&M Contract, containing a true-up mechanism with the goal of adjusting the overall revenue to match a target price per energy compensated.
 
In the case of São Francisco de Itabapoana, the true-up formula first calculates the utility's energy credit value, after discounting the non-compensable taxes from the grossed up low voltage rates, and applies a fixed discount on it to extract the total on which to charge the consortium members. This method allows for a higher realized revenue in the project, as the basis for the application of the discount (the credit value) is lower than the utility tariff. It is, then, deducted from the collected billed amount, after a 3.00% projected default rate is applied, the demand charge (TUSD up until the expected revision date of May 25th, 2023, and TUSDg thereafter, as a direct scenario where PL 5829/2019 passes is being accounted for), and the fixed monthly price of the Rental Contract. The result, if positive, gets collected by the SPE and, if negative, discounts the fixed monthly value of the Equipment Rental.
 
This analysis used a 30-day billing cycle to realize each month's revenue.
 
Inflation readjustments of both contracts are timed, in the model, with the utility's price refresh. Historically, ENEL RJ's rates tend to readjust once per year, in the month of March. Currently, the model uses as a basis for adjustment, the Brazilian Central Bank's 2020's target inflation rate of 4.00%, defined in the IPCA index. However, energy inflation in Rio de Janeiro has been, historically, above IPCA, with ENEL RJ's last three years readjustments at 17.30% (2021 to 2022), 4.50% (2020 to 2021), 2.31% (2019 to 2020) and -2.03% (2018 to 2019) and, cumulatively for the last 5 years, 34.60% versus IPCA's 27.68%.
 
Table 3 - Revenue Assumptions
Revenue Contract Term
25 years
Fixed Discount on Credit Value
13.00%
Rental Revenue Price
330,000 BRL / month
O&M Revenue Price
Variable
Resulting Energy Credit Rate
794,23 BRL / MWh
Energea's Rate (Taxes Discounted)
794,23 BRL / MWh
Demand Charge (TUSD rate)
38,85 BRL / kWac
Demand Charge (TUSDg rate)
10,72 BRL / kWac
Default Rate
3.00%
 
Operating Expenses
 
The model assumes the operating expenses as they are valued on Table 5.
All prices used on Table 5 are readjusted by IPCA, currently assumed at a 4.00% rate, once per year.
 
Table 4 - Operating Expenses Assumptions
Operations & Maintenance
20,000 BRL / month
Paid by SPE
Security
2,500 BRL / month
Paid by SPE
Land of Roof Rental
1,200 BRL / month
Paid by SPE
Insurance (GL & Property)
57.282 BRL / year
Paid by SPE
Banking & FX Fees
200.00 BRL / month
Paid by SPE
Utilities
1,000 BRL / month
Paid by SPE
Postage and Courier Services
100 BRL / month
Paid by SPE
Travel
1,000 BRL / month
Paid by SPE
Entity Expenses
1,000 BRL / month
Paid by SPE
Marketing Commission
5.00% of Revenue
Paid by Consortium
Average OPEX per Month
60,445 BRL/ month
-
*On the energy compensated
**All values readjusted with IPCA annually.
 
CAPEX
 
For this analysis, it was considered, in the model, the latest EPC market prices.
 
As the project currently finds itself in a development stage, the standard assumption of 3% contingency on the EPC total is assumed as part of the total Soft Costs, alongside other expected budgeted items.
 
Lastly, no interconnection cost is assumed by the project.
 
Table 5 - Capital Expenditures Assumptions
 
Brazilian Reais (BRL)
US Dollars (USD)
Acquisition Costs
500,000 BRL
0.15 BRL/Wdc
96,724 USD
0.03 USD/Wdc
 
 
 
 
 
Hard Costs
17,887,500 BRL
5.30 BRL/Wdc
3,430,524 USD
1.02 USD/Wdc
Solar Modules
7,038,896 BRL
2.09 BRL/Wdc
1,354,038 USD
0.40 USD/Wdc
Solar Inverters
934,638 BRL
0.28 BRL/Wdc
179,792 USD
0.05 USD/Wdc
Mounting Materials
2,906,053 BRL
0.86 BRL/Wdc
559,023 USD
0.17 USD/Wdc
Electrical Materials
1,897,917 BRL
0.56 BRL/Wdc
362,839 USD
0.11 USD/Wdc
Civil Materials
457,610 BRL
0.14 BRL/Wdc
87,717 USD
0.03 USD/Wdc
Engineering Drawings
369,880 BRL
0.11 BRL/Wdc
71,152 USD
0.02 USD/Wdc
Site Works
802,847 BRL
0.24 BRL/Wdc
153,551 USD
0.05 USD/Wdc
Electrical Work
1,730,337 BRL
0.51 BRL/Wdc
329,800 USD
0.10 USD/Wdc
Mechanical Work
187,950 BRL
0.06 BRL/Wdc
35,819 USD
0.01 USD/Wdc
Others
1,561,372 BRL
0.46 BRL/Wdc
296,795 USD
0.09 USD/Wdc
 
 
 
 
 
