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Edited Transcript of CPFE3.SA earnings conference call or presentation 13-Nov-19 2:00pm GMT

Q3 2019 CPFL Energia SA Earnings Call

Campinas, São Paulo Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of CPFL Energia SA earnings conference call or presentation Wednesday, November 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fernando Mano da Silva

CPFL Energias Renováveis S.A. - CEO and Member of Executive Board

* Gustavo Estrella

CPFL Energia S.A. - CEO, Chief Planning, Chief Bus. Dev & Mgmt. Officer, Member of Board of Exec. Officer and Director

* Luís Henrique Ferreira Pinto

CPFL Energia S.A. - Chief Regulated Operations Officer & Member of the Board of Executive Officers

* Yuehui Pan

CPFL Energia S.A. - Chief Financial & IR Officer and Member of Board of Executive Officers

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Conference Call Participants

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* Gustavo Miele

Banco Itau BBA SA, Research Division - Research Analyst

* Thiago Silva

Santander Investment Securities Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. Thank you very much for waiting, and we would like to welcome everyone to the CPFL Energia 3Q '19 Earnings Conference Call. Today with us, we have Mr. Gustavo Estrella, CEO of CPFL Energia; and Mr. Pan, CFO and Investor Relations Officer; as well as other officers of the company. The presentation will be available for download at the company's website, www.cpfl.com.br/investorrelations. (Operator Instructions) It's important to mention that this call is being recorded.

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 beliefs and assumptions of CPFL Energia's management and information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate 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 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.

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Gustavo Estrella, CPFL Energia S.A. - CEO, Chief Planning, Chief Bus. Dev & Mgmt. Officer, Member of Board of Exec. Officer and Director [2]

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Good morning, everybody. I would thank you very much for your presence in the third quarter of '19 conference call.

Let's go to Slide #3 of the presentation with the highlights for the third quarter. And the first 2 ones refer to our results. EBITDA reached BRL 1.618 billion, a growth of 4.5%. Our net income, BRL 748 million, growing by 19.4%. And later on, we will see that from the view -- we have not seen a recovery of the consumption of energy, but the results are good in EBITDA and net income lines. Our net debt was BRL 16.8 billion with a leverage of 2.68x our net debt-to-EBITDA ratio, here already considering the acquisition of the CPFL Renováveis shares that occurred in the first half, 99.94%, already consolidated under the CPFL Group.

One important highlight has to do with the investments. We invested in the quarter BRL 616 million, a growth of 17% vis-à-vis 2018, and we continue delivering the investment of BRL 2.2 billion during the full year of 2019. On this track, very good news, have to do with the tariff review of CPFL Piratininga, we will be talking about this entity later on, but the final effect is negative adjustment of 7.8% for our customers, an increase in 6.2% in Parcel B, and the effect is the transfer of the loan of CPFL. And this causes this important drop in the tariff, and this is very important for our customers.

As I said before, we have already finished the transfer of shares of CPFL Renováveis, BRL 4.1 billion being paid, and the value per share BRL 16.85, and the process has already been concluded. So we have Renováveis almost 100% integrated into the CPFL Group, and with that our installed capacity for generation is 4.3 gigawatts already considering the new participation of CPFL Renováveis. We also had an important recognition on here, Exame, The Sustainability Index, as the most sustainable company in the area of energy, highlighted the CPFL at Hospitals program. By means of which the program with energy efficiency program we will have BRL 150 million being invested over the next 3 years in order to have solar energy installed in our areas, so this recognition from the Exame is very important. We also have another highlight, having to do with the community with the projects of the CPFL Institute.

Now let's go to Slide #4, in which we will give you more details about the tariff revision of CPFL Piratininga. RAB BRL 3.8 billion; net regulatory asset base, BRL 2.487 billion; Parcel B corresponding to BRL 921 million and the regulatory EBITDA, BRL 460 million. On the chart, you can see on the lower part of our slide, it will be vis-à-vis the fourth cycle of tariff review, growing by 34%, BRL 117 million in growth vis-à-vis our regulatory EBITDA of the fourth quarter, BRL 460 million. In the comparison with the fourth cycle restated or updated, considering the effects of the write-offs and depreciations and the monetary restatement, we see an even higher growth, 47% growth vis-à-vis the basis for the fourth cycle, of course, with a better expectation of regulatory EBITDA and the expectation of growth in our result for the next few years.

