CPFL Energia SA

BOVESPA:CPFE3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, and thank you for waiting. Welcome to CPFL Energia's Fourth Quarter of '18 Earnings Conference Call. Today, with us are Mr. Gustavo Estrella, CEO of CPFL Energia; Mr. Pan, CFO and Investor Relations Officer of CPFL Energia, as other officers of the company. The presentation will be available for download at CPFL Energia's investor relations website www.cpfl.com.br/ir. [Operator Instructions] I would like to remind you that this call is being recorded. The conference will be held in Portuguese by Mr. Gustavo Estrella, with simultaneous interpretation into English, and we will have the participation of Mr. Pan who will be addressing all listeners in English.

Before proceeding, we would like to mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of CPFL Energia's management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may also affect the future results of CPFL Energia and may cause results to differ materially from those expressed in such forward-looking statements.

Now we would like to turn the conference over to Mr. Gustavo Estrella. Mr. Estrella, you may proceed.

[Gustavo Estrella, executive]

Good morning, everyone. I thank you for participating in our conference about the fourth quarter of 2018 results and the full year of 2018.

Let's go to Slide #3 with some highlights of 2018. And the first one is the increase in the consumption of energy in the load in our concession area, 2.7% increase, very much concentrated in residential and industrial classes. It's important to highlight that this is the second year that we have over 2% increase after negative years, 2015, 2016, with 3% to 4% markets dropped, in 2017 we had this recovery higher than 2%. I would like to highlight the growth of the EBITDA, 15.9% EBITDA and net income, 74.2%, a record net income of the company and as well as record EBITDA net debt closed at BRL 16.3 billion, leverage reaching 3.05x, net debt EBITDA ratio with a drop vis-a-vis 2017. In 2017, the leverage was 3.20x, and now we have 3.05x.

Another important highlight in relation of investment in the fourth quarter of '18 investments amounted to BRL 693 million and for the year over BRL 2 billion, closing at BRL 2,066,000,000. We would like to mention the tariff reviews, especially CPFL Paulista and RGE Sul and RGE that occurred during the year of '18. By the end of the year, on December 31, we grouped the concession of RGE and RGE Sul. So in January 1, 2019, now we have only one concession in the state of Rio Grande do Sul with the assets of RGE and RGE South combined.

Regarding growth and the participation of the company auctions in the renewables auction, we won 2 projects, the first one is SHPP Cherobim with 28 megawatts installed and also the Gameleira wind farm with 69.3 megawatts capacity.

And another important landmark is the startup of the Boa Vista SHPP that should be started at the beginning of 2020, and we brought it forward over 1 year, so -- with startup in December '18. Another important highlight is the participation in the transmission auctions, we had 2 last year and we won 1 lot in CE CapEx BRL 102 million and 2 lots in December '18, the first one in June '18 and the CapEx was BRL 366 million, the first one and the second BRL 349 million.

Together, the projects of renewable energy plus the volume of transmission, we're talking about an additional CapEx for BRL 1.4 billion. And at the end of November we also had the auction for CPFL Renováveis, controlling 99.94% of the shares, State Grid now holds 99.94% of the shares CPFL Renováveis.

Now going to Slide #4. We see that beside the highlight of the EBITDA record, the EBITDA as I said BRL 5.6 billion, and we shared the Distribution per segment of the EBITDA. In Distribution, Distribution continues to be the main one with 53% share. Conventional Generation 23% and renewable 21%. And lastly, the Commercialization Services & Others with 3%.

Here we have a highlight of our results and afterwards Pan will be talking about our results more in detail. We see an important evolution in the Distribution segment. Our EBITDA going up by 8.7% in the fourth quarter and 34.5% in the full year of 2018 accumulated comparing to '17. It's important to highlight the growth of the market that directly affects the evolution of our EBITDA but the conclusion of our tariff review in our Distribution companies as well.

In the Conventional Generation segment here, we see -- basically the 13.4% in the quarter, 6.1% in the year, has to do with a long-term contract that we have because here we don't have any new projects. In the renewable energy we see an effect in the fourth quarter of '18 due to the write-off of assets of BRL 47 million, this is a nonrecurring effect, with impact only on this quarter. So because of that, we have a drop of 15.8% in the year, we see a drop of 1.1%, and we'll be talking in detail but the main reason for that is the reduction in the volume of wind.

