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CPFL Energia S.A. (NYSE:CPL)
Q2 2018 Earnings Conference Call
Aug. 21, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and thank you for waiting. Welcome to CPFL Energia's Second Quarter 2018 Earnings Conference Call. Today with us, we have Mr. Andre Dorf, CEO of CPFL Energia; Gustavo Estrella, CFO and Investor Relations of CPFL Energia and other officers of the company. The presentation will be available for download at the Investor Relations website at www.cpfl.com.br/ir. We would like to inform that all participants will be in listen-only mode during the company's presentation. Afterwards, there will be a question-and-answer session when further instructions will be given. (Operator Instructions) I would like to remind you 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 the beliefs and assumptions of CPFL Energia management and information currently available to the company. 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 could also affect the future results of CPFL Energia and could cause results to 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.

Andre Dorf -- Chief Executive Officer

Thank you and good morning everybody. Welcome to another CPFL Energia conference call about our results and this time about the second quarter of 2018. As usual, we have a brief presentation and then we will be opening for questions.

Slide three please. This is where we have the highlights of the quarter. The load measured in our concession area grew by 3.8% in the period and later on we will be seeing that most of this growth as we have been seeing over the last few quarters happened in the free market, growing about 7%. Also, we had growth of 16.5% of our net operating revenue and we will also see that this comes basically from the distribution segment and 33% EBITDA. Our net debt measured by our covenants closed the quarter at BRL15.7 billion. Therefore, our leverage was 3.11 times our net debt/EBITDA ratio of the last 12 months. We also had an important amount of funding BRL3.4 billion in this quarter, always at competitive rates.

In the quarter, we invested BRL422 million in all segments where we operate. Also in the second quarter, we concluded the RGE tariff review with an average impact perceived by consumers of about 21%. Regarding growth [ph], CPFL Geracao won Lot number 9 of the Transmission Auction that we had in June. So we won the Maracanau lot in Ceara with a CapEx projected by ANEEL of about BRL100 million. And over the quarter, we also had some other relevant sectoral issues. It is important for us to say that flag or tariff flags vis-a-vis regulatory assets is a very important thing and you know that we accumulate regulatory assets and some of them have to do with GSF and thermal start-ups and the hydro situation, the variation that comes from Itaipu and this should be covered by tariff flags which has not been happening. This means that we have been accumulating regulatory assets that are important over these months. And another thing that is being discussed by us is the GSF with a short-term settlement of IPCA and part of the solution is also part of the bill of law that is being furthered by Congress and that has to do with privatization of the Eletrobras distributor companies and this is being extensively discussed or was extensively discussed during the quarter.

On the next slide, slide number four, we see our EBITDA per segment in the second quarter of 2018, we had an EBITDA of BRL1.370 billion and on the upper chart on the left, you can see the breakdown per segment of business. So our distribution represented almost 60% of the EBITDA followed by conventional generation and renewables as well with 24% and 17% respectively. Every other businesses still represent a very small part of the period EBITDA. And looking per business segment and starting on the upper right of the chart, we see the evolution of the EBITDA in the quarter and in the half year. So a major evolution of the EBITDA in distribution as you can see BRL768 million in the second quarter of 2018, almost 70% increase vis-a-vis the same period last year and very much because of the growth of the market itself and also the control of PMSO and the financial asset of the concession. So these are the three main positive impacts on the EBITDA the distribution segment, conventional generation, a slight reduction very much due to the reduction of the assured energy of Serra da Mesa or Semesa [ph] plant in renewable generation, we had a major growth of almost 15% and here there were many impacts that are described in our release and the start-up of the Pedra Cheirosa wind farm is one of them and then commercialization, services and other segments where we operate. The highlight here is our services segment in construction and grid maintenance that had a positive contribution to this increase.

On the next slide, we talk about the distribution segment and we start by seeing the -- of the increase in the load and the sales in the period and they were very much hand-in-hand about 4% each. And a major growth also in residential and commercial 5.7% and 3.7% respectively and here mainly because of the high temperatures in April and May. In the industrial segment, although we had the truckers strike and also the economic scenario of the country, in spite of all that, we achieved a growth of 2.4% in this period and the highlight in the class, in the industrial class are the metallurgic industry and vehicles and food industries that had a positive impact on this growth.

If we look at the upper right, we see the sales in the concession area as I said growing 4% and very much impacted -- positively impacted by the customers in the free market, 7.6% increase. On the lower part, starting at the left, we see the market breakdown in the concession area in consumer class, our biggest one is the industrial with almost 40% followed here by residential and commercial. And when we compare our growth in Brazil and in the regions where we operate, we see a positive evolution as well. For instance, in the first map in the middle chart on the lower part of the slide we see that Brazil grew 2% in sales and CPFL grew 4%. In the southeast region, we had a growth of 3.2% and we grew 4.1% and in the south of Brazil the region 4.2% increase and we 3.8%. On the right, we can see the evolution per consumption segment and these figures have already been mentioned when we talked about our highlights.

