management proposal of the extraordinary general meeting 08.26.2015
TRANSCRIPT
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DRAFT FOR DISCUSSIONPRIVATE & CONFIDENTIAL
Proposal for pro fessional services
Apr il 2015CORPORATE FINANCE
Eneva S.A.
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Dear Mr. Ricardo Levy,
Thank you for this opportunity to submit our proposal (“Proposal”) for the provision of professional services to Eneva S.A. (“Eneva” or
“Client”) related to the valuation of Parnaíba Gás Natural S.A. (“PGN”), BPMB Parnaíba S.A. (“BPMB”), and Eneva ParticipaçõesS.A.(“Eneva Participações”), altogether referred to as (“Target Assets”), in the context of a potential capital increase process.
We are looking forward to working with you. Please do not hesitate to contact us should you have any questions in relation to this
document.
Yours faithfully,For
KPMG Corporate Finance Ltda.
Paulo Guilherme Coimbra
Partner
Private & Confidential
April 9th, 2015
Eneva S.A.- Praia do Flamengo, nº 66, 6th floor, Flamengo, Rio de Janeiro/RJ, Brazil
Provision of valuation analysis services
ABCD
KPMG Corporate Finance Ltda. é uma sociedade brasileira,simples, de responsabilidade limitada, membro da KPMG
International, uma cooperativa suíça.
KPMG Corporate Finance Ltda. is a Brazilian limited liability company,member firm of KPMG International, a Swiss cooperative.
KPMG Corporate Finance Ltda.Av. Almirante Barroso, 52 – 4th
20031-000 - Rio de Janeiro, RJ - BrazilP.O. Box 2888
20001-970 - Rio de Janeiro, RJ – B razil
Phone 55 (21) 3515-9400Fax 55 (21) 3515-9000
Internet www.kpmg.com.br
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© 2015 KPMG Corporate Finance Ltd a. is a Brazilian limited li ability company and a member firm of th e KPMG network of independ ent member firms affi liated with KPMGInternational, a Swiss entity. All rights reserved.
This document has been prepared by KPMG Corporate Finance Ltda. (“KPMG”) upon the request of Eneva. The distribution of this
document to any third party is prohibited.
Confidentiality
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© 2015 KPMG Corporate Finance Ltd a. is a Brazilian limited li ability company and a member firm of th e KPMG network of independ ent member firms affi liated with KPMGInternational, a Swiss entity. All rights reserved.
The contacts at KPMGresponsible for the
preparation of this Proposalare:
Paulo Guilherme Coimbra
PartnerCorporate Finance
Tel: +55 21 3515-9219Fax: +55 21 3515-9000
Rúben PalminhaSenior ManagerCorporate Finance
Tel: +55 21 3515-9072Fax: +55 21 3515-9000
Fabiano Delgado
ManagerCorporate Finance
Tel: +55 41 3544-4835
Fax: +55 41 [email protected]
The curricula of these
professionals are includedin Appendix III.
• Introduction and objective
• Scope of work
• Valuation Methodology
• Reporting and timetable• Engagement team
• Fees
• Alterations of Terms and Conditions
• Acceptance
• Appendix
Appendix I – Terms and Conditions
Appendix II – Thomson rankings and KPMG credentials
Appendix III – Curricula Vitae
Appendix IV – Example of Hold Harmless Letter & Authorization Letter
Appendix V – Example of a Representation Letter
Appendix VI – Disclaimers
Contents
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]
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© 2015 KPMG Corporate Finance Ltd a. is a Brazilian limited li ability company and a member firm of th e KPMG network of independ ent member firms affi liated with KPMGInternational, a Swiss entity. All rights reserved.
ntroduction and objective
Introduction
General Background
Currently, Eneva and Eneva Participações are under Judicial Recovery.Eneva Participações is a joint venture (50:50) owned by Eneva and E.ONSE (“E.ON”), through its subsidiary DD Brazil Holdings S.A.R.L.. Eneva isa publicly-listed company with the following shareholding structure:
Eneva´s and Eneva Participações´ Judicial Recovery Plan
Eneva and Eneva Participações, on February 12th, 2015, filed a Plan forJudicial Recovery (“JRP”), in accordance with Article 53 of the BrazilianJudicial Recovery Law. Within this context, Eneva seeks to initiate acapital increase. Such potential capital increase envisages a change inEneva´s shareholding structure, and, in case the JRP obtains full approvalfor execution, such mutations in shareholding structure are planned to bemade through the following contributions: (i) cash; (ii) credit capitalization;(iii) and asset subscription .The contributions´ values are estimated as
follows:
Introduction (cont.)
E.ON Participation in the Capital Increase
Within such context, E.ON is interested in subscribing assets in thepotential capital increase of Eneva (item iii of the capital increase in theJRP). In effect, E.ON is willing to contribute with its 50% stake in EnevaParticipações (downstream) and a 9.09% stake PGN (upstream). Pleaserefer to corporate structure on page 11.