In Commercialization Services & Others, the market is more general. The nature of the commercialization segment, we have here a drop in margin and that leads to the EBITDA drop in the fourth quarter as well as on the year with 75.25% and 26.9% on the full year.

Moving on to Slide 5. We have here a little bit more detail. In the increase of energy consumption -- consumption in the concession area in the fourth quarter of 2018, specifically the total sales in concession, we have an increase of 1.2% and 0.4% in the captive market and 2.8% in the free market. We still have a bit of a reflection of that migration from the captive market to the free market.

Now looking here, when we break down per segment, the increase in the Residential segment is 2.2%, followed by Industry at 0.9%, Commercial 0.7% and Others basically in the room in of 0.6%. In the comparison by region, in our concession where our concessions are located, we compare CPFL with Brazil where we see a growth of 1.2% comparing the Brazilian market that increased 1%. In the Southeast, CPFL increased 0.6% compared to 1% of the regional -- region as a whole and in the South Region 2.6% for CPFL, 2% for the region.

Now on the next slide it's the same information but focusing on the year 2018 so we can see an increase in sales in the concession area of 2.5% even with the effect of the -- the same effect of the fourth quarter we see here, the increase in the captive market of 0.5% and the increase on the free market of 7%, so that's basically due to the migration of clients from the captive market to the free market.

Some of the highlights is the increase in the residential segment of 2.6% with an effect over the year that was positive in the consumption due to temperature, especially in the RGE region with a growth of 3.7%. In the Industrial class, on the average of the year, we have an increase of 2.8%, and the highlights are Piratininga with a 4% increase, RGE at 3.1%, and CPFL Santa Cruz at 7.6%.

So for this year the main highlights of the consumption segments that we have in our concession areas. As we see is the motor vehicles metallurgy and chemical segments being in the main classes contributing to this growth in 2018. The comparison by region, we see higher growth in all of them when compared to the country's growth and the comparison with the Southeast and with the Southern region.

Now on Slide 7, we have the hydrology scenario and we can see a significant recovery in the reservoir levels throughout the month of March, with a more pessimistic expectation in the beginning of the year with a decrease in the level of reservoirs but an important recovery on the average in the months where we historically have a lot of rainfall. This is an important piece of data so there's recovery of the reservoir during the month of March. In April, we started April a little bit more pessimistic in terms of rainfall, so it's slightly below average but still at a good level. In the month of April so bring more recovery in the reservoir levels. So we should close at around between 48% to 49% by the end of the month.

We see here in the spot price chart the PLD, which is connected to the expectation of rainfall increase in the month of March. After the peak in February where the expectation was of much less rainfall but we come now to these levels. In '17 we see a curve that is suffering from an impact with the industry agents in the secondary -- in power in the beginning of the year, but with an expectation of higher levels in the second half of 2019.

Moving on to the next slide. I will turn over to Mr. Pan, and he will talk a little bit about the details of the company.

I would now like to turn over to Mr. Pan, and he will give his presentation in English.

[Yuehui Pan, executive]

Good morning. My name is Pan, I'm just here to present the following slides. The first one is about revenue. In the fourth quarter of 2018 our revenue -- net revenue was BRL 6.7 billion, which is 10% lower than last year and in terms of [indiscernible], the fourth quarter of 2018, we have BRL 1.3 billion, which is around BRL 12 million less than last year and in terms of net income, our fourth quarter income in last year was BRL 670 million, which is BRL 173 million higher than last year, that is 35%.

In the [indiscernible] I'll explain the various [indiscernible] data. First about Distribution, contributes around a BRL 58 million of increase. In terms of monthly tariffs, we have BRL 186 million of increase, the raw adjustment is BRL 63 million lower than last year. And in terms of the PMSO, we see a BRL 38 million of increase amounted PMSO. We have legal, our initial expenses increased by BRL 14 million. And in terms of ADA, around BRL 14 million increase.

The second part is about the conventional generation. We have a BRL 37 million increase compared to last -- the fourth quarter last year amounted BRL 37 million, we have price adjustment of contracts contribute BRL 23 million and ISS continues [indiscernible] in '17. In Enercan this difference contributed BRL 13 million.

And the GSF compensation agreement with Baesa is BRL 11 million contribution, and we have kind of the physical guarantee reduction that decreased the data by BRL 9 million. And the third part is the commercial and service areas. We see a BRL 52 million decrease, mainly because the margin in the commercial licensing side around BRL 40 million.