On page number six now we talk about delinquency. Unfortunately, this is a very much fashionable thing, so to say. Our ADA evolution as a percentage of the gross revenue is at the same level in this quarter, 0.64% of the gross revenue in provisions which is very much in line with our historical average and I would like to mention one point outside the curve, which is in the first quarter of this year and this was very much because of a reversal, a non-recurring reversal in our ADA that we had in RGE Sul in the first [ph] quarter and that was not repeated and will not repeat -- be repeated from now on. So we are in line with our historical averages. On the lower part of the slide, we see the total of past due bills, over 90 days past due as a percentage of the gross revenue, a very comfortable 1.15% and our collection actions on the right -- on the lower right in thousands of disconnections per quarter and we see in this chart a reduction in the number of disconnections. However, this is not the strategy of the company, it's not a change in behavior, but it was caused by the truckers strike that we had in May. So we should go back to the previous figure that we had in the previous quarters.

And some news here on page number seven. Here we included a snapshot of our operating indicators during the period and also the comparisons with the previous periods in the first chart. On the upper part, we have total losses, technical and commercial losses and here what we can see is a trajectory or a downward trend in our total losses compared to previous periods and technical ones as well going down and commercial or non-technical losses also dropping, but a little bit more resilient because of the crisis and because of the economic scenario where we find ourselves and on the bullet points on the right, we made a list of some initiatives that the company has been putting in place in order to fight for the losses. And so here we are talking about new technologies to combat the theft of energy and the expansion of telemetry client network, improvement, modernization and shielding of the distribution network, replacement of measuring equipment, modernization of our hubs and update of public lighting points and inspection of new expansions and update in our client file, our customer file. So these are some of the measures that we have been adopting to fight losses and theft.

On the lower part, we see the evolution of the SAIDI and [ph] below the better in the center the two figures, we see here in the middle an evolution of our -- in our distribution companies, a positive evolution, that is the -- a evolution of our SAIDI and also our SAIFI also going down. We see a positive evolution in all our DisCos. And here, we made a drill [ph] that will calculate the weighted average of the SAIDI and the average weight by the number of customers and we got to 8.74 hours of interruptions. And this is equivalent to an availability equivalent in the service area of 99.9%. So on an average, we have an availability of 99.9% availability in our services. And these charts on this slide also have the objective of showing that although the company has been reducing cost and showing better results in the short-term in the last few quarters, this did not happen to the detriment of quality of service or investment. The company continued to invest and continues to invest. The company continues to improve and to bring on board technology in order to deliver more quality and better indicators to our customers.

On the next slide, we talk about generation, our generation segment. So, on the upper part, we have the reservoir levels and that became a point of concern during the last few months because of the very dry weather that we had and on the left, we show the southeast, the NIPS reservoir levels which closed last month or that is now on August 16th at 34% of the level compared to a historical level of 54%. And southeast which is very important, we have 31.6% on August 16th in comparison to 54% of our historical level.

Now, to the left bottom chart, we have the performance of our spot price with volatility. If you look at it in the last two years, but now it's at the ceiling of BRL500 and something per megawatt hour. To our right bottom chart, we have the GSF projection and the market is talking about a GSF very recent now of 39% but the GSF is measured depending on different factors. So you can see here this factor is 0.7, 0.6 in June and July respectively and a trajectory of GSF that is negative or that is a factor that is below 1 for a long period of time over this year. Therefore, we did have in July 39% below in generation of -- that is 39% below of our assured energy. Now I end my presentation and I'll turn the floor to Mr. Gustavo Estrella, our CFO and he's going to talk about the financial results.

Gustavo Estrella -- Chief Financial and Investor Relations Officer

Well, we have here the results of the company in the second quarter. These are positive results (Technical Difficulty) and so we can see a net revenue with a growth of 16.5%, EBITDA growing 33.3% and net income up 265.5% and under the slide before the main highlight here comes from distribution, we see here a total positive variation in the segment of BRL315 million coming mainly from the market and tariffs. Once again we have a growth in energy consumption, we cite here that there was an increase in temperatures bringing therefore greater consumption in residential areas, but also we have the tariff review process that we had at CPFL Paulista and RGE Sul also with a positive impact in the results for May and June.

We also -- we had a positive effect at concession financial asset with BRL106 million. Basically, the two main effects here, first, the adjustment of the inflation by the IPCA and the second effect here is the productivity indicators that also brought a positive effect to our results and that's how we get to the BRL106 million. We also have the results of private pension fund of positive BRL6 million and as Andre has mentioned a variation of our PMSO of BRL36 million positive, we had less expenses vis-a-vis 2017 and the main highlight here is coming from legal and judicial expenses, which were -- provided us BRL26 million.

