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Edited Transcript of CPRE3.SA earnings conference call or presentation 8-Aug-19 1:00pm GMT

Q2 2019 CPFL Energias Renovaveis SA Earnings Call

SAO PAULO Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of CPFL Energias Renovaveis SA earnings conference call or presentation Thursday, August 8, 2019 at 1:00:00pm 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, Member of Executive Board & Director

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Presentation

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Operator [1]

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Good morning. Thank you for waiting. Welcome to the Teleconference of Earnings of CPFL Renováveis for the second Quarter of 2019. Today with us, we have Fernando Mano da Silva, CEO and Financial Director of CPFL Renovaveis. This teleconference is being transmitted simultaneously on the web, on the website at www.cpflrenovaveis.com.br/ir, where you can see the presentation for download. (Operator Instructions) Then we'll have the Q&A session and more information will be given. (Operator Instructions). Should be reminded that this teleconference is being recorded.

Before going ahead, we'd like to clear that any statements that may be made during this conference as to the perspectives and goals, financial and economic, [are premisses] of the company based on information available at this time. So they don't -- they are not guarantees of performance and they relate to future expectancies and they may or not occur. You should understand that the general economic conditions and other factors -- operating factors could affect the future performance of CPFL Renovaveis and could lead to results materially different from those presented here.

I'd like to give the floor now to Fernando Mano. Please, Mr. Mano, go ahead.

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Fernando Mano da Silva, CPFL Energias Renováveis S.A. - CEO, Member of Executive Board & Director [2]

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Good morning, all. Thank you for your participation. I'm going to start with our presentation as of Slide 4. There, we show a little bit of the background of the leadership achieved by CPFL Renovaveis over the years, we have an installed capacity of 2,133 megawatts, most of it being wind energy with 250 million of -- with biomass and also solar at in the interior of Sao Paulo. The main highlights of the second quarter 2019 were BRL 231 billion (sic) [BRL 251 million] with a margin of 61%. We have 99 power plants, of which 5 are being implemented, 94 are operating. We are present in 58 municipalities of the country, the 4 sources. We have 2.9 gigawatts of pipelines to be developed over the next 2 years, including wind, small hydro plants and solar energy also and then 468 employees.

On the right-hand side of the chart, you see the portfolio evolution. In 2011, we had 652 gigawatts of installed capacity. Today, we have 2,133, and we intend to have until '24, 2,230 with the A-6 auctions of last year [indiscernible], which is the Cherobim, small hydro plant in the state of Paraná.

See the leverage of the company, the [debt] indicators, we see a drop in this indicator, which reached 3.7 in 2018. This shows the level of maturity of the company. It's a company that's only investing and growing, but it's a company that has great quantity of assets and operations. And it's very solid to carry on with its path of growth with the projects and acquisitions in the market.

Going on to Page 5, we have the main highlights of the second quarter 2019. Our generation was 1.6 gigawatts hour, which is higher than that of the second quarter 2018, 5.8% more. Net revenues was BRL 411 million. It's revenue that's stable compared to the second quarter 2018. It should be highlighted, many factors we'll see further on with the less winds -- the lower winds compared to last week, despite the improvement of availability of our machines, of our in the parks, we had a growth in the availability of 78% in the second quarter '18 compared to the second quarter '19. And now we have some 90% in the quarter, where the low winds were impacted or didn't allow our growth and revenues was better. [The EBITDA on its hand] was BRL 215.9 billion (sic) [250.9 million], or 1.9% less than in the last -- in the second quarter of 2018 and a net loss of BRL 38.5 million. The cash of the company is still a BRL 1.3 billion, which shows the liquidity that's adequate and comfortable to the company's debt profile.

Another highlight for this quarter was the issuance of debentures in the amount of BRL 838 million. With these resources, we will reprogram our debts with the costs that are more adequate to the company. We have 106%, 105% of the CDI compared to the original cost of 126% of the CDI, which is an improvement in the cost conditions for the companies.

Closing this part on the 21st of May 2019, we disclosed a material fact that talked about with the basis of a negotiation of a potential operation that would involve the purchase by CPFL Energia of the total of shares of CPFL Renováveis. And as part of this process, we started in July 2019, a process of integration of the administrative activities of CPFL Energia, CPFL Renováveis using the potential synergies, increase of exchange of best practices within the companies, which reinforces the commitment of the management in seeking alternatives for growth and for their shareholders.

