Eneva SA

BOVESPA:ENEV3

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon, and thank you for standing by. Welcome to Eneva's audio conference call to discuss the results of the fourth quarter of 2019. Here with us are Pedro Zinner, CEO; Marcelo Habibe, CFO; and Lino Cancado, COO.

This event is being recorded. [Operator Instructions] This call is also being broadcast via webcast, and it can be accessed at ri.eneva.com.br, where the respective presentation is also available. Slides will be controlled by you. The replay of this conference call will be available after its end. Let us remind you that webcast participants can send their questions in advance through the website, so that their questions will be answered in the Q&A session.

Before proceeding, let me mention that forward-looking statements can be made during this conference call regarding Eneva's business perspectives, projections and operation and financial goals. Forward-looking statements are based on the beliefs and assumptions of Eneva's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of the company and could cause results to differ materially from those expressed in such forward-looking statements.

I would now like to turn the conference over to Marcelo Habibe, who will start the presentation. Please go ahead, sir.

[Pedro Zinner, executive]

Thank you, and good afternoon to everyone. Thank you for participating at Eneva's conference call with the results of the fourth quarter of 2019.

Please, I'd like to refer to Slide 3. Before we talk about the performance and the numbers of the fourth quarter, I would like to remind you of recent events that were very important to the company, such as the proposal of a business combination that has been proposed to AES Tietê on March 1 and valid until April 30. This business combination will result in a significant value creation for the shareholders of both companies as we will share more details with you later.

Also, we had raising of debentures worth BRL 1.4 billion. The first issue of debentures totaling BRL 750 million that allows us to refinance the debt of a subsidiary. And with that, we have more attractive costs and with better terms. There was another issue of debentures made by our holding, totaling BRL 650 million that aimed at raising more funds for IP. In addition to those 2 issues of debentures in January this year, we were able to get the approval of BRL 1 billion worth financing approved with the Banco da Amazônia for the Jaguatirica project. This recent raising of funds plus our cash generation and future cash covers the investments we have planned for the next years and -- comfortably.

In the context of growth, we also are very victorious in the auction A-6/2019, with the ParnaÃba VI project, guaranteeing an additional fixed annual revenue of BRL 85 million. We were also successful in reviewing the physical guarantees of ParnaÃba I and III in an auction in the same year. With that, we can commercialize additional 160 megawatts without incremental costs or investments in generation. We have also started another round in our exploratory campaigns with the acquisition of seismic data in our blocks of R-13, R-14, Open Acreage and part of the Fazenda Tianguar, a discovery assessment plan.

I should also highlight the volume of natural gas in 2019. We incorporated 4.1 Bcm of reserves in the ParnaÃba Basin with a replacement rate of 293%, much higher to our original goal. With that, we closed the year 27 Bcm in reserves, including 3.6 Bcm in the Azulão field that had already been reported in 2018.

Finally, November 2019, we signed an exclusivity call option of 75% of the Nossa Senhora de Fátima TPP project with license capacity of up to 1,740 megawatts.

Now in the next slide, Slide 4. You can see that on March 1, we informed the market about the binding proposal we sent for a business combination between Eneva and AES Tietê. We sent this to the board of AES Tietê. This proposal aims at merging the shareholder bases into 1 publicly held company within -- listed on Novo Mercado of B3, with complementary resources and the potential of benefiting from financial and operational synergies of both companies. The transaction structure is based on an exchange ratio of 0.2305 of Eneva shares plus BRL 6.89 for each unit of TIET11. The total cash payment is BRL 2.75 billion. This total price of the transaction involved 3.3% on the quote of AES Tietê of the date of our proposal. The shareholders of that company would receive, in total, 91,994,693 common shares issued by Eneva, corresponding to 22.58% of Eneva's share capital after the transaction was completed. This transaction is still subject to the approval of shareholders of Eneva of AES Tietê at a general shareholders meeting, the prior approval of CADE and the prior approval of ANEEL.

Now moving to the next slide, Slide 5. The combination of the businesses of both companies has a very attractive value creation. The new company would have a significant platform of complementary generation with operational assets that would combine diverse generation sources that will give more predictability to the EBITDA and high cash flow generation. Value creation can also stem from the expansion of the shareholder base, raising the free float and potentially the liquidity of the shares of the new company. It would also enable increased investment and opportunities in growth and greater future returns to shareholders.

