Eneva S.A. (ENEV3) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for taking part in this call today. The idea is that we explain the transaction between Eneva and Focus. So I'd like to move on to Slide #3. A couple of years ago, the Eneva portfolio was mainly comprised by capital projects. Today, the company is a leader in the energy industry with an innovative business and a growing market trend. Across the past years, we have a significant amount of capital invested to improve the quality of our assets, low risks associated to our business and develop our growth strategy. Allocating capital in an efficient manner is very tough and continuous work. And although we don't manage the company concerned by share price in the short term, in the long term, the share prices are a measure of progress achieved in the past years. And when we look at the past 4 years, as of the IPO, our share valued 430%. This advance is related to continuous investments in good and bad periods to develop our resources and a strong asset base. Such investment leverage the potential of our company, positioning us towards growth and prosperity across the decades. The discipline and correct allocation of capital are the elements that have set us apart in the past and will continue to differentiate us from other players in the industry. Now moving on to Slide #4. In 2018, we established a mission of doubling our ability of generation up to 2023, achieving 4.7 gigawatts. We always highlight that we would not pursue growth at any cost. We made a few acquisitions since 2017. We've been focusing on organic growth with an additional capacity of approximately 700 megawatts and delivering actual returns in the high level -- 2-digit high-level rates. However, even though we haven't taken part in mergers and acquisitions, that does not mean that we do not have a strong pipeline or strong flow in negotiations, quite on the contrary. In the past years, we've assessed a number of different opportunities in the entire energy industry, but we've always been very selective. As Charlie Munger, the partner of Warren Buffet, used to say if there's no sense in doing business, it's no use to do that well done, just allocate the time and efforts in assets if we believe that the investment can considerably increase the marginal returns of our portfolio. And that is exactly the case in the combination with Focus. That's why we're here today. Now I'd like to hand over to Marcelo Habibe, who will explain the rationale behind the transaction.

Thank you, Pedro. Good morning, everyone. Now moving on to Slide #6. I'll talk about the rationale of the transaction. And Alan will talk about the rationale for Focus to their shareholders. This combination has shown to be an appealing return given the complementarity of the business. We're going into an area of growth, which is renewable generation. We have a balanced portfolio of energy sales agreements in the free and regulated market. We also have a synergical pipeline and competitive pipeline with solar projects, and we will talk about those projects further into the presentation. We also count on the experience and sales force of Focus with a portfolio of over 1,600 customers that will expedite our strategy to sell energy, bringing in the major cases and gas consumers. With new -- we have new sources of funding such as greenbonds in addition to contributing to decreasing the GHGs in our portfolio. And with the solar, we can consider green hydrogen in more distant future, if it shows to be very economically feasible source. Now I'll hand over to Alan to talk about the benefits for Focus' shareholders and Focus in general.

Good morning, everyone. Let me talk about the benefits of this operation for the Focus' shareholders. Since IPO, we've been developing or we started the Futura 1 project. And in this operation with Eneva, it guarantees us immediate funding to conclude the Futura 1 project with a characteristic of the financial structuring of this project being done in the future in a scenario of Eneva capital cost, which is more competitive than the Focus' cost of capital. Based on the investor point of view, the Focus' shareholders and the company everybody knows, we released a material fact in May, where we had a contractual problem with our solar boards supplier. And now we're -- there's losses and damages to this contract. We have a CapEx overrun to the company. So we're preserving the value for all these Focus' shareholders in that operation. That gives us -- from February till now, there was a change not only in the macroeconomic scenario, but also a change in supply, not only in shipping, but also solar plates, based on the increase of the silicon on a global basis. And China also had additional issues where the combined value of the transaction and arbitration would give this Focus' shareholders and upside. After concluding the transaction, we also have an upside that the shareholders from Focus will receive by getting the Eneva shares and capturing more synergy, as Habibe mentioned, by combining sources of energy and long-term contracts. On Slide #8, we have -- we had -- for those who have seen our earnings release and the roadshow, I have already seen this, but I'll go over this quickly, just so you see the company characteristics. We were established in 2015 to sell energy, focused on large-sized customers and going in deeper into the sale, the business of selling energy with recurring results based on intelligence and business origination, where we started to grow with water assets distributed generation and the purchase of 2 small power plants in Minas Gerais. And then in 2019, we started the Futura project. After the IPO, we started building the Futura 1 project, that's a solar park in Brazil it's -- or solar farm in Brazil. It's one of the largest works in solar farms in the world at this time. Together with the acquisition of Futura 1 and developing the Futura 1 project, there was an option to -- a 5-year option where we buy the Futura 2 project. This project gives us interesting commercial options after developed because it can be developed for every 100 mega, so that enables us to have more capacity towards consumers. And when you do that in 500 mega farms, you need to have a bigger portfolio. So you don't know what comes first, the PPA or construction. So the Focus figures are public. They're growing. The biggest company value today is in the seller with its ability to bring in long-term commercial contracts in addition to renewable energy, which matches the Eneva diversification strategy. I'm going to hand over to Alexandre Guimaraes you'll go into the details now about the main assets and the main works and characteristics of the Focus operation in the upcoming times.

