CPFL Energia S.A. (NYSE:CPL) Q3 2022 Earnings Conference Call November 11, 2022 9:00 AM ET
Company Participants
Carlos Cyrino – Director, Investor Relations
Gustavo Estrella – Chief Executive Officer
Yuehui Pan – Chief Financial Officer
Conference Call Participants
Carol Carneiro – Credit Suisse
Marcelo Sa – Itau
Carlos Cyrino
Good morning to everyone. You are welcome to one more presentation of the CPFL Energy Group. We are going to talk about the Third Quarter 2022. I am Carlos Cyrino, Director of Investor Relations of the Group and I will be the master of ceremonies of our event. We have Gustavo Estrella, our CEO; Mr. Pan, our CFO; and other executives of the company.
The presentation will be done in Portuguese with interpretation to English. Click on the interpretation button that shows up at the bottom of the platform. If you want to see the presentation in England you will find it at the website.
I’d also like to inform all the participants that at the end of the presentation, we will have a session of questions-and-answers. All the questions will be done live. Then all you have to do is click on the button, raise hands that is on the bottom part of the platform. This event is being recorded.
Now I give the floor to Mr. Gustavo Estrella to begin the presentation of the results.
Gustavo Estrella
Thank you, Cyrino. Good morning to everyone. I am very happy to be once more in this call. I am going to start in slide three with our highlights. It’s our EBITDA with a growth of 14.3% reaching R$2 million growth, which is a continuous growth, very robust in one more semester.
Our net Income is R$1,419 million, with a decrease of 1.2% already affected by the interest rate increase that we have this year compared to 2021. The investments one more year of record of investments in the group R$1,600 — R$1.6 million, an increase of 72.4%, an accumulated of nine months of more than R$4 million of investment. It’s a very important year of investments. This way, we build the growth of the Group with the increase of the investments. Our net debt is R$22 billion, a leveraging of 1.92, the net debt of the EBITDA, reminding you that we have the last installment of the dividends to be paid at the end of this year.
One important thing that we have is a decrease of 43.3% in ADA, reaching 0.90% of the revenue from sales to final consumers. It’s one more quarter with all the efforts of decreasing default in historical levels but in a positive trend.
Now let’s move on to slide four. Here we are concluding our DTO from CPFL transmission. We launched this on the 19th of October, the auction will be held on the 18th of November. We also exercised the right-of-first refusal to acquire 3.4% of the shares of Enercan CPFL generation and we increased our participation in the Campos Novos plant.
We signed Allegra Project, the modernization of the Pacaembu stadium with all the energy solution is the responsibility of CPFL solutions, an investment of R$70 million and a contract of maintenance and operation of R$300 million for the next 15 years. That’s an important project that shows the capacity of projects and execution of CPFL solutions.
And last, CPFL Energy got the price, best of money, Melhores da Dinheiro in ESG and the Época Negócios among the utility sector.
Now let’s go to slide five. I want to talk about energy sales. So we had almost flat sales compared to 2021, load in the concession area with a drop of 2% and the sales 0.2% decrease. When we look at consumer classes, we can see residency with a drop of 2.3% here with the impact — relevant impact of AGD with 2.3% and lower temperature with a negative impact of 1.5%.
When we look at industry we have some recovery, some resilience in growth with a hike in 3.2% with some segments like food, rubber, with higher growth and we see some signs of an uptake in the consumption in this area.
The commercial class also continues with the recovery. In 2021, we had a relevant impact of the pandemic. So we have an increase here with the reopening of commerce, in general, an increase of 5%.
And in the other classes, we have a drop of 9.1%. Here, we also have an impact of the GD but an impact to the migrations the limited impact in our results, but also due to the better hydrology. We have an irrigation reduction in the rural area in Hugradoso [ph] which brings an impact of consumer reduction in this class.
Now let’s move towards the next slide. We can see the sales here in the nine months of the year. This is a scenario very similar to the third quarter, stable sales of energy. This is our expectation to close the year. We should close practically flat with some recovery coming from industry, from commerce, but a relevant impact of AGD affecting the low tension clients.