And getting into more details, as I said before, the positive effect of the growth of Parcel B, 6.17%. The main effect here is the increase in our investments made in BRR. We see that we have an incremental growth of BRL 69 million, and also an increase in the average rate of depreciation. In the reduction of the Parcel A, the main highlight is the end of loans of CCEE, a reduction of BRL 300 million practically in our Parcel A, which brings about a major reduction in our tariffs for our end customers.

Now let's go to Slide #5, in which we see our sales performance. As I said, it's a challenging quarter with no clear signs of a recovery in consumption in our concession area. Here, we see a reduction of load in our concession area, 0.3%. In sales in the concession area, 1.8% drop. And when you have this difference between these 2 ratios, it is because you have a recovery in the market at the end of the quarter that still does not affect our sales, but it does affect our load.

What we have been seeing now going to the fourth quarter, mainly in October, we see a recovery in consumption already, mainly because of the temperature effect. We already get a little bit of this effect at the end of the third quarter, and it has an impact on sales that we will be seeing in the fourth quarter of '19.

When we look at the consumption classes, industrial is a highlight with a drop of 4%. And what we did here on this table on the right side is to break down this drop in order to see from where it comes. And we see that there is a calendar effect that is not a real effect of market and migration of some clients that they are connected directly to the base grid, so there is no direct relationship with the consumption of energy, and also DG with 0.1%. And if you isolate all the effects, you see the macroeconomic effect, that is to say the performance of the industrial classes with a drop of 2.4%, lower than the 4%, but still a very negative effect.

Industrial consumption, once again, talking about a more recent consumption expectation, we see some signs already, very tentative signs of recovery in consumption in the fourth quarter. It's a little bit better than the third, but still a performance along the same lines of 2018.

On Slide #6, delinquency and energy losses. Regarding delinquency, we see an improvement in delinquency comparing to the second quarter of 2019. Basically, the trend that we identified here over this year, 2019, after an important increase at the end of last year. So we see that in the first quarter of 2019, our ADA was BRL 68 million, going down to BRL 64 million and going down now to BRL 61 million. This is a positive trend in delinquency, but still much higher than the third quarter of '18. And with a very intensive action of decrease in delinquency on the lower left part, you see our collection actions with a growth of 10.8% and the volume of cuts, 589,000 cuts. On an annual basis, we intend to have BRL 2.2 million impact in our concession area of disconnections. In terms of losses, we closed the quarter with 9.31%, slightly higher than June '19. And here, we also see a calendar effect in terms of billings, and this affects our calculation of losses the way this is done. And our expectation is of a real growth of losses, and this is a calendar adjustment that should be offset in the fourth quarter of '19.

Slide #7, we see our hydrological scenario with an important drop in the level of reservoirs in our national interconnected system, with an expectation for November to close at 21.4%, one of the lowest levels in our historical series. And this also brings about a bigger reliance during the period that starts now with an expectation of recomposition of these levels in the next few months.

It should continue to affect our PLD or spot price because it has been consistently superior to the 2018 levels, and this is an expectation that it continues to be under pressure over the next few months.

Slide #8 now, renewable generation. We had the 3 sources in the CPFL Renováveis, with our performance -- effectively flat performance in biomass growing by 8 gigawatt hour of energy generation; a growth of 35 gigawatt hour in our SHPPs in the South region and also in Minas and Sao Paulo, but the main effect comes from our wind mills, a drop of 169 gigawatt hour, especially due to the reduction in generation of wind.

And you can see on the chart, a drop of 10 percentage points on an annual comparison, 3Q '18 and 3Q '19. Here, we also see a certain recovery as of October, but still lower than the levels of the (inaudible).

Now I would like to give the floor to Pan, our CFO, and he will be talking about the results of the group in the third quarter.

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Yuehui Pan, CPFL Energia S.A. - Chief Financial & IR Officer and Member of Board of Executive Officers [3]

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Good morning, everyone. Now let's go to Slide #9. The EBITDA in this quarter was BRL 1.6 billion, with an increase of 4.5%. In the Distribution segment, we had an increase of 17.8%, and the main effect were BRL 187 million of market effect, mainly due to the increases in the tariffs that we had during the last readjustment and by the load in our concession area. We also had a gain of BRL 42 million because of the RAB report of CPFL Piratininga.

On the other hand, the financial asset of the concession had a drop of BRL 78 million, due to the lower IPCA this year. And lastly, an increase of BRL 23 million in PMSO, highlighting the expenses with asset write-offs and also linked to our CapEx of BRL 17 million. And also our expenses with pension funds, BRL 6 million. And in the trading services and others segments, we saw a drop of 24.8%, and this happened because of CPFL Brazil that had a lower margin in 2019 due to the lower energy prices.