Good morning, everyone. Just I'd like to give you an overview of our main assets. So we have many operational assets and distribution generation and production generation pipeline [but it is] the main project, 3 projects, 1 in the works and 2 in development. And in total installed capacity of 3 gigawatts with 1 physical guarantee and 1 should start up in 2022 with Futura 1. In Minas Gerais, the State of Minas Gerais, we have 3 small power plants, 1 in construction, the other 4 and 1 in developing. So a current installed capacity of 6 megawatts. 1.7 in the works and 6 mega in development. In the state of Rio Grande do Sul, we have 1 CGH, 1 small power plant and 1 new HP. Moving on to the next slide. We have an overview of our future projects. So the installed capacity of 3 gig divided among Futura 1, 2 and 3. The CapEx of Futura 1 is estimated at BRL 2.7 billion and estimated for the second quarter of 2022 and a very strong pipeline when we look at Futura 2 and Futura 3. After commissioning, we didn't see the size of Futura 1, it's a sizable project in any way you look at it. In the current ranking in Brazil, it's the first 670 megawatts. And as Alan mentioned, 1 of the 10 largest projects in the world. On the next slide, we'll give you some more details about the project. So 1,500 hectares, approximately 500 soccer fields, installed capacity of 670 megawatts. CapEx of BRL 2.74 billion, 100% contracted and hedged, energy generation P50 of 231 megawatts, average terms of PPA 16 years and installation permit has already been issued. The main highlights are we already have 2,999 workers mobilized, 78% of labor in the state of Bahia and 64% from the city of Juazeiro. That's 1 of the commitments that the company undertook to develop the local labor and economy. Deforestation 92% progress. One of the critical paths that we had was the transformer and elevator. So we already have highway transportation to this site, which was supposed to begin in February, that's extremely relevant in terms of project derisking. And now specifically about the solar modules. We have 32% embedded, 8% that will be embedded from end of December, beginning of January. We've -- out of the 22 UFEs, we've already manufactured 9 of them to this date and 20% were already delivered on site and in the work front by February. On the next slide, when we talk about project contracting and hires, there are 2 messages here. Still low level in 2022. It will be completed according to project milestones. That's 1 of the risk measures that we've taken to deliver smoothly. And at the same time, it shows us that the focused capacity to capture good opportunities in the market. In '22, average price, which is very interesting and where we decided to contract during the water crisis. And from '23 to '42, you can see the level of hires and an uncontracted strategy so we can take these market opportunities -- take advantage of these market opportunities. Moving forward, when we look at Futura 2 and Futura 3, the market expectation of the growth of solar is approximately 171%. That's very interesting and shows us that we have a lot of room to develop Futura 2 and 3, to capture these great opportunities in solar. That's what we had to say. I'd like to hand back over to Habibe to talk about the business combination.

Thank you, Guimaraes. Now moving on to Slide #15. As I mentioned at the beginning of the presentation, this combination will give us a more balanced portfolio in the energy contracts in free and regulated markets. Considering [ Parnaíba Azulao-Jaguatirica ], Eneva has 91% of its energy in ACR and focus is 1% in -- 100% ACL. By combining these companies that will decrease a little in relative terms. So we'll have a more balanced combined company, bringing together safety and predictability of ACR contracts and more upsides coming from the free market. In -- on Slide 17, I'll talk about the structure of the transaction in a more explanatory manner, how it was designed and executed. Eneva's shareholders will receive part in cash and other part in Eneva's shares. And the Focus shareholders after the completion will have 1.3% of the combined company that will be Eneva. On Slide 18, you can see the numbers. So the cash amount is BRL 715 million, corrected by the CDI yesterday until liquidation. We still have an additional installment paid in shares, 17 million shares of Eneva. And on the date of announcement, the total amount is BRL 965 million. But given the volatility of Eneva's shares, the amount should vary marginally across the next months until the transection is completed. By adding these 2 installments, the Focus shareholders will receive a contingency, which is the net transfer of credits coming from the arbitration procedure that Alan mentioned before. And with that, we -- this is the -- we closed that transaction and now end the presentation, and I'll hand over for Q&A.

