Equity Research

BTG Pactual Global Research

Latin America
Electric & Other Utilities
Company Note
16 November 2017

Eneva
Not just a name change Rating Buy

Initiating coverage with a Buy rating and a R$16.5/share target price 12m Price Target R$16.50/US$5.03

Some might argue that this is a re-initiating report, but so much has changed in the past Price R$13.12/US$4.00
four years that Eneva literally seems to be another company today, having restructured RIC: ENEV3.SA, BBG: ENEV3 BZ
its balance sheet, shareholder structure and asset portfolio, whilst also becoming a fully
Trading Data and Return Forecasts
operational company versus its previous soon to be operational status.
52-wk range R$16.00-11.69/US$5.12-3.54
Morphing towards an Upstream+Power business model Market cap. R$4,133m/US$1,260m
Shares o/s (m) 315.0
The change in its asset portfolio transformed Eneva from a pure power company (even Free float 25%
though it carried gas risk) to the so-called reservoir-to-wire model, i.e. a verticalized Avg. daily volume('000 Shares) 373
Avg. daily value (R$ m) 4.9
approach to thermal generation. For better or worse, and for the opportunity and risk it
Forecast price appreciation +25.8%
represents, Eneva now carries both gas exploratory and development risks. With vast Forecast dividend yield 0.0%
infrastructure already on the ground, the marginal return of finding gas is great. But not Forecast stock return +25.8%
finding additional reserves would pose downside to current market prices.
Stock Performance (R$)
A scenario analysis and our base case scenario 50.0 160

Given its new, verticalized profile, Enevas investment case should be less sensitive to 40.0
120

IRR debates (very common in the power sector) and more sensitive to its exploratory 30.0

80
success. As such, one question we expect the market to always ask is: how do you 20.0

calculate Enevas fair value in different gas reserve scenarios. Our base case assumes 10.0
40

the company finds an additional 22.3BCM and that the extra resources are turned into
0.0 0
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16-Feb-15

16-May-15

16-Feb-16

16-May-16

16-Feb-17

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power, with the companys plants operating as merchants. Closing Parnaba Is cycle
and extending existing PPAs both pose upside to our base case, whilst failure to find Price Target (R$) Stock Price (R$) Rel. Ibovespa

additional gas naturally poses downside.

Antonio Junqueira, CFA
Buy rated
New York BTG Pactual US Capital LLC
Our target price is DCF-derived. We discount the power cashflow at a nominal 11.6% antonio.junqueira@btgpactual.com
WACC rate and the upstream cashflow at 12.8%. +1 646 924 2476

Joao Pimentel
Brazil Banco BTG Pactual S.A.
Valuation 12/2015 12/2016 12/2017E 12/2018E 12/2019E joao.pimentel@btgpactual.com
RoIC (EBIT) % 4.0 7.7 9.3 11.0 11.6
EV/EBITDA 13.9 8.4 6.7 5.9 5.3 +55 11 3383 3313
P/E 0.3 (33.4) 42.9 11.0 8.9
Net dividend yield % 0.0 0.0 0.0 0.0 0.0 Gustavo Castro
Brazil Banco BTG Pactual S.A.
Financials (R$mn) 12/2015 12/2016 12/2017E 12/2018E 12/2019E gustavo.castro@btgpactual.com
Revenues 1,519 2,160 2,464 2,249 2,318
EBITDA 288 977 1,124 1,199 1,238 +55 11 3383 3366
Net Income 137 (112) 96 375 463
EPS (R$) 0.44 (0.36) 0.31 1.19 1.47
Net DPS (R$) 0.00 0.00 0.00 0.00 0.00
Net (debt) / cash (3,960) (4,469) (3,402) (2,872) (2,379)
Source: Company reports, Bovespa, BTG Pactual S.A. estimates. / Valuations: based on the last share price
of the year; (E) based on a share price of R$13.12, on 14 November 2017.

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 22

Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Any U.S. person receiving this report and wishing to effect any transaction in a security
discussed in this report should do so with BTG Pactual US Capital, LLC at 212-293-4600, 601 Lexington Avenue. 57th Floor, New York NY 10022.
 Eneva
16 November 2017 page 2

Not just a name change

Almost five years have passed since the last report we wrote on Eneva (back then,
MPX). In our 2013 Outlook report, entitled From Macro to Micro, we decided, among
other things, to downgrade the stock to Neutral on a combination of additional delays
in plants construction and a complex spot price outlook (2013 was the first year of the
still complicated hydrological reality we are living in).

Well, a lot has certainly changed since then:

(i) The thermal plants are all operational. In the old MPX case, the construction of
capacity was an ongoing risk (and opportunity). The plants are now built and the capex
risk (on the power side) is small.

(ii) The balance sheet was restructured. At the holding level, there was a 20% debt
haircut and a 40% debt-to-equity conversion. The remaining 40% was renegotiated,
with a new maturity of 13y (9y as of now), a 4y grace period for interest, 8y grace period
for principal and at a cost of CDI + 2.75% p.a. The holding debt dropped to R$1.1bn
from R$2.4bn in the process.

(iii) The controlling block changed. Cambuhy and BTG Pactual co-control it now.

(iv) The Parnaba basin became a reality. As of Q3 2017, Enevas 2P reserves in the
Parnaba basin were at 17.7 BCM. And that doesnt factor in the 7.7 BCM that was
already extracted and turned into powerdaily production capacity also grew to 8.4MM
m3/day (from 4.9MM m3/day in 2014).

(v) Asset portfolio restructuring. Eneva morphed from a power-only company into a
reservoir-to-wire model. In its big corporate restructuring process, assets (and stakes
in assets) not previously held were incorporated (in exchange for shares). In the
Parnaba basin, Eneva now owns 100% of all the thermal plants and the Upstream.

