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CPFL Energia S.A. (NYSE:CPL)
Q1 2020 Earnings Call
May 15, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Everybody is connected from their own homes. So we apologize if there is any disconnection and we will work in order to reestablish the communication as soon as possible. The presentation for download is available at CPFL Investor Relations website, cpfl.com.br/investor relations. We would like to inform you that all participants will be in listen-only mode during the company presentation. At the end, we will hold a question-and-answer session when further instructions will be given. [Operator Instructions]. We would like to remind you that this call is being recorded.

Before proceeding, we would like to clarify that forward-looking statements are being made under the Safe Harbor of the Securities Litigation and Reform Act of 1996. Such forward-looking statements are beliefs and assumptions of the company's management as well as information currently available to the company. Forward-looking statements are not a guarantee 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 materialize. Investors should now understand that general and economic conditions, industry conditions and other operating factors may affect the future performance of CPFL may lead to results that differ materially from those expressed in such forward-looking statements.

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

Gustavo Estrella -- Chief Executive Officer

Good morning. We would like to thank you for the present and we hope everybody is healthy and now we have a different format of our results earning conference call.

About the first quarter of 2020, let's go to slide number three with some highlights of the quarter. A reduction in our concession area in the load of 0.2%, still with the little effect of the pandemic on the result with our load already reports this as of March a reduction in consumption of energy. Our EBITDA was BRL1,696 million with the growth of 10.8% vis-a-vis 2019. Net income with a growth of 58.5%, reaching BRL904 million. Our net debt has a reduction reaching BRL15.1 billion with a leverage of 2.21 times net debt-EBITDA ratio.

I would like to remind you that we keep our leverage very comfortable for the group investments reaching BRL516 million with a growth of 15.9%; 90% of these investments go into distribution. We had a tariff adjustment approved by ANEEL for CPFL Paulista in April of 6.05% for consumers and 6.92% in our Parcel B and the first one was postponed to July 1st and this reflects the transfer of the IGP-M and this is a new event in this quarter. We had the postponement of the application of our adjustment for 90 days. So the application of the tariff adjustment was postponed because of different dynamics. We have good news about the listing tender offer of CPFL Renovaveis registered with CVM on April, 27 and the auction will occur on June 10. We started to participate in this entry of CPFL Energia's shares in the Ibovespa in the B3 as of May 20, so we will be participating in the Ibovespa of the Sao Paulo exchange in this year while the equity due of the year 2020 Americas granted by The Banker because of its 2019 reIPO of BRL3.7 billion. Another important event was the recognition by ANEEL of CPFL Santa Cruz as being recognized as the best distributor in the country for the global continuity performance or DGC because of the levels of [Indecipherable] of the company.

On the next slide, page number four. We give you more details about our sales performance. As we said, our load in the concession area went down by 0.2% with the positive growth of 4.3% in Free Client and Captive Client, 3.2% [Phonetic]. Because of the pandemic, we see a drop of sales in the concession area of 1.6% and we will see afterwards details in residential and commercial. This drop of 2.9% and 2%, very much impacted by the temperature. The temperature was very high at the beginning of the year. So we have an effect in the comparison with 2019, the drop in the market, mainly driven by temperature recent and the industrial area, a drop of 1.4% with the non-recurring effect of the migration of two clients of high voltage for direct connection. Net of this effect of migration, this has no effect whatsoever practically in our result for this market. 0.2% drop in industrial and when we breakdown, we see some segments with a positive variation, here 8.2% [Phonetic], up 2%, chemical 3.2% product with a drop of 4.16%, vehicle 3.8% and metallurgy 3.2%. Consolidated, it is flat net of the migration of these clients that I referred to.

On page number five, we see our delinquency and energy losses. Delinquency, we achieved 0.77% with 57.9% and there is no impact of the pandemic yet on the results and comparing on a year-on-year basis, we see an important drop of 15% vis-a-vis last year and this drop is driven by our program of power cuts. We can see 30% vis-a-vis 2019. It is one of the two that we have in order to control delinquency so you can see that we had a drop in our ADA in this period vis-a-vis the previous quarter, there is an increase and this increase is influenced by non-recurrent effect in the fourth quarter of last year and basically some renegotiations that we talked about during our previous call and net of the effect of the renegotiations we would have practically stability vis-a-vis these quarters.

