Eneva SA

BOVESPA:ENEV3

Earnings Call Transcript 2019-Q3

[Unknown Executive]

Good morning. Thank you for standing by. Welcome to Eneva's conference call to discuss the results regarding the third quarter 2019. Today, with us are Mr. Marcelo Habibe, Chief Financial and Investor Relations Officer; and other officers of the company and Flávia Heller, Investor Relations Manager. We would like to inform you that this event is being recorded. [Operator Instructions] This event is also being broadcast simultaneously over the Internet via webcast and can be accessed at ri.eneva.com.br, and also on the MZiQ platform, where the respective presentation is also available. [Operator Instructions]

Before proceeding, we would like to clarify that any forward-looking statements that may be made during this conference call regarding Eneva's business prospects, financial and operational projections and goals, constitute beliefs and premises of the company's management as well as information currently available.

Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and depend on circumstances which may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect Eneva's future performance and could lead to results that differ materially from those expressed in such forward-looking statements. We would now like to turn the floor over to Mr. Marcelo Habibe, who will start the presentation. Mr. Habib, you may proceed, sir.

[Marcelo Habibe, executive]

Good morning, everyone, and thank you for participating in our conference call regarding the results for the third quarter 2019. Before we move on, we have a message. Now moving on to Slide #3. Before we talk about the numbers, I'd like to call your attention to 4 recent events of extreme importance. Number one, as we won the A-6 energy auction for the Parnaíba III project, we will add another 92 megawatts or installed capacity to the Parnaíba complex, starting in 2025.

A second point has to do with the exploration of the Parnaíba Basin. In September, we purchased 6 additional blocks at the first cycle of permanent offers by ANP that provides continuity to our model of development, which integrates gas energy production. Another highlight was the license to build the Azulão-Jaguatirica project in the Azulão of Amazon. This is the last license we still lacked to further the Jaguatirica project. The company had already been granted a license for the wells in the Azulão field. And now for the Jaguatirica II. Civil works are on schedule and will move forward according to project. Finally, we managed to refinance Parnaíba II that profile issuing BRL 700 million and convertible debentures and the anticipated payment of the balance of that, and I'll go into detail as we move forward with the presentation.

Moving on to the next slide and talking about numbers. Specifically, we had a third quarter which was quite atypical in terms of thermoelectric dispatch, especially for the North-Northeastern area, where we had a different hydrology pattern. The first quarter in '19 had a regular hydrology, which helped us find or occupy a favorable reservoir position. And especially in the Northeastern region of Brazil, that has allowed us to reach records in energy production in that area. As for thermoelectric dispatch for the period, we reached [ 23% ] reduction. As a consequence, the amount of net energy generated by the company dropped by 23%. As a consequence, the gas consumption in the period sat at 0.59 billion cubic meters vis-à-vis 0.72 billion cubic meters in the third quarter of 2018.

On top of that, the energy settled in the short-term market with lower margins, due to decreased spot prices in the period. The smaller amount of energy generated combined with the price of commodities explains the drop in adjusted EBITDA in the third quarter, which totaled BRL 346 million in the period. On the other hand, Eneva closed the third quarter with a cash position of BRL 1.5 billion, an increase of 73% when compared to the third quarter of last year, and a net debt-EBITDA ratio of 3.1x, an increase in the leverage level that was driven by the Parnaíba projects and Azulão-Jaguatirica project as well.

Moving on to the next slide, you can see a breakdown of our financial performance and the EBITDA result. With a lower dispatch and a drop in commodity prices, which impacts our variable revenue, we saw a pressure on our margins, especially S.A. in Parnaíba, which explained 81% of our EBITDA results. The balance can be explained by the lower hedging and trading results in this quarter were flat, whereas in the past, they led to positive results.

Moving on, we see a more detail about the revenues. If we talk about volume on the next slide, Slide #6, we see that the dispatch in the third quarter of this year, as I mentioned, reached 82% as compared to 99% last year in the same quarter. So that impacted our energy generation of a drop of [ 23% ]. Last year, all our plants were dispatched throughout the third quarter of this year. We only had Parnaíba II connected for the full quarter and the others were dispatching only in late August. The flip side of that was a lower consumption of gas at 18% when compared to previous year.