And in terms of renewables generation, we see a BRL 56 million decrease that is because of write-off of assets, which is BRL 47 million and also we have lower revenue from the wind farms of course partially offset by the lower GSF impact and hedge. That is around BRL 10 million. And in terms about the net income, we see a 34% increase compared to last -- the fourth quarter '17. That indicates we have a decrease in the CDI and from 7% to 6.5%, and that contributes around BRL 25 million.

Okay, let's go to Slide 9. This is whole year numbers. In terms of revenue 2018, we have 5.2% increase compared to '17. And in EBITDA, our 2018 number is BRL 5.6 billion, which is a historical high and that is around a 16% increase compared to 2017. That is BRL 773 million. And net income 2018 was BRL 2.2 billion of net income, also a historical high, which represents 74% increase, around BRL 923 million compared to 2017.

Okay, in terms of this valuation of EBITDA, I would like to explain as follows. The first, Distribution side, we have a variation of BRL 770 million. That BRL 770 million around BRL 641 million comes from the market and tariff revision we had last year. And in the financial asset side, we have the adjustment of BRL 141 million, and the second part about the Conventional Generation, we have BRL 73 million of increase compared to 2017. The price adjustment of contracts contributes BRL 44 million. And GSF compensation adjustment BRL 44 million. And the ISS contingency, in Enercan contributes BRL 13 million and have the reduction, as I mentioned in the -- on previous slide, contributes actually BRL 45 million.

In terms of the commercialization of service sector, we have around BRL 56 million decrease. That's -- we have a -- BRL 74 million comes from the commercialization side margin loss. In the service sector we have a margin gain of BRL 8 million. And let's go to the Renewable Generation. We see a net BRL 13 million variation compared to 2017. The CCEE exposure, the surplus of deficits and compensation management on [indiscernible] and also the wind farms, we have around net reduction of BRL 33 million. And hedge of energy, next to BRL 30 million. And we have a positive of 51 -- BRL 51 million of increase come from the higher biomass generation. And in the net income side, we have an increase of BRL 385 million, comes from the financial results. That is a reduction of the interest rate, the CDI contributes BRL 406 million.

Okay, next slide, Slide 10, we have indebtedness of the 4 groups. We can see here, fourth quarter of last year, we have a historic -- around historic, a very low net income over EBITDA ratio that is 3.05 and our adjusted EBITDA in the last 12 months is BRL 5.3 billion. And in terms of our gross debt costs, 7.5% nominal. And if you exclude inflation [indiscernible] 3.6%. And the breakdown of the gross debt, we have 64% is CDI linked and TJLP/TLP 24% and inflation impact 7% and we have a drop of the floating interest rate financing, it's 5%.

[Gustavo Estrella, executive]

So I come back. On Slide 11 of the Boa Vista CHPP (sic) [ SHPP ], which is new, as I said, with commercial startup in the end of last year with an installed capacity of 29.9 megawatts, 100% already operational.

Now on Slide 12, we see the 2 projects that we won in the last auction [indiscernible] of 2018. The first one is the Cherobim CHPP (sic) [ SHPP ] with an installed capacity of 28 megawatts. The projects that we will initiate construction. Same thing for the Gameleira wind complex, 69.3 megawatts of installed capacity with the project to be structured, beginning the construction and the financing.

On Slide 13 we see our transmission auction. There were 2 auctions throughout the year, one in June 28 where we won lot 9 in the state of Ceará with a contracted RAP of BRL 7.9 million and the investment estimated of BRL 102.2 million. In the December auction, we won 2 lots, one in Santa Catarina with a RAP of BRL 26.4 million, and an investment estimated in BRL 366 million. In the second lot, lot 11 in Rio Grande do Sul, RAP of BRL 33.9 million and investment estimated of BRL 348.9 million.

On Slide 14 we have our CapEx program for 2019 until 2023. What we have here for the 5 years of CapEx and the total close to BRL 12 million is BRL 11.938 million and concentrated in the Distribution segment with slightly above BRL 10 billion with investment close to BRL 2 billion per year in the Distribution segment. And since last year we have additional investments in generation or the renewables project but also in the transmission segment with the 2 auctions that we won last year.

And here finally, on the last slide, just to give you a highlight of the grouping of RGE and RGE South, as we were saying in the State of Rio Grande do Sul, we have a new concession, will be RGE. The 1 concession with close to 3 million clients, 2.9 million in 381 municipalities and the capacity for synergies is a lot greater when we have 1 single concession. This concludes our presentation.

