Eneva SA

BOVESPA:ENEV3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning and thank you for standing by. Welcome to the conference call of ENEVA to release the results of the fourth quarter of 2018. Today, here with us, we have Mr. Pedro Zinner, CEO and CIRO, and other company executive officers; and Flavia Heller, Manager, Investor Relations. [Operator Instructions] Then we are going to start the question-and-answer session, when further instructions will be provided. [Operator Instructions] This conference call is also being simultaneously transmitted on the internet through a webcast, and can be accessed at the address: ri.eneva.com.br, and also at the platform MZiQ, where you may find the slide deck available.

Slide selection will be controlled by you. A replay of this conference call will be available right after event. As a reminder, all participants on the webcast

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They involve risks and uncertainties referring to future events and depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future performance of ENEVA, and may lead to results that could be materially different from those expressed in such forward-looking statements. Now I would like to turn the conference over to Mr. Zinner, who is going to start the presentation. Please, Mr. Zinner.

[Pedro Zinner, executive]

Thank you all, very much. Good morning to everyone, and thank you very much for attending ENEVA's conference call for the fourth quarter of 2018. And before beginning, I would like to take the opportunity to welcome Marcelo Habibe, who has joined the company as CFO earlier this year, who is going to speak to you. Also, before we start, I would like you to pay attention to our disclaimer on Slide #2 of our presentation.

Going on Slide #3. ENEVA has had an outstanding performance in 2018, not just financially speaking, but also in operational terms with the consolidation of the R2W. And so we have delivered value to our shareholders and we have overcome our challenges in 2018. In terms of exploration and production of gas, we have increased our 2 key reserves by 4 Bcm, with a reserve replacement index that was 286%, above our initial target.

For the first year in history, coal operations operated at a profit. As part of our asset integrity program, we have optimized the variable costs of our coal mines, and we have reached our objective of reaching variable margins that are interesting in terms of dispatch.

We have reached significant marks of growth. We have completed the acquisition of Azulão field. We have opened a new opportunity for growth and consolidation of our R2W. We were successful in our auction Y-6 with Parnaíba V, with additional installed capacity and 326 megawatts marketed -- in the regulated market.

Our objective of advancing with the company's restructuring, thereby eliminating inefficiencies and maximizing our tax opportunities, and opening even more room to make use of the opportunities, was also reached. We have successfully completed the debt settlement plan with the funds that we raised in our re-IPO in 2017, which also made it possible for us to complete the restructuring of gas segment.

When we accessed the capitals market in 2017 through our re-IPO, we had a short history of accomplishments, many challenges ahead of us. But we were sure that the potential to create value was really significant.

Not much longer than a year later, we have demonstrated concrete results that overcome, by far, the commitments that we assumed with those who invested in our company.

Now moving to the next slide, you will see the highlights of the fourth quarter of 2018. In the fourth quarter of 2018, EBITDA -- adjusted EBITDA, rather, in spite of low dispatch in the period, reached BRL 311 million, driven by expansion of variable margins in coal generation.

With the early rainy season in Q4 '18, average dispatch was 38%, against 90% that we saw in Q4 '17. As a consequence of the drop in gas sales, the EBITDA of Parnaíba Complex has had a reduction of 44% as compared to Q4 '17.

In terms of coal generation, we saw the opposite. In Itaqui, the margin -- the variable margin went from BRL 26 per megawatt hour in Q4 '17 to 1 -- of BRL -26 to BRL 1 per megawatt hour in Q4 '18. In Pecém, the margin evolved to BRL 31 per megawatt hour. In this manner, the EBITDA in Q4 '18 has reached BRL 118 million, with a growth of 61% as compared to Q4 '17.

The good results also had reflected in our operational cash flow that totaled BRL 629 million in the quarter. The company closed the year with a consolidated cash of BRL 1.5 billion and 2.6x net debt/EBITDA.

We should also highlight the evolution in our volume of reserves. As I said before, we have attained a reserve replacement index of 286%, closing the year with 21.4 Bcm in terms of remaining reserves. And the Azulão field that we acquired earlier that year, we also -- we had 3.6 Bcm.

Lastly, we completed in December the restructuring of natural gas segment, which led to a more efficient cash management, also made it possible for us to start compensating the tax losses in the holding. After this short summary, I would like to turn the conference over to talk about our operating performance.

