Eneva SA

BOVESPA:ENEV3

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, and thank you for standing by. Welcome all to Eneva's Conference Call to discuss the results relative to the first quarter 2020.

Here with us today, we have Mr. Pedro Zinner, CEO; Marcelo Habibe, CFO; and Lino Cancado, COO. [Operator Instructions] This event is also being broadcast over the Internet at the following URL: ri.eneva.com.br, where the respective slide deck can also be found. Slide selections can be controlled by participants. A replay facility of this event will be made available after its closing. [Operator Instructions]

We'd like to say that forward-looking statements made during this conference call concerning Eneva's business outlook, financial and operating targets are based on the company's beliefs and assumptions and also on information currently available. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not materialize. Investors should have in mind that general economic conditions, industry conditions and other operating factors might affect Eneva's future performance and thus lead to results that will differ sharply from those expressed in these forward-looking statements.

Now I'd like to turn the conference over to Mr. Zinner, who will start the presentation. Please, Mr. Zinner, you may carry on.

[Pedro Zinner, executive]

Good morning, everyone, and thank you for participating on our results call relative to the first quarter of 2020. Before moving on, I'd like to please move to Slide #2 -- or Slide #3 rather. I'd like to start the presentation touching upon the current scenario as related to the COVID-19 pandemic and how the company has reacted to that situation.

On Slide #3, we have listed the main actions we've taken throughout the crisis, both in terms of prophylaxis in terms of fighting the disease inside and outside the company's walls. Before we move on, it is important to emphasize our commitment and how we have prioritized to the most -- to preserving our most important assets, our people. From very early on, we have sent our employees daily information on the most recent scenario with prevention measures which are currently updated, and also guidance in terms of contamination or suspicion of contamination. We have also made available a channel to monitor the health conditions of everyone. We have also hired a company specialized in diagnosis and in epidemiology to provide services in line with guidelines coming from global health entities.

From very early on, we have implemented mitigation measures. We interrupted all travels, meetings and face-to-face meetings and we have adopted the work-from-home mode of operation. We have revealed our work shifts which are essential, and we have adopted several prevention measures and the subsequent monitoring at our site, again, aiming at preserving our main assets.

Our commitment is to contribute to the community where we operate. We have donated 25 ventilators, 49 tons of food and 3,600 kits for hygiene and sanitation for hospitals and also for the community where we operate and other groups, which are considered vulnerable in the states of Amazonas, Ceará, Maranhão, Roraima and Rio.

After this brief introduction, I turn the floor over to Lino, who will update you on our projects and the ones which are under construction right now.

[Lino Cancado, executive]

Good morning, everyone. I'd like to invite you to come with me as we update the projects under construction. Parnaíba V, Azulão, Jaguatirica are following as predicted with no major changes in course, at least until the end of the first quarter. But because of the pandemic of coronavirus, Asian and European and Brazilian suppliers were -- had to stop their operations and they have notified about potential delays in delivery -- the delivery of some supplies. Most of those notifications have not been quantified yet. So we do not know the size of the delay for some of those suppliers given that those countries are still in Lat Am. Additionally, several of those supplies are not critical to putting together the plan, so they have a smaller impact on the scheduling of the construction, given the delays and why -- and those which have been already quantified until the end of the first quarter. The estimated delay for each one of the construction is the following: Azulão, no delay; Jaguatirica loses 30 days; and Parnaíba V, up until 60 days of delay.

The contamination by coronavirus has already reached the countryside of the country, so cities where we have operations already show cases of the disease. The energy generation works are considered to be essential, and that's why we are taking the necessary measure for them to carry on. And the company has increased operations and has increased communication with local authorities.

In Azulão, located in the city of Amazon, we had no delay with significant impacts in our schedule until then. Our producing wells already and have been tested, and the equipment for the gas production units are already in the final phase of manufacturing, some of which are already being delivered. Galileo informed us that the [ CPGS ] equipment, which is to treat the gas before liquefaction and the cryogenic manifolds are already being finalized. In a total of 32 cryoboxes, 16 are already in the field in Azulão, 6 are in transit and another 3 are under -- manufactured in Argentina. The last lot coming from China, 62 units -- isotanks have already been shipped. And when they arrive at Manaus, the total number of 240 will be done.

