CPFL Energia SA

BOVESPA:CPFE3

Earnings Call Transcript 2020-Q2

[Carlos Cyrino, executive]

Hello, sorry for the delay. We had some technical problems. But welcome to the presentation for the second quarter results of CPFL Energia. I'm Carlos Cyrino, Director of Investor Relations, and I'll be conducting this call. Today with us, we have Gustavo Estrella, CEO of CPFL Energia; Mr. Pan, Vice President, and Investor Relations Officer and other executives. Due to the pandemic, all the executives are connected from their home. So we apologize in case we have any failures. We will be working to reestablish the reconnection. The presentation will be made in Portuguese with interpretation to English. [Operator Instructions]

We remind you that this is being recorded, and we'll start now our presentations, and I'll pass the floor to Gustavo Estrella.

[Gustavo Estrella, executive]

Good morning all. Thank you for attending this call. I would like also to apologize for the delay. We had some technical problems. I hope we can carry on without any further problems. So I will go on to Slide 4, where we have our main highlights of the second quarter '20. This is the first quarter with 100% of the impact of the pandemic in our results. So based on that, we had a reduction of 11.1% in the load in the concession area. I'll talk further about that. But we see that this reduction basically comes from commercial and industrial classes. Our EBITDA reached BRL 1.208 billion, a reduction of 19.7% compared to 2019. And this obviously has the impacts of the pandemic, but also the deflation of the IPC in the second quarter of minus 0.72%, compared to an inflation of 1.46 -- 1.96% in 2019. This affects our financial assets, and we have BRL 170 million in loss. In the net income of BRL 462 million represents a reduction of 19.4%, and we'll see the positive impact in the financial expenses due to the reduction of our interest rate. Our leverage is 0.29x -- 2.29x regarding the results of 2019 of 2.21x. We had a program of the debts prepayment, not only for CPFL Renováveis, but in the group at large, using the loan with the straight bid our holding for the prepayment of debt. And in this, we had an important reduction in the cost of financing.

Investments. We reached BRL 648 million in investments, a growth of 24.3% compared to 2019. The company carries on with its investment plan, the original one approved in our budget of last year, and we carry on with our investments without impacts of the pandemic for 2020. We also declared dividends in the amount of BRL 2.075 million, BRL 1.80 per share, this dividend should be paid by the end of this year. We also had the tariff reset of RGE. Historically, it should be in June '20, but this year, it was enforced as of first of July as well as the reset of Paulista, which was not in April, but in July, also, so all the impacts of these tariff resets were offset in our results and in our cash flow.

We had the funding of the COVID account according to ANEEL Resolution 885. And the total amount of BRL 1,382 million and we received BRL 1.2 million so far. We also made an important step which was the delisting of the CPFL Renováveis the auction was held on the 10th of June and was approved on the 7th of July. We also entered the MSCI portfolio which brings an evolution, which is very important in liquidity for our shares, and it already reflected in the increase of liquidity of our shares in the market. We also celebrated on the 12th of June, our re-IPO, which is an important milestone for our company. And also one very important action to fight COVID. The company made donations of BRL 6 million, of which BRL 5 million went to 20 hospitals in our concession area, public hospitals, and BRL 1 million, we adhered to the program of BNDES saving lives also to support public Brazilian hospitals.

Going now on to the next slide, we will be talking about the energy sales. So we can see a drop of load in the concession area of 11.1%, of which 14% are free clients and 9.6% in the captive market. As to sales, there was a drop of 10.1%, 11.9% in the free market and 9.1% in the captive market. When we look at it by class, as I said, industrial class has 17.7% reduction in the commercial class of 19.1%. So these 2 classes suffered the most in this pandemic period with the reduction of consumption. The residential class was stable compared to 2019. We can see on the chart, on the left bottom chart that was compensated by what we call macroeconomy for an impact -- due to the impact of the social -- this is seen in people when they're home they consume more energy. It's important to stress on the left-hand side, the sectors in our industry of activities, the vehicles was the one that suffered the most with 41.8%. Its chain also suffers metal industry with 28.4% and rubber and plastic, 18.6%. The 2 main classes of the market of the CPFL Group. Food went down by 4.3%, and the chemicals had a small increase of 0.1%. When we compare these numbers with industrial Brazilian industry, we see that the 4 main sectors of the CPFL Energia market had performance above the drop in the industrial production.