Now talking about losses on the same slide, we see a calendar effect and because of that we see a change in the percentages of losses in the last 12 months when you adjust for the calendar of March 2020 compared to March 2019, we see practically stability vis-a-vis the percentage of losses and this is if we are good that we track very closely going from 8.84% in March '19 going to 8.98% in March 2020 adjusted by the calendar. So you can see that the losses are practically stable vis-a-vis the last 12 months.

On the next slide on page six, we see the performance of our generation. So we see a major drop in our spot price even more so in the second quarter of 2020. In generation, we have the seasonality effect that this affect our GSF secondary energy going to 102% and this effect tends to be offset over the year. In the case of SHPPs, you can see a reduction in flow of almost 9% and this is a very positive result regarding the flow with Minas Gerais growing compared to '19 of 240% and then the south region with a drop of 6% in the period. In wind energy, two effect. The first one that causes a drop of 16% in our generation. We see a lower performance of wind in [Indecipherable] combined or partially offset the availability in the three regions, [Indecipherable] and with the [Indecipherable] machines where we see a highlight, important highlight in the performance of the equipment in the last 12 months.

Slide seven, I give the floor to our CFO to continue the presentation.

Yuehui Pan -- Chief Financial and Investor Relations Officer

Thank you. Thank you. Gustavo. Good morning, everyone. Turning to slide seven, this quarter EBITDA amounted to BRL1.7 billion, increasing by 10.8%. The distribution segment posted an increase of 16%. The greatest gain came from market and tariffs, totaling BRL135 million, mostly due to an increase in tariffs related to adjustments in 2019 and also Piratininga's review in addition to the 0.7% increase in the concession area load with adjustments. Another important effect was our financial asset of the concession, which increased BRL74 million, owing to an IPCA of 1.62% in the first quarter of 2020 compared to 0.9% in 2019. Last year, we also posted BRL34 million from PIS/Cofins over Santa Cruz ICMS. The sum of PMSO and ADA increased BRL9 million and other effects on EBITDA with a negative impact of BRL9 million. In trading services and others, the strongest impact was on trading, owing to a drop in margin of BRL30 million. The services segment and the Holding Company decreased by BRL7 million and BRL4 million respectively.

The next slide shows conventional generation in which EBITDA was 6.3% higher, favored by pass through of inflation in contracts, BRL24 million. The effects of Epasa's overhaul last year, BRL11 million and the lower thermal generation this year negative with BRL15 million were virtually offset. As for CPFL Renovaveis, EBITDA increased 16.1% due to gain of PPA seasonalization in SHPPs of BRL54 million and biomass gains with seasonalization of contracts and higher generation implants, BRL15 million, gains with inflation effects on energy contracts, BRL12 million and these effects were offset in part by lower revenues with GSF in SHPPs due to the fact that it is secondary energy, negative BRL29 million and lower wind farms generation, negative BRL25 million.

Slide nine shows the performance of our net income, which amounted to BRL904 million in the quarter, increasing 58.5% vis-a-vis the first quarter of 2019. In addition to the variation of BRL165 million in EBITDA, there were gains in the financial result that totaled BRL341 million. Depreciation were BRL22 million and taxes increased by BRL150 million. It's important to highlight that we had an important effect in the financial result related to mark-to-market. MTM which totaled BRL260 million, owing to the large volume of funding, nearly BRL3 billion at an average cost of CDI plus 0.8% in a four-year timeframe while the market already began to feel the crisis of COVID-19. Please note that the gain in mark-to-market will be returned in the future as the scenario of risk spread comes back to normal and as we get closer to the maturity date of these debts. However, this result reflects the cost avoided in this moment of crisis since our conservative prudent profile, which anticipated cash management to 2020. I addition, the decrease in CDI and the lower net indebtedness generated gains of BRL67 million.

The next slide shows the company's net debt over EBITDA ratio. On the first chart, net debt totaled BRL15.1 billion and EBITDA in the last 12 months amounted to BRL6.8 billion. The leverage measured by net debt over EBITDA was 2.21 times. On the next chart, we see the cost of debt in recent years, both in real and nominal terms. The decrease in the first quarter of 2020 is mostly due to a reduction in the interest rate, Selic rate. As for the composition of the gross debt, we can see that 67% is pegged to CDI. This position became stronger with the new funding in the first quarter of 2020. CPFL has BRL2.9 billion in new funding with an average tenure of four years and all-in cost of CDI plus 0.8%. In addition, in April, we signed a contract with BNDES in the amount of BRL3.5 billion, a 20-year tenure and the first disbursement is expected to happen in the first half of the year, accounting for approximately one-third of the operation. At the end of the first quarter of 2020, our cash amounted to BRL5.6 billion with a coverage index of 1.78 times short-term amortizations. The average amortization term is 3.15 years.

