CPFL Energia SA

BOVESPA:CPFE3

Earnings Call Transcript 2017-Q4

[Operator]

Good morning and thank you for waiting. We would like to welcome everyone to CPFL Energia Fourth Quarter Earnings Results Conference Call.

Today we have Mr. Andre Dorf, CEO of CPFL Energia; Gustavo Estrella, CFO of CPFL Energia; and other officers of the company.

The presentation will be available for download at the website, www.cpfl.com.br/investorrelations. [Operator Instructions] It is important to mention that this call is being recorded.

Before proceeding, we would like to mention that forward-looking statements that might be made during this call regarding the business prospects of CPFL are to be made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, they depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future performance of CPFL Energia and may lead to results that differ materially from those expressed in such forward-looking statements.

Now we would like to turn the conference over to Mr. Andre Dorf. Mr. Dorf, you may proceed.

[André Dorf, executive]

Thank you very much. And welcome, everyone, to today's conference call. During which, we will be talking about the fourth quarter of 2017 and the full year of 2017 as well. First, we would like to make a brief presentation and then we will be available to answer your questions.

Starting by Slide #3, we have the highlights for 2017. The third highlight has to do with the load measured in our concession areas. Net of RGE Sul due to the fact that it was integrated to the group in November 2016, so in order to make the comparison valid, we excluded it today from P&L. So our load measured in the concession area went up by 2.2% over 2017. And later on, we will have more details about that. Very well. As you saw, we had a very -- we had a transition in our quarter's end, also the integration of the RGE Sul when the grouping of concession then -- our team was very much focused on the operating assets and the delivery of results over the year. As a result of that, we had an increase of almost 40% in our net operating revenue and almost 18% in the EBITDA in the period. This was a very intensive -- a yield of almost BRL 400 million and over BRL 2.6 million in 2017. This was a record investment made by the company in the history of the company. Our net debt remain comfortable with the same financial discipline. And so by the end of the year, we delivered 3.2x EBITDA in that leverage indicator. So we continue in this trajectory of deleveraging the company. As we said before, we had the integration of RGE Sul in 2016 from the viewpoint of systems and the change and operating practices that and the company is already fully integrated with the CPFL company.

Next the grouping of concessions. We grouped 5 concessions with the permission of Enel. And now we have one single concession called CPFL Santa Cruz, which brings the operating benefits and -- of efficiency gains for the group. We had over the third quarter our tag along tender offer, CPFL Energia, and the auction occurred on November 30. As we stated, now holds almost 95% of the shares issued by CPFL Energia and other relevant sector issues that were in the agenda of the fourth quarter. Some of them are shown in the agenda for this year. GSF, for the free market, this is a thing that has to be solved. And this is the last regulatory issue to be addressed. And also Eletrobras, this is to be highlighted, that sale of the -- they're the north and northeast and also Democratic capital of Eletrobras that has been discussed at Congress. We had important discussions also about the Regulatory Act, a very sensible decision, a very balanced decision I know. And because of that, we continue with our [ 8429 work ], and this is a very positive conclusion of this subject for everybody involved, the investors and the company and the credibility of the regulator. Everybody has won with the decision. And also we have a law project, Public Consultation 33, a bill of law in fact, with the objective of organizing the regulatory environment -- modernizing the regulatory environment and the regulatory framework of the electricity sector.

With changes linked to the attributed energy and the renewable energy among other, certain technological changes that have to do with the sector. So this is a very important thing for the sector and that should be debated over the next few months.

We will -- now turning to the next slide here. We have here some highlights of the quarter in the year. Starting on the pie chart to our left, we see the distribution of the EBITDA, the breakdown of the EBITDA for the fourth quarter that has already totaled almost BRL 1.4 billion in this -- BRL 1.4 million, 49% was allocated to distribution and energy. So this distribution business as it was almost half of the EBITDA in the quarter, followed by renewable and Conventional Generation and commercialization and other services, with 3%.

Now turning to our chart to the right, we see a significant increase in the EBITDA for distribution. Thanks to the integration of RGE Sul and innovation to the market recovery, we had in the year a growth of 21% in the distributions EBITDA, almost BRL 100 million; and Conventional Generation, a growth of 8% in the year; and renewable, 23%. So if we add conventional and renewable generation together, we have almost BRL 300 million of EBITDA gain. Therefore, very well balance out over the businesses. And commercialization services and others also a significant growth, higher than 17% year-on-year. Now the message that we want to leave with this slide is that we had operating improvement and gains of EBITDA in all the businesses of the company, so it was not an isolated recovery of EBITDA.