And conventional generation, we have a negative total variation of BRL9 million. Here we have an agreement regarding GSF and low exposure that we have through GSF and that was rather stable and also because of the inflation. Here specifically we will have the effect of the reduction on SEMESA's assured energy by 5%, which represented minus BRL7 million and commercialization plus BRL3 million and renewable generation, we had a total positive variation of BRL33 million. And this quarter, we had lower wind farm generation because of lower wind speeds with the negative effect of BRL14 million, but that was more than offset the by other effects and the first one is a credit recovery of PIS and Cofins adding up BRL18 million. Also the participation of the MCSD [ph] allowing us a positive effect of BRL13 million in our result and the start-up of Pedra Cheirosa wind farm complex also bringing BRL8 million to the quarter. Now turning to the net income, we do have here the reduction of the interest rates, which allowed us to have a reduction in our financial expenses of BRL123 million and also a positive effect of mark-to-market with BRL58 million.

Now turning to slide number 10. We have our indebtedness and the main highlight here is the reduction of our leverage. Now we are at 3.11 times net debt/EBITDA ratio at the end of this quarter and the main highlight here probably is the robust growth of our adjusted EBITDA for the last 12 months over BRL5 billion. And remember that in spite of the lower leverage, we still have here, as Andre mentioned, some regulatory assets and that makes us carrying to our that BRL1.1 billion of regulatory assets that we have to transfer that to tariff just next year.

Now in terms our debt profile, we have a cost of 7.6% stable vis-a-vis the prior quarter, but we are (inaudible) the scenario of interest rates going down in Brazil. Regarding our indexers, half of our debt today is pre-fixed, so these were debts that initially were indexed in the CDI. Now they are pre-fixed and so these are our main indicators and we have very low volatility for the year.

On slide number 11, we have our debt profile and the amortization schedule. You can see that for 2018, the company since the beginning of the year 100% refinanced and we are working already with the refinancing already for the second half of 2019. We are doing that, as Andre mentioned, in the beginning of the presentation, in the second half of the year we have funded BRL3.4 million and this was basically to refinance existing debts. We are extending these debts and also we are having lower rates there. Therefore, in August we will be almost BRL1 billion more just exchanging that debt profile in the short-term.

Now on slide -- and the next slide I should highlight the conclusion of the tariff review process of RGE now in June and the main highlights here is the growth of the regulatory EBITDA. We see that there is a leap of 103% -- we reached the BRL543 million in this fourth cycle and this is very relevant and it starts to affect basically starting now in the third quarter of '18.

And another important highlight is the participation of the company in the transmission auction that happened (Technical Difficulty) end of June. We now won the Lot number 9 of Maracanau in the State of Ceara and we estimate an investment of BRL102.2 million. So this is our third transmission project that will have here in the company, we have already have concluded to and this is a new lot that is in the construction process.

So now we turn the floor to operator to start the Q&A session.

Questions and Answers:

Operator

Ladies and gentlemen, we will now start the Q&A session. (Operator Instructions) Our first question is from Bruno Varella, Solana Capital.

Bruno Varella -- Solana Capital -- Analyst

Hello, Dorf and Estrella, good morning. I have a few quick questions. The first one is about consumption now in the third quarter. I would like to understand is that at the same level as the second quarter growing at 4%. My second question debt leverage of 3.1 times, do you believe this is feasible considering a stronger EBITDA after the review and a leverage for the next -- for the end of the year around 2 times and a half [ph]. Would it make sense to think along those lines? And third question, the transmission process that you were awarded in Ceara. If we have that discount of 54%, I have a return rate that is very low. I would like to understand what would be an optimized CapEx on your side and is that possible to tell us more about the IRR that you foresee for the project and finally about passive [ph] privatization, what is your idea? Do you expect to have a complex M&A because of the amount of contingencies, but what about after the agreement with the prosecutor's office that the company has made if that has changed your understanding about the privatization?

Andre Dorf -- Chief Executive Officer

Good morning, Bruno. This is Andre and I will start by the last two questions and then turn it to Gustavo to talk about leverage and market growth. About the project in Ceara, yes, we do have a streamlined CapEx more than the one estimated by ANEEL. We don't disclose our internal estimation for CapEx, but what we can tell you is that we are maintaining our financial discipline and economic discipline of the company, so we are not letting go the internal return rate, very much on the contrary, we have an attractive project considering the CapEx estimate that we have. Yes, we are assessing all possibilities of growth that we have here in our segment and I'm talking about that and for us that is under the radar. I don't know if today we would (Technical Difficulty) businesses. So we are assessing it but we do have other possibilities that are more encouraging. Now Gustavo, turning to you.