Going on to the next slide, we see the reflects of delinquency and energy losses. We see an increase in delinquency to BRL 79.3 million, a 23.3% increase compared to 2019, also due to the impact of the pandemic and maybe the main impact is the Resolution 878, where we had the ban of disconnections as of March '21. So our main instrument to control default is disconnection. And since 24th of March, we weren't able to do so for low voltage customers, which brings -- reflects in our default rates. The expectation to return to disconnections is in August, and we expect to recover at least partially this increase in default in the second quarter. When we look at losses, we see almost stability compared to 2019, 9.1% against 9.09%, with no impacts in the market for the time being.

Going on to Slide 7. We have some measures that the company has taken to make it easier to collect -- and the payment of bills by our customers. So we have a series of new channels for payment that we launched during this period, and we see some of them with very positive results. So we have here payments with credit cards with 57,000 payments from April to July. The delivery with BRL 28 million collected also in this period. Also credit card installment payments with 30,000 installment payments. Payment via the Corona Voucher application with 52,000 payments directly to our account with BRL 8.2 million collected. The collection through our stores that were closed and also our call center with 116,000 contracts and BRL 10 million negotiated. And PicPay payment, digital electronic tool all in July had 43,000 transactions with almost BRL 6 million collected. This is the group of tools that we used and developed during this period to increase our collection. We had a positive impact of BRL 85 million collected by these tools, most of which are tools that will carry on being used even after the post pandemic period.

Going on to Slide 8. We have the generation performance. We had a drop in the PLD of 42.5%. This is very low levels due to the reduction of market in this period, and due to the hydrology that was positive. We had levels of reservoirs, very close to the historic averages, which gives us some comfort for next months. GSF was stable. We closed it at 89% against 91% in 2019. The flow of our hydrological plants were negative because we had very low flows in the South, a drop of almost 70% compared to 2019. The small hydro plants has a similar situation with 24% less compared to 2019. In the wind farms generation, we had generation little lower than in 2019. The performance on top of the wind, which was worse than in 2019, which brought a smaller generation. On the other hand, we have availability that's higher than in 2019. This is a process of evolution, especially of the wind farms of Suzlon, which has been improving according to its availability. So it brought, on average, an increase of 3.4%.

Going on to the next slide, I give the floor now to Mr. Pan so that he can give us the details of the financial results.

[Yuehui Pan, executive]

Good morning all. Going on to Slide 4 (sic) [Slide 10]. EBITDA in this quarter was BRL 1.2 billion, a reduction of 19.7%. And the distribution segment, certainly was the most affected by the pandemic, having a drop of 28.7%. The main impact was in the concession financial asset, which represent a reduction of BRL 170 million due to the deflation recorded in the period. In the second quarter of 2019, IPCA was 1.46%. And in the second quarter of 2020 was minus 0.62%. The drop in the energy load also affected the result in BRL 72 million, regardless of the positive effect of the tariff resets in the last 12 months. PDD also increased by BRL 15 million, impacted by higher default observed since the disconnections of energies were suspended. PMSO on its hand showed a gain of BRL 29 million in EBITDA. Whilst other items had a negative impact of BRL 24 million. In the trading segment, services and others, we had an increase of 20% due mainly to the better performance of the CPFL Serviços operation.

On the next slide, we have conventional generation that had an EBITDA of 1.9% smaller due to the lower volume of energy generation, which impacted in BRL 16 million. The adjustment of prices of contracts on its hand helped with BRL 10 million. CPFL Renováveis EBITDA dropped 19.2%. The main effect is the seasonality of the small hydro plants, which generated the reduction of BRL 40 million, returning part of the gains obtained in the first quarter of 2020.