Moving on to Slide #7. Another important point was the sharp drop in coal prices. Our main component to calculate expenses in our coal generating plants. In the third quarter of '19, we paid a price for that at around $70 per ton. And now we see price of coal dropping and then that caused a mismatch between our stock, our inventory and our sales prices that impacted the margins for our coal operations. And you can see in the chart in the third quarter of 2018, that mismatch effect between prices was positive, generating the same quarter of last year, a positive difference which affected the variation that we saw when we compared quarter-on-quarter. Additionally, as for the gas generation, the variable revenue for Parnaíba I also dropped given a drop in the indexing indicator.

Moving on to the next slide. We see the company's operating cash flow, which totaled BRL 335.9 million, out of that generation, BRL 286.7 million were reinvested: BRL 94.5 million in Parnaíba V, BRL 130.7 million in Azulão-Jaguatirica.

We also paid BRL 165.7 million as for our financial obligations. Having said that, the company closed the quarter with a consolidated cash position of BRL 1.5 billion, an increase of 73% vis-à-vis the third quarter of last year.

Moving on to Slide #9. We talked about our investments, which totaled BRL 360 million in the quarter, with a highlight for the 2 projects, Parnaíba V and Azulão-Jaguatirica, which are both under construction and account for 70% of investments in the period. As for Parnaíba V, we have concluded the basic engineering projects, and we are working in terms of providing the concrete basis for the foundations. As far as Azulão-Jaguatirica, we have finalized the land works in Azulão, we started probing and leveling the land and we are concluding the [ vegetal ] suppression in the surrounding area. As for the gas plant, we have finished the replacement of parts. And we are preparing further scheduled maintenance for Parnaíba III and the revamp of Parnaíba V. As for the coal plant, we started the preventive maintenance at Basin II and the upgrade of the turbines. We concluded the exploration drills for exploratory wells, as we can see on Slide #13.

On the next slide, we see the pictures of the status of Parnaíba V and other plants, quite in line with our schedule.

On Slide #11, some pictures of the Azulão field, where we are now drilling for -- wells.

On Slide #12, we see the evolution of the project in the state of Roraima for the thermal plant of Jaguatirica II. Landworks or artesian well drilling and so on.

Moving on to Slide #13. We're going to be talking about the company's capital structure. The company closed the quarter with a consolidated debt of BRL 15.4 billion and leverage cost of net debt today sits at 8.6%, with an average term of 4.2 years. If we extract BRL 1.5 billion in cash, our net debt closed at BRL 3.9 billion, equivalent to a ratio of 3.1x net debt-EBITDA. The chart in the bottom part of the slide shows that there is no maturation in the short term, showing that our amortization schedule is quite comfortable from the company's standpoint.

Moving on to Slide #14. In October, we concluded the refinancing of our debt for Parnaíba II. We issued BRL 755 million of a simple debenture series. The issuance took 3 series at a weighted price of CDI plus 1.4% a year and a duration of 4.6 years that with the resources we raised of about BRL 465 million -- plus the EUR 465 million we had in cash, we prepaid the most expensive debt we had, which led to a savings in interest rate of around BRL 60 million a year.

So on top of reducing interest rates, we'll have more free cash to reinvest in the company's growth, to speed up and leverage our company. We have also contributed to a good -- way better practice in terms of cash management because Parnaíba II generates significant cash level. But because of the dividend flow that we expect, we would only have that available in 4 to 5 years. So this was an important leverage in terms of management of our assets vis-à-vis what we have in our cash. This was a very important initiative in terms of debt management. We started when we swapped the debt for the holding and -- back in March, which will add to a savings of around BRL 25 million a year in terms of interest rates. That concludes our presentation and I now remain available for questions and answers. Thank you.

[Operator]

[Operator Instructions] Thank you. If there are no questions, I will turn the call over to the company for the final considerations.

[Unknown Executive]

Thank you very much for attending our conference call. Have a good day. And we will see you in the fourth quarter's presentation.

[Operator]

Thank you. Eneva's conference call is over. Have a good day. Thank you.

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