[Operator Instructions] First question here will be, will you have an increase of capital of 70 million shares for Eneva?

Thank you very much for the question. Yes, this will be a capital increase. We will issue new Eneva shares. There -- we will not use cash. These are new shares, 70 million that will be delivered to the Focus shareholders.

[Felipe Andreoli] asks regarding the contingency tranche, will there be some type of right negotiated in the stock exchange market?

Well, the shares will be -- this is Alan speaking, the 4 controlling shareholders will have a proxy within Eneva to carry out this process together with our lawyers in New York. This right is guaranteed together with the SPA and Eneva. And this is regarding the net results of this right will be distributed amongst the shareholders the day -- on the closing date. There will be no substitution bonus negotiated in the exchange for this. This can be analyzed in the upcoming years, but there is no legal forecast for this. This is a non-negotiable receivable and the owner of this receivable would be the shareholder that before the transaction had shares of Focus. So now therefore, the creditor base that will be the creditors of these receivables. During the settlement, we will transfer to these individuals and to these companies the net value of what has been agreed upon.

Our next question comes from João Pimentel. Can you break out how much CapEx will you destinate to Futura 1 and how much will be destinated next year?

This is Alexandre Guimaraes speaking. Focus has already placed in the cash flow, BRL 800 million upfront. There is a difference between BRL 800 million, BRL 2.74 million, of course, we are going to break this out between this year and next year, but this will start on December 15.

We have an anonymous question. Is there a type of retention agreement between the Focus executives? And what is this agreement about?

This is Alan speaking. Yes, the 4 main partners of Focus have agreed to conduct a transition during 6 months. In my case, this could be renewed for a number of months. This will depend if Eneva needs some transition conditions. It is important to highlight that this is a strategy of Eneva. And Eneva was -- had already as a strategy to open an office in Sao Paulo. And this is something that will facilitate the transaction between the past controllers of Focus within the transition towards this new structure that is being created by Eneva.

If I can add something, Alan, this -- the integration plan will be carried out between Focus and Eneva. The idea here is to do this the best way possible, so that we can accelerate Focus' expansion plan, bearing in mind Futura 1 and also with the options of Futura 2 and considering the growth potential and the growth strategy of the company. People are the greatest assets, and this is what we observed in Focus. There is capability and there is knowhow to sell energy, amongst other things that this is something that we didn't have in-house. This way, we will accelerate in an intelligent way. And of course, we're focused on people to do this.

Our next question, do you believe that this new business has profit that is similar to Eneva's core business?

Yes, yes, we do believe a number of characteristics that are different. There are different risks here. But by and large, the profit is very similar to what we have delivered in our past projects.

Our next question for Habibe, the transactions accelerate the transition of fiscal credits?

No, it doesn't accelerate. The main result of this transaction When everything is ready, we will have Futura 1. Futura 1 is in different SHPs. They work with a different type of profit calculation. The fiscal loss that we have in our holder that is BRL 1.5 billion will not be affected by the result generated by Futura 1. That will be the main result of Focus in the future.

Marcelo Sá, could you give us more details regarding the development pace?

In terms of Focus' development, well, Futura 1 has already been contracted. Second, we have a COD during the second semester and it's when we see Futura 2 and 3 according to the cost of the solar panels. This doesn't make sense for next year. But this cost in the past years has presented great volatility. Therefore, now we have a different option as soon as we have cash, we can exercise this. The idea here is to develop Futura 2 and 3 in the upcoming years, but we have to wait for a better moment of costs and investments so that this project becomes feasible. In the meantime, we will focus on other projects of our portfolio. Today, within our pipeline, we have a number of wind farm product, we have [indiscernible] that we have not developed because of other reasons, but the company has solar projects, wind projects and also thermoelectrical projects and gas projects, by and large, and we will pursue opportunities according to the moment. So we have a portfolio that we want to develop. But this will probably not take place next year.

Our next question. In your presentation, you talked about your interest in embarking in green hydrogen market. What is your interest? What is your view on this and your plans?