Auto generation engines from Caterpillar, manufacturer in Germany, have been shipped and they're scheduled to arrive in the end of May.

The first cases of COVID-19 have been confirmed and led current labor to be resized. We have set aside those who are in the risk groups, and that might lead to delaying silo construction. Those delays might be and will be recovered after we go over this pandemic.

As for Jaguatirica II, we had already said that most of the silo construction works were done, and we did that strategically so that we won't be impacted by that in the second quarter. Water tank assemblage and silo construction structures have already been started and therefore as scheduled. Despite the good advancement of the schedule, several suppliers have informed force majeure delays, but we have not quantified them, as I said. The critical path analysis indicates that you'll have a 30 days of delay in schedule because some of the equipment won't be arriving. The boiler, the chimney are things coming from Siemens will be delayed and will have an impact on the operation as a whole.

We haven't been informed by contamination of COVID-19 in Jaguatirica II as of the end of the first quarter.

As for Parnaíba V, the main impact point is coming from GE supply, some of the specific piece of equipment, the [indiscernible], which has been manufactured in China. For that delivery, we have a confirmed delay of 58 days and the impact on the schedule will be up 60 days since that piece of equipment is critical. Those deadlines are preliminary. And of course, it depends on the resumption of work in Asia and Europe. Our teams are working along with our suppliers to make sure that happens in a timely manner. We have that COVID cases confirmed, so we have already provided leaves of absence for those under suspicion. Eneva is receiving the first test kits for COVID-19, which the company acquired. 6,000 units in this first delivery. Some of our tests have been commissioned and will be delivered later.

Having new protocol has been established, and the workforce will be tested throughout, 100% to make sure we have no contamination and to avoid complications with our own employees who eventually might be tested positive.

I'd give the floor over now to Marcelo, who will be touching upon the financial numbers.

[Marcelo Habibe, executive]

Thank you, Lino. Good morning, everyone. Over to Slide #5, I'll now be addressing the company's liquidity, a very important topic, especially today, given the uncertainty and volatility moment we're going through.

At the end of the first quarter 2020, our cash balance is BRL 1.6 billion, considering that we still have BRL 1.8 billion for the coming months relative to financing with the Banco da Amazônia and Banco do Nordeste, we're already considering that our cash position was adequate to face our commitments for CapEx in the long [indiscernible], still with this uncertainty scenario and intending to reinforce our cash position, we have raised BRL 500 million last month at the cost of CDI plus 2.5% per year and a term of 1 year. Out of the total, BRL 410 million will be raised through the issues of debentures and BRL 90 million through a finance contract with the China Construction Bank.

It's worth mentioning that Eneva has adopted the measures by a directive issued by the Finance Ministry, which allowed for the delay of the paying of federal taxes. We also have adopted the emergency programs that suspend repayment of debt. So for contracts with BNDES and Banco do Nordeste, those measures will allow us to retain BRL 150 million, which were going to be disbursed in the next months in terms of debt payment. That ensures an additional liquidity for us to look forward in a more reassuring way, and also guarantees more flexibility to explore opportunities that might come up.

Moving on to Slide #6. We see a snapshot of our energy contracts. Credit risks, default risk is also being discussed significantly in this scenario. We operate in a very robust market today, 89% of the regulated market totaling 1.8-gigawatt average is contracted, as I said, in the regulated market. These contracts with generating markets and distributors result from the ACR auction with determined volumes and tariffs and the common mitigating mechanisms to the risk of default agents. Additionally, there cannot be contractual changes without approval of -- by ANEEL. As we talk about the [indiscernible], they are depending on the delivery so they receive a monthly fixed fee, which ensures the company revenue even in a crisis scenario.

When they are dispatched by the ONS, those accounts receive an additional revenue or favorable revenue to cover the generation cost of [indiscernible].