On point (v) above, some might argue that in the previous model, the Upstream risk
(which was at OGX) was smaller and that MPX was a power only company. In our
view, that is not that precise. Even when it did not hold any shares in the gas producing
entity, the former MPX was, indeed, exposed to the basins risks. OGX was liable,
which meant that MPX was exposed to OGXs credit risk. The former model created
conflicts of interest that the corporate restructure correctly addressed.

For better or worse, Eneva is now an integrated play. With a gas basin that has proved
to be a reality and power plants that are up and running, both the upside and the
downside of the investment case are directly correlated to the fate of the Upstream.

In our base case model, we assume Eneva finds an additional 22.3BCM and explores
it throughout 2036 (as a merchant operator, post the expiration of the existing PPAs).

A lot has changedfor the better, in our view.

 Eneva
16 November 2017 page 3

Company Overview
With the restructuring and changes mentioned above, Eneva positions itself now as a
reservoir-to-wire company, a vertical operator that extracts the gas and transforms it
into electricity. We can list the following strengths of the company in its new phase:

(i) Eneva has a robust portfolio of operational assets, all of them located in
tax-advantaged regions.

(ii) In the Parnaba basin, the marginal gas found has a great NAV, given
that the power plants are up and running.

(iii) The company is the only private power generator with E&P expertise.
This might represent future opportunities to replicate the Parnaba
success elsewhere.

(iv) It has long-term PPAs, inflation-hedged revenues and a solid operational

cash flow.

Figure 1: Enevas Geographic Footprint

Source: Eneva

The map above shows a quicker picture of the assets held by the company. On the
Parnaba basin, the company added 5 additional fields in the 14th bidding round that
took place in October.

The coal plants are a legacy of the past, while the gas complex is where the
companys efforts are concentrated upon which its future relies.
 Eneva
16 November 2017 page 4

Most of the thermal plants have long-term PPAs. The table below summarizes the
companys exposure to thermal generation, with some details on each one (more will
be discussed below).

Table 1: Enevas thermal plants

Inst. Cap. Assur. Cap. PPA CVU Fixed Rev.
plant stake held source MW avgMW expiration R$/MWh R$mn
Itaqui 100% coal 360 315 2026 130 407
Pecm II 50% coal 365 276 2026 132 363
Parnaba I 100% gas 676 480 2027 111 574
Parnaba II 100% gas 519 490 2036 67 488
Parnaba II 100% gas 176 103 2027 182 127
Parnaba IV 100% gas 56 45 2018 89 -
Source: Eneva, BTG Pactual

Management team

The new Eneva management team is led by Mr. Pedro Zinner (the CEO) and Mr. Carlos
Ferreira (the chairman), who bring to the company a good mix of knowledge of both
the Upstream and the Power sectors. Among the companys leadership, we would
highlight the following backgrounds:

. Pedro Zinner (CEO): Mr. Zinner was formerly the CEO of PGN, the Parnabas
Upstream company. Under his management, the gas basin expanded its daily
production and certified reserves, and reduced development and manageable costs.
Mr. Zinner was also Enevas CFO.

. Carlos Ferreira (Chairman): Mr. Ferreira has vast experience in leading corporate
roles, of which the last 13 years in the power sector. He served as the CEO of Elektro,
COO of CPFL and VP of Distribution of Energisa and led asset turnarounds in many
distribution concessions.

. Lino Canado (E&P Director): Former COO of PGN, Lino has vast experience in
the Oil&Gas sector, having served as VP of Integrated Projects at Schlumberger South
America and Director of Operations at Schlumberger Brazil.

. Flavia Martins (Acting CFO): Former CFO at PGN, Mrs. Martins also served as
General Manager of Finance at Vale, Head of Derivatives Sales at Banco BBM and
Risk Manager at Telemar.

. Laira Sanui (HR & Corporate Services Director): Laira Sanui holds a graduate
degree in Mechanical and Industrial Engineering from USP, with an MBA from
Anderson School of University of California, Los Angeles. She has over 15 years of
experience in corporate planning, finance and governance. Before joining PGN, she
acted as General Manager of Corporate Finance at Vale, Integration General Manager
at Vale, Planning General Manager at Vale, and Senior Consultant at Booz &
Company.
 Eneva
16 November 2017 page 5

. Ronan Dias (Gas Generation Director): Mr. Dias is a former GM at

Termopernambuco power Plant, Operations & Maintenance Manager at Termoau and
Maintenance Manager at Termorio Power Plant. He holds a BS in Mechanical
Engineering from UNIFEI.

The board composition reflects the shareholder structure below.

Chart 1: Enevas shareholder structure

Source: Eneva

Asset Portfolio
The judicial recovery process was concluded, whereby Eneva altered the companys
asset portfolio considerably. Before this event, Eneva held full control of some thermal
plants and had no equity exposure to the Upstream business.

The following assets were contributed to the company: (i) 30% of Parnaba I; (ii) 48%
of both Parnaba III and Parnaba IV; (iii) 100% of the Upstream at the Parnaba basin;
(iv) 50% of the JV it shared with E.oN (now Uniper) to develop renewables greenfield
projects.

The company also divested in this period, reducing its coal exposure a lot by selling
50% of Pecm I to Energias do Brasil and 50% of Pecm II to Uniper.