The lower wind generation resulted in a loss of BRL 23 million. But on the other hand, the pass-through of inflation to the contracts gave us gains of BRL 24 million. The other effects had a total of minus BRL 9 million.

On the next slide, we show the performance of net income, which was BRL 462 million in the period, a reduction of 19.4% compared to the second quarter of 2019. In addition to the variation of BRL 296 million in EBITDA, we had in the financial result, a gain of BRL 139 million. Depreciation varied BRL 24 million, and the impacts were reduced by BRL 70 million. The -- if the higher effect on the financial result is the drop of CDI and the lower cost of the debt. That gave us a gain of BRL 150 million. The other items together had worsened BRL 11 million.

On the next slide, we show the year-to-date results until June 2020. The start of the year, had a result that was very positive in such a way that EBITDA accumulated, recorded a drop of only 4.3%, even with the impact of the pandemic in the past months.

We stress here distribution, which had a reduction of 5.1% of BRL 94 million. Basically, due to the concession of financial assets, which dropped to BRL 95 million in comparison to the first semester of 2019. The tariff resets were positive. And smaller PMSO helped to mitigate the weak performance of the volume of sales and the higher PDD. The commercialization segment was affected by the drop in prices at the beginning of the year, but it already showed recovery in this quarter. And CPFL Renováveis carries on having the impact of the lower wins in Brazil. Net income increased by 19.4% or BRL 222 million. This result was favored by the lower CDI and the drop in the cost of the debt, which generated a gain of BRL 270 million in addition to the positive effect of the MTM at the beginning of the year with BRL 265 million. So far, we have a gain of BRL 480 million in the financial result if compared to the first semester of 2019.

On the next slide, we have CapEx. In this period, we made investments of BRL 648 million, an increase of 24.3% compared to the same period of last year. By segment, we had in distribution, total investments of BRL 546 million, used to enlarge and upgrade and maintenance of the electric system.

For generation and transmission, we had BRL 62 million to Renovaveis continuing with the projects of Gameleira and Cherobim. BRL 32 million for transmission to the projects of Maracanaú, Sul I and Sul II and BRL 1 million for the conventional generation. Lastly, for the service segment, BRL 7 million were used.

Going on to the next slide. We have -- the company's indebtedness, in the chart, you see that the debt net totaled BRL 15 billion, and the EBITDA of the last 12 months reached BRL 6.6 billion. Leverage measured by the net debt on EBITDA was 2.29x. On the chart, to the side, we have the cost of the debt in the last years, both actual and nominal. The drop of the -- on the second quarter of 2020, is due mainly to the variation of the CDI and IPCA and also the replacement and prepayment of debt that occurred in the period. As to the composition of the gross debt, we see that the greatest exposure was indexed to CDI with 69%. The cash at the end of the second quarter 2020 had BRL 7 billion and coverage index of 1.43x the amortizations of low -- short term. The average term of amortization is 3.03 years.

On the next slide, I'd like to talk about what we have already done in terms of financing this year. At the beginning of the year, we funded in the market, BRL 3.4 billion with an average term of 4 years and the cost of CDI plus 0.83%, especially, under Law 4131 with 100% of hedge.

This financing has already gone to the reinforce cash. CPFL financed more than BRL 3.5 billion with BNDES with a total term of BRL 28 million at the cost of PCA plus 4.27%. Part of that was disbursed in June, some BRL 1.25 billion. In June and July, we signed contracts of loans between CPFL Renováveis, CPFL Brazil and State Grid. Totaling BRL 2.4 billion at the cost of CDI plus 1.1%. The aim of both loans was to give continuity to the liability management strategy of the company. For CPFL Renováveis, BRL 850 million were disbursed in the second quarter of 2020 and BRL 1.15 billion in the third quarter of 2020 will be disbursed. This amount were used to prepay the debt with BNB and BNDES. In the case of BNB, the total prepayment was BRL 841 million. In the third quarter 2020, we'll make payments to BNDES of some BRL 2 billion. And then we can free cash that was stuck of approximately BRL 915 million. Thank you very much. And now I give the floor back to Gustavo Estrella.