A very relevant point is that the combination of these 2 companies would result in a diversified portfolio of generation sources, thus reducing Eneva's exposure to E&P risk and AES Tietsê's exposure to hydrological risk. The combination of assets would bring a complementarity of Eneva's portfolio in terms of geographic location. There's also a combination of assets between regulated and free market given AES Tietê's increasing uncontracted capacity. There are operational and financial synergies and also the possibility of having a faster use of tax loss carryforwards of the Eneva holding that is at BRL 1.5 million today. Also, more cash generation would leverage the ability of invest, allowing also more innovation and growth of this new company.

Now we move to Slide 6. On this slide, we show what the combined portfolio will be of the combined companies, considering the projects of each company. In generation, we have 6.4 gigawatts with diverse generation sources across the country. The combined company portfolio would be composed of 41% of hydro energy, 32% for natural gas thermal plants, 11% from coal thermal plants, 11% from wind and 5% from solar energy.

Now let's move to Slide 7. In a probabilistic analysis, the combination of the portfolio of both companies will create a new company with less volatility of results. On the left-hand side chart, you can see the correlation between generation megawatt hour from hydro and thermal sources using the load factor on a monthly basis since June 2006. There is a very high negative ratio, as you can see, minus 0.95. We see that the average capacity factor is also similar in the energy reallocation mechanism when you see Eneva's generation and AES' hydro generation. In the case of Eneva, it was estimated to be 10 percentage points in 12 months.

On the right-hand side chart, we can see the dispersion of generation of Eneva that owns basically thermal sources and also the information from AES. The combination of the portfolio of both companies would lead to a negative correlation of 0.74, negative one, which was still very high. The volatility of the estimated generation of this combined company, considering hydro, solar, wind and so on, would be dropped to 4 percentage points in 12 months. In our understanding, the combination of both companies would lead to more balance between sources of generation reducing generation risk and consequently, the cash flow at risk of the company.

The last 4 slides show the benefits that we see in the combination of our businesses with AES Tietê in very practical terms. We will be at your disposal to clarify any questions of our shareholders or of shareholders of AES Tietê. Our management and our team of Investor Relations are at the service of the shareholders of both companies.

Now I turn over to Marcelo Habibe, who will share the results of the fourth quarter. Thank you.

[Marcelo Habibe, executive]

Thank you, Pedro. Let's now move on to Slide 8, and we can see the highlights of the fourth quarter '19.

First of all, adjusted EBITDA reached BRL 464 million, one of the highest quarter results of the company, or a 49% increase compared to the EBITDA of the fourth quarter '18. High dispatch of generation was 4,021 gigawatt or 130% increase in net generation. Gas production totaled 0.7 Bcm of an increase of 138%. In Itaqui, we've observed a consistent operational improvement in the power plant, leading to impairment reversal of BRL 127 million. Adjusted net income reached BRL 269 million in the fourth quarter '19.

Eneva finished the quarter with a cash position of BRL 1.8 billion or a 30% increase over the fourth quarter '18. Leverage, which is net debt over EBITDA of last 12 months, was 2.8x.

Let's now move on to the next slide, where we can see our operational performance. In the first chart, we can see net power generation with an increase of 130% compared to the fourth quarter '18. In the fourth quarter '19, our system in North and Northwest presented less favorable hydrologic conditions, reducing reservoir levels and really forcing the thermoelectric dispatch in this region. This increase over previous years shown a atypical one-time event only because of the rainy season that extended during the third quarter of the year, impacting the dispatch that was expected to be on the third to the fourth quarter. So the consolidated average dispatch was 97% in the quarter over 42%, which was the fourth quarter '18.

In terms of dispatch of our plants, we also had a gas production with 138% increase, reaching 0.7 million cubic meters. The average dispatch of our plant, GTU, was 0.70 over 0.29 in the same period the previous year.