The Integrated Gas System

Figure 2: Reservoir-to-Wire Model

Source: Eneva

Four power plants compose the Parnaba complex. They add 1.4GW of installed
capacity (more details in the table above) and carry a fixed revenue of R$1.19bn (as
of 2017). At full capacity, the plants consume some 3BCM per year (or roughly 1/6 of
the 2P certified reserves as of Q2 2017).
 Eneva
16 November 2017 page 6

Parnaba IV works as a merchant unit and has a PPA in the free market that expires at
the end of 2018, while all other units operate with long-term contracts with the regulated
market, with take-or-pay and inflation-protected revenues.

Parnaba II is the most efficient of the plants, as the only one operating under a
combined cycle. Eneva has an agreement with Aneel in which it pledges to close the
cycle of Parnaba I. We only expect the company to start the investments for closing
the cycle once more gas is found and certified and once it negotiates a longer take-or-
pay contract for the plants capacity (which currently expires at the end of 2027).

Figure 3: Parnaba Thermal Plants Overview

Source: Eneva

The integration of the Parnaba complex poses a great opportunity for Eneva
naturally, subject to the success of the exploratory campaign. With 1.4GW already
installed and 2.1GW of licensed greenfield, the marginal value of finding additional
reserves is quite interesting.

Naturally, the risk of the investment case is also associated to the exploratory story. At
the current pace of dispatch, we estimate that the existing 2P reserves will be entirely
consumed before the expiration of the take-or-pay PPAs (more details in the scenario
valuation analysis below).

The company still has a vast territory to explore to fulfill the current PPAs and expand
its revenue base.
 Eneva
16 November 2017 page 7

Figure 4: Reservoir-to-Wire in the Parnaba Integrated Complex

Source: Eneva

Enevas gas thermal plants havent dispatched at full capacity in 2017. The
transmission bottleneck between the Northern system and the rest of the country,
combined with the start of production of the Belo Monte mega hydro plant, led to low
usage of the plants in the first half of 2017. While gas usage in H1 2017 was only 0.29
BCM, it reached 1.21 BCM in H2 2016 and might reach something higher in H2 2017.

The level of dispatch represents a risk and an opportunity. The greater the dispatch,
the greater the companys aggregate results (EBITDA, earnings, cash flow, etc.). At
the same time, though, the greater the dispatch, the smaller the lifespan of the existing
gas reserves. As stated above, at full dispatch, the 2P certified reserves (Q2 2017
numbers) would be slightly more than 6 years. With longer PPAs, that seems to be an
undesirable scenario.

Table 2: Parnaba Complex, dispatch level per plant and gas usage (in BCMs)
2016 2017
plant Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 E
Parnaba I 77% 92% 90% 92% 9% 17% 99% 85%
Parnaba II 100% 100% 54% 35% 100% 95%
Parnaba II 67% 53% 44% 69% 0% 0% 100% 85%
Parnaba IV 62% 84% 100% 100% 30% 23% 100% 85%
gas usage (BCM) 0.32 0.39 0.58 0.63 0.15 0.14 0.63 0.65
Source: Eneva, BTG Pactual
 Eneva
16 November 2017 page 8

Despite operating as combined units, we model the gas thermal plants and gas
Upstream separately. We are projecting a weighted average dispatch of 57% for the
plants between 2018-2021, after which the dispatch climbs to 73% given our
expectation that, at that point, Belo Montes electricity will be able to be transferred to
the integrated system with no specific bottleneck.

Table 3: Income Statement Parnaba Thermal Plants

R$m 2016 2017 2018 2019 2020 2021
Gross Revenues 1,689.2 1,906.8 1,833.4 1,894.5 2,000.5 2,064.3
Fixed Revenues 863.1 1,103.8 1,222.3 1,274.2 1,325.2 1,378.2
Variable Revenues 826.1 803.0 611.1 620.3 675.3 686.1
Discounts (107.5) (177.3) (159.5) (164.8) (174.0) (179.6)
Tax rate (%) -6.4% -9.3% -8.7% -8.7% -8.7% -8.7%
Net Revenues 1,581.7 1,729.5 1,673.9 1,729.7 1,826.5 1,884.7

Fixed Costs (343.1) (370.1) (348.9) (400.1) (411.9) (428.4)

of which is fixed payment to Upstream (212.4) (227.7) (237.3) (247.3) (257.2) (267.5)
of which is non-Upstream (130.6) (142.4) (111.6) (152.7) (154.7) (160.9)
Variable Costs (777.7) (746.7) (718.3) (731.3) (773.7) (791.3)
of which Upstream marginal (692.1) (578.7) (616.8) (654.9) (695.8) (715.7)
of which non-Upstream (85.6) (168.0) (101.4) (76.4) (77.9) (75.5)
Fixed EBITDA 465.1 632.7 767.1 763.3 798.0 829.9
Variable EBITDA (4.2) (20.1) (160.4) (165.0) (157.1) (164.9)
Cost breakdown
Materials (517.0) (415.6) (616.8) (654.9) (695.8) (715.7)
Electricity for Resale (1.0) (14.3) (12.7) (11.4) (6.5)
Others (10.1) (27.1) (27.2) (28.6) (29.6)
Depreciation (117.7) (114.8) (114.8) (114.8) (114.8) (114.8)
EBIT 343.2 497.8 491.9 483.5 526.0 550.2
EBITDA 460.9 612.7 606.7 598.3 640.9 665.0
Source: BTG Pactual estimates, Eneva

The Upstream

In the Parnaba basin, Eneva won the right to explore blocks in the 9th, 13th and 14th
bidding rounds. All the currently certified reserves are located in blocks from the 9th
bidding round, in fields named:

. Gavio Real, Gavio Branco, Gavio Vermelho, Gavio Azul, Gavio Branco Norte,
Gavio Caboclo and Gavio preto.