Well, I will leave that with the business combination with Focus, we're creating an option that didn't exist in Eneva, not in this scale. We had a lower scale. And we started working with adjacent projects in terms of solar projects in Parnaíba and Pecem. And as a core of our strategy, we always have gas, but we never denied that this is a transition energy. And at a given moment, we will migrate to a more renewable base. This in the medium and long run. So to try -- so to understand and to use alternative for us -- forms, well, this is part of our strategy. I believe we will give more disability regarding our long-term strategy and how we're going to include hydrogen in our portfolio and other alternatives in February when we talk about Eneva 2030 and a long-term strategy. Here, we will see how we can position ourselves with new projects and what we will do to achieve this.

Pedro, now what about the energy market spreads? How do you see the price of energy in the upcoming year with a scenario of the improvement of the water scenario? What about the free market, you believe these spreads will increase or will drop?

Well, the balance of incentivized energy has to undergo supply and demand. Here, we believe that all the expansion of the free market adds cost to distribution. The more customers leave the distribution, well, the distribution prices together with the benefits and the incentives, well, they are paid by the customers that remain increasing the capacity of the clients to absorb discount. So what we realize is there is a better supply of incentivized energy greater than what is perceived by the customer and this is greater. Now what makes sense, this is why it makes sense to work directly with the final customer, with the end customer and to know how to adapt this asset in a more competitive way.

Just -- I would just like to -- if there is someone that wants to carry out this calculation, the incentive is around BRL 50. We are working with an average cost between energy and incentivized energy in the long run. This is an average price for 2024 between BRL 35 and BRL 40. For those -- I don't know if you wanted to calculate or if you were just interested to see the upside of the company. This is the calculation, and this is how we price our energy at the store.

Now what about Futura 1's CapEx and an update of the value of Futura 1 and when this will become operational?

I think we conveyed a little bit. We talked about the CapEx. It's 100% contracted and it's already 100% hedged. We don't expect major changes here marginally. But this is not our expectation, and we continue maintaining the COD probability between the last week of April and the first week of May.

Now Pedro, generally Focus use 80% of its debt for its [indiscernible]. Now will you leverage more with the new avenue of growth with [indiscernible]? Are you considering an M&A -- water M&A?

Well, now regarding the leverage position, it's a good figure to work on. This is -- the distribution is proper here. We don't want to necessarily leverage more, but we want to lower cost and stronger balance and more competitive credit. Now regarding water or hydro. Hydro doesn't compete with the solar view or the renewable form by and large. Therefore, the answer is yes, we have a major portfolio of thermoelectrical and thermal plant has a negative correlation with water, and this is the thesis of investment of the hydrothermal portfolio. Hydro makes sense when there is proper return. There are many old assets. We have to understand the quality of the assets, by and large. Nonetheless, if this does make sense, our strategy is this is still a match regarding water plants.

Now about financing of Futura 1. What is the stance of the BNDES to finance Futura 1?

Well, we continue talking with the BNDES Bank. We would like to remind you, we already have a BNB for BRL 150 million. And we understand that the -- we may have an additional window of BNB next year, and we continue in conversations with the BNDES.

Next question, I would like to understand the capital structure strategy of Eneva after buying Focus, development of new projects, Futura 2 and 3? And you may buy Urucu, will you -- if Urucu is concluded, will you go to market?