Now Slide 10, we are going to go over financial performance. As a result of thermal dispatch, it has impacted our net revenue with 50% increase over the fourth quarter '18. Upstream, we had almost double net revenue compared to previous period. Gas generation showed 72% growth. Eneva do -- had in October and November a specific generation of the plant, but it was not according to what we expected. However, differently from what was the case in 2018, there was a dispatch of order of merit throughout the whole month of December '19, which meant variable increase of BRL 34 million compared to the fourth quarter '18.

Still in gas generation, we can see the variable revenue in the short-term market had over 200% increase over the fourth quarter '18. This revenue means liquidity of generation above our plants ParnaÃba I and II and also liquidation and settlement of the energy generated at ParnaÃba IV. As of January '19, ParnaÃba IV became available in the system as a motion modality, dispatching centralized by ONS and CLD generation. Fourth quarter '19, ParnaÃba IV generated BRL 44.7 million in gross revenue.

In coal generation, our net revenue had a 29% increase over the fourth quarter '18. The main dispatch was partially offset by our CVU production, especially with decreasing coal prices, which is an indexing element of this kind of power plants.

In Slide 11, we can see the main factors that led to 49% increase of adjusted EBITDA of the company comparing fourth quarter '18 and fourth quarter '19. The main positive effects were higher volume of generated power and the increase of fixed bases in ParnaÃba and Pecém II. These factors were partially offset by the decrease in price of commodities that indexed the variable revenue of ParnaÃba I, Itaqui and Pecém, which end up impacting prices. There was also an increase of SG&A because of an increase in cost of personnel and services and greater expenses with exportation compared to the fourth quarter of '18 because of the beginning of our seismic data acquisition campaign.

In 2018, the seismic data acquisition finished on the third quarter. This increase was offset by lower expenses in the fourth quarter compared to what we had in the fourth quarter '18.

Slide 12 shows cash flow of the company, which totaled BRL 514 million. In addition to the increase of EBITDA, there was an impact of compensation of federal tax and a combination of different factors that impact our working capital. An impact of inventory levels because of increase of dispatch, so we had a decrease in coal inventory, an increase in accounts receivables because we've acquired some additional equipment for some of investments, a reduction of some of the deposits because of the reduction of major overhaul of Pecém II and final increase in accounts receivables because of the increased generation of the quarter.

We can see here a negative impact, especially because of disbursement related to the purchase -- the construction of ParnaÃba V and also Jaguatirica, which was BRL 226 million in the region. So we finished with a robust cash position consolidated at BRL 1.8 million (sic) [ BRL 1.8 billion ], which is compared to [ 14 ], in addition to all the deposits that are related to the projects of the company. This increase in a scenario of an increase of investments was all supported by the operating results and all the goals we've achieved in 2019.

Slide 13 now. It shows our debt. Net debt closed BRL 3.9 billion in the quarter, reducing net debt over EBITDA 2.8x. So went from 3.1 in the third quarter to 2.8 in the fourth quarter, despite investments that were made. As a result of all capital raising throughout 2019, we've concentrated 77% of our due dates as of 2023. Only 5% planned for 2020, which really makes us very comfortable to pay our consolidated debt. As a result of restructuring of debt, our effective average cost went down to 8.2% and the average term increased to 4.6 years. In the end of 2019, our total gross debt was BRL 5.7 billion as opposed to BRL 5.2 billion, which was the gross debt in the fourth quarter '18.

Now let's talk about new debt issuance. I'm now showing you Slide 14. In October '19, we refunded our debt with ParnaÃba II. We anticipated the settlement of previous debt amounting to BRL 1.2 billion with an average cost of CDI plus 3.11%. So we generated funds, BRL 750 million, at a cost of CDI plus 1.24%. So we had a less debt to pay a more expensive debt, which has also impacted the cash of the company at ParnaÃba to prepay the existing debt.

In addition to reducing cost and the total amount of debt, the renegotiation has also increased the maturity of ParnaÃba II from 3.5 to 4.2 years in addition to reducing the average cost. In December '19, we finished the third issuance of debentures in our holding. The resources that were captured or raised then are going to be used for investments, for paying a number of expenses or anything that has happened within 24 months for this initial offer, which were related to the execution of Parque dos Gaviões at ParnaÃba Basin. The debt was also -- showed very attractive conditions, IPCA plus 4.23% per year, with amortization in 3 annual installments, installments from '25 to '27. In addition, in January this year, we had the approval of a funding line of BRL 1 billion with Banco da Amazônia. It was approved with the following characteristics: A maturity date in 196 months from the date it was signed and disbursement of funds will depend on investments and all of the activities will be done in the project.