The area of these seven fields adds up to 890 km2. The company also has 7 evaluation
plans on blocks of the 9th bidding round, totaling an area of 5,329 km2. On top of that,
it has rights to explore seven blocks of the 13th round and five from the 14th round, as
per the figures presented below.
 Eneva
16 November 2017 page 9

Figure 5: Parnaba basin blocks (before the 14th Bidding Round)

Source: Eneva

Figure 6: Enevas winning blocks in ANPs 14th Bidding Round (2017)

Source: Eneva, ANP

The 2P certified reserves of the Parnaba basin have soared as a result of the
exploratory campaign and the need for more available data in preparation for the
companys re-IPO.
 Eneva
16 November 2017 page 10

Chart 2: Reserves and Production

Source: Gaffney Cline & Associates, Eneva

Aside from the size of the reserve itself, and as highlighted above, the cumulative
production of the basin was 7.8 BCM as of September 2017 and 7.0 as of April 2017.

This shows the much different scenario we highlighted when comparing the old Eneva
to the new one. Yes, the company will always carry commodity risks (exploration,
development, reserves, etc.), but the basin is no longer a project. Its a reality!

The plan is to develop 5.5BCM by the end of 2018 and an additional 3.8BCM in the
2019-20 period, as per the figure below. In parallel, the company will keep exploring
the region, starting with the 7 evaluation plans still linked to the 9th bidding round.

The certified resources (2C+P50) of the ongoing evaluation plans add up to 10 BCM,
and the company expects to invest R$68mn a year in exploration until 2022.
 Eneva
16 November 2017 page 11

Figure 7: Gas Production Development

Source: Eneva

As we stated previously, we model the gas thermal plants and upstream separately.
Naturally, they operate on a combined basis, but we believe the separation allows us
to understand the variables better.

With the expected 57% dispatch, and as mentioned above, this is what our Upstream
projections look like:
 Eneva
16 November 2017 page 12

Table 4: Parnabas Upstream Income Statement

Key Operating Data 2016 2017 2018 2019 2020 2021
Reserves (nothing new) 17.7 17.1 15.5 13.9 12.4 10.8
Reserves (w/ findings) 17.7 17.1 15.5 13.9 19.4 17.8
New Reserves - - 7.0 -
Production (MWh) 8,367.6 7,049.9 6,606 6,606 6,606 6,606
Production (Bi m3) 1.9 1.6 1.56 1.56 1.56 1.56
Test (MWh / Bi m3), '000s 4.36 4.49 4.74 4.74 4.74 4.74

Income Statement (PGN+BPMB)

R$m 2016 2017 2018 2019 2020 2021
Gross Revenues 900.2 800.4 854.1 902.3 953.0 983.3
Fixed 212.4 227.7 237.3 247.3 257.2 267.5
Variable 692.1 578.7 616.8 654.9 695.8 715.7
Discounts (115.3) (110.0) (106.8) (112.8) (119.1) (122.9)
Net Revenues 784.9 690.3 747.3 789.5 833.9 860.3
COGS (310.8) (165.4) (233.1) (236.9) (247.9) (257.0)
Gas Costs (290.8) (102.3) (171.5) (171.4) (178.3) (185.4)
Royalties (19.5) (63.1) (61.7) (65.5) (69.6) (71.6)
Others (0.4) - - - - -
SG&A (112.6) (85.3) (60.0) (62.6) (65.1) (67.7)
Depreciation (71.6) (106.4) (78.4) (78.4) (78.4) (78.4)
EBIT 289.9 333.2 375.8 411.6 442.6 457.3
EBITDA 361.5 439.6 454.2 490.0 521.0 535.7
Source: BTG Pactual

The Coal Plants

Enevas legacy from the old days is represented notably by its remaining coal thermal
plants. The company today owns 100% of the Itaqui thermal plant, in the state of
Maranho (in the Northern region of the country) and 50% of Pecm II (in partnership
with Uniper), in the state of Cear. The old Eneva used to own 100% of Pecm II and
50% of Pecm I (sold to Energias do Brasil).

Figure 8: Coal Power Generation Thermal Plants

Source: Eneva
 Eneva
16 November 2017 page 13

Eneva still faces issues from the past at both plants, notably:

(a) The plants generated so much losses that the recoverability of tax credits,
without any capital increase in the plants, seems highly unlikely.

(b) Both plants, and Itaqui especially, lose money when the plants are on. In other
words, the CVUs as declared in the auctions that made the plants viable were
incorrectly estimated.

We believe the plants have a small value contribution to Enevas base-case valuation
scenario, and we see a combined equity value (before any capital increase in the
plants) of R$1.3/share, i.e. less than 10% of Enevas current market cap.

We believe the biggest strategic value of the plants is the potential hedge it might
represent in the future if the gas exploratory story proves unsuccessful.

It might seem a coincidence, but both Pecm IIs and Itaquis PPAs expire at the end
of 2026. Brazil wont be able to simply ignore the existence of the plants once their
PPAs expire. With Itaqui in the same operational region as the Parnaba plants, Eneva
could use it to produce electricity if it is unable to meet the contracts signed for the gas
plants units.

Naturally, with different CVUs, Eneva would lose some money in this power
compensation scenario. The cost, though, would be much smaller than buying
electricity at spot prices.

Eneva is not verticalized in any segment (the old Eneva was when it owned the coal
mines in Colombia). That said, dispatch levels are important given the negative variable
EBITDA margins carried in the units, especially for Itaqui.

Table 5: Coal Plants Dispatch

2016 2017
plant Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 E
Itaqui 71% 69% 89% 82% 16% 16% 100% 90%
Pecem II 86% 91% 51% 30% 84% 83% 99% 90%
Source: Eneva, BTG Pactual

This table can be compared to the one for the Parnaba complex. Itaqui has a very
similar trend to the Parnaba thermal plants because it is located in the same
operational region, which means it was also affected by transmission bottlenecks and
Belo Monte production.