[Gustavo Estrella, executive]

Thank you, Pan. Finalizing our presentation, we have some information on the COVID account and other measures that were taken by the government that somehow affected our business. First of all, the COVID Account is important to bring liquidity to the companies and also to dilute the tariff impacts in the short term. That would come naturally in the next tariff reset. So this is an important impact. We had BRL 1.4 billion from this COVID account already disbursed, already in our cash. But with the impact that was diluting the tariff adjustments. Also, we had subsidies to low-income customers that ended in June. It's important that the low-income customers did suffer with the economy, with the drop in income and with the economy. So it's important to have this subsidy until June. The postponing of tariff adjustments of Paulista would -- they had no impact for the company, but it's also important to postpone tariff resets for the month of July. Also, the transfer of sector charges for the free client with an impact of BRL 2 million that helps mitigating this impact of tariffs in the short-term for our clients. We have the 2 most important measures, which -- of which the economic impacts of the tariff review. The public hearing will be opened by the 22nd of August. This is an issue that has been discussed for quite a while with the regulator.

Second one is the methodology to voluntary subcontracting. We already have this right recognized through a decree. And now we have the regulatory means through the agency. So these are 2 measures that are very important, and that will be our focus in the next 2 months to address these issues. These were the information that we wanted to share with you. And now we are available for questions and answers. Thank you.

[Carlos Cyrino, executive]

Thank you, Gustavo. Thank you, Pan, for you information. Great presentation. Now I'll open our Q&A session. [Operator Instructions] So far, we have no questions. Would anybody like to ask a question? So since we have no questions. I will close the Q&A session. And in case you have any doubts or any questions to our IR team will be available to answer them later on.

I'll take this opportunity to seal this question. [ Eduardo Morales ], he has a question first, so I'll return to the Q&A session, and I'll ask the question of [ Eduardo Morales ] for the company's executives. Can you tell us how was the evolution of the results within the quarter? Just to tell you again the question, what was the evolution of the results within the semester like all the quarter?

[Gustavo Estrella, executive]

Can you hear me? I think that, in fact, we see that the most challenging month was April, when we had a great impact both on the drop of the market and also collection. We had a quarter that was very, very challenging. In fact, these 2 impacts were quite big in this quarter, but they kind of reduced along the quarter, especially as to the energy consumption. When we look at the month of July, we see clearly the signs of recovery. But within the quarter, we had April with a great impact in the industrial and commercial classes. It improved in May, and we saw some positive impacts in July -- in June actually. Especially in the month of April, we had this impact, I will extend it beyond the quarter we arrived in July already. We see a recovery in collection. And this has the impact of the Corona voucher, which brings an increase in revenues. That's very important to our clients, especially, the low-income customers, we see an improvement in the profile of collection along these months. And from May until July, what we can see is that of the total volume of overdue accounts compared to the total volume of payments received. We have payments in excess of default. So the aging of these accounts receivable, we have accounts receivable with an average term greater than the average, but the volume of payments start to revert as from May. We still have a situation that's far from being normal. But gives us a perspective, a positive perspective for the next months.

[Carlos Cyrino, executive]

Thank you, Gustavo. We have another question from Bruno Varella, he will ask it himself. So I'll open the audio for him, Bruno Varella from Solana.

[Bruno Varella, analyst]

Estrella and Pan, can you hear me?

[Gustavo Estrella, executive]

Yes, we can.

[Bruno Varella, analyst]

My doubt regards the results of RGE, I couldn't see the details yet as to the results, but I saw that RGE was different from the EBITDA of the company, some 40% drop, but the volume dropped in line with the others. It had a stronger residential. There were losses dropping and was there anything specific in the Rio Grande do Sul to justify this performance in the results?

[Unknown Executive]

Thank you for your question, Bruno. This is [ Joanna ] from IR. Can you hear me?

[Bruno Varella, analyst]

Yes.