On the next slide we have the Conventional Generation segment, which had an EBITDA 0.5% higher, and the main effects were the transfer of inflation to the contracts amounting to BRL 32 million; the lower volume of hydro and thermal energy representing BRL 17 million; and a non-typical effect that happened in 2018, which was a tax benefit amounting to BRL 11 million; and at CPFL Renováveis [EBIT] dropped by 10% due to a lower generation of wind energy, BRL 34 million, and asset write-off and an increase in expenses by BRL 6 million.

And on the other hand, seasonality of contract generated a gain of BRL 45 million due to a higher allocation of energy during this period, and I would like to remind you that this should be offset during the next quarter.

On Slide 11, we show you the net income performance, which was BRL 748 million in this quarter, with an increase of 19.4% vis-à-vis 2018. Besides the BRL 70 million variation in the EBITDA, the main effects were in the financial result, it was an improvement of BRL 147 million, which is due to the additional revenue that we have with the funds coming from the IPO in the CPFL cash that reached BRL 56 million and the reduction in interest rates and also the net debt with a benefit of BRL 53 million.

The mark-to-market effect, BRL 32 million, depreciation with a variation of BRL 30 million, and there was an increase in taxes due to the better results, BRL 65 million.

On the next slide, we show the results year-to-date, up to September. The EBITDA had an increase of 8.6%, BRL 370 million and net income going up by 26.5%, representing BRL 396 million. In the EBITDA, I would like to highlight distribution that was favored by the tariff reviews that occurred in 2018. And in the other segments, we see that the weak performance of wind in the CPFL Renováveis units was offset by the good results obtained in the other ones.

Now going to our net income. This has the positive effect of the EBITDA. We also had an improvement in the financial result of BRL 268 million due to the lower indebtedness and the lower cost of debt added to the financial revenue from the IPO funds.

Now let's go to the next slide about the company's indebtedness, in which we show in the first chart, the evolution of the net debt EBITDA indicator. Thus, net debt amounted to BRL 16.9 billion and EBITDA in the last 12 months reached BRL 6.3 billion. Net debt-to-EBITDA ratio was 2.68x, and this increase is due to a higher participation in CPFL Renováveis during this last period. And on the lower part of the slide, you can see the evolution of the nominal cost and the real cost of debt. The nominal cost reflects a change in the debt profile as from the end of 2018, and the real cost is also affected by the IPCA, which was 2.89% in the third quarter of '19. And I would like to highlight the fact that 64% of the debt is pegged to the CDI.

On Slide #14, we have our CapEx figures. In this quarter, we made an investment amounting to BRL 616 million with an increase of over 17% on a year-on-year comparison. And per segment, we had in distribution a total invested of BRL 515 million. For the expansion and improvement in the system and the year-to-date amount was BRL 1.4 billion. For generation and transmission, we had BRL 45 million for Renováveis, BRL 8 million for transmission and BRL 2 million for conventional generation.

For the transmission segment, I would like to highlight the beginning of the Maracanaú, Sul I and Sul II project, which were acquired during the 2018 auctions. And for the Services segment, BRL 10 million were invested. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Thiago Silva with Santander.

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Thiago Silva, Santander Investment Securities Inc., Research Division - Research Analyst [2]

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I have 2 questions. First, you mentioned in the beginning of the presentation a resumption in consumption volume in October. Given the temperature effect, could you give us more color in terms of how much is coming in concession area? How much is coming from volume? I mean if this is a shy resumption, or do you think it will come with more momentum, and considering the Industrial segment as well? My second question has to do with growth. We know that we have the CEEE distribution company to be sold and other distribution companies in the market, are you considering those? And also, I'd like to know about transmission auctions. The next auction that will be held in December, are you considering any lots that would make sense to you?

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Unidentified Company Representative, [3]

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Regarding your first question, resumption of volume in consumption, indeed, we saw in October and in November signs of consumption recovery, basically in the residential segment, because of the temperature. In October, average temperature was above the historical series and so that drove consumption in the residential and commercial segments. Sorry for the interruption. In the Industrial segment, we saw that in the third quarter, we have a 2.4% reduction in consumption. This is macroeconomics. And what we see is that from October onwards there is a certain resumption and remaining flat compared to 2018. So there is some improvement in the third quarter. So there is a certain resumption of growth. Our expectation for the year is that we should end consumption, on average, 1.5% above the level of 2018. And a lot more concentrated on low voltage segment than on the industry. So this would be kind of the breakdown. I think the temperature has an important effect. We don't see a lot of signs of resumption of consumption by the Industrial segment.