And Page #5, the next page, we talk about the behavior of the market in energy distribution. So starting by the qualitative side of the slide, there was an increase in the concession area of 8.7% to the quarter, very much into -- by the integration of RGE Sul. And net of RGE Sul, this was 4.8%, a very important improvement. And also, we continued in the trajectory of improving our technical and non-technical losses for the company. We had 8.81% of losses in the fourth quarter, relatively better than in the previous quarters. And looking on the right side of the slide, we have the load measured in the concession area. Net of RGE Sul, so growing 5.4%. And now if we look at the lower part of the slide, we will see that sales during the same period with RGE Sul show the sales compared with the indicators, very close to the load that we saw in the concession area, 4.8%. And here on the right, you can see that all classes of consumption had recovery over the period. And I would like to mention, specifically, the industrial class with a growth of 5.3%. And you know that this is the driving force behind the economy. So we see a major recovery here in the fourth quarter.

On Page #6, we talk about the same indicators, but now we are talking about the full year of 2017. So let's start at the middle of the slide. Sale in the concession area without RGE Sul, 2.1% increase. And on the right, you can see the growth in consumption classes over 2017. And as you can see, all of them are delivering recovery after some years of dropping, so highlights here for the industrial and the residential areas. In the pie chart on the lower part of the slide, you see the market profile, the market breakdown, so you can see the distribution of our sales over the year. Industrial accounted for almost 40% of our market, followed by residential with almost 30%; commercial and other segments such as rural and the city administration and other classes. On the right -- on the lower right of the slide, we compare our performance to other regions. So if we look at the numbers, we see 2.1% of sales in our concession area vis-à-vis the sales in Brazil as a whole, growing by 0.8%. So our region delivered the best performance. And with the comparison with the southeast, we had 2.1% vis-a-vis 0.3%; and operations in Rio Grande do Sul, 2.6% vis-à-vis 3% in the south region.

On the next slide, Slide #7. We show the behavior of delinquency and ADA evolution as well. So the evolution of our ADA as a percent adjusted growth revenue continues on a downward trend. As you can see on the upper part of the slide, we had a peak in the second quarter of 2016 where we had a 0.9% indicator of our growth revenue in ADA. And in the last quarter of last year, 0.57%. Going back to the historical average of this indicator, of course, this was not for free and the company has been making a huge endeavor both on the operating and financial side in order to fight delinquency and to fight fraud as well. So if you look at the bar chart, our collection actions, one of the collection actions is the disconnection. And so we had -- it is much higher than what was desired, so 400,000 -- 407,000 disconnections in the quarter. And during the first quarter of 2018, the situation continued to be the same, so there is not a very big improvement here. So on the left, you see the total above 90 days past due bills as a percentage of revenue is also going back to historical level, that is to say, show improvement.

On the next page, we show some indicators related to generating the GSF posted in 2017. And here, I mentioned that the GSF continues to be an issue to be tackled mainly in the free market. But in fact, we had a high GSF in 2017, almost 21%. Also a challenging year for wind generation, minus 11% vis-à-vis the 15%. And in our case, we had 2 major factors to achieve this result. First, it was -- the speed of wind that was lower than expected in some of the regions; and secondly, a lack of availability and some status of equipment due to the replacement of a relevant supplier in the operation and maintenance activities of some of the wind farms. So the -- this replacement led us to have a lack of availability of some pieces of machinery. And this had an impact and we think there's negative impact. So here, the spot market, the high volatility of the spot market prices and the volatility continued in 2018, mainly in the last few days when we had a very high volatility. Installed capacity on the right with a slight increase mainly due to the increase in renewable energy. And on the lower part of the slide, we show the level of the reservoirs. And this was a very critical thing in the second half of last year. But we had a recovery of the rainfall level through the last few months. And the message is that to date, we are over 40% of the average level of reservoirs in the National Interconnected System. In the NIPS, still lower than the 60% historical average but already higher than the critical year that we had in the decade. So a recovery here. So it's no longer a critical thing from the viewpoint of supply in the short term.

On the next few pages, we talk about the results. And now, I would like to give the floor to Gustavo Estrella.

[Gustavo Estrella, executive]

On Page #9, we see the results of the fourth quarter with very positive results, both in the line of the operation and EBITDA growing by 36%, BRL 363 million. And also the last line, net income, an increase of 262% vis-à-vis 2016, reaching BRL 498 million.