[Unknown Executive]

Unfortunately, we ended up -- we end up by not opening details in the release because it will be too long but we have some specificities in RGE, especially last year, we had some regulatory adjustments that ended up by increasing last year's results. It's more a problem of comparison that's uneven amongst the companies. Last year, we had some regulatory assets that were recognized and we're not provisioned. And we ended up by accumulating an effect that was 12 months, and it was totally accounted for in June. We have been very conservative in this provisioning of the regulatory assets. And then you recognize it and we were able to recognize it on the results as well. So that's basically it. When you asked, we started looking into it. If there is anything else, I'll come back to you.

[Carlos Cyrino, executive]

Thank you very much, [ Joanna ]

Thank you, Bruno, for your question. [ Ed Castro ] has another question. I'll be reading it. What are the new steps for the privatization of C3E and the change in bylaws that they suggested for approval and that will be done in the next few weeks?

[Vítor de Souza, executive]

Can you hear me?

[Gustavo Estrella, executive]

Yes, we can, Vitor. Thank you.

[Vítor de Souza, executive]

Thank you, Ed, for your question. I'm Vitor Fagali, Business Development Vice President. What we have been following with this C3E, it's formulating to come to this privatization auction. So these adjustments to the bylaws delayed it a little bit. What we expect in the next steps is the opening of the data room of the process. And following that, the publication of the notice of the auction, some internal processes of approval, vial legislation or all the internal approval by the company, and we understand that we are on the right track. So we believe that in the next few weeks, we will be able to give you any more news starting from the opening of the data room.

[Carlos Cyrino, executive]

Thank you, Vitor. Now the next question comes from [ Joanna ], from [indiscernible]. I'll be reading it for you. Could you comment on the expectation as regards the RTA, would it be through individual processes for each distribution along next year. Do you believe that sub contraction will be -- will be recognized and default will be recognized?

Thank you for your question, [ Joanna ]. We'll be passing it on to an executive to answer it.

[Andre Luiz Gomes da Silva, executive]

Can you hear me?

[Gustavo Estrella, executive]

Yes, we can hear you. Thank you.

[Andre Luiz Gomes da Silva, executive]

Thank you, [ Joanna ]. I'm Andre Gomes, Regulatory Affairs Director. The expectation as regards the RTA process, you must have seen this is on the agenda for the meeting with ANEEL and the public hearing regarding the economic rebalance. We don't have a position -- a clear position from ANEEL as to how these procedures going to be of economic rebalance. So on Tuesday, we should have a little bit more of a view as regards to this process. As regards to the second question, I think that the over contracting is considered 100 percent because it's very clear in the decree as voluntary. The issue of default and others we're still waiting in the second part of the public consultation. And if everything goes well, we will know which methodologies will be used both for default and loss of income. This over contraction. It's clearly already recognized in the decree. We consider that, yes, it will be 100% considered and also the methodologies by ANEEL.

[Carlos Cyrino, executive]

Thank you, Andre. We will go on to the next question by [ Diego Viera ] I'll be reading it for you. Good morning, what's the dynamic expected by the company for the second semester as to the volume of default in distribution since July and August.

This is the question, and I'll be passing it on to our executives.

[Gustavo Estrella, executive]

Basically, it's like I said, we see clearly a signal of recovery in consumption at the beginning of the second semester. Looking into the month of July, August, we are already at the middle of August. So we see recovery. We also have the positive effect of temperatures above the averages of the month of July, which brought a higher consumption, and we see a trend of recovery of the market. Our expectation is that this trend, as we have a slack, and we have no normality in the cities where we perform we expect that this sign of recovery will be carried on through the end of the year. As to the collection, we see signs of improvement. One doubt that we still have is -- has to do with the dynamics as to the help -- assistance from the government. In the past few months, we had the BRL 600 of the Corona voucher, but we don't know how it will be from here on. If reduced, we'll have the effect of loss of collection due to this loss of income. So this is our doubt as to these dynamics of revenues for our consumers. On the other hand, we have the return to the disconnection, which should bring an important response to the collection control. We see a positive signal. It will all depend on the recovery of the economy and the unemployment rate. But the return to disconnections brings us some perspective as to the collection.