Your second question has to do with growth. I guess that we have some good opportunities here. Keeping in mind the short- to mid-term, perhaps in the foreseeable future, we have the transmission auction and following our strategy we want to operate in niches. So there are some lots that fit our strategy. So we have an expectation of, yes, bidding in this auction in December for some lots that fit our strategies. Looking more at the mid to long term, as you mentioned, there are some important expectations of assets in the distribution area. And again, it has to fit our strategy by region, by location. So I think it makes sense to look at these assets that are possibly put in the market. You mentioned CEEE and some others, and we will be looking into those for sure at the right time. But given our size and the relevance of CPFL in the market, we are definitely a consolidation player in the distribution segment. And regarding generation, with the completion of CPFL Renováveis shares acquisition, we are now an investment player in new generation projects. Again, we are keeping this market in our radar.

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Thiago Silva, Santander Investment Securities Inc., Research Division - Research Analyst [4]

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And just going back to my second question, there were some acquisition of Sempra assets in Chile. Did you get involved in that acquisition in terms of -- did you help them? Could you speak about that?

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Unidentified Company Representative, [5]

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No. We didn't play a part there. Our strategy is very much geared to the Brazilian market where we have a great competitive edge given our footprint in the market. And like I said, given that we have a number of new potential assets that we could invest in. So our expectation is that we will keep our focus on the Brazilian market. Other players have an approach of going more international, but they do it, not us.

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Operator [6]

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Our next question comes from Gustavo Miele with Itaú BBA.

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Gustavo Miele, Banco Itau BBA SA, Research Division - Research Analyst [7]

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I'd like to ask a question about CPFL Renováveis. Perhaps it is the subsidiary that drew attention the most in the results. But in a broader view, I would like to -- have you discussed the triggers for results of CPFL Renováveis for the next 2 quarters? Anything regarding lower cost that we could expect because of the integration to CPFL Energia after the follow on? Anything we could expect in terms of a faster start-up of projects that are being built? And there is another question of a more regulatory nature. Have you conducted any study regarding the impact of implementation of our prices in your renewable sources? Because we have talked with some wind players and they have different views regarding this point. Some expect a benefit from the implementation of this sector, others expect a more negative impact depending on the profile of wind that they have in their portfolio. Have you conducted any studies about that? Could you give us any number related to that? These are my questions.

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Fernando Mano da Silva, CPFL Energias Renováveis S.A. - CEO and Member of Executive Board [8]

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Gustavo, this is Fernando speaking about CPFL Renováveis. To try to address your first question, in terms of results, as you mentioned, we are, at the moment, integrating CPFL Renováveis and CPFL Energia processes. We are adopting the best practices. As we mentioned, we have an expectation of capturing synergies in PMSO as well as tax gain, considering an accumulated loss of about BRL 2.5 million at CPFL Renováveis. There is also an expectation of reducing our cost of debt at CPFL Renováveis that we can observe, and we can actually see some of this impact in the recent months. Regarding the results, it is important to say that wind has been below expected along the year of 2019. But as you know, wind projection is done for a 20-year horizon for safety, so when they get our older arms that have been in operation for more than 10 years, such as is the case of CRR, we have a generation very close to 100%. So it is normal to have a natural resource performing a little below expectation in the next year. In the following year -- you can have a recovery in the following years.

Speaking about spot price by hour, we are considering this topic at the company. It really depends on where the farm is located. A good deal of our farms are located in Rio Grande do Norte and CRR states. Over there winds tend to be stronger during the day. During the afternoon, it tends to be very windy in these regions. And that tends to generate a positive effect in terms of the spot price per hour. Other regions of Brazil have a different wind performance, but our farms are located particularly in locations where it tends to be more windy during the day.

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Operator [9]

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(Operator Instructions) Our next question comes from [Luiza Klaus] with Safra.

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Unidentified Analyst, [10]

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I have 2 questions. Number one, in the Distribution segment, particularly regarding regulatory EBITDA of the companies. I would like to know how are the companies performing regarding the regulatory EBITDA, and particularly at Piratininga. This increase expected as of the first cycle will be captured in the coming months. And my second question is regarding the discos. Do they have any losses regarding overcontracting? And what are the measures taken regarding the migration of customers regarding energy contracting in the long term?