Slide 15, I'm going to hand it over to Lino, who's going to talk about our investments.

[Lino Cancado, executive]

Good afternoon, everyone. Our investments in the last quarter of 2019 totaled BRL 417 million, showing a growth when compared to the values at the end of 2018. Basically, we had investments in the new projects, Azulão and ParnaÃba V.

At ParnaÃba V, we concluded the foundation of steam turbine and the bases of the 4 boilers and also the water treatment plant and the cooling tower, the foundations of those. We have also completed the wells on Azulão. And the first cryo banks (sic) [ cryoboxes ] have been completed also. Completed 100% of the contracting and purchases for the execution of project. We also completed the earthworks, the construction site, the execution of drainage and slope treatment.

At Jaguatirica, we have completed the earthworks, concreting of gas turbines and bases and boilers. We have also advanced in terms of the underground facilities, and we plan to complete them until the end of the year. We have also, in terms of the UT -- the TPPs, maintenance of the 2 gas turbines. We have also paid before the costs as the parts -- the purchase of the parts for this maintenance work. We have also completed Pecém II's major overhaul and also the retrofits of wells and Eneva 6. And in development fields, we have drilled 2 exploratory wells and 2 development wells. We have also started some investments for the construction of the new plants and projects totaling BRL 15 million.

Now on Slide 16, we'll make some comments about the construction works that are being conducted. At Azulão, we don't have any signs of delays so far. In terms of the cryoboxes, we have already -- there's a total of 34 (sic) [ 32 ]. We received already 14, and 8 are being transported. They are on transit to Manaus. As for isotanks, in a total 240, 80 have already received. We expect the 100 to be shipped shortly.

In Jaguatirica, the construction work has already been completed and strategically before the wet season. There will be some delays that we have already anticipated because of the problems related to COVID-19 from China. We believe that there will be a delay of about 30 days in the delivery of the boilers.

In ParnaÃba V, most of the constructions are in advanced phase. The delivery of most of the equipment is confirmed, but the main impact we expect relates to the delivery of 1 part of the steam turbine that is manufactured in China. We expect a delay of approximately 35 days, and it still needs to be assembled. So that's the delay we're expecting, 35 days. We are also making an analysis of the critical path to propose alternatives and keep everything up to date.

As of Slide 17 and 18, you can see some examples and some pictures of the implementations in ParnaÃba V. So the diverter damper production at Vietnam in the left-hand side picture. And on the right-hand side, you can see the loading of the ship with the boiler structures. Those are huge parts, and they are being unloaded. They're being unloaded here in Vietnam in the picture.

As for ParnaÃba V, you can also see some of the improvements. You see that there are some constructions, such as the water tank cooler.

On Slide 21, on the left-hand side, you can see that the construction work is going very well with the installation of pre-molded cable galleries.

Now on Slide 22. We can also see some pictures of where the administrative building will be on the left-hand side.

[Operator]

I'm sorry, I have no audio at this point.

[Technical Difficulty]

[Lino Cancado, executive]

Now continuing on Slide 22, as I was saying, on the left-hand side, you can see the picture of where the administrative building will be. So the foundation work is being performed. And you can also see some of the water tanks there being prepared.

On Slide 23, at Jaguatirica TPP on the left-hand side, you can see pictures of the construction of the steam turbine base. On the right-hand side, the execution of the electric turbine steam building.

Now moving to the next slide, Slide 24. On the left-hand side, you can see the LNG unloading area. And on the right-hand side, the bases of the ACC, a cooler that cools the water.

On the next slide, Slide 25, we can see the construction of isotank bays. You can see on the bottom and also part of the electrical foundation, that will be an underground work and where cables will be laid down. So that will connect the TPP to the center.

Now on Slide 26. You can see pictures from the Azulão site. On the left-hand side, the foundation where the cryoboxes will be implemented. And on the right-hand side, you can see some of the stakes of the isotanks that are being implemented.