Now let’s move to slide seven. I think here, we have important information about the drop in defaults reaching 0.9 in our revenue. As I said, we have a historical average of 0.7. So we are still higher than the historical averages, but it has a reduction trend.
We have scenario, which is challenging. But I think some factors have helped us in this semester. One was the reduction of the tariff on average. This fell 20%. It dropped 27%. This brings a positive impact due to the reduction of the energy bill and also the hydrics scarcity now with a yellow flag and also with an important reduction for our final line.
We also see the economy and the flow in three and we have an increase of real revenue. This affects the power of purchasing and the capacity to pay the bills. Internally, we are very mobilized in our billing is — the main one is the cuts of energy. So we have a hike in cuts. This gives us more or less 232,000. It’s what higher than the historical average before the pandemic. Of course, this brings a positive reflex to control lack of payment.
Now let’s move on to slide eight. This is also a good news with all the challenges that we have to control losses. We have here one more reduction of the global losses, 8.82% and 2.20 — 2021 and 8.55% this year. So our challenge and our mobilization of our engagement continues for us to be able to reduce even more losses in the next three months.
As for generation here in slide nine, we have an expressive reduction of PLD in this third semester. This is due to the good hydrology that we have had in 2022, different to what we had in 2021. This also gives us positive reflex with an improvement of 41%, reaching 73% as we close this quarter.
In the wind farms, we have a worse performance due to the weaker winds this year compared to 2021. But the good news is the availability of our aero generators 96.4%, which represents an important improvement in the last years. We continue in this trend of improving the availability of our wind farms.
Now we are going to move over to slide 10. I am going to give the word to Mr. Pan to talk about the financial results.
Yuehui Pan
Good morning. Good morning to everyone. In this quarter, we reached an EBITDA of a hike of 14%. The Distribution center had an EBITDA of R$1.5 million, we had 2.3% increase. This is due to the active drop that R$380 million due to the low PSA with — we also had an increase of R$17 million. This was very much affected by the high inflation and also the higher cost for third parties.
On the other hand, we had another higher gain of market and tariff R$206 million, especially due to the APCI — IPCA. Another important effect is the margin of other revenues that had a gain of R$66 million, basically the rental off posts and they have contracts that are adjusted by the IGP-M. The PD [ph] was lower this quarter million, as Gustavo has already demonstrated in slide seven.
In generation, the EBITDA reached R$1.1 billion, a reduction of 11.2%. The main effect was gained with the GSF solution and the regulated market of R$274 million accounted for. In 2021, there was also an impact of R$55 million in wind generation due to weaker winds and an increase of R$37 million in the expenses with PMSO and sectorial taxes.
On the other hand, the updating of the prices of the contracts helped with R$150 million. It’s a less lowest expense for GSF due to the higher volume of rains and the lower PLD. This contributed with R$122 million. Other effects had to a loss of R$42 million.
Next, the Transmission segment was the highlight with an EBITDA of R$374 million. A good part of this amount is due to the consolidation of the Transmission CPFL numbers with R$279 million.
The other transmission projects had a positive impact of R$218 million. In the past, we had a negative effect due to the increase of the CapEx. But this year, we have a positive effect in the contractual asset. These effects took place in the IFRS.
In the Trading, Services and Others, we had an EBITDA of R$14 million, impacted mainly by comercializador represented the best result of R$400 — R$48 million. Other effects added to a loss of R$3 million.
Now the next slide, we show the performance of the net profit, which was R$1.4 billion during the period, a small drop of 1.2% in relation to the third quarter last year.
The financial results, we had worsening of R$290 million due to the expenses with the net debt, the increase of R$292 million due to the increase of the CDI and also a larger balance, a reduction in fines, R$16 million after the adoption of the IPCA and no longer the IGP-M, compensated by monetary updating with regulatory assets, R$303 — R$38 million, because of the higher SELIC, other effects added to R$17 million negative, the depreciation increased R$83 million and the taxes had an increase of R$14 million.