[Carlos Cyrino, executive]

Thank you, Gustavo. So let's go on to the next question, comes from [ Fernando Dendril ]. I'll be reading it for you. Can you talk about the mechanisms of safe -- security in the area of energy generation. Are there causes like a pay-for-pay.

Thank you. Thank you for your questions. And I'll be passing it on to our executives to answer it.

[Karin Luchesi, executive]

Good morning all. I'm Karin Regina Luchesi. I'm Market Business Vice President. As regards to your question, it's important to stress the most contracts of CPFL generation are contracts on the ACR, the rules in the ACR are fixed volumes. So there is no variation of volumes regardless of consumption. Part of our contracts, which is a very small part is sold in the free market. And there, they have as a market practice take-or-pay of volume, and this is about 10% reduction possible. So there is great reduction on the standpoint of the contract of sales of energy for this variation in consumption that we have been experiencing. Thank you.

[Carlos Cyrino, executive]

Thank you, Karin for your answer. Another question from [ Kyle Magnum ]. Thank you, [ Kyle ], for your question. How are the studies for a possible restructuring of state grid in Brazil? Are there any discussions in the short-term in regards to that. Thank you, [ Kyle ]. I'll be sending your question to the executives.

[Yuehui Pan, executive]

[Foreign Language]

[Carlos Cyrino, executive]

Thank you, Pan for your answer. So going on to the next question from [ Vladimir ] from [ Kiron ]. What's the schedule of integration of CPFL Renováveis in CPFL generation. Can you characterize the situation of the events for the third quarter?

Thank you very much, [ Vladimir ]. I'll be forwarding your questions to be answered by 1 of our executives.

[Gustavo Estrella, executive]

So first of all, we carry on in our schedule as regards the reintegration of CPFL Renováveis with CPFL Generation. The expectation is that by the end of next month, we will be able to do the integration between the 2 companies as foreseen. I would say that the great step or most important steps have been taken. We have now a homework to carry on with the process. But it's totally within our expectation and our schedule. As to -- as to your second question, we have the performance of winds that was negative. And we see some improvement for the third quarter. We can see that from the beginning of this third quarter, it has been on levels that are much better than in the second quarter. It's important to remember that we have wind blowing in the third quarter that's normally higher. So our expectation is that we'll be bringing results in the comparison of quarters very important as to generation that will be higher than in the previous quarters.

[Carlos Cyrino, executive]

Thank you, Gustavo. Having no further questions, we close our Q&A sessions at this time. And afterwards, if you have any doubts or any questions, we are available, our IR team is available. So I give the floor back to Gustavo Estrella for his final remarks.

[Gustavo Estrella, executive]

So thank you again for attending our call. I think that we're still experiencing a very challenging times. The company carries on a very focused in prioritizing the safety and health of our collaborators. This has been our attention and focus in the past few months. And unfortunately, we should still have some months ahead of us with this pandemic. And are -- our focus is on these points. As regards to perspectives, in general, we see some sign of return, positive return. We talked about consumption and the control of default. So yesterday, we had the approval of [ TR3975 ] as regards to GSF, less as regards to CPFL, but thinking of the sector at large, it's a great improvement. CPFL has been discussing that for many years. So this brings a positive perspective as regards the [ PRT75 ]. We have been talking that as from next week based on the discussions of the public hearing, which is also an issue that has been discussed with the agency for some time. It's a consensus that the pandemic does bring limitations that demand further discussions as regards tariff reset. So we start new talks about that next week. We also had a great improvement as regards to CPFL Renováveis, now we'll promote this integration to bring more synergy and more optimization, tax optimization to our generation business. Now we did the payment dividend declaration. So we are balancing and we have over BRL 2 billion to be paid by the end of the year, and this is very important to our investors, of course. So generally speaking, we carry on, very focused on the issues connected to the pandemic, but always seeking new investment opportunities, focusing on the return of the economy for the next months. Thank you very much, and have a good afternoon.

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