Soft Costs
1,033,025 BRL
0.31 BRL/Wdc
198,182 USD
0.06 USD/Wdc
Contingency
536,625 BRL
0.16 BRL/Wdc
103,306 USD
0.03 USD/Wdc
Entity Costs
10,000 BRL
0.00 BRL/Wdc
1,925 USD
0.00 USD/Wdc
Independent Engineer
90,000 BRL
0.03 BRL/Wdc
17,212 USD
0.01 USD/Wdc
Insurance
100,000 BRL
0.03 BRL/Wdc
19,521 USD
0.01 USD/Wdc
Land Rental
26,400 BRL
0.01 BRL/Wdc
5,049 USD
0.00 USD/Wdc
Legal Fees
50,000 BRL
0.01 BRL/Wdc
9,626 USD
0.00 USD/Wdc
Marketing Channels
50,000 BRL
0.01 BRL/Wdc
9,515 USD
0.00 USD/Wdc
Spare Parts
170,000 BRL
0.05 BRL/Wdc
32,298 USD
0.01 USD/Wdc
 
 
 
 
 
Pre-COD OpEx
164,041 BRL
0.05 BRL/Wdc
31,269 USD
0.01 USD/Wdc
 
 
 
 
 
Total CapEx (All-In)
19,584,566 BRL
5.80 BRL/Wdc
3,756,699 USD
1.11 USD/Wdc
 
Taxes
 
São Francisco de Itabapoana stands with an effective tax rate of 14.21%, compared with its gross revenues, with PIS / COFINS representing 3.65%, ISS at 0.08%, IRPJ at 7.60% and CSLL at 2.88%.
 
As the project contains an average Profit margin of 50.18% (after depreciation), it is benefited by the Presumed Profit tax basis as it locks the taxable income at 32% of gross revenue. The downside of adopting a Presumed Profit basis is the loss of 196,214 BRL in Net Operating Losses ("NOLs") and 1,654,594 BRL in PIS / COFINS tax credits. After running both scenarios, the model assumes that a Presumed Profit tax basis is more beneficial to be used in the SPE.
 
IOF tax is assumed, given that all contributions, distributions and intercompany transactions are done internationally, in between the SPE and an American holding company.
 
Indirect taxes are not charged to the SPE but are both paid indirectly through demand charge (as it's grossed up by both PIS / COFINS and ICMS) and deducted from the energy credit's value. Rio de Janeiro currently contains medium rates for indirect taxes, for Shared Generation projects, if compared with other States, representing, for the São Francisco de Itabapoana, a total of 18.68% of the gross revenue and an annual average of 1,154,569.31 BRL.
 
Table 6 - Tax Assumptions
Direct Taxes
PIS / COFINS on Revenue
3.65% of Gross Revenue
ISS on Revenue
5.00% of O&M Revenue
Tax Basis
Presumed Profit
Taxable Income Basis
32.00% of Gross Revenue
IRPJ on Profit
15.00% of Taxable Income
Additional IRPJ on Profit (If monthly taxable income is greater than 20,000)
10.00% of Taxable Income
CSLL on Profit
9.00% of Taxable Income
IOF on Financial Transactions
0.38% of Financial Transactions
 
Indirect Taxes
PIS / COFINS on Demand Charge
5.50%
ICMS on Demand Charge
18.00%
Non-Compensable PIS / COFINS
57.67 BRL / MWh
 
 
Legal Review
 
Relevant Documents
 
A Legal review was performed in the project's available documentation. The most relevant documents are listed below:
1.     Social Contract of Energea Itabapoana Ltda.;
2.     Property Lease Agreement.
 
Issues List
 
Table 7 - Issues List
EPC Agreement
There's no EPC Agreement.
Revenue Agreements
The Revenue Agreements (Equipment Rental Agreement and O&M) are not signed.
 
Contract Summary
 
Table 8 - SPE Social Contract Summary
Contract
Social Contract of Energea Itabapoana Ltda.
Incorporation Date
March 9th, 2022
Structure
Limited Liability Company (Brazilian Limitada)
Quotaholder
Energea Portfolio Holding Ltda. (100%)
Management
Christopher Joseph Sattler
Frederico Gomes
Antonio Pires
 
Table 9 - Property Lease Agreement Summary
Contract
Property Lease Agreement
Date
March 17th, 2022
Parties
Energea Itabapoana Ltda. - Lessee
Rafael da Silva Imobiliária - ME - Lessor
Term
25 years from the start of operation date
Object
Lease of a rural property in São Francisco de Itabapoana, State of Rio de Janeiro, with a total leased area of 6 hectares
Basic Rent
R$400.00/ha from the start of implementation period until the start of operation date;
R$1,200.00/ha from the start of operation date
Rent Payment
Monthly
Surface Rights
Lessors have the obligation to provide the surface rights deed when requested by Lessee.
 
 
Documentation Checklist
 
Table 10 - Documentation Checklist
SPE
Social Contract
X
National Registration
X
Municipal Registration
 
Site
Site Photos
X
Land Owner Documents
X
Property Lease Agreement
X
Design and Application
Energy Resource Study
Preliminary Engineering
Interconnection
Parecer de Acesso
X
Interconnection Contracts
Permit
Environmental License
X
Offtaker
Offtaker Credit Analysis
Revenue Agreement Set
EPC
Selection of EPC
EPC Contract scoped and priced
O&M
O&M Agreement
 
Investment
Project Model
X
 
The Investment Committee members have reviewed the Project Memorandum and hereby approve the investment on the São Francisco de Itabapoana Project.
 
 
Signatures
 
Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Energea Global LLC
 
By MICHAEL SILVESTRINI
Name: Mike Silvestrini
Title: Managing Partner
 
Date February 1, 2023