In the next slide, we show you the accumulated performance in the year. We reached an EBITDA of R$8.5 billion, a hike of 27.8%. The result was due to the good performance of Distribution with an increase of the EBITDA of 26.2%, favored especially by the tariff readjustments.
In the segment of Transmission, we added R$810 million especially due to the consolidation of CPFL transmission.
In Generation, there was a reduction of 2.2% due to the gain with the GSF solution in the free market, which was regulated in 2021 and the lower wind generation compensated by the contract readjustments.
On the chart on the right side of the screen, you can see the performance of the net profit, which was R$3.8 million in the period, an increase of 9.1% in relation to last year. The increase of the EBITDA was partially compensated by the worsening of R$1.2 billion in the financial results, impacted by the higher cost of the debt, the depreciation increase from R$173 million and the tax is R$108 million.
On the next slide, on the left side, we have the cost of the debt, which is 13.8% below the second quarter due to the lower IPCA. In comparison to 2021, the increase is due to the variation of the CDI in the period, which below we have the profile of the gross debt, our large higher exposure in CDI with 70% followed by 28% in IPCA and 2% TJLP on the right side.
On the bottom part of the slide, we have the cash at the end of the quarter, which was R$4.3 billion with a coverage rate 9 — 0.9 times the amort — short-term amortizations. The average amortization is a little over three years.
On the top part, we have the net debt in the covenants criteria, which reached R$22 billion. EBITDA of the last 12 months totaled R$11.4 billion. Therefore, the leveraging measured by the net debt over the EBITDA was 1.92 times — 1.92. I remind you that we will be paying the installment that is still missing from the dividends declared in April, R$1.8 billion at the end of this year slides.
Now let’s go to slide 15. The CapEx was R$1.6 billion, an increase of 72.4% in relation to last year. In the division per segment, we had in Distribution our main destination of the CapEx, a total invested of R$1.3 billion, reinforcing the assets for tariff revisions that we will have next year.
In the Generation segment, we invested R$58 million with the maintenance of projects that are ongoing and also the building of Cherobim. We also invested R$155 million in reinforcements, improvements and the building of our Transmission projects.
Finally, for the other segments, we invested R$18 million. So in the accumulated of nine months, we have R$4.2 million, which represents an increase of 57.4% in relation to the same period in 2021. With a highlight to the investments carried out in the segments of Transition and Distribution.
I thank you all for your attention and I give the floor back to Mr. Gustavo. Thank you very much.
Gustavo Estrella
Thank you, Pan. Well, we are here in the last slide, where we show our commitment with the decarbonization adhesion to the global pact of the UN with the ambition net zero. This is ambition of several companies that have come together.
It’s a reduction of 2 gigs tons of CO2 and this has to do with everything that CPFL doing with our ESG agenda, several actions that we have to have more and more renewable energy. The reduction of our own emissions and we formalized this commitment with a vision that we can also influence positively other companies and the clients themselves so that we can have this strong and engaged movement in the reduction of CO2 in the world.
Another important data and this has been a focus of the company during the last months in — is in the market of carbon credits. This is a market that has been growing and the perspective of the growth is even higher in the next years and this is a potential new business for the company that can be relevant way forward.
So we already have here revenue of R$24 million. In CPFL solutions, we know that this market has a huge potential, whether it be a certification of new credits, whether it be the demand of the market with more and more companies purchasing these credits. This is something that we have been focused on with a very positive perspective.
Okay. So I think that’s what we had to say. I thank you all for your participation. I give the floor to Cyrino for us to open our Q&A. Thank you very much.
Question-and-Answer Session
A – Carlos Cyrino
Thank you, Gustavo. Thank you, Mr. Pan, for your presentation. [Operator Instructions] And we will — we have a first question here from Carol from Credit Suisse. Good morning, Carol. Thank you for your participation. Go ahead with your question.