And we would like myself and Pan to make ourselves available for the Q&A session. Thank you.

[Operator]

[Operator Instructions]

[Unknown Analyst]

[indiscernible] from [indiscernible] Investment. [indiscernible] this net income over BRL 2 million (sic) [ BRL 2 billion ] was beyond even the most optimistic analyst. I have two questions, in fact, Estrella. State Grid, when they acquired CPFL, it was BRL 25. And at the time it was about 24x high. 2019, it would be close to 12x high. Do you believe there is a possibility of a follow-on for instance below the price that they paid for, and this is my first question. And the second question is the following. Let's suppose you do a follow-on, having a primary offering, how much of the funds of the primary offer would be invested? Do you believe this could happen over 2019? What the gains would be? And what would be the definition of these funds, the other funds?

[Gustavo Estrella, executive]

Thank you for your question. First regarding the price. We see an important evolution in net income. In 2016 we announced the acquisition and it was concluded in 2017. In 2016, the net income of the company was around BRL 102 million. And now it's almost BRL 2.2 billion. In fact, it is a major recovery of our results. And this affect the price. So if we have a follow-on process of the company, of course, this is a talk that is just starting based on the perspectives and the results of the company obtained today and not 2016. In this case it would be a follow-on issue based on the perspectives of the company today and not on 2016. We have a very different scenario today compared to 2016. And if we choose a follow-on path, we will be telling the story of CPFL today and not 2016. So the scenario is completely different and we are just talking about that. And regarding the primary offering and the secondary offer, in the case of a follow-on and in the case of a primary offer, we have many different alternatives ahead of us. One of them would be the acquisition of the participation of State Grid in RGE Sul and the expectation of synergies with the -- the interpreters apologize, however, the sound that we are receiving here in the interpretation booth is totally impossible to translate. We are trying, we are doing our best. So we have a pipeline of CapEx of [ BRL 24 billion ] less. Based on the expectation of a recovery of consumption for the whole of Brazil in general, in generation, this opens opportunities for additional investments. And we have also the expectation of Distribution as well in the sense, assets that could be financed by our possible follow-on, if we choose this path.

[Unknown Analyst]

Well, let me take this opportunity and ask you another question. The decision about the follow-on, when this could happen? And do you believe it could be done by the end of May, which would be the 18 months?

[Gustavo Estrella, executive]

We could make a very fast decision and this is on the table, this is being discussed today between CPFL and State Grid and so we expect to have a very quick decision about this subject. And regarding the deadline, we're almost in April already. So any of the 2 alternatives, they will be done or they will be carried out within this framework.

[Operator]

Our next question is from Bruno Varella from Solana Capital.

[Bruno Varella, analyst]

Estrella, I have 2 questions. But first, in line with [ Juliana's ] question, how much time did you have? We're in the beginning of April, how long would you estimate for each of the processes, both in the MTO or re-IPO? And what you would have to need in terms of discussing with the stock exchange in terms of a time or deadline? And the second question, in this last quarter in particular, there have been some increases in the working capital accounts, very relevant and ahead considered cash generation of just around BRL 1.5 billion. And it came to BRL 1.4 billion and if you consider the basic accounts of EBITDA, CapEx, interest and tax rate, you get to the numbers and it includes CVA and a negative receivables account and providers you can invert this BRL 1.5 billion positive to BRL 1.4 billion negative. CVA is clear enough but I would like to understand the dynamics of the receivables from providers in your working capital?

[Gustavo Estrella, executive]

The first in terms of the deadline. It's a challenge for us to estimate. Of course, in an MTO process, this is not 100% controlled by the company so this process may be longer as we receive questions or discussions about the process on the table. So if it's a process without any surprises, it would be something around 2 or 3 months for its conclusion. But this could be much longer, depending on how the discussions develop in the market. As for the follow-on, it also depends on a number of factors. So if we have an expectation that there is an open window with a regular term that would be until mid-July, for example, for our results. We could try to access that window but the market is developing and the windows open and close very rapidly. So if we chose the path of the follow-on, we would be paying attention to that. Of course, we would not go to market without a definition that is very clear that there is a window that allows us to go to market for that operation. So without being too clear, but there are many factors involved and we -- and they will be discussed at some point and any of these processes will be addressed with serenity and following all the proper procedures for us to have the best operation possible. As for the working capital, an important point here, the company raised funds in December and at the end of the year, we made use of the cash available to anticipate some payments, to advance some payments that would usually be done in the beginning of the year, we made in the month of December. Just making use of the cash available at the table. We can't see that effect yet but the month of January, the payments that would have been made had been made and we're starting with that on the working capital in January. So there's no structural change in the working capital flow. That was basically us making the most of an opportunity in the payments that had to be made.