What we see here are the key factors for each business of the group. So we start with distribution with variation with the highest effect, which is the effect of market growth. So we see in the market an increase and also the effect of the tariff adjustments for the company over the year. So we had an increase in our results of BRL 118 million. We also have the effect of the consolidation of RGE Sul. We acquired the company in November 2016. And during this quarter, we see a consolidation of the -- bringing a positive effect of BRL 83 million. We also had the appraisal report at the RAB CPFL Paulista base with an effect that we're concerned at the beginning of this year, vis-à-vis December '17 is BRL 63 million positive results. And also a variation in the -- on the financial asset of the company index to the IPCA, so we had the IPCA for the quarter higher than the quarter of '16, the same quarter in '16 with a positive -- it balance -- or effect of BRL 56 million. And also we've had -- let's talk about the -- also the effect of inflation on the PMSO due to the adjustments of the contract and also the collective bargaining agreement with a growth of BRL 20 million in those line items. And also, we had a provision for contingencies basically legal and legal in November 2017; machine and line maintenance that we carried out over the full year of 2017 and -- with an impact on this quarter of BRL 15 million on the overall results of the group. Personnel, growing by BRL 13 million. Basically, these are the layoffs that we did in 2017 with a positive impact in terms of cost reductions in our payroll as of 2018. And also, a process that has to do with a tariff review, which is the increase in our CapEx, as was said before by Andre, the highest ever CapEx in the history of the company. But together with that, we have a write-off of assets in this quarter with an impact of BRL 6 million.

Renewable energy total variation of BRL 85 million. So in -- we had a provision, a lower provision in 2016 that we didn't have in 2017. So this is a positive variation by BRL 48 million and also the startup of wind farms of the ACL wind farms increasing by BRL 27 million in the results of the fourth quarter.

Conventional Generation. Basically, a seasonal effect of the GSF, so we have a very short exposure, a small exposure of -- to the GSF, so we had a negative variation of BRL 25 million. And when we go to the variation of the full year, this variation is practically nonexistent.

Now turning to our final line of the net income result, we have a positive effect in our financial results. And that is impacted by the interest rates that in [ overall ] and we have here 840 -- BRL 164 million in the quarter. We also have the consolidation of the RGE Sul, which also have a lot of -- to have a positive effect of -- because of the interest rate variation both here with BRL 20 million. But obviously with the increase of the indebtment because of the company's acquisition, we had financial -- additional expenses of BRL 34 million.

Now turning to Slide #10. And now talking about the results for 2017, the whole year. Here, once again, in line with the fourth quarter's result. We have positive results again with a growth of almost 18% in our EBITDA and 41% in our net income. And the key factors here are in the EBITDA are -- to the variation and the distribution of BRL 390 million. The main variation here is the positive effect from RGE Sul, almost BRL 300 million in 2017 vis-à-vis 2016. Obviously in 2016, we had only 2 months of EBITDA of that company. And now, we have to augment. But here, we should highlight an increase of the results of this company when we look at the whole year of 2016 vis-à-vis the whole year of 2017, the 12-month phase. So we have -- are the results, we -- the EBITDA of BRL 355 million. We also have a positive effect in here not as much for the market growth, but we had a market growth of 2%. But an -- a significant increase because of the transfer of -- tariff adjustments in 2017 that has allowed us to have a combined effect of BRL 256 million more in our results.

Itaipu exchange variation are in our final line. We also have a positive effect here of BRL 36 million, and we bring that back to the financial results. Our allowance for doubtful accounts also has an important evolution in the program to fight the delinquency in the group. We had a reduction in our ADA of BRL 36 million. So I think this is very positive. Also, there is a private pension fund effect of BRL 29 million with a variation of interest rates in our pension fund plans. And this is because of the reduction in the interest rates. And also variation of PMSO, minus BRL 228 million. I would say that almost half of that is just because of price adjustments, whether by the inflation or collective bargaining agreement, and that is BRL 96 million. Also, we had maintenance of machines and lines to the networks of BRL 32 million. And we have the carryover of prior years and the fulfillment of maintenance is -- that now having done in 2017. So we had an extra BRL 32 million in maintenance expenses. Legal and judicial expenses, BRL 24 million. This is the provision for December of 2017 basically of some labor losses that we had at the end of the year.