Carol Carneiro
Good morning, everyone. Thank you for the call. I have two questions. The first is about GD. You mentioned in the presentation and also in the release about the impact that you have observed for the total consumption. How much this is deducted. Could you please, if you have, how much does GD represent of the total consumption of the CPFL concessions for us to have a real idea of what is the total impact of this in the consumption that you see net in GD. And also if, in fact, there has been any acceleration of the participation of GD in the whole, because it wasn’t something that you could notice so much, but this time the impact is very clear. And my second question is about the allocation of capital and dividends. At the Investor Day, you mentioned that the company now feels more prepared due to the 100% of the incorporation of Transmission within the group with very good results and we have some auctions coming up, up to the end of the year and beginning of next year and also the cash generation of the company is very positive. So we see it’s more to have an idea of what appetite you have for these transmission auctions vis-à-vis the payment of dividends, which as always is attractive for the company? Thank you very much.
Gustavo Estrella
Hi, Carol. Thank you for your question. Let’s go, first about the GD, I think, it’s very clear that this year was an explosion of new clients putting GV and today we have more than 17,000 clients a month.
We are going to close next year with 6% of our load coming from this. So it’s a very high number. We never imagined that this would happen in such a short timeframe. But that is the photograph of 2022.
There’s been an investment in a migration of residential clients looking at regulation and the subsidies and this end in the beginning of 2023. So there was a race for the installation of new solar panels.
We have seen this discussion with a lot of apprehension, this delay of the subsidies because of the impact that it causes. We always can’t compare this and with the low income, the expectation is that the low income subsidies will reach 15 million clients and it will cost around R$3.4 billion.
So we are going to AGD and the expectation considering the numbers that we have today 1.38 million in the whole of Brazil. This is going to cost almost R$5 million. So it’s a large difference and it affects a lower number of clients of the distributors and high income clients.
So it doesn’t make sense to focus efforts on a type of subsidy that besides getting a universe of small universe. It reaches those with higher income. So this is a preoccupation. I am talking about the numbers today. So if we delay this, the size of the subsidy will be even, because we will have this migration of clients, distributed generation.
For us, it’s very clear that it’s a natural trend that’s going to happen. It will happen. I think distributed generation has an important role in our matrix today and it’s very healthy and positive.
Clean energy centralized but it can grow and expand with its own legs without depending on subsidies that we know is for the captive clients. Those ones that don’t have resources and the bill gets more and more expensive for those with a lower income.
Let’s move to your second question. Allocation of capital, I think, that we see some good opportunities in the next auctions. We have an auction in December now. So to — which slots are we going to participate in, also with good expectations for next year due to the volume of, first as a strategy, we have to have this with a payment of dividends and we are able to do this, as you said, are leveraging.
And we are going to have an impact of the payment of dividends, R$1.8 million, as Pan mentioned, but its leverage, which is structurally low and will allow us to continue to do two things, paying the dividends and dealing with good opportunities of growth.
Now the question always is our capacity of competing, we have financial discipline, which will also always have to do with the future investments. So if we don’t have the capacity for a return with an adequate return, possibly we won’t be able to buy any.
So we have to do our homework, which is to monitor, identify good opportunities. We continue doing this. So we will participate. But always with this guidance, with the main focus on the positive financial return to our shareholders.
Carlos Cyrino
Let’s move to the second question, Marcelo Sa from Itau. Thank you, Marcelo, for your participation. Go ahead with your question.
Marcelo Sa
Thank you for the call. It’s about the revision of the physical guarantee that was published. We see a reduction of the plants that have analyzed 3.5%. So I was looking here at the physical guarantee of CPFL plant and there’s a reduction. So I’d like to understand what you think, if this is the final number? And the other question is about the dynamics of the commercialization of energy. You have been very vocal about the prices of energy in the next years and this vision was shown to be correct. So how do you see the price curve for the next years? What do you think about this? Thank you.
Gustavo Estrella
Good morning. I am going to answer the first question about the revision of physical guarantees. The public prosecutor has done this very much in line with what they published a month ago. The difference was the update of availability rates. So in the global we pay a bit of what was published before, but within what was expected considering all the premises that the Ministry has adopted for this revision.
There was no surprise in relation to the numbers that will publicize and that were discussed with the Ministry. Thanks, I think that’s what I had to say about the first question. Let me know if I did not reply or if you need any additional information.