Notwithstanding the fact that upstream (gas fields) and downstreamoperations (thermalgas power plants) are, at the moment, separate, theasset subscription would, as a consequence to their integration in Eneva,combine both operations.
Banco BTG Pactual S.A. (“BTG”)´s Participation in the Capital Increase
Within such context, and in addition to possible credit capitalizations (item iiof the capital increase in the JRP), KPMG has been informed by BTG that,in case the JRP is approved for execution, BTG intends to participate in thecapital increase of Eneva through a possible subscription of the shares BTGholds in BPMB (item iii of the JRP).
BPMB is a gas producer (upstream energy segment), and holds a 30%stake of gasfields in Northeast Brazil (the other 70% is owned by ParnaíbaGás Natural S.A.). These gasfields are responsible for the supply of fuel tothe Parnaíba Complex (a thermalgas electricity park with a 1425MWinstalled capacity).
Objective
Given the above mentioned context and background, Eneva has requestedKPMG to provide two valuation reports: one regarding BPMB; and oneregarding PGN and Eneva Participações (please refer to page 11 forcorporate structure), in order to underpin the possible asset subscription byE.ON and BTG in Eneva´s capital increase. The reports, in accordance to theJRP, will be presented to Eneva´s creditors. Should the JRP be approved byEneva´s creditors, the reports will be presented to Eneva´s shareholders.
Type of contribution in
capital incre ase
Est im ated values (in R$
mil l ions)
(i) Cash 600
(ii) Credit capitalization 1.100
(iii ) Asset subscription 1.300
Total 3000
Source: Eneva ́ s Judicial Recovery Plan, E.ON ́ s management and BTG ́ s management
Relevant shareholders % total shares
DD Brazil Holdi ngs S.A.R.L. (1) (2) 43%
Eike Batista (2) 20%
Free float 37%
Total 100%
(1) - Controlled directl y/indirectly by E.ON
(2) - Part of controlling block
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© 2015 KPMG Corporate Finance Ltd a. is a Brazilian limited li ability company and a member firm of th e KPMG network of independ ent member firms affi liated with KPMGInternational, a Swiss entity. All rights reserved.
Objective (cont.)
Objective (cont.)
In case the JRP is approved by Eneva´s creditors, and therefore presentedto Eneva´s shareholders, the valuation will be subject to the Brazilian Act ofPublic Limited Companies (Law 6.404/1976, Article 8, §1).
• According to Eneva´s management the main operational companiesbelonging to Eneva Participações are identified bellow, which will beevaluated according to the Discount Cash Flow approach.
• The other Eneva Participações subsidiaries, namely Seival ParticipaçõesS.A., Seival Geração de Energia Ltda., Açu II Geração de Energia S.A., UTEPorto do Açu Energia S.A., MPX Chile Holding Ltda., Sul Geração deEnergia Ltda., Eneva Comercializadora de Combustíveis Ltda., EnevaComercializadora de Energia Ltda., Açu III Geração de Energia Ltda., EnevaSolar Empreendimentos Ltds., Tauá Geração de Energia Ltda., SPE’sVentos (jointly, the “Eneva Participações Subsidiaries”), will be evaluatedaccording to the Cost approach (book value), as identified in page 11.
• Considering that the reports will be used in the analysis of a potentialcapital increase transaction (“Transaction”) involving Evena, which is aBrazilian company listed with the São Paulo Stock Exchange (“Bovespa”),as well as subject to the reporting requirements of the Brazilian StockExchange Commission (“CVM”), Eneva may be required to give access tothe Proposal and the reports to CVM. In this sense, Eneva may give suchaccess only to the extent required by law.
Eneva Participações S.A.´s main operation al assets
Parnaíba III Geração de Energia S.A.
Parnaíba IV Geração de Energia S.A.
Parnaíba Geração e Comercialização de Energia S.A.
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© 2015 KPMG Corporate Finance Ltd a. is a Brazilian limited li ability company and a member firm of th e KPMG network of independ ent member firms affi liated with KPMGInternational, a Swiss entity. All rights reserved.
Scope of work
Scope
The scope of our work comprises the following activities:
i. Valuation analysis of the Target Assets
o Analysis of the Target Assets´ financial statements availableand its key performance indicators;
o Interviews with the management of each one of Eneva, E.ONand BTG to expand and check our understanding of the TargetAssets´ business operation and future perspectives;
o Analysis of the files containing projections of the Target Assets’financial results, prepared by BTG, E.ON and Eneva;
o Discussion with the management of each one of Eneva, E.ONand BTG on the assumptions to be used in the projection ofdiscounted cash flow (income approach) or othermethodologies;
o Analysis of market data provided by the Target Assets andEneva, and comparison of data disclosed with information onthe internet, when available;
o Gathering of external information aiming at the improvement ofthe understanding on the business operational environment inwhich the Target Assets are inserted and the identification ofthe Target Assets´ performance main factors;
o Discussions with the management od each one of Eneva, E.ONand BTG on the consistency of criteria used in the valuation;
o Estimation of the discount rate to be adopted.