Out of the 11% of the fiscal guarantee of decontracted [indiscernible] correspond to Parnaíba IV, which has been operated since January last year and whose physical guarantee is calculated monthly in February, for example, was 38.8-megawatt average. We have the additional fiscal guarantee for thermal plants for Parnaíba I and III, and those plants had their fiscal guarantee reviewed last December. Moving from -- to 129.9 for Parnaíba I, 30.4 for Parnaíba III average megawatts. Those numbers reinforced and has a solid basis for revenue even in a recession scenario in our economic slowdown.

Lastly, we have a risk management policy, which is quite robust, which, together with the part of our contracts, guarantees that we had 0 default in our portfolio.

Moving on to the next slide, we have how the crisis has impacted the energy sector. The current price reductions coming from some consultancy companies for 2020 and estimated is bad for our plans in 2020. One of the significant impact was the reduction in energy consumption. Until March, consumption was increasing when compared to 2019. With the crisis, we saw consecutive drop in energy consumption for the past 2 months. So when compared the same dates and weeks before, just immediately before, as compared to last year in numbers, weekly drops reached 16% and net annual drops, 25%. A factor directly affecting the dispatch predictions in ERP, the dropping load, provided an oversupply and excessive supply of energy, and also led to the recovery of reservoir levels at the end of March. The quarterly review of load was also announced for energy operations and after a drop in the number. The load projection was dropped by 3.5 average gigawatts for the period between 2020 and 2024. As a result of those effects, some specialized companies in the energy sector has been providing PLD business [indiscernible] you can see on the right side of the slide, on the chart, the most recent predictions for the Parnaíba level indicating lower level than usual. A reflux of that, there are indications where the dispatch for the year for gas might oscillate between 32% and then 33% in the year for the company. As a registration, we also have the company's CGU in April 2020.

Moving on to the next slide, we see the highlights for the first quarter of 2020. Number one, our adjusted EBITDA reached BRL 434 million, the highest historical level filed by the company in the first quarter, representing an increase of 20% when compared to the first quarter of last year. The average dispatch from thermal plants is set at 56% in the period compared to 15% in the first quarter 2019. That boosted a growth of 280% in net generation, reaching 2,323-gigawatt hours. To meet a higher dispatch from thermal plants, we produced more natural gas, adding to 0.4 billion cubic meters in the first quarter. In this quarter, we also saw the impact of an increase of fiscal guarantees from Parnaíba I and III, which occurred at the Auction A-2 in December 2019. As a result, Eneva sold over 340 million-megawatt hours additionally for the free market with no additional generation costs, leading to a net revenue of BRL 34 million in addition to the period.

As for coal generation, EBITDA grew 13% when compared in the first quarter of '19, which can be explained by the expansion in the net margin and the variable margin in power plants. The effect came from lower fuel costs, a drop in international prices of coal, along with a higher calorific power in our coal, which made the plants more efficient. Net income reached BRL 180 million in the first quarter, a growth of 39% when compared to the first quarter of last year, driven by an improving EBITDA and a better net result. The company closed the quarter at a cash position of BRL 1.6 billion, an increase of more than 50% when compared to the first quarter of 2019. The leverage, which is the rate of net debt over EBITDA for the last 12 months, dropped to 2.6x in the first quarter.

Moving on to Slide #9. We saw the company's operating performance. Early on in 2020, the stored energy at the north provision system were below to the volumes filed for this part of the year, which increased the demand for thermal sources as a result. And all those plants saw an above-average dispatch level. So the net generation of energy added to 2,323 megawatts of energy, representing an increase of 280% compared to first quarter of last year due to the higher dispatch of gas plants. The plant production also increased significantly when compared to the first quarter of 2019. As I mentioned, we reached 0.4 billion cubic meters of gas in terms of generation.

Moving on to Slide #10. A higher dispatch in the thermal plants, as I said, was the main drivers in terms of positive impact in the company's net results, an increase of BRL 328 million when compared to the first quarter of '19. On top of that, as I mentioned before, fiscal guarantees for Parnaíba I and III came at 130-megawatt average and 30.4 megawatt average, respectively, in December. Before that review, energy generated above the fiscal guarantee. It was settled at the company's other plants CVU. After the review of the fiscal guarantee, that same energy has now been negotiating the free market at higher prices than before.