Now I'll go on to Slide 7. We have the economic -- macroeconomic results of the company. We see that our net revenue in the second quarter '19 was BRL 411 million. The EBITDA in the second quarter was BRL 250 million. The reduction was 1.9% compared to the second quarter '18 and an EBITDA margin of 61%. As I said, there was a net result of BRL 38 million and the installed capacity of 233 megawatts (sic) [2,133 megawatts] with 94 active assets in the 4 generations -- sources of generation. So we have 468 employees now.

Going on to Page 8, we see the volume of generation of energy of the company in the second quarter 2019. We grew by 5.8% compared to the second quarter 2018. When we look source by source, we note that the wind energy had a drop despite the improvement in the availability of the parks, especially those operated by Suzlon, Ceará, lower winds in Ceará and Grande do Norte caused reduction in generation in that period.

I'd like to reinforce that the winds oscillate a lot from month to month or from year to year, and we know that this quarter especially was one of the worst in terms of winds in the measurement of the past few years -- the past 20 years actually. And we have historical average and a projection of 20 years that in the long term, the expectation of the certifiers] and the specialized companies that's in the average, we will reach at (. Taking the parks that have been operating for longer, our average wind is close to the [piece 50]. Studies of the certifiers in the states in Brazil also points to the deviations that are very small in the long term. We had an increment going on to the small hydro plants, an increment of 132 gigawatts hour. The main factor was the start of operation -- 2 main factors, the start of operation of SHPP Boa Vista 2 in November of last year before the date anticipated.

It was a project also delivered within the CapEx, which gives us a generation better than in the second quarter 2018. We had more rainfall and in our regions in Mato Grosso do Sul and Sao Paulo, despite we had a smaller flow in the state of Minas Gerais. Biomass also showed a increase of approximately 20.8 gigawatts hour, especially due to better conditions -- weather conditions, which allowed the higher generation than that of the last year.

Going on to Page 9. We'll open now the line by line, the main impacts in the results of the company. We start with the net revenue. Despite the volume -- higher volume, our net revenue, it was in line with the second quarter of last year. When we note the variation source by source, we see that the wind had a variation of minus BRL 35 million. Here, we split it in 2 factors, volume and price. When we look at the volume, we had almost [BRL 27 million] in deviations or variations due to the lower winds in the second quarter '19 compared to the second quarter '18. Despite the improvement of availability of our wind farms, that contributed with 35 positive millions so [5] availability generated in terms of volume, less BRL 22 million. Then we had the effect of price. Over last year, we had the possibility of using them at MCSD, the mechanism of surplus. This mechanism is no longer authorized in 2019. Through this mechanism, the company last year could decontract or deregulate energy and sell this energy in the free market, which allowed us to obtain last year prices higher than those in the regulated market noted in the second quarter '19. This part of the price had an impact -- negative impact of BRL 8.5 billion (sic) [BRL 8.5 million]. We had an effect also of the deficit of generation of our complexes, Santa Clara, in the amount of BRL 3.5 million. In the case of this wind farm, we had a generation accumulating within the 4 years outside the anticipated. We had the reimbursement that was done, which has been accounted for now and not at the time of the adjustment of the -- for 4 years.

In general lines, this wind source was affected by lower winds and the MCSD that was -- that generated difference in price. In the SHPPs, we had an increase of BRL 22 million in revenues. This is due to the strategy of seasonality of the fiscal guarantee of the SHPPs. They are much more associated to the profile of seasonality of fiscal guarantees than the actual generation of the plants. We had the stronger seasonalization in the second quarter '19, which ended up by generating almost BRL 20 million more than in the second quarter 2018, the level of GSF was also lower than those noted in the same quarter of last year, which also contributed for better results in the SHPPs.

And going on to biomass, we had BRL 3.2 million in addition to last year due to the contracts and also for the generation -- higher generation of some of our plants which generated a positive impact on our results. And at the holding, we had an increase in revenues of BRL 6.4 million. We have levels that the purchase of our SHPP Boa Vista, was the PLD was generated. And in the first -- in the second quarter of last year, these surplus were used to mitigate the effect of the exposures of those wind farms that were taking advantage of the MCSD.