PSR carried out a study for Eneva and presented the following dispatch (which is
different than ours).
 Eneva
16 November 2017 page 14

Chart 3: PSRs expected dispatch for Enevas coal thermal plants

Source: PSR, Eneva

The study seems to be outdated for the tougher hydrological scenario of the past
months and, as such, we will keep our more conservative (higher) dispatch scenario
for both plants, leading to weaker EBITDAs than if the dispatch was PSRs.

Table 6: Itaqui Income Statement

R$m 2016 2017 2018 2019 2020 2021
Gross Revenues 601.7 742.7 640.5 654.5 676.2 700.8
Fixed Revenues 375.0 401.9 418.8 436.6 454.0 472.2
Variable Revenues 226.7 340.9 221.7 217.9 222.1 228.6
Discounts (60.5) (75.4) (65.0) (66.4) (68.6) (71.1)
Tax rate (%) -10.1% -10.1% -10.1% -10.1% -10.1% -10.1%
Net Revenues 541.2 667.4 575.5 588.1 607.5 629.7
Fixed Costs (128.4) (116.0) (120.8) (126.0) (131.0) (136.2)
Variable Costs (248.9) (347.4) (254.0) (249.2) (250.3) (252.3)
Fixed EBITDA 209.0 245.1 255.4 266.3 277.0 288.0
Variable EBITDA (45.1) (41.2) (54.8) (53.4) (50.7) (46.9)
Depreciation (89.2) (96.3) (96.3) (96.3) (96.3) (96.3)
EBIT 58.8 99.8 104.4 116.6 130.0 144.9
EBITDA 147.9 196.0 200.7 212.9 226.2 241.1
Source: BTG Pactual
 Eneva
16 November 2017 page 15

Table 7: Income Statement Pecm II

R$m 2016 2017 2018 2019 2020 2021
Gross Revenues 590.3 728.4 733.8 700.4 677.3 701.7
Fixed Revenues 338.0 361.1 376.3 392.3 408.0 424.3
Variable Revenues 252.3 367.4 357.5 308.1 269.4 277.4
Discounts (62.6) (77.0) (77.6) (74.1) (71.6) (74.2)
Tax rate (%) -10.6% -10.6% -10.6% -10.6% -10.6% -10.6%
Net Revenues 527.7 651.4 656.2 626.3 605.7 627.5
Fixed Costs (103.6) (109.4) (114.0) (118.8) (123.6) (128.5)
Variable Costs (226.1) (323.3) (329.2) (286.4) (253.1) (261.9)
Fixed EBITDA 198.6 213.6 222.5 232.0 241.2 250.9
Variable EBITDA (0.5) 5.2 (9.5) (10.8) (12.2) (13.9)
Depreciation (73.8) (88.2) (88.2) (88.2) (88.2) (88.2)
EBIT 112.0 126.7 124.8 132.9 140.8 148.7
EBITDA 185.8 215.0 213.0 221.1 229.0 237.0
Source: BTG Pactual

Valuation Scenarios
Enevas re-IPO process was particularly interesting when it came to the discussion
regarding valuation. Most investors that started studying the case had a background in
the Utilities sector.

But one of the clear perception changes after the companys overhaul was that it
morphed from a company that followed the positive (or negative) trends of the power
generation sector into a hybrid player exposed to both power generation and Upstream.

With fully operational plants and lower power generation risks, the investor community
correctly, in our view realized that the most important positive (or negative) trigger
for the company relies precisely on its Upstream arm. The more gas it finds, the more
valuable it will be, and vice-versa.

The one point that really differentiates Utilities analysts from Upstream ones is risk
tolerance to a big unknown variable. In the Utilities universe, we are used to analyzing
pre-existing conditions (capacities, contracts, regulations, etc.), while Oil&Gas analysts
generally try to assess a value for the unknown (possible reserves, contingency
resources, etc.).

The nature of the Oil&Gas business is one in which the natural resources explored are
constantly working on three fronts: (a) exploration; (b) development; and (c) actual
production.

It is common for majors like PBR to never have reserves above 15-20x annual
production levels. And that, by the way, is the right way to operate it.

Investors should ask themselves: Is it worth certifying reserves that will only be
monetized in 20 years? Whats the actual NPV of the exploratory capex allocated to
something that wont be converted into cash in less than a decade?
 Eneva
16 November 2017 page 16

Enevas current 2P reserve life, in our base case model, will last until 2027 (the year
when Parnaba I and Parnaba III existing contracts expire). So, today, the company
doesnt have certified gas to meet its longer (Parnaba II) contract.

That leads to an interesting valuation discussion reality: while Utility analysts are used
to debating the real implied IRR levels of a company, Eneva is more of a scenario
analysis play.

And that is not only on the valuation side (the more gas it finds, the bigger its value
potential), but also in terms of operational and cash flow realities: the more the
thermal plants are dispatched, the greater the EBITDAs and Cash Flows, BUT the
shorter the reserves life.

In this part of the report we will present some valuation scenarios, starting with our
base case scenario.

Base Case Valuation Scenario

In the valuation scenarios herein presented, we are neither changing our discount rates
nor the value of the coal assets. Our nominal WACC rate for the thermal plants is
11.6%, while our nominal WACC rate for the Upstream business unit is 12.8%.

In our Base Case scenario, Enevas current 2P certified reserves end by 2027, but the
company is able to find 22.3 BCM of additional gas. In this scenario, Parnaba I and
Parnaba III operate as merchant plants until the gas ends (around the same time
Parnaba II ends).