On the next slide, Slide 27, you can see isotanks that have been [indiscernible] at that were unloaded at the Port of Manaus from the ships, and they will then -- after they are cleared by the customs, they are -- they will be sent to the site.

And now on the next slide, you can see the cryoboxes being delivered. And then you can also see some containers. There are 6 cryoboxes and 6 on the way.

On the next slide, Slide 29, you can see the 7 cryogenic trucks that will be used to transport LNG from Azulão to Jaguatirica. There are 7 of them that are ready. And we use them for the transportation of the products to Manaus.

Now I turn over to Luis Vasconcelos, Corporate Services Head, who will make the final remarks about the COVID-19 pandemic.

[Luis Vasconcelos, executive]

Good afternoon, everyone. I'm going to tell you about our actions during coronavirus epidemics. We've been monitoring it closely and all health protocols adopted by the authorities, really trying to contain the virus. We've been -- determined procedures to be followed in all our production units. They are really revealed daily and corrected according to the need.

In general lines, since the very beginning of the process, and we started monitoring internally on February 4, we are counting all the support of specialized companies supporting us and also helping us control some workers who are in isolation if necessary. We've set quarantines for all of those who were coming from abroad. All trips were discontinued right from the beginning. We are also avoiding unnecessary commuting, visits. We've been working remotely whenever it's possible. We've also adopted social distancing measures in all the housing facilities for our workers, cafeteria and all in the access to productive plants.

We also have all necessary cleaning, alcohol gel and all the supplies. We are going to start the influenza immunization next week. And we've been working together with the government by donating supplies in all the states where we operate.

From the very beginning, we've been emphasizing communication. We submit daily reports about all the adopted protocols and instructions and measures to all staff. We've been working very closely with state and municipal health authorities to really fine-tune our initiatives. And we've shared our action plans with our subcontractors as well. We are learning from them and they are learning from us.

Concerning business continuity, we are also concerned about having the people available for our ongoing operations. This is why we've been reviewing our work shifts. We've adopted some mobility solutions. For example, alternative commuting and specific logistics by site. And we've also been monitoring third-party providers who come to our units by monitoring their body temperature so that we can have appropriate control and avoid inappropriate contact and contamination. We are confident that these measures will help Eneva contribute to reducing the proportion of the epidemics.

Let me now hand it over to Marcelo Habibe for his closing remarks.

[Marcelo Habibe, executive]

Thank you, Luis. Now we are going to open for the Q&A. Moderator, please?

[Operator]

[Operator Instructions] Our first question comes from Marcelo Sá from Itaú.

[Marcelo Sá, analyst]

My first question has to do with the transaction proposed between Eneva and AES Tietê. So part of this will be paid in cash. And I remember that back then, you had said that, that would increase the debt. Do you have the debt guaranteed with any bank? And how do you see the credit market at this point? My second question has to do with the regulatory agencies. Given the current scenario, and we believe that the situation will get worse, do you think that there is a risk of the regulated market contracts being reduced than -- in a way that could affect your business?

[Marcelo Habibe, executive]

Thank you for your question, Marcelo. This is Habibe. As to your first question related to the debt, the original plan was to take a loan from the bank and refinance that in the capital market. This, of course, was an idea we had before the current crisis. So what change is, given the recent market conditions, is that we will take our finance from the bank and remain the debt until the capital market opens again so that we can refinance this debt with better conditions in the debentures market. That's what changed in our plan.

I think everyone is following up how the capital market is behaving in terms of debts and variable revenue. There is a major volatility, a lot of uncertainties, most banks are very concerned with the balance of retail, logistics, airline companies. We had some good news from Central Bank with a very good injection of liquidity into the economy. BRL 1.2 trillion are expected that could maybe make people calmer in the next weeks. Our duty here is to be ready for the worst-case scenario. If there is a better scenario, of course, we can reap some benefits from that. If things improve, from now on, it will be better for the company and for our shareholders.

Regarding your second question, could you repeat it, please? The call is not very clear. Maybe you should speak a little bit louder.