Gustavo Estrella -- Chief Financial and Investor Relations Officer

Bruno, talking about the consumption in the third quarter, the expectation that this recovery, it will remain in this quarter, it started basically in the second half of last year. We expect it to keep the same pace, but when we compare a percentage of growth considering that we have a consumption pace that is already higher last year, we start having an percentage growth that is a little bit lower. So we believe that this will be closer to 3% now to this third quarter, but that recovery signs are still there. Now the second question about leverage. We are clearly at a downward trend for our leverage and the new factor that we have here is that regulatory asset that could affect our short-term leverage. Today we have a volume of assets of BRL1.1 billion and we expect to grow, maybe not stable (inaudible) by the end of the year. So we are not [ph] reached 2.5 of leverage, I would say that basically because of this high regulatory asset, but when we start transferring that to tariffs over 2019, we will have a drop in leverage that will be even more significant. We are not going to get it to 2.5 right now, but without that regulatory asset, we would get to there.

Bruno Varella -- Solana Capital -- Analyst

Thank you very much.

Operator

Our next question is from Fabiano Rios, Absolute Investment.

Fabiano Rios -- Absolute Investimentos -- Analyst

Thank you very much. My questions [ph] have been answered.

Operator

(Operator Instructions) Bruno Varella, Solana Capital.

Bruno Varella -- Solana Capital -- Analyst

Thank you very much for the additional question. I still have a doubt about losses. Understand that of course, the overall economy impacts commercial losses, of course, but there is a specific point in RGE Sul, looking at these technical losses in the last 12 months, we see an increase in the last 12 months of about 40 [ph] bps vis-a-vis the second quarter of '17 and then you have a drop of non-technical of deposit [ph] third quarter and then, going up again in the second quarter. So I would like to know what specifically affects the technical losses in RGE Sul going up consistently in the last few quarters and what about the environment regarding the non-technical losses. Do you see anything different in the environment, different from the other concession areas and mainly in RGE because the technical losses are very low in RGE Sul. Could you please talk about the environment in which Sul operates -- RGE Sul operates?

Unidentified Speaker --

Bruno, good morning. This is Luis Henrique [ph]. Regarding the non-technical losses of RGE Sul, ever since we acquired the company, we have been doing work in terms of the calculation of losses, we have been improving it or streamlining it because the difference is in calculations in the technical losses and with the difference, you have the non-technical losses. So these calculations, we have been streamlining them every single month ever since we acquired the company and better understanding and installing the necessary and adequate measurement instrument so that we have the most precise calculation possible. So we did this calculation and we are streamlining it and cleaning it up so to say and this is the reason why there was an increase in technical losses because we were streamlining this calculation and that reduces the non-technical losses, of course.

And in this quarter, in RGE Sul, you have seasonality and this is something very critical. You have the hydro -- in the south, where you have a lot of rice cultivation or plantations and this causes an upside [ph] difference that we monitoring and other consumption characteristics of the company that we are assessing and that bring about the seasonality and what are we doing about it. While having a good calculation of the technical losses secondly, we're investing a lot in the grid and the flexibility of the grid itself and this has translated into a reduction of technical losses. However, this is not seen in the short run, it will take some time until we see with those and about the others we are having a [Technical Difficulty] to install such as we did in the Sao Paulo companies, we're going to shield and invest in telemetry and everything will be tele-measured and with that we are going to monitor the consumption of these customers and with that we will be able to visualize and therefore we will be able to make measures in the group A and which is very important in certain periods of the year. And for this reason, we are also getting to know and getting to streamline these calculations, but the plan is already setup for the next few months.

Bruno Varella -- Solana Capital -- Analyst

Thank you very much Luis Henrique [ph].

Operator

(Operator Instructions) We'll end now the Q&A session. I would like to turn the floor back to Mr. Andre Dorf for his final remarks.

Andre Dorf -- Chief Executive Officer

Very well, over the second quarter of '18, we have completed two years since we started the transition and the stakeholding of the company. So you have been able to see that over this period of time, our team was able to focus on operations to improve the (inaudible) team also in our operations team and also we were able to focus in the capital discipline. Everything that we have discussed today and the results of the first half of the year as a whole do show our efforts and also our commitment to the results in the short-term as well as with the sustainability and the results in the long-term as well. So I now end the presentation and the discussions about the results of the second quarter. Once again, thank you all for being with us and thank you also for your support. Thank you.

Operator

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

Duration: 37 minutes

Call participants:

Andre Dorf -- Chief Executive Officer

Gustavo Estrella -- Chief Financial and Investor Relations Officer

Bruno Varella -- Solana Capital -- Analyst

Fabiano Rios -- Absolute Investimentos -- Analyst

Unidentified Speaker --

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