Slide 11 shows our capex. This quarter, we invested BRL516 million, an increase of 16% year-over-year. A breakdown by segment shows in distribution, total investment of BRL454 million allocated to expansion, upgrade, and maintenance of the electrical system. For generation and transmission, BRL30 million to [Indecipherable] keeping projects, Gameleira and Cherobim in progress. For transmission, BRL8 million earmarked to projects, Maracanau, Sul I and Sul II and BRL1 million for Conventional Generation. Lastly, for the service segment, we allocated BRL24 million.

Thank you very much. And now I give the floor back to Mr. Estrella. Thank you.

Gustavo Estrella -- Chief Executive Officer

Thank you, Pan. Moving now to slide number 10, let me tell you more about our efforts vis-a-vis COVID-19 and how we are getting the company ready to face the pandemic. So I think we were very prompt to mobilize the company in mid-March, allowing ourselves to be ready and check the progress of the pandemic and the impact on our business. So from the very beginning, we started a crisis committee. We have daily meetings to discuss the main topics, analyze the main indicators, identifying any changes in routes, if necessary. All the major executives take part in these meetings. We make decisions to be ready for the crisis.

Another important point, we've been firmly guided by the experience from other areas. So two good measures were made and we anticipated ourselves owing to State Grid experience like buying masks, alcohol gel and some prop measures that we anticipated based on state grids experience and it helped us a lot to have under control the speed of infection at CPFL. And here we show some pillars. The most important one is a very strong focus on safety and health of our employees. A number of measures like cancellation of events and travel, monitoring the health status of employees with daily reports, identifying signs of fever or symptoms, distribution of masks, alcohol gel, so we can actually protect all our employees and do the best we can in our current practices in the company. We have a daily safety dialog before our teams go to the field. We have conversations about safety, everything related to COVID. In parallel, considering the honesty behind our activities, we are all aware of the importance of completing our activities, not only at CPFL, but the society at large. So that's a critical topic for us and we've been doing a daily follow-up by the executives of the company. Still we have home office now. That's a topic being discussed for a long time at the company and within two weeks, we had 80% of our employees more than 4,000 people working from home all at once. We didn't know exactly how the dynamics would be at first. The impact on our work, our system, communication, but the good surprise is that everything is running very smoothly.

Another important point is that we have our call center units concentrated and the volume of people also work in the same site. So we began to decentralize these workstations and recently, not only decentralizing, but also using home office regardless of the call center independently. So more than one-third of our call center is working remote from home and also working very well. Another challenge, in addition to the disconnections, we also had some closing of our agencies and that's a challenge of digitalization, so we can actually educate our customers, so they use our digital channels. This is already happening. Today, we have 90% of service via digital channels and this is also very positive. And just as we did with call center, we do the same with our operation base and substations, preventing everybody to be on-site. So we are working on smaller groups. So should we have any infection, which fortunately never happened, maybe we can have a more proper isolation by working with smaller teams.

Now on the next slide. We show a sequence of our measures for the crisis. So very much concern and we have a contingency plan to assure operation continuity. This crisis brings a lot of uncertainty and it's hard to predict the crisis and how we can evolve and affect the society and our business. So we have this idea of working on a contingency plan to assure and preserve the continuity of our business and a very strong effort on our IT and information security systems. We largely and increasingly depend more and more on our IT area, so that's a core topic for us today and we are constantly monitoring our teams. Physical segregation of operation is another item, applying both for distribution and generation, everybody connected, but with remote operations, including commercial ones in order to prevent physical contact and also mapping and recycling professionals for backup for emergency situations. Fortunately, we didn't have any infection case yet.