Losses -- and here in the write-off of assets, once again, there was an increase of our CapEx over 2017 in the preparation of the company for those profits, the tariff review that's going to happen now in 2018 that -- and that's impacting the assets write-off in BRL 22 million. Personnel expenses, BRL 18 million. Basically, this is a program that we have carried out because of the indebtment costs and it does have a -- an important effect in our EBITDA. And finally, tracking the collection actions here, we were able to reduce delinquency but we still demand collection actions. And therefore, there is the inclusion of OpEx in here. We have an effect of BRL 9 million in the year.

Now turning to renewable generation, there was a total variation of BRL 228 million. The main impact here is the startup now ready for 12 months for 2017, the wind farm that started at the end of 2016. And we have positive results here of BRL 179 million. Also, there was a price adjustment with the transfer of -- inflation rate and IPCA rates in our contracts of energy sale and that is BRL 70 million. Contractual benefits [ sales ] are a separate element of August in 2016 and that did not happen in 2017. It was onetime-off situation for 2016. And so that has an impact of BRL 53 million for the comparison.

Also we have seen lower wind farms generation, almost 11% below the piece of the curve. Therefore, we have a negative impact of BRL 32 million. Also there was a lower biomass thermal plant generation of BRL 20 million in the results. And here, for [indiscernible] we have some exposure to GSF because of our SHPP was an impact of BRL 18 million. For Conventional Generation, there was a positive variation of BRL 89 million basically because of contract adjustment and the IPCA adjustment that are in some contracts that we have. And so we have -- did have margin gains by price of BRL 39 million. Also financial adjustments of the UBP with BRL 30 million. Once again, inflation variation here including smaller inflation in 2017 than in '16. So we have a lower adjustment. Therefore, we do have positive results of BRL 30 million. And also EPASA, our oil thermal power plant. That had a dispatch that was higher in '17, higher than in 2016. Therefore, we have a positive margin and that more generation we have, the better our results. Therefore, the impact in the year was of BRL 25 million positive.

Now in commercialization, there was a BRL 31 million variation, a positive one, thanks to 2 main topics. The first one, the margin gains by price and volume of our commercialization company and they were partially offset by the contractual penalties from 2016. We did not have those penalties in 2017, and that amount was BRL 57 million of penalties.

Now turning to our net income. There was a financial result variation of negative BRL 34 million. The main impact here was really the reduction of the interest rates. And therefore, we have a positive result here of BRL 365 million of debt charge and net income from financial investments. But we do have RGE Sul consolidation of BRL 74 million in our financial expenses. And the acquisition also that -- so there's an additional financial expense of BRL 186 million. So we do have also our derivative in our provision and the foreign currency represents here a variation of BRL 49 million that is negative. And remember here, we have 2 positive effects. Since 2016, we had the results of the derivative of BRL 68 million. And now also a positive of BRL 19 million. So a negative variation of BRL 49 million. We also have an important effect in our financial results, which is the reduction of the revenue of debt installments with consumers, BRL 36 million. That is because of the lower interest rates. And with lower interest rates, we're also charging less of our customers. And also, we had Itaipu's exchange variation, BRL 36 million, negative as well.

Now turning to Slide 11. We have our indebtment. We are ending the year with a net debt of BRL 14.5 million with a leverage that is clearly going down at 3.2x our net debt over EBITDA. That is very important because they are covenants of 3.45. And so we have these results at the end. The gross debt cost, here, you see a correlation of the CDI graph, which is over 2/3 of our debt. And our debt is indexed by the CDI, so you see a drop in -- and a drop trend in the interest rates and also in our debt and that should continue over 2018.

Now turning to Slide 12. Basically, we talk about the liquidity of the company. So we end 2017 with a cash of BRL 2.9 billion. If we analyze our short-term debt of -- and in spite of the cash of last year, we have funding of BRL 2,800,000,000 that we have -- that we were able to get in the beginning of last year. So we are at a very comfortable situation within our cash to cover all our future and in short-term maturities. So we are already working in -- for 2019 and 2020. However, its tenor is 2.6 years. So we only have the compensation of short-term maturities. And we're always working with the rolling over with these tenors to avoid any type of concentration and any risk of liquidity to the company.

Now turning to Slide 13. Today, we have in CPFL Renováveis, our SHPP Boa Vista under construction. This is a project that is going according to schedule. It should start operations in 2020 and we have contracted -- financing already signed with BNDES. This is a process that has no surprises and we expect to have it ongoing as scheduled.

Now on Page 14. We show that our investment plan up to 2022 is once again -- we've our record in investments of June 2017 of BRL 2.6 million. And it still has an expressive -- a significant volume of investments especially in distribution and investments are still at BRL 1.8 million to BRL 2.2 million in the year -- per year. So for the group, the total investments in 5 years, it's going to be BRL 10.4 million. So this is really our challenge, to maintain the investments in the company at high levels.