In the first quarter 2020, the energy generated by Parnaíba I and III was settled in the free market in a total of 340,000-megawatt hour, generating a positive impact of BRL 34 million. In the Upstream segment, net revenue grew BRL 136 million when compared to last year, basically driven by a higher dispatch on gas plants. Once again, upstream revenue is not included in the cost of the plants.

Net operating revenue grew $142 million when compared to the first quarter of 2019, mainly driven by higher volume of energy traded, which reached BRL 423 million when compared to 497-megawatt hours that were traded last year. The effect of the increase was partially offset by the drop in the average spot price in the Southeastern, Midwestern regions, which sat at 189-megawatt hours in the first quarter 2019 as vis-à-vis 185 last year in the first quarter. So the consolidated company's numbers totaled BRL 939 million in the first quarter from 2020, a growth of 54% when we compare to the first quarter of 2019.

Moving on to Slide #11. So the evolution of the consolidated EBITDA comparing both years '19 into the first quarter 2020, the consolidated EBITDA totaled BRL 434 million, the highest EBITDA reported in the first quarter in the company's history, a growth of 26% or BRL 89 million compared to the first quarter of 2019. The main drivers for that growth are related to high revenue, as mentioned in the previous slide, higher energy volume due to a combined dispatch with the review of fiscal guarantee were main drivers to leverage that EBITDA level. It's worth mentioning that the coal business saw a growth in EBITDA of 13.2% when compared to the first period of last year due to an increase in the fixed margin and of the variable margins in both plants, driven by lower costs of coal and the use of a more efficient type of coal, as I mentioned before. The EBITDA growth was partially offset by an increase in SG&A in the quarter, driven mainly by third party and personnel costs, boosted, of course, by the need to increase the number of employees and some other expenses with consultancy firms and travel expenses, and also by the adjustment or coming from collective bargaining agreements. And also looking to support the states where it operates and have contributed with BRL 1.1 million in terms of donations for ventilators in the first quarter. And that, of course, appears in our SG&A entry. Another impact that brought the consolidated EBITDA down has with higher exploration expenses, specifically with the seismic campaign started in the fourth quarter of 2019, which advanced over the first quarter 2020. In the first quarter of the year, the company acquired 1,120 kilometers for 2D seismic and the 163, 143 and 103 blocks coming from around 30, in the first quarter 2020, there were no seismic campaign underway.

Moving on to Slide #12. We saw that our cash flow is now at BRL 1.6 billion. That position does not consider the positive balances linked to company's financing lines which total BRL 185 million or bid sold in March. In the first quarter of 2020, the operating cash flow of the company totaled 494 -- BRL 497 million, leveraged by higher EBITDA and by the release of more working capital. In terms of investing cash flow, it came at a negative at BRL 526 million, mainly driven to new construction projects. The main disbursement is BRL 323 million for Azulão and the construction of Jaguatirica II, BRL 209 million related to the construction of Parnaíba V and BRL 38 million relative to exploration expenses in Parnaíba. The cash flow for financing was negative but BRL 149 million. That amount was impacted mainly by BRL 67 million, the payment of the principal part of debt and interest amortization in debt really to the holding company and also by an increase in deposits at BRL 64 million, which is a provision for the payment of some of our debentures.

Moving on to Slide 13. We closed the quarter with a net -- at BRL 4 billion. And then net debt ratio of 2.6x. We have concentrated our efforts in constantly optimizing our capital structure. At the same time, we have been getting ready to focus our investments in growth projects. As a reflux of our efforts, our average cost in the quarter dropped to 8.2% a year and the average term for maturity went up to 4.4 years. Only 4% of our maturities are concentrated in 2020, most -- more than [ 70% ] will mature by 2024. That brings us flexibility and some comfort to capture opportunities that might emerge. The company's financial discipline, combined with active management of assets allowed us to delay or extend that at better cost. With that, we clearly see that moments like this that [indiscernible].

We're going through -- the company has a healthy balance. Liquidity has credit with banks and feels confident with its growth projects.

Now I'd like to turn the floor over to Lino, who's going to talk about our investments in the quarter.