This doesnt seem to be the best way of monetizing the additional 22.3 BCM. It would
be much better if the company was to monetize the additional gas by closing the cycle
of Parnaba I (in exchange for an extension of its take-or-pay contract). If more gas is
found, it would always be better if some sort of fixed payment is agreed with the
systems regulator, as it would reduce the risks of being a merchant.

Table 8: Base Case Valuation

SOTP R$mn
Itaqui 1,427
Pecm II (Equity Value) 341
Parnaba Thermal 4,363
Parnaba Upstream 3,004
Holding (70) 6x (419)
EV 8,716
(-) Net Debt Q2 2017 (3,559)
Equity Value 5,156
R$/share 16.4
Source: BTG Pactual

No New Gas Valuation Scenario

Another scenario worth exploring is the one in which no new gas is found (and the
company becomes short of gas in 2027). Naturally, we cant call this the worst-case
 Eneva
16 November 2017 page 17

scenario. The worst-case scenario would be one in which not even the 2P reserves are
developed and produced.

The penalty for not having the natural resource in a contracted plant (for whichever fuel
source one has) is the ceiling spot price! So, with no gas, Eneva cannot simply buy at
the average spot price to compensate for not producing. A big difference!

The segment is discussing changes with the regulator. The thermal plants in the
country have and will continue to have a big strategic value. But operating them is risky
when they become merchant plants or when a problem with the natural resource
occurs.

Back in 2005, PBR had a similar problem and ended up acquiring uncontracted thermal
plants to compensate for the lack of the natural resource at one of its plants.

In our No New gas scenario, Eneva would be short of the natural resource at a time
when only Parnaba II PPA exists. Parnaba IIs assured capacity of 490avgMW is
similar to Enevas exposure in the coal segment.

In this scenario, we assume the company will use both coal plants to generate the
electricity it was supposed to be producing in Parnaba II. In this scenario, the company
keeps Parnaba II fixed revenues, runs on the coal plants costs and receives the
variable payment from Parnaba II. Considering the coal plants have greater CVUs than
Parnaba II, the company would pay for the difference.

This solution seems particularly smart for Itaqui, which is situated in the same
subsystem (and state) of the Parnaba complex.

Table 9: No New Gas valuation scenario (with compensation)

SOTP R$mn
Itaqui 1,427
Pecm II (Equity Value) 341
Parnaba Thermal 3,323
Parnaba Upstream 2,535
Holding (70) 6x (419)
EV 7,206
(-) Net Debt Q2 2017 (3,559)
Equity Value 3,647
R$/share 11.6
Source: BTG Pactual

In an extreme scenario in which compensation is not possible and Eneva has to buy
all the non-produced electricity at the ceiling price until 2036, the companys fair value
would drop to zero.

This scenario is bad for the company and for the power grid (as the companys
incentive would move towards not producing the capacities of Itaqui and Pecm II, as
a means of negotiating the power compensation scenario herein presented).

As previously stated, the most important role of the coal plants for Eneva might prove
to be the hedge they could represent for a stressed, no new gas scenario.
 Eneva
16 November 2017 page 18

Attachment

Table 10: Eneva Income Statement

R$m 2016 2017 2018 2019 2020 2021
Net Revenues 2,160.0 2,464.3 2,249.4 2,317.8 2,434.0 2,514.4

COGS (1,053.8) (1,141.7) (1,050.3) (1,079.9) (1,111.8) (1,141.1)

SG&A (185.3) (198.4)
Other Expenses / Revenues 56.4
Depreciation (377.3) (340.9) (289.5) (289.5) (289.5) (289.5)
EBIT 599.9 769.7 909.6 948.4 1,032.7 1,083.9
EBITDA 977.2 1,110.6 1,199.0 1,237.9 1,322.2 1,373.3
Equity Income (40.8) (13.4) 6.5 13.7 20.7 29.1
Financial Result (548.4) (538.8) (438.8) (384.9) (344.2) (312.1)
Revenues 40.7 101.7 155.6 196.3 228.5
Expenses (257.4) (540.5) (540.5) (540.5) (540.5)
Pre-tax 10.7 217.6 477.2 577.2 709.2 800.9
(-) Income tax (122.9) (134.8) (102.6) (114.0) (130.3) (133.8)
Tax rate -1144.9% -61.9% -21.8% -20.2% -18.9% -17.3%
Net income (112.1) 82.8 374.6 463.2 578.8 667.2
Source: BTG Pactual, Eneva

Table 11: Balance Sheet Statement - Assets

R$m 2016 2017 2018 2019 2020 2021
Assets 10,516 11,215 11,546 12,016 12,606 13,281
Current assets 1,250 2,165 2,587 3,097 3,514 4,400
Cash 627 1,356 1,886 2,379 2,769 3,635
Credits 315 529 440 454 477 492
Dividends to receive - - - - - -
Others 127 126 126 126 126 126
Asset held for sale - - - - - -
Inventory 163 116 97 100 105 108
Deposits - 14 14 14 14 14
Anticipated expenses 18 23 23 23 23 23
Non current assets 1,041 887 887 887 887 887
Credits 283 459 459 459 459 459
AFAC - - - - - -
Deposits 188 54 54 54 54 54
Taxes Deffered 563 373 373 373 373 373
Anticipated expenses 8 1 1 1 1 1
Investments 441 424 424 424 424 424
Fixed assets 6,528 6,515 6,422 6,383 6,555 6,345
Intangibles 1,257 1,226 1,226 1,226 1,226 1,226
Source: BTG Pactual, Eneva
 Eneva
16 November 2017 page 19