Now we start the new model of contract that obliges us to make the purchase of energy for covering the debts and the seasonality was flat. In the level of seasonality in the second quarter '18 was below that level of seasonality. So this purchase of energy was -- had to be done in 2018. The mechanism now is different. The returns are not more month by month, but in the 2 years or according to the contract. Going now on to Page 10, we talk about the cost of energy -- electrical energy. We start with the cost of purchase of energies, which had a total of BRL 42 million. This is 37% less than that of the second quarter 2018. This variation is explained by the lower volume of energy purchased in the hedge operations. And the winds -- and the fact that the wind farms didn't participate in the MCSD. Last year, we had the flat part and due to the exposure, they needed to be settled in this regulated environment. This is also explained by less GSF. In [distribution] in the last year, we had this payment of approximately BRL 3 million regarding the GSF. And now we have BRL 3 million, a difference of approximately BRL 10 million. The cost of purchase of energy was lower than in the same quarter of last year. The charges for the use of the system went to BRL 24.5 million, that's compared to BRL 28 million almost. Here, we have a indiscernible . There was a recovery in 2018 of credits of PIS and Cofins that were not observed. There was only one-time as this effect was not recurring in 2019. We had this variation, which was partially compensated by the adjustment of prices of the charges for the use of the system. We also have had in the PMSO, in the operating part, an increase of BRL 16.3 million. The credits discount fees were both for charges and cost of materials, services and others. So the same effect that I explained for the PIS Cofins credits that is valid for the PMSO. And in the case of the PMSO, we have the wind parks of the ACL, which were at [2] years of grace period. And the last year of grace period 2018. So in 2019, we're already paying these [costs] of O&M. And this explains the difference that we see in terms of PMSO. So in this part of charges in PMSO, the great variation is explained by the factors PIS Cofins that we] had last year. And this main phase [GSF] indiscernible that we didn't have this year.

Going now to Page 11. When we talk about the general and administrative expenses, we didn't have any relevant variations from one quarter to the other. It was very much in line with that showed in the last -- in the second quarter of '18 with personnel, outsourced services.

And so we're going to -- onto this next page. We see the EBITDA consolidated with a variation of 1.9% compared to the second quarter of '19 and the great effect is on revenues, that on [its hand] was impacted by the lower winds. And by the MCSD applied in 2018 that could not be applied in 2019.

So going on to Page 13. Now looking below EBITDA, we talked about the financial results of the company -- financial earnings. We observed the negative result of BRL 111 million against BRL 119 million last year. Our financial revenues had an increment of BRL 20 million -- BRL 20.3 million. Due to the financial settlement at CCEE, we have receivables that generated this positive effect. And this effect was offset by the lower balance in the period. We had 1.6 B (sic) [BRL 1.6 billion] now we had 1.4 b (sic) [BRL 1.4 billion] in the second quarter '19. But in the end, we had a positive impact in the growth of financial expenses. And financial expenses dropped by a variation of BRL 20.4 million (sic) [BRL 12.4 million] due to the CCEE settlement. We have GSF that generated this increase. And also this was offset partially by the lower interest rates and the monetary updates of our debts, which were below the rates observed in the second quarter of 2018.

At the bottom of this slide, we show as a consequence of all of that, our net result of minus BRL 38 million against BRL 36 million in the second quarter '18.

To conclude my part, we go on to Page 14. We see the debt profile of the company. We have -- on the left-hand side of the chart, we have TJLP, 56.7%. The second largest share was the CDI debt, which are the corporate debts. On the right-hand side, we see the leverage of the company for the 3.8x of EBITDA in second quarter of 2019. The drop in leverage is due to the level of maturity of the company. That has a lot of projects already in operation, mature. And in the bottom of the chart, we show a position of cash of 1.3 B (sic) [BRL 1.3 billion] which is not adequate for the flow of -- which is adequate for the flow of debts that we have to pay over the next few years. So that's what I wanted to show you.

And now I open to questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We now close our Q&A session. I would like to give the floor to Mr. Fernando Mano for his final considerations, the final remarks.

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Fernando Mano da Silva, CPFL Energias Renováveis S.A. - CEO, Member of Executive Board & Director [2]

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So again, I thank you for your participation and your presence. I reinforce that the company is endeavoring its best efforts to improve its operation excellence. We showed our constant search for more synergies and the reduction of costs and the best practices. And we also carry on strong industry search for growth opportunities, which can be seen by the [sake of] projects by the company, and we're still study and assessing projects in the regulated or nonregulated market. So thank you all, and have a good day.

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Operator [3]

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The conference of CPFL Renováveis is now closed. We thank you all for your presence, and have a good day.