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Luís Henrique Ferreira Pinto, CPFL Energia S.A. - Chief Regulated Operations Officer & Member of the Board of Executive Officers [11]

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This is Luís Henrique from Distribution. Regarding regulatory EBITDA, it is in keeping with the real one. Given the regulatory threshold, there are no great distortions here. It is very much in line. And regarding Piratininga, we start to see the effect in the next months and in the coming years. So this effect will start being -- will start to be seen gradually in the next months, October, November and subsequently. Regarding overcontracting, we don't have any problems. All of those customers have migrated to the free market, this is considered as voluntary, and we are following it. We are using all of the mechanisms for exchange, for sale. In other words, we are managing overcontracting really well. This has not been an issue for us, and we've been managing it very well over the years. Regarding possible discussions about the past, we are discussing this with NEL, according to the regulatory rules and according to what is established in the regulations. So it's all under control.

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Unidentified Company Representative, [12]

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Let me just add to this. Regarding overcontracting, yes, in some companies. One example is Piratininga. We have a relevant surplus, but here basically given a quota allocation in the migration of customers to the free market, which is actually involuntary. This is not a theme that worries us. All of the surplus that we have is an involuntary surplus that has no impact whatsoever on our results.

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Unidentified Analyst, [13]

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Excellent. So when you talk about the regulatory EBITDA, you think it is performing -- it's overperforming? Or is it compatible with the regulatory EBITDA of the other companies, Paulista, RGE?

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Unidentified Company Representative, [14]

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We're performing in keeping with the regulatory EBITDA, but just a little bit.

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Unidentified Analyst, [15]

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And regarding regulatory WACC in Q3, was it penalized in any way?

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Unidentified Company Representative, [16]

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No. When we defined a WACC of 809, it would be valid until the end of this year of 2019. So all tariff reviews of our group that happened in 2018 or Piratininga now in 2019 will remain with a WACC of 809, and this will continue until the end of the cycle, 4 years of Piratininga and 5 years in the case of all of the other companies, Paulista and RGE.

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Unidentified Analyst, [17]

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And for the next cycle, have you defined anything? This has been discussed?

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Unidentified Company Representative, [18]

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There is an open public hearing that will be held today, and this topic will be discussed. So we are following this up close, but there is no definition regarding the new WACC.

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Operator [19]

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(Operator Instructions) This concludes the question-and-answer session. I would like to turn the floor back to Mr. Gustavo Estrella to proceed with his closing statements. Please go ahead, sir.

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Gustavo Estrella, CPFL Energia S.A. - CEO, Chief Planning, Chief Bus. Dev & Mgmt. Officer, Member of Board of Exec. Officer and Director [20]

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Very well. Again, I would like to thank all of you for joining us in this earnings conference call and for your questions. I just want to stress some important points about our company. We completed the process of acquisition of CPFL Renováveis shares. And as we said, in the share issuance process of the company in June, this is a consolidation process in the CPFL Group bringing some important benefits to the group. Some of them are already being felt. We are finalizing the integration process of both teams, CPFL Renováveis and Energia. So we're going to have a cost benefit. Particularly as of 2020, we have an important expectation of reducing our funding costs. We have a program of debt exchange at Renováveis with an expectation of reducing the cost of our debt. And also in the integration and merger process between CPFL (inaudible) and Renováveis, the benefits will be captured along 2020. The business and process then has been kicked off. The expectation is that the process will be ended by the end of 2020. And the expectation is that it will bring good results for the group. For 2020, we expect the economy to roll in, the reforms are being -- now taking place, the pension reform was approved. We see, even if in its infancy, signs of consumption resumption for the industry and the expectation for next year is that we're going to have the economy rebounding more strongly, and this will have a reflect on our consumption and it could impact on our commercial losses and delinquency rates.

In terms of opportunities, I think the group is working at new investments. We are going to have the December transmission auction, and we will take part. We are monitoring, and we're paying attention to opportunities in the Renewable Generation segment, particularly now within integration of CPFL Renováveis. And also in Distribution, I hope there is an interesting asset in the market; we'll look into it. So this is the outlook for 2019, and we have a more positive expectation regarding 2020. Again, I would like to thank all of you for your participation, and have a good day.

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Operator [21]

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That concludes CPFL Energia conference call for today. Thank you very much for your participation, and have a good day.

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