Table12: Balance Sheet Statement - Liabilities

R$m 2016 2017 2018 2019 2020 2021
Total liabilities 10,516 11,215 11,546 12,016 12,606 13,281
Current liabilities 1,693 1,182 1,138 1,145 1,156 1,164
Suppliers 177 265 221 228 239 247
Personnel 37 25 25 25 25 25
Loans and financing 1,193 562 562 562 562 562
Taxes 153 182 182 182 182 182
Dividends - - - - - -
Others 133 148 148 148 148 148
Non current liabilties 4,342 4,658 4,658 4,658 4,658 4,658
Suppliers - 5 5 5 5 5
Loans and financing 3,903 4,197 4,197 4,197 4,197 4,197
Related party 102 115 115 115 115 115
Provisions 79 84 84 84 84 84
Others 258 258 258 258 258 258
Equity 4,494 5,375 5,750 6,213 6,792 7,459
Paid in capital 8,026 8,830 8,830 8,830 8,830 8,830
Capital reserve 8 44 44 44 44 44
Profit Reserve - (25) (25) (25) (25) (25)
Other reserves 2 (3) (3) (3) (3) (3)
Accumulated profits (3,542) (3,456) (3,081) (2,618) (2,039) (1,372)
Minorities (13) (14) (14) (14) (14) (14)
Source: BTG Pactual, Eneva

Table13: Tax Rate Calculation

R$m 2017 2018 2019 2020 2021
Holding Costs (69.9) (62.5) (63.3) (65.9) (68.5)
Holding estimated cost of debt (46.7) (120.8) (119.6) (119.6) (79.8)
Holding pre-tax (160.6) (183.3) (182.9) (185.5) (148.2)
Itaqui pre-tax (42.9) (18.7) (1.2) 19.2 43.0
Taxes on Holding and Itaqui - - - - -
Remaining pre-tax (ex-Equity Income) 534.7 672.6 747.7 854.7 877.1
Remaining taxes (134.8) (102.6) (114.0) (130.3) (133.8)
Rate -15.3% -15.3% -15.3% -15.3%
Total taxes (134.8) (102.6) (114.0) (130.3) (133.8)
Source: BTG Pactual
 Eneva
16 November 2017 page 20

Table14: Cash Flow Statement

Cash flow (R$m) 2017 2018 2019 2020 2021
Net income 83 374.6 463.2 578.8 667.2
Depreciation 341 289.5 289.5 289.5 289.5
Working capital (66) 63.4 (9.6) (16.3) (11.3)
Capex (307) (197.0) (250.0) (462.1) (79.0)
Capital increase 806 -
Debt (payment) / raise (337) - - - -
Cash flow (pre-dividends) 520 530.5 493.0 389.8 866.3
Dividends 0 - - - -
Cash flow (post-dividends) 520 530.5 493.0 389.8 866.3
Source: BTG Pactual
 Eneva
Eneva 16 November 2017 page 21

Eneva

Income Statement (R$mn) 12/2012 12/2013 12/2014 12/2015 12/2016 12/2017E 12/2018E 12/2019E
Revenue 0 0 0 1,519 2,160 2,464 2,249 2,318
Operating expenses (ex depn) 0 0 0 (1,231) (1,183) (1,340) (1,050) (1,080)
EBITDA (BTG Pactual) 0 0 0 288 977 1,124 1,199 1,238
Depreciation 0 0 0 (148) (377) (341) (289) (289)
Operating income (EBIT, BTG Pactual) 0 0 0 140 600 783 910 948
Other income & associates 0 0 0 (47) (41) (13) 6 14
Net Interest 0 0 0 18 (548) (539) (439) (385)
Abnormal items (pre-tax) 0 0 0 0 0 0 0 0
Profit before tax 0 0 0 111 11 231 477 577
Tax 0 0 0 26 (123) (135) (103) (114)
Profit after tax 0 0 0 137 (112) 96 375 463
Abnormal items (post-tax) 0 0 0 0 0 0 0 0
Minorities / pref dividends 0 0 0 0 0 0 0 0
Net Income (local GAAP) 0 0 0 137 (112) 96 375 463
Adjusted Net Income 0 0 0 137 (112) 96 375 463
Tax rate (%) 0 0 0 0 1,145 58 21 20
Per Share 12/2012 12/2013 12/2014 12/2015 12/2016 12/2017E 12/2018E 12/2019E
EPS (local GAAP) 0.00 0.00 0.00 0.44 (0.36) 0.31 1.19 1.47
EPS (BTG Pactual) 0.00 0.00 0.00 0.44 (0.36) 0.31 1.19 1.47
Net DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
BVPS 0.00 0.00 0.00 11.39 14.27 17.11 18.30 19.77
Cash Flow (R$mn) 12/2012 12/2013 12/2014 12/2015 12/2016 12/2017E 12/2018E 12/2019E
Net Income 0 0 0 137 (112) 96 375 463
Depreciation 0 0 0 148 377 341 289 289
Net change in working capital 0 0 0 0 0 (66) 63 (10)
Other (operating) 0 0 0 0 0 0 0 0
Net cash from operations 0 0 0 285 265 372 727 743
Cash from investing activities 0 0 0 0 0 (307) (197) (250)
Cash from financing activities 0 0 0 0 0 469 0 0
Bal sheet chge in cash & equivalents - 0 0 249 378 729 530 493
Balance Sheet (R$mn) 12/2012 12/2013 12/2014 12/2015 12/2016 12/2017E 12/2018E 12/2019E
Cash and equivalents 0 0 0 249 627 1,356 1,886 2,379
Other current assets 0 0 0 673 623 809 701 717
Total current assets 0 0 0 922 1,250 2,165 2,587 3,097
Net tangible fixed assets 0 0 0 5,451 6,528 6,515 6,422 6,383
Net intangible fixed assets 0 0 0 767 1,257 1,226 1,226 1,226
Investments / other assets 0 0 0 1,305 1,482 1,311 1,311 1,311
Total assets 0 0 0 8,445 10,516 11,215 11,546 12,016
Trade payables & other ST liabilities 0 0 0 423 500 621 576 583
Short term debt 0 0 0 1,011 1,193 562 562 562
Total current liabilities 0 0 0 1,434 1,693 1,182 1,138 1,145
Long term debt 0 0 0 3,198 3,903 4,197 4,197 4,197
Other long term liabilities 0 0 0 236 439 461 461 461
Total liabilities 0 0 0 4,867 6,035 5,840 5,796 5,802
Equity & minority interests 0 0 0 3,577 4,481 5,375 5,750 6,213
Total liabilities & equities 0 0 0 8,445 10,516 11,215 11,546 12,016