[Lino Cancado, executive]

So here, you have further details about the main investments in the quarter. Most of the investments, as Marcelo said, focused on Parnaíba V and Azulão-Jaguatirica construction works. We also focused on Gavião Preto, Gavião Tesoura and the rest in maintenance operations of the Parnaíba Complex and of our coal power plants. In the first quarter '20, our CapEx was BRL 525 million, so a dramatic increase compared to the first quarter of '19. Over 90% of this amount, as we said, were focused on these projects. In Parnaíba V, we finished the construction of the base of our steam turbine, and we finished building the building that will host this turbine, and we also finished our water treatment planned construction and the centrifuge building, and we finished the underground electric cable galleries. We also started to assemble the diverter 22 and 21 units and the columns at boiler number 32. Still in Parnaíba V, we got equipment from Asia. All of the equipment that we needed to assemble the 4 boilers were already received. In Azulão, we finished the foundations where our cryoboxes will be located. And we also finished the foundation of our isotanks, where we're going to store the gas produced in that unit. We also finished the foundation of our loading station. We also received 16 cryoboxes that were transported to Manaus on ferries.

In Jaguatirica, we finished the main foundations of the gas turbines and the steam turbines as well as the recovery boilers and support cradles of the isotanks. We also started installing the isotanks and their bases, and we started assembling the tanks of raw water and fire, and we completed the power island pile integrity tests.

For the gas power plants in the Parnaíba Complex, investments were for acquiring pieces and maintenance of our gas turbine in Parnaíba III. In our coal turbines, we completed the works in some administrative areas, and we have acquired strategic spare equipment for Pecém II. And we started acquiring equipment for a major overhaul in Italy that will take place in 2020. Now we also completed 2 wells and started drilling 3 wells in Gavião Preto. And we started drilling 1 well in Gavião Tesoura. We also prepared the base for access of another well in Gavião Tesoura.

About our exploration activities, we paid the bonus for subscription of the blocks that we acquired. We also had seismic activities that are not considered investment, but Marcelo has already mentioned this.

And now, I'm going to share with you some pictures that will illustrate the evolution of our works. Here, you can see the modules of the boilers being unloaded. And also the structure of those boilers also being unloaded from the ship in the Port of Itaqui.

Now in Slide #17, you can see the unloading of containers with pieces and parts of diverter damp 21 and 22 and the unloading on the right-hand side of the first main part of diverter damp #22.

Now in Slide #18, you have an aerial view of the Parnaíba V project. This is our construction site. You can see the fourth chimney from the left to the right and the beginning of the assembly of the structure of boiler 32. And on the right-hand side, in the upper corner, you can see part of the concreting being completed. And in the middle, the concrete being put in place, still under construction.

In Slide #19, you can see the assembly of the boiler and unit 32, the beginning of the assembly of unit 31 and on the left-hand side, the concrete being put in place.

Now Slide #20. The first picture on the left-hand side shows the beginning of the assembly of the fiber glass structure of the cooling tower. In the picture in the middle, you can see the beginning of the assembly of the structures of boilers #21 and #22 and on the right-hand side, you can see a close up of the assembly of boiler #32. Just as a correction, in the picture in the middle, it's actually boilers #31 and 32.

Now in Slide #21, you can see the assembly and installation of diverter damper unit 22 and on the right-hand side, withdrawal of GT 22 t-box.

Now in Slide #22, once again, the concrete being laid for the turbine table pedestals. And on the right-hand side, the front view of the turbine table pedestal.

Then in Slide #23, an aerial view of the water treatment plant, and on the right-hand side, an execution of the second stage of the forms of the multi-flow tank.

In Slide #24, you can see pictures of Roraima, the -- our Jaguatirica II thermal plant. On the left-hand side, you can see the isotanks being put in their base. These isotanks will be used to store liquefied gas. And on the right-hand side, you can see the execution of the isotanks containment basin.

In Slide #25, on the left-hand side, you have an aerial of view where you can see the tanks of the water treatment plant and also the foundation of the gas turbines, the boilers and the steam power plant. On the right-hand side, an aerial view of the assembly of those tanks for the water treatment plant.

In Slide #26, you can see details of the electric underground building where all the cables of the power plants go through.