Important notes
We emphasize that the determination of the fair value ofinventories, tangible assets and contingencies, as well as otherrelevant assets and liabilities, are not part of the scope of thisProposal. Thus, with respect to such items we will base our workon information and analysis to be made available by the Client,E.ON, BTG, Target Assets and / or their respective auditors,
lawyers and / or other advisors. In the course of the work, we will perform the analysis procedures
deemed appropriate in accordance with the scope set forth in thisProposal. However, KPMG is not responsible for the informationprovided to it and will not be liable or pay, in any event, damagesor losses arising or resulting from the omission of data andinformation by the Client, E.ON, BTG or Target Assets. Weemphasize also that the work does not constitute an auditaccording to generally accepted auditing standards or otherwiseand, therefore, should not be interpreted as such.
We understand that we will have adequate access to theinformation necessary for the development of our work, and thatwe will be able to count on the cooperation of the Client. If ouraccess to information is restricted, we will not be able to performthe work according to the scope and the timetable planned. Anydifficulties in obtaining the information will be communicated and
discussed with you, and that may result in impacts and changes inthe terms of this Proposal.
KPMG does not state an opinion in relation to the probability of thefuture results of the Target Assets reaching the projected values. Itmust be emphasized that the actual future realization ofprojections depends on the continuing validity of the assumptionsthey are based on. Any advice, opinion or recommendationprovided by KPMG as part of the engagement shall not amount toany form of guarantee that KPMG has determined or predictedfuture events or circumstances.
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© 2015 KPMG Corporate Finance Ltd a. is a Brazilian limited li ability company and a member firm of th e KPMG network of independ ent member firms affi liated with KPMGInternational, a Swiss entity. All rights reserved.
Scope of work (cont.)
Valuations in general present significant degrees of subjectivity.Furthermore, the projections and assumptions used invaluations are based on future expectations, which could beconfirmed or not, in view of the fact that projected events maynot occur, due to a number of exogenous economic andoperating factors. Thus, there are no guarantees that anyassumptions, estimates, projections, results or conclusionspresented in the reports will be effectively observed and/orverified, entirely or partially. The figures observed in the futuremay be different and the differences may be significant. Thesepossibilities are not a bias or a defect of the valuation processand are recognized as part of its nature. Hence, KPMG is notresponsible and cannot be held responsible for any differencesbetween the valuation results and the results observed aposteriori.
The work will consider the assets and liabilities as presented inthe financial statements. Therefore it will not include theanalysis of potential contingencies not accounted for in therespective financial statements.
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© 2015 KPMG Corporate Finance Ltd a. is a Brazilian limited li ability company and a member firm of th e KPMG network of independ ent member firms affi liated with KPMGInternational, a Swiss entity. All rights reserved.
Free Cash Flow to Firm
The Free Cash Flow to the Firm aims to evaluate the company as a whole,
that includes, beyond the stockholding, the participation of others holders
of rights in the company (holders of bonds, shareholders, etc). The Free
Cash Flow to the Firm can be represented by the following formula:
Free Cash Flow to the Firm
Net Profit
Working Capital
Investments (Capex)
=
+
-
Depreciation and mortization
+/-
Discounted Cash Flow
This methodology estimates the economic value (or the market value) of a
company by calculating the present value of projected cash flows, i.e. the
income and expenses (including investments needed for maintaining and
expanding the company’s activities) that are predictable from the
perspective of perpetuity of the entity. These projections should take intoconsideration the business plan established by the company’s
management, the prospects of the sector in which the company operates
and macroeconomic aspects.
The Discounted Cash Flow Methodology can be used to value any type of
company provided it has a business plan that is consistent and feasible.
This methodology is recommended for companies that have reasonable
prospects for significant expansion of their activities and whose business
plan may be considered appropriate for achieving this growth, since the
methodology is cash flows based on future.
This methodology also reflects the value of the intangible assets, such as
brand name, client portfolio, product portfolio, among others, as all these
assets have an effect on the company’s capacity to generate results.
This is the methodology that is most commonly used in estimating the
market value of companies that are considered going concerns, except
when the resulting value is less than the liquidating value of the company
(adjusted net worth).
Methodology – Valuation Approaches
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© 2015 KPMG Corporate Finance Ltd a. is a Brazilian limited li ability company and a member firm of th e KPMG network of independ ent member firms affi liated with KPMGInternational, a Swiss entity. All rights reserved.
DCF(Primary)
Historicalbalance sheet
DCF
Assumpt ion s (*)
Projected balance sheet
HistoricalIncome statement