[Unknown Executive]

Good morning, everyone. Now moving to Slide #5, our operating performance. On the bar chart, on the left-hand side, you can see the average net power generation, which -- where you can see the dispatch dropped to 42% because of reduction in net generation of 57%.

In spite of that, in terms of availability of the power plants, both coal and gas plants increased, considering that we had a 4% increase for gas plants and 3% increase for coal plants. We should also highlight that Pecém II dispatched to operational reserve recomposition, which led to 4.2 weeks of dispatch with an average CVU of 126% in the CVU of the power plants. These numbers are reflected in the variable margin for the power plants in Q4.

Now moving to Slide #6. Talking about operational performance. You can see the position of reserves of the company.

In the fourth quarter of last year, reserves were 18.8 billion cubic meters. We have added over 2018, over 4 billion of cubic meters, and this resulted in remaining reserves of 21.4 billion cubic meters.

Gas production over the last 2 months of the year dropped 58% due to -- and average dispatch of our gas treatment unit was 38% gas production over the quarter, compared with the maximum production that the unit is able to deliver.

Moving to Slide 7. There's a brief summary of our exploration and development activities.

The graph shows the seismic acquisition campaign that was started at the end of 2017 and concluded in the first half of 2018, with more than 4 kilometers of seismic acquisition. And the processing and interpretation of this data has been completed in 2018. And we define the first prospects to be incorporated in 4 blocks in the thirteenth round, which will be incorporated over the course of 2019.

Also, we had 4 additional wells drilled and 1 drill -- 1 evaluation drill in Gavião

Preto, which helped to increase remaining reserves of the company. And the construction of the third well of Gavião Azul was completed, and this was also connected to the gas production system of Parnaíba Complex.

And finally, we had encouragement of low permeability reserves in the Gavião Azul after the connection. And the company is already producing in this low permeability reservoir for the first time in history. I would like now hand it over to Marcelo Habibe, who will talk about financial performance.

[Marcelo Habibe, executive]

Good morning, everyone. Some highlights about our financial performance. We are moving now to Slide 8.

As has been alluded to, this was a very atypical quarter due to the early rainy season. Because of this, the dispatch of the 4th trimester was 42%. And this explains the reduction that we had in net revenue and recurring net income compared to the previous -- the same period in the previous years with 98% dispatch.

In figures, we are talking about BRL 61 million in net revenue, BRL 200 million with a 42% margin over the period and BRL 71 million in recurring net profit, which is the [indiscernible] number -- around 10% margin over the period.

Net revenue nonrecurring events that we had in this fourth quarter. The net -- accountable net revenue was BRL 479 million, and we had approximately BRL 399 million related to accountable impacts in tax and societal incorporation of [indiscernible] by ENEVA that happened at the very end of 2018.

ENEVA used to be a operational activity holding and had a large volume of tax losses with no expectations, is now a traditional company with upstream. And we use this tax [indiscernible] to have an impact on the future taxes and we have a [ constitution ] of our assets to be deducted from taxes. And these were paid accountable in 2018, due to treatment of nonrecurring debts. The cash impact grew as the result of these fiscal changes and we will have less tax to pay in the future. Another point to be highlighted is the better performance of the coal generation tax rate, which progressed from 70% in the 4Q of 2017 to 37% in the 4Q of 2018.

The dispatch level was 62% and 65% -- compared to 65% in 2018. The lower dispatch in 2018 still allowed us to deliver a strong EBITDA of BRL 1.4 billion, and this is a result of our discipline in cost reduction and operational improvements.

In Slide 9, we can see the progression of adjusted -- Parnaíba Complex. At the beginning of the rainy season, we have significant lower dispatch in generation plants. And we had a reduction in the net generation of the Complex and also this had the same impact on gas production. In gas generation, in the 4Q of 2017, we had a positive impact due to ending of operations at Parnaíba II in contract termination. And in this segment, in 2017, we had BRL 29.6 million, and this led to EBIT range of between the fourth quarter of '17 and fourth quarter of '18.

In coal generation, EBITDA growth was related to the variable margin of both plants. Initiatives for operational improvement still delivered very good results. In Itaqui, we will have operation in line with the original project and the impact of the first reduction of the ICMS of coal imports will be reflected in coal fuel cost.

In Pecém II, we had reduction of cost at risk, and we had a positive impact in the recomposition of operational reserves in the fourth trimester of -- fourth quarter of 2018, and we had a variable revenue of BRL 126 million.