In Slide #27, another aerial view where you can see the concrete being laid for the foundation of the 2 gas turbines and the 2 boilers, and on the left-hand side, the concrete being laid for the steam power plant and the main building.

In Slide #28, you can see the execution of the rain drainage channel, and on the right-hand side, an execution of the access road to Jaguatirica II.

In Slide #29, you can see an aerial view of our Azulão construction field. In dark gray, you can see the first cryoboxes that have arrived there. On the right-hand side in the bottom part, you can see concrete structures which are actually the foundation where the cryoboxes will go, and then you can see also the bases of the isotanks. And the groundwork at the top is where the trucks will come to transport the natural gas, liquefied natural gas.

Now Slide #30, you can see the concrete being laid for the cryoboxes foundation on the left-hand side. And on the right-hand side, the foundation's finished, completed. In Slide #31, a view of the same area with the foundations of the cryoboxes and on the right-hand side, the foundation of the isotanks with this drilling machine buried in the back.

In Slide #32, you can see the shipment of the cryoboxes with our logistic operator, TNM, at the Port of Manaus. And then on the right-hand side, you can see a picture of our cryoboxes on the site. They have been covered with black canvas to wait until they are positioned in their final location.

And in Slide #33, you can see 22 cryogenic trailers. All of them have been -- 22 have been delivered of a total of 108 that have been ordered.

Okay. That's all. Now let's open for questions.

[Operator]

[Operator Instructions] Our first question is by Marcelo Sá from Itaú Bank.

[Marcelo Sá, analyst]

I have a question about your growth strategy. You submitted a proposal to combine with AES Tietê in the beginning of March. But because of the writing vote issue, you ended negotiations. And then B3 positioned itself in favor of your interpretation of the bylaws. So are you considering making another proposal to AES Tietê? What are you considering? Are you waiting for CVM to position itself in order to make another proposal? Now another question about dispatch. You showed us a chart with dispatch projections. So I want to understand, from your point of view, which of those projections are closer to reality?

[Pedro Zinner, executive]

Okay, Marcelo, I'll try to answer your first question. We made a proposal to combine our assets with AES Tietê's assets. We were quite confident that this transaction would add value to both companies and their shareholders. The proposal was not accepted by AES Tietê Board of Directors. We saw this transaction as something positive. But right now, we want to focus our efforts on executing our strategic plan. Right now, we're not intending to present another proposal to combine our businesses with AES Tietê. We're looking at inorganic growth as something that depends on opportunities, of course, but we're always concerned with capital allocation. That's the main message we always want to convey when it comes to organic and inorganic growth. The last proposal shows a lot of discipline. And that's what we want to give, our capital discipline and now focus on organic growth. We have many projects in our pipeline on which we'd like to focus right now.

[Unknown Executive]

Just to add to what Pedro said, because of financial difficulties that many companies are facing right now, new opportunities will come along and opportunities that may be more interesting and simpler to execute. So we are now considering all of our possibilities, always having in mind the growth of our company.

[Unknown Executive]

Okay. We gathered independent and renowned sources in the market. But internally, we want to be in the middle. We don't agree with CCE's view. We don't think that the extremes will take place when it comes to the dispatch. So the dispatch, both extremes, should not be considered a reality. We think we should -- we're more towards the center of that spectrum.

[Marcelo Sá, analyst]

Okay. So as you said, you are not planning to make another proposal to AES Tietê right now. Your results show some loss because of the devaluation of AES Tietê's shares, and you have acquired shares in AES Tietê. What is the size of your stake at them right now -- with them right now?

[Unknown Executive]

We have acquired 0.7% of the shares of their company. So we are assessing the possibility of selling those shares when the time is right.

[Operator]

[Operator Instructions] Questions received via webcast will be answered later by the Investors Relations team. Well, if there are no further questions, I'd like to turn the floor back to the executives for their final remarks.

[Pedro Zinner, executive]

Well, if there are no further questions, I'd like to thank you all for participating in our earnings conference call, and I hope to see you again in our next earnings conference call. Thank you very much.

[Operator]

This concludes Eneva's earnings conference call. Thank you very much for your participation, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]