Company Profile: Financial ratios 12/2015 12/2016 12/2017E 12/2018E 12/2019E

EBITDA margin 19.0% 45.2% 45.6% 53.3% 53.4%
Operating margin 9.2% 27.8% 31.8% 40.4% 40.9%
Eneva is a private integrated energy company, with businesses
in power generation and gas exploration and production. The Net margin 9.0% -5.2% 3.9% 16.7% 20.0%
company has an installed capacity of 2.2 GW (split between coal RoE 7.6% -2.8% 1.9% 6.7% 7.7%
and gas-fired thermal plants) and is the largest private natural RoIC 4.0% 7.7% 9.3% 11.0% 11.6%
gas operator in Brazil. EBITDA / net interest -15.9x 1.8x 2.1x 2.7x 3.2x
Net debt / EBITDA 13.8x 4.6x 3.0x 2.4x 1.9x
Total debt / EBITDA 14.6x 5.2x 4.2x 4.0x 3.8x
Net debt / (net debt + equity) 52.5% 49.9% 38.8% 33.3% 27.7%
Source: Company reports and BTG Pactual estimates. Valuations: based on the last share price of that year(E)
based on share price as of 14 November 2017
 Eneva
16 November 2017 page 22

Required Disclosures

This report has been prepared by Banco BTG Pactual S.A.

The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.

BTG Pactual Definition Coverage *1 IB Services *2

Rating
Buy Expected total return 10% above the companys sector 56% 45%
average.
Neutral Expected total return between +10% and -10% the 40% 38%
companys sector average.
Sell Expected total return 10% below the companys sector 4% 50%
average.

1: Percentage of companies under coverage globally within the 12-month rating category.
2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
Absolute return requirements
Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed:
a) a Buy rated stock must have an expected total return above 15%
b) a Neutral rated stock can not have an expected total return below -5%
c) a stock with expected total return above 50% must be rated Buy

Analyst Certification

Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that:
(i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco
BTG Pactual S.A. and/or its affiliates, as the case may be;
(ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities discussed
herein.
Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the restrictions
contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account.
Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by Banco BTG Pactual
S.A. and/or its affiliates.
Where applicable, the analyst responsible for this report and certified pursuant to Brazilian regulations will be identified in bold on the first page of this report and will be the first name on the signature
list.

Statement of Risk

Eneva S.A. [BRENEV] (Primary) - Given its regulated nature, the electricity and water utility sectors are subjected to political or legal interferences. Therefore, the federal (or state) governments could
implement changes or apply more severe rules that could negatively affect companies cash flow. Finally, an abrupt change in FX rate should negatively impact foreign investors, as companys tariffs
are basically adjusted by inflation annually.

Valuation Methodology

Eneva S.A. [BRENEV] (Primary) - Our price target is the result of a SOTP exercise, in which the value of both the gas thermal and upstream units are DCF-derived and discounted at WACC rates.
The value of Itaqui coal plant is also DCF-derived, while the Equity Value of the 50% stake in the Pecm II coal plant is calculated with the FCFE methodology (and discounted at a nominal kE rate).

Company Disclosures

Company Name Reuters 12-mo rating Price Price date

Eneva 1, 2, 4, 6, 7, 9, 12, 20, 42 ENEV3.SA Buy R$13.12 14-11-2017

1. Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.
2. Banco BTG Pactual S.A, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services
from this company/entity within the next three months.
4. This company/entity is, or within the past 12 months has been, a client of Banco BTG Pactual S.A., and investment banking services are being, or have been, provided.
6. Banco BTG Pactual S.A. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which
represents the same interest of this company/entity.
7. As of the end of the month immediately preceding the date of publication of this report, Banco BTG Pactual S.A., its affiliates or subsidiaries beneficially owned 1% or more of a class of this
company`s common equity securities.
9. Banco BTG Pactual S.A. has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates or subsidiaries within the past 12 months.
12. Directors or employees of Banco BTG Pactual S.A., its affiliates or subsidiaries take part on the board of directors of this company.
20. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this research report was published.
42. Banco BTG Pactual S.A. and/or its affiliates or subsidiaries, including the funds, portfolios and investment clubs in securities managed by them, beneficially own directly or indirectly 5% or more
of a class of the subject company common equity.
 Eneva
16 November 2017 page 23

Eneva
Stock Price (R$) Price Target (R$)
50.0

40.0

30.0

20.0

10.0

0.0
16-Feb-15

16-Feb-16

16-Feb-17
16-Nov-14

16-May-15

16-Aug-15

16-Nov-15

16-May-16

16-Aug-16

16-Nov-16

16-May-17

16-Aug-17

16-Nov-17
Buy
Neutral
Sell
No Rating

Source: BTG Pactual and Economatica. Prices as of 14 November 2017

 Eneva
16 November 2017 page 24

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