Okay. We ended the last quarter with a leverage 3x net debt EBITDA and our financial covenants are 5x net debt over EBITDA. As of now, we will deleverage the company in a scenario with new projects, with no acquisitions. We are deleveraging with the commissioning of Jaguatirica. And with the end of the investments in Jaguatirica and our project Parnaíba 5 is at the end. So we have lowered our investments there. Now we are in a line of deleveraging 3x net debt EBITDA trends to be lower every quarter. And now with Focus, we will disburse BRL 715 million that will take place in the first few quarter of next year. We will not -- we didn't mention this, but there is a time line here of a general assembly. And parallelly, we will request the approval of the antitrust agency and BNB, we believe that the transaction will end at the end of February and the beginning of March. Well, there may be a delay because it's the end of the year or maybe I don't know the process may advance if both parts are fast, but this is a good window to take into account. In the first quarter, we will disburse BRL 715 million corrected by CDI, and we have the investments in Futura 1 that will not stop. There are BRL 2 billion that will be invested from now until 2022, and this drives a little bit our leverage position seen, we have BRL 715 million to pay in cash, plus EUR 2 billion in investment in order to conclude Futura 2, we're talking about BRL 2.7 billion. And we also deleveraged BRL 2.7 billion when we see the EBITDA. Over the last 12 months, this is equal to slightly below 1.5x the EBITDA, 1.4x EBITDA would be added. If we see the EBITDA of the last 12 months, it would be an increase of 1.3, 1.4 EBITDA and a leverage base of net debt over EBITDA that is lower than what we have today that is 3x. This being said, we expect that at the end of the transaction and the end at the conclusion of Futura 1, together with the CapEx of BRL 2 billion, we want to be at a level close of 3x net debt over EBITDA without no other acquisition. This would be the normal pace of the company. If an acquisition, for example, Urucu, the value hasn't been defined, and we really don't know when. Once Urucu is approved, well, there is a lag time between the transaction announce and payment of the transactions, and this can take between 8, 9 months because we do have conditions and we need an approval. If Urucu is approved, this would be a settlement that will take place by the end of the year -- next year. And this can even take place in the beginning of 2023. And with this, the company will already be deleveraged. Therefore, the -- when we work with these timings and the portfolio that we have to date, there is no need to increase the capital of the company, of course, with exception of the 17 million shares that we will issue to merge with Focus, there are a lot of assumptions. We have to work on these assumptions throughout the time because these things will take place in different moments. The company is in a trajectory of being deleveraged, and you will realize that we will not need a capital increase for these to invest.

The next question is for you as well from [Felipe Andreoli]. Are there any tax synergies in taking advantage of the seller's EBITDA to take advantage of the accrued losses from the holding?

Yes, there is. Thank you for your question. It exists, Felipe. So we have to have the company design. With the results of the seller, that doesn't exists. We do have this and it also has accounting losses, I think, BRL 150 million. So if we combine the companies, the legal entities, we can take advantage of the tax losses from -- and even take advantage of the future results and positive results from Focus.

Next question is about the leverage of Futura 1. The D&P is BRL 450 million. When do you expect reimbursement? Do you -- are you looking for supplementary funding?

This is Alexandre Guimaraes speaking. Now we have a challenge of getting the approval of the BNB. It already has that amount available obviously requiring bank surety. So the strategy between -- with the combination of Focus and Eneva and in the short term, so we can get that approval from the BNB and obviously get that money as fast as we can. In relation to other sources of funding, there was a different reality of Focus alone and now it's a different reality, Focus plus Eneva. Obviously, that leads to a number of opportunities and probably much more advantages in terms of interest rates and financing. So without a doubt, that's one of the aspects that we will apply and capture those synergies from the transaction.

Next question is about the estimated timing to conclude the merger, the operation.

Well, this is Habibe speaking. I think we answered that in the previous question. So we're working on the paperwork, preparing reports protocol to call an assembly in the next days. After that -- after the call, 30 days to have the assembly meeting. And then we need the approval from the BNB and the Brazilian Antitrust Agency evaluation. So considering that we expect to conclude end of February, beginning of March, next year.

Next question is for you as well. Can you talk about or add to indebtedness with the potential purchase of hydro plants, would you mean leverage?

Well, we don't have anything in the pipeline to acquire opportunities. When we talk about hydro, we don't have that competency in-house to build a hydropower plant, it would be acquired. So it has to be a sizable opportunity. We're getting close to 2.8 giga of installed capacity in thermal power. So to think with that mindset, in a diversified portfolio, natural hedging between the 2 different energy sources, hydro and thermal, it has to be sizable. We're not assessing or negotiating with anybody. But if that comes up in terms of quality and return, then obviously, we'll pursue that. Maybe way in the future when the company is deleveraged again with -- and the capital structure depends on the moment that the company is going through and the quality of the asset. So nothing is on our radar at this time. But if it comes up, we will definitely rethink the capital structure, always thinking of the balance sheet safety, our covenant is 5x net debt over EBITDA. We have leverage policies. We can't even come close to that level. We work with huge financial safety here, even conservative, I'd say, so we can work smoothly in terms of all the investment plans in the company.

Now our Q&A session is over. I'm going to hand over to Pedro Zinner. I'd like to say that in case you have any other questions or doubts, please send that to the IR of Focus or Eneva. Pedro?

I'd like to thank everyone for participating in this call. Thank the Focus team, Alan, Matt and Enrique, the other partners and shareholders and the team. I hope to see you in the next year's earnings release. [Statements in English on this transcript were spoken by an interpreter present on the live call.]