So the financial aspect is also very important now, particularly when it comes to liquidity. So this is also part of CPFL's strategy to anticipate items, preserve liquidity and like Pan showed, our cash position, which is very robust, making us very comfortable to move forward in the next months and overcome the crisis. I also mentioned the digital channels, a lot of enhancements and improvement in our relation, customer relation channels, improving our website, our web, IVRs, use of chat-bots and providing free Internet for anyone who uses our app. So the idea is to encourage the use of digital channel. So these are many changes that will apply not only to this moment of crisis, but also in the post-crisis time, so we can expedite our service to our customers and also a better quality of service perception, also an important increase in the number of accounts per month 3 million in a universe of 9 million, but a significant increase also affected by the beginning of the crisis.

New payment options. Now we have high rate of physical payment term. This is for the industry, the electrical system in general. But we are also encouraging new payment option, digital options and now last month, we started to offer a credit card option and basically the team is also showing the delivery collection. Now we have 97 teams and this implementation of collection by using POS machines for that purpose. So when we have this crisis with a lot of uncertainty, what we do is to have daily meetings to track the moves and try to position CPFL in all its areas, so we can always make the best decisions, always focusing on health, safety and the continuity of our operations, maintaining our financial liquidity.

So unfortunately, we know it will still happen for the next weeks, so we still have to be working from home remotely, so we can face the crisis and also assure our safety.

So that's what we had. Once again, we thank you all for being with us and we'll be here to take questions during the Q&A. Thank you.

Questions and Answers:

Operator

Ladies and gentlemen, now we will start our Q&A session. The session will be in Portuguese and simultaneous translation into English. [Operator Instructions] Our first question comes from Thiago Silva from Santander.

Thiago Silva -- `Santander Securities -- Analyst

Thank you for the question. Congratulations for the results. I have two questions. The first one has to do with losses. I understand that the calendar was unfavorable in the concession area, however, I would like to understand and maybe you could give us some color about it. How are you positioning ourselves as you are close to the target of the regulator, how are you positioning yourself, because this is a very sensitive situation that is to say when you exceed the regulatory level, are you sensitive to that because of the situation of the COVID-19 pandemic?

And the second question, we are all expecting a presidential degree, but based on your talks with the regulator and your communication with them and also based on the measure that have already been taken or mentioned in terms of liquidity, is there any problem for CPFL or is there any situation that should draw our attention, not only regarding CPFL, but the whole sector when we see measures beyond the ones that are regulatory measures.

Gustavo Estrella -- Chief Executive Officer

Thank you for the question. This has been exhaustively discussed with the regulators and now when the company is in the sector and there is a positive side to these talks and the idea is to preserve liquidity, not for the company alone, but for the whole sector. We believe there will be an increase in costs and -- the interpreter apologizes because it's very difficult to understand what Mr. Gustavo Estrella is saying, we apologize.

So there is one function regarding preservation of the liquidity of the distribution companies, but also you have to think about the transfer of tariff adjustment. So these are the two main objectives. Your question is very timely because we need a very quick answer regarding this liquidity issue and the reality among the company is rather different among the companies in this sector. And of course, the need of the whole sector have to be met. We have already had some talks with the regulators and the Ministry and the theme of equilibrium is very important. We have been seeing the market performance regarding delinquency already giving an impact or having an impact on April already and it's very difficult to foresee, but anything the scenario that we foresee is not positive in this regard. So this is an extraordinary situation, it is a one-off situation in a pandemic such as the one that we are living today together with the team of delinquency. So our main tool is the cut of the energy. This is the reality that we are living today and the perspective is for an increase in delinquency. So this would bring a relief in terms of cash and for consumers as well.

About the losses, would you like to say something?

Luis Henrique Ferreira Pinto -- Regulated Operations Vice-President

Good morning, Thiago. This is Luis Henrique. With relation to the losses, we are working very high hard on inspections. We have already had 188,000 inspections in April and these inspections I'll give you results mainly on groups A and B the ones where you have the biggest losses that all the companies in the sector have been operating with losses, higher than the limit of the regulator. This has to do with the regulation that was established way back then and with this effect on this crisis, this pandemic situation, we have not stopped inspections. We are doing this very carefully, protecting our employees and our clients as Gustave said. But we continue to carry out our inspections and the calendar effect and that are hindering [Indecipherable] in April. We already have a change in the situation because of the calendar effect that led us to have this small increase, but the losses are very well under control.

And during the pandemic, we are evaluating very well all these issues and we are monitoring consistently and [Indecipherable] event we can cover all the A group and then we have more assertive inspections and working very strongly regarding the quality of the inspections, so that we may keep losses under control and some of our distribution companies are getting to the regulatory level. They are getting close to this level and our trend is to work, so that everybody may go to the regulatory level. This is our plan for the next few months and years as well.