And finally, here on Slide 15. As we mentioned, we have the grouping of our 5 verticals. At the end of last year, so CPFL in Santa Cruz, we have just 1 tax ID number and 1 concession. And we have some synergies here for CPFL. So we have the figures of the company with almost 450,000 customers with 208,000 gigawatt sales within the concession area and almost 21,000 square kilometers of concession area. Almost 1/3 of CPFL Paulista are our largest distributors.

Well, we'll now turn the floor back to the operator to start our Q&A session.

[Operator]

[Operator Instructions] We have a question from [ Juliana Vee ] from Paritas.

[Unknown Analyst]

Actually, I have 3 questions. I just would like to start by understanding the growth of the technical losses of RGE Sul. If that is going to turn into a trend and what are you doing to bring it down? Second, I would like to understand the evolution of your OpEx. We have seen that in 2017, there was a -- an increase in there. And I would like to know how you are going to address that line over 2018. And finally, what do you forecast for volume growth in the first quarter of 2018? These are my 3 questions.

[Gustavo Estrella, executive]

Hello, [ Juliana ]. Talking about OpEx. We understand that we did have some nonrecurring effects that have affected our OpEx in 2017. Not considering that effect because this is a recurring one. We will have then smaller transfers starting in 2018. I think it's important to say that today, we are starting a new cycle, our ZBB process. Just to remind you that we have started with ZBB in the company in 2011. When ZBB has a cycle, that usually takes around 5 to 6 years. So we feel that now is the time of having a new leaf of the ZBB process not only because of the natural growth processes, but also because of the changing process that has -- the company has done so in the last few years, especially with the growth in new companies and new projects and so on. So we feel that now, this is our moment and we have a positive expectation of aiming for new productivity gains, new synergies so that we can have a positive effect in our OpEx curve in the next few years. Just to remind you that we have very onetime-off effect that happened in 2017, but we do have challenges, too, in terms of looking for more productivity starting on 2018. Now addressing your volume question, we have -- and I think at the end of last year, as we have shown, there was a significant growth in terms of market growth, market increase, close to 5%. And what we have here is that the industry is still reacting to a growth similar to what we had in 2017. And what we see that -- especially in the low voltage, this is an important effect of temperature, especially February. February was a month that is different from the average and has allowed us to have a reduction in consumption. And we're starting to recover now in March. So in March, we have the different situations with the increase of the average temperature, therefore, with a positive effect in the energy consumption for our low-voltage customers.

[Unknown Analyst]

And the third question?

[Luís Henrique Ferreira Pinto, executive]

Hello. This is Luís Henrique, VP of Operations. About losses, they were more or less in line to what we have forecasted. But there was a slight increment because of the conditions in Rio Grande do Sul and especially RGE Sul where it served the metro. We then closed the Porto Alegre there, is where we had a bad situation, a mix of the macroeconomic situation that end up affecting our losses. But we are already working on it. And in this year, we are working with -- for RGE Sul, this was an end year for the company's integration and now it's going to have the same practices as typically the group has. And we are already preparing a full action plan to address these losses and bring them down to acceptable levels, increasing the number of inspections, of disconnections and developing an operating method as we work within those -- the facilities.

[Operator]

[Operator Instructions] So right now, we end our Q&A session. I would like to turn the floor to Mr. Andre Dorf for his final remarks.

[André Dorf, executive]

Very well. We had in here as you could see that we're very intense in the specialty of the group. We have the transition in our control in shareholder, we have several operating initiative. And also the integration of Energia and Sul, that you're going to have to ask us about in our Q&A session, we had the grouping of the concession. And we had several organizational redesigns in the company. But even then, we were able to keep our focus in the operation and the daily management of the company and also deliver consistent results. At the same time that we look at the operations in our daily activities, we have been able -- we were also able to have the largest investment of the company in distribution, generation and transmission. Therefore, I would like to stress the operations and how robust they are. And the assets of the company, as we have been growing and we have been having consistent results in the different businesses of the company. And that is the idea for 2018 as well, to keep on focusing on the deleverage whether revenue and market, whether expenses, costs as Gustavo Estrella has mentioned. So thank you very much for the trust of the shareholders in 2017. Thanks to our employees and partners for another year of good results at CPFL. Thank you very much and have a nice day.

[Operator]

The conference call of CPFL Energia has ended. Thank you very much for your participation and have a nice day.