[Marcelo Sá, analyst]

Yes. My second question has to do with the regulatory restrictions that are taking place. We know that distributors are over-contracted. And now, with a drop in demand, that will change. So I want to know whether the government could review the volume in the regulated market. And how could that impact your business? I'm just trying to understand what could happen in the regulated market in this scenario and the possible impacts that could affect generators?

[Marcelo Habibe, executive]

Thank you. It's clearer now. We don't believe that we will feel impact. We are following that very closely. And at 4:00, I have a very important meeting with ANEEL, the regulatory agency. We don't believe that those changes will impact us. Our PPAs are long in the regulated market. Our contracts are widely spread among distributors. We don't have so much concentration. So I don't think that these changes that will come in the upcoming month will affect our environment. We are monitoring that. We're being cautious. But we don't see an impact in the first -- in the beginning. What we'll be more concerned with is those that are decontracted. Those that are too exposed to the free market, which is different from our case. We are monitoring the situation, but our concern is different.

[Marcelo Sá, analyst]

That was very clear. If you allow me to have another question. ANEEL today will no longer discuss the auction of thermal plants that will take place in April. Given the distributors and the high currency exchange rate, do you think that this auction can take place?

[Marcelo Habibe, executive]

It's very hard to say. This statement just said that the auction was not canceled, but simply postponed. I think that the situation, of course, is getting worse and worse in Brazil, so it's very hard to say at this point. Let's just wait a little bit longer to see if ANEEL makes a different statement.

[Operator]

Our next question comes from Marcelo Britto, Citibank (sic) [ Citigroup ].

[Marcelo Britto, analyst]

I hope you can hear me well. My question has to do with this transaction with AES Tietê. In March -- the beginning of March, the transaction was about 45% of the shares of AES Tietê, but it had a better performance than Eneva, so there was a difference in this part. So the part of the cash in this transaction, can this be reviewed, revisited? And how can you fund BRL 2.7 billion in the market since each one of the companies has -- is running with approximately that amount?

[Marcelo Habibe, executive]

Marcelo, we'll answer your first question, but we'll ask you to repeat the second one because it was difficult to understand it. Our proposal is made on March 1, and it is valid for 60 days. We will maintain the conditions. So that's a straight answer to your question. So this exchange ratio changed a little bit. But we are going to keep that firm proposal until the end of that term, 60 days. After that, we don't have a mandate to renegotiate the proposal. That's a discussion we'll have with our Board. So I cannot tell you at this point what the result will be. Can you repeat your second question, please?

[Marcelo Britto, analyst]

My question is, how can you fund BRL 2.7 billion in the market given the debt levels of the both of those companies that is usually 2.8x?

[Marcelo Habibe, executive]

In terms of leveraging, the combined company, so the combined companies, even with the BRL 2.7 billion from funding, we cannot go over what we would expect in terms of leveraging peak of what it never would have on its own. So one of the good points about this operation is that the company gets leveraged by the balance base that AES Tietê has to leverage our business. So we expect that to be about 4x EBITDA that would remain. So that would -- the expectations would have. So the AES Tietê balance would allow us to leverage the company in the short term. That's the first point. And the second point is that where does this money come from? Basically from banks and not from debentures as we would like originally. So it's not a small number of banks, but a large number of banks because the average ticket per banks has reduced. I hope that I have answered your question.

[Marcelo Britto, analyst]

If I may add something. Are these 2 points already fully committed on your side or not?

[Marcelo Habibe, executive]

You mean the BRL 2.7 billion in that, is that what you mean?

[Marcelo Britto, analyst]

Yes.

[Marcelo Habibe, executive]

No, no. We have BRL 2.7 billion negotiated, but we have no signed contract, if this is your question.

[Marcelo Britto, analyst]

Perfect.

[Marcelo Habibe, executive]

Well, other contracts, because we have a number of banks involved.

[Operator]

[Operator Instructions] If there are no further questions, I would like now to turn it over back to the company for their closing remarks.

[Pedro Zinner, executive]

Well, thank you all very much. It was great to have you all for our conference call for the results of the fourth quarter '19, and we hope to be with you again when we talk about the first quarter '20. Thank you very much. Have a nice afternoon.

[Operator]

The conference call of Eneva is finished now. Thank you very much for your participation. Have a great afternoon. Thank you.

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