Marcelo Sa
No. I think that’s very clear. And the other question was about the commercialization of energy?
Yuehui Pan
Well, good morning. I am going to answer this part of your question. We have this goal. We have more offer than demand projected for the next five years or six years. We have a lot of premises inserted. So how will the generation expansion take place, but we see that the market prices converging.
So lower than R$100 megawatts hour is impacting the price different to what was negotiated one month, two months ago, R$140, R$145 for the forward and the report has a certain delay in relation to what is negotiated to the market.
But it has a lot of adherence to the prices that are being negotiated. So they still have the potential to drop. But it will depend a lot of what’s happening in the hydrology in the meantime. So I think it’s more associated to the short-term hydrology to be able to have a drop in prices and this is going to have a dynamic, this will happen as the realization period gets closer.
Marcelo Sa
And if I could ask another question, the privatization and the thermal contract of energy, we had the first auction that took place, but it was only a part that was contracted and available in that auction? So I’d like to understand your vision, if you think the way the law is written, this part that was not contracted, would never have to come back or should it be offered in all the auctions. For example, the North market as an example?
Gustavo Estrella
Marcelo, understanding is that, by the law, it has to be contracted. So I think these reserve auctions to, which should happen soon. This is what we understand about the law.
Marcelo Sa
Thank you very much.
Carlos Cyrino
Thank you, Marcelo. We have a third question. Giller Milima [ph] from Santander. Thank you for your participation. Please move on with your question.
Unidentified Analyst
Good morning, everyone. I was muted. Sorry. I’d like to go back to the issue of dividends. Could you please comment if the leverage of the distributors is also comfortable to pay out 100% in 2022 or if you are going to exclude BNR to leverage the distributors? And the second question would be if you can comment a bit about the Amazonas asset. What challenges can you see in the operation and partners? How is it going to pan out?
Gustavo Estrella
Hi, Giller. Thank you for your question. First of all, about the dividends, it’s very clear that volume of investments — potential volume of investments, especially in the distributors, we have a higher potential and medium-, long-term, this will pressure the leverage of the distributors.
Remembering that we see this much more as an opportunity due to be an integrated company, we have the capacity to manage the cash funds to finance this investment and we do this with leveraging under control.
But we will have something — some treatment with the distributors in one of the scenarios that we are discussing, as you mentioned, the BNR and our Energia [ph] married this with the — then BNR is an accounting effect. So this can be evaluated and discussed again.
So I think we have a pressure to leverage short-term that concerns us. We have comfortable leveraging where this additional volume of investments fits. So looking at the perspective, long-term, we see this as the upside given the increment that we are going to have during the next few years.
In relation to the Amazonas asset, I think, it’s an asset that is not — it has a series of challenges. It doesn’t have anything to do with CPFL. So there’s no interest of us in looking at this right now.
Unidentified Analyst
Thank you.
Carlos Cyrino
We have no more questions now. So we will end a session of questions-and-answers. If there’s any doubt or anything that you would like to clarify, we are available to clarify later. Before giving the floor back to Gustavo, I’d like to remind you that next week, we have our first investor education. This would be two days of events in Sao Paulo. So if you haven’t put your name down and registered, please contact us, it will be the 17th and the 17th, two day of events, talking about this segment, the sector, et cetera. So if I haven’t registered, do so.
I am now going to give the floor to Gustavo Estrella for the final considerations and to end this event.
Gustavo Estrella
Thank you, Cyrino. Well, once more thank you very much for participating in our call. I think once more we present a robust result — resilient results. We continue with the challenge of building results for the next years.
We talked about investments, opportunities of goals. This is our target, balancing capacity of generating dividends with assets that bring us return and value for our company and our shareholders and also the assets that exist with additional investments.
We continue our journey looking for opportunities of growth with controlling our expenses and maintaining our efficiency and our performance in relation to the results. That’s our story. We hope to continue growing, telling the stories and growing in the same way. I thank you for your participation and your support and have a wonderful day.
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