[Bruno Varella, analyst]

And following up on the MTO or the re-IPO question, at what stage do you think the decision is at State Grid? Is this still at the State Grid international level? Or has it been forwarded to the controlling shareholder in China?

[Gustavo Estrella, executive]

Considering how close the final deadline is, this subject is a top priority, not only for us but for them as well. So we're at the last stages to have this decision shortly.

[Operator]

[indiscernible]

[Unknown Analyst]

So my questions have mostly been answered already because they were included in Bruno and [ Juliana's ] questions. I would like to ask a question about CapEx. What about the wind farm, the auctions that you won, are you going to bring forward the CapEx? Are you going to bring it forward to have a more short-term return?

[Gustavo Estrella, executive]

This was a very recent fact to say the auctions that we won, we are evaluating this possibility and of course, we are looking at this as an alternative, this is to be studied. It depends on many factors, the execution of the project and the grid connection. It's a little bit too early for us to say anything about this. And of course, we will be analyzing this over the next few months to check if this is a real possibility or not.

[Operator]

Our next question will be in English from [ Roger ] [indiscernible], [ EY ].

[Unknown Analyst]

I have 2 questions. The first one's related to the page, Slide 8. What are the major components of the assets that were written off? Second one is also on the same slide, what is the major reason for reduction of interest rate?

[Gustavo Estrella, executive]

Could you please repeat your question?

[Unknown Analyst]

Sure. The first question, what are the major components of the assets that were written off in the Renewable Generation? And the second one, what is the major reason for the reduction of interest rate?

[Yuehui Pan, executive]

Can you repeat again or if you can't speak Chinese, you can also -- repeat in Chinese, we can also understand Chinese, Mandarin.

[Unknown Analyst]

Okay. I can speak English so I can use English to ask. I'll repeat my question first. And I'll repeat my question in Chinese later. My first question is related to the assets that was written off. What are the major component of assets that were written off? The second one is related to the reduction of interest rate, what is the major reason for the reduction of interest rate? And now I will use Chinese to repeat my question. [Foreign Language]

[Yuehui Pan, executive]

Okay, the first question actually is about Slide 8, we have mentioned here the write-off of assets, actually, this BRL 47 million of write-off of assets is the -- we have some small projects, hydro power plant projects, right, in Renováveis and in the end, we found that this asset is not -- has little value to continue for the development and according to the accounting rule, we found there's kind of impairments so it is in the write-off. The name of the project is [indiscernible], right. [indiscernible] This is a project we write-off. And in terms of the second question about the difference of the interest rate, actually, the difference of the interest rate is the Interbank certain loan. Certain interest rates, CDI, which is the basic rate in Brazil, it's a difference from 7% from 6.5%, this is from the Central Bank of Brazil. And because most of our financing -- actually, 64% of our financing is through CDI so we have this kind of -- once you have this kind of decrease of interest rate, you have this kind of benefit in interest expenses. I'm not sure you heard it clearly. It's not very clear. I can explain in Mandarin.

[Unknown Analyst]

Yes, it's clear, it's clear.

[Operator]

We would like to conclude the question-and-answer session. I will turn over to Mr. Gustavo Estrella for his final considerations.

[Gustavo Estrella, executive]

Once again, thank you all for your presence and participation in our results conference call. It's an important moment for the company with record results in the net income or the company's EBITDA, and as important as the results, we also have a significant reduction in our indicators and an improvement in our quality levels. We've also broken records with a decrease of 17.8% compared to 2017. So it's record results with excellent quality indicators and an aggressive expansion plan for our CapEx that we can see was close to BRL 12 billion in investment with very good results of growth last year. So we have an asset base that has quality, efficiency, generating results and we see the possibility to bring future growth. So that's our scenario, very positive perspective and the outlook for 2019 and the coming years. So once again, thank you. Have a great day.

[Operator]

CPFL Energia's conference call is now over. We thank you all for your participation. Have a good day.