In Slide 10, we can see the investments of the company, BRL 76 million in the quarter; BRL 3 million upstream and BRL 40 million in generation units.

The upstream investments were destined to the completion of preparation of the wells, and with reports of low permeability in Gavião Azul, completion of the construction plan in Gavião Azul and also the pipeline connecting to the oil and the production complex in Parnaíba.

[indiscernible] in generation were concentrated at Pecém II, where we had acquisition of some material for the construction in 2019.

In Slide 11, in the 4Q of 2018, operational cash flow was 600 -- BRL 629 million, an increase of 61% compared to the same period in the previous year. And this was due mainly to the reduction of our working capital, which reflected the reduction of the accounts receivables in the fourth trimester.

Cash flow from investing activities was negative compared to a worse result in the first quarter of the previous year. It was -- had an impact on the upstream segment.

Financing activity was impacted by restructuring of the gas segment compared to the -- which happened at the end of last year. And we had BRL 1.5 billion in Parnaíba I and II, and these resources were used to pay debt that were acquired by Parnaíba II and PGN.

We closed the year with cash generation of BRL 1.2 billion, which is 1.8% cash generation -- equivalent to. Consolidated cash position at the end of the year is BRL 1 billion, 18% higher than what we had in December 2017.

In Slide 12, we can see the company indebtedness. The loan cost of our debt in 2018 was 9.3%, with a tenure of 4.5 years. Over the year -- over the course of the year, optimization -- our optimization for net debt reduction in cost and extension of the tenure, we had a net consolidated debt of BRL 3 billion, which is equivalent to 2.6x of EBITDA.

On Slide 13, you can see our debt amortization schedule. The first phase of debt restructuring, our debt schedule for amortization was smooth and without any peaks for payments. The current level of liabilities is compatible for the growth that we are planning for the company, minimizing the risk of refunding the debt in the future and giving to the company the option of accessing the debt market, whenever we find a positive to swap our debt in the long term, to make it even cheaper to reduce our costs, which will be reflected in interest rates, released cash flow, reduced leverage and as a consequence, improve the company's risk and credit profile. All of this will create a virtual cycle of value generation and the reduction of the interest spread for the next years and will release more and more cash flow. So now, I turn the conference over for the closing remarks.

[Pedro Zinner, executive]

Well, and just as we did in 2017 as compared to 2018, so we like to close the year of 2018 and now expressing our goals for 2019. With economic recovery and a more liberal energy market, we see major opportunities in the near future. And so this year, we will continue to work to position the company to grow and to generate long-term value for our shareholders.

In terms of gas exploration and production, our objective is to keep our natural gas reserves in at least 100% availability and to reduce our exploration portfolio. In Parnaíba basin, we want to drill 15 wells in 2019, 2 of them will be exploration wells. We want to start the implementation of Parnaíba V 6 months in advance as to our initial plan. And we intend to start the construction work in the dry season of 2019 with the objective of expediting even further the beginning of our operations and to capture additional gains. We also hope to complete, still in the first half of this year, the restructuring of Parnaíba V with a hybrid structure, thereby minimizing cost, optimizing the utilization of tax losses and keeping the flexibility in cash management.

Although a feasibility and attractiveness analysis is going on, as subject to approvals depending on the company's governance. We have described the integrated generation project Azulão in Roraima auction that is scheduled for May this year. So we have A-4 and -6 auctions that the company is assessing to monetize this project.

We believe that there will be a wind of opportunity for the development of energy and association gas project. And we want to have options of generation project that are competitive in both modalities of gas supply.

A more liberal market may also bring interesting opportunities for the segment of marketing of energy, and we are assessing the positioning of all our marketing companies and want to position it to maximize the return on our assets, and to capture the benefits that arise from potential liberalization.

Along the year of 2018, we revisited our innovation strategy. We're focused on research and development assets to, first, extract additional values of the existing businesses by using new technologies, and secondly, to create new businesses with models that are potentially disruptive. In this manner, we are developing our innovation strategy. And we have established as a goal for 2019, to implement pilot projects in small scale, up to 3 megawatts, distributed solar generation in Parnaíba, and also to structure [indiscernible] accelerator in the hour -- in the area of energy. That being said, we are now open for questions and answers.

[Operator]

[Operator Instructions] If there are no further questions, I would like to turn the conference over to the company for their closing remarks. Thank you very much. The ENEVA's conference call has ended. Please disconnect your lines, and have a good day.