Thiago Silva -- `Santander Securities -- Analyst

Just to add to what you said, is ANEEL sensitive in terms of mitigating the impact during the pandemic, mitigating some situations of losses, do you see any goodwill on the part of ANEEL.

Gustavo Estrella -- Chief Executive Officer

Well, as we said, the first impact was that and we have been discussing this with ANEEL and the losses as they are stable. We have already opened a discussion with ANEEL and we have already submitted this concern to ANEEL, not only our company, but all the companies in the sector, because some period you have no cut and then all of a sudden you have a lot of cut and depending on the economic situation, the population at the moment, there could be an increase in losses, but we are preparing our plan and we are studying our plan in order to tackle this. So far what we have seen up to now is that we see no oscillations. We have things very well under control and the figures are surprisingly good as far as we are concerned. But we are talking with ANEEL because in case of a big distortion, ANEEL should recognize this exceptionally.

Thiago Silva -- `Santander Securities -- Analyst

Thank you very much.

Marcelo Sa -- Itau BBA -- Analyst

Marcelo Sa, Itau. Thank you for the call. I have two questions. The first one has to do with the decree that everybody is expecting with the package of adjustments and will be leaving open the economic side and I would like to know if the idea is to have something very clear that is to say, guaranteeing some financial measures and in this decree, do you think it will be enough for distributors to recognize the CVA to avoid an immediate impact in the next few quarters?

And the second question has to do with the limitation for three months of cuts of delinquent client. Do you think this could be further extended?

Gustavo Estrella -- Chief Executive Officer

As I said, for the decree, it's very much focused on the financial side. So it is basically a measure to anticipate cash or bring forward cash. So this discussion regarding equilibrium is under the responsibility of ANEEL and [Indecipherable] industry itself. So we expect a decree in this direction. Our expectation is that in the decree, we might have but they included regarding there's over-contracting and this will be addressed in further talks with us.

Luis Henrique Ferreira Pinto -- Regulated Operations Vice-President

Yes. Gustavo, I think this is it, as you mentioned yourself in the talks that we have been carrying with the regulator that could be some more clear mention although the contracting part, but this should be started very carefully in terms of the assets.

About your second question we have no information whatsoever regarding the extension of the three-month period. But the crisis, the pandemic, the way it is happening here in Brazil, more specifically in the state of Sao Paulo we believe that this could be extended a little bit further. If we get into a more critical situation, we believe this will be a possibility, but again this crisis is such a new scenario, so unprecedented for everybody that measures taken will probably have to be reviewed for all the sectors.

Marcelo Sa -- Itau BBA -- Analyst

Thank you very much.

Operator

[Operator Instructions] This concludes the Q&A session, I would like to give the floor back to Mr. Gustavo Estrella for the final remarks.

Gustavo Estrella -- Chief Executive Officer

Okay. Once again, thank you all for joining us today. So my final remarks are that these are tough times that we are all going through. It relates to our professional activities, but also our personal lives and with a lot of uncertainties in the scenario for the coming months. So our word of order is to keep focused and disciplined and also be in united at the company, focusing on what I said, health and safety, maintenance of operations and the liquidity of our company and in parallel to that we are opening discussion, particularly in the regulatory framework involving loans discussion of the financial economic balance, so we can have robustness in our industry after the crisis. To some extent, what we've been doing is to have internal conversations about the world after the crisis after the pandemic. So we also be focusing on digitization and undoubtedly considering new ways to interact with our customers, considering good opportunities and also considering our working relations which will also be different.

So it's only natural to use video conferencing now working from home office is no longer a taboo. We see that in many companies, home office is efficient and it can be very positive too. So the idea is to consider to imagine what our business and company will be after the pandemic and also remembering that during crisis, we also have opportunities if we consider the shop owners not only CPF but our shareholders you have to keep an eye open on many opportunities that the future may bring. So once again, thank you very much. We are all here for you for further discussion and questions. Have a good day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Gustavo Estrella -- Chief Executive Officer

Yuehui Pan -- Chief Financial and Investor Relations Officer

Luis Henrique Ferreira Pinto -- Regulated Operations Vice-President

Thiago Silva -- `Santander Securities -- Analyst

Marcelo Sa -- Itau BBA -- Analyst

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