CPFL Energia S.A. (NYSE:CPL)
Q1 2014 Earnings Conference Call
May 13, 2014 10:00 AM ET
Wilson Ferreira – CEO
Sergio Tamashiro – SAFRA
Vinicius Canheu – Credit Suisse
Good morning ladies and gentlemen. Thank you for waiting. We’d like to welcome everyone to CPFL Energia First Quarter 2014 Earnings Results Conference Call. Today, we have here with us the Executive Mr. Wilson Ferreira Jr., CEO of CPFL Energia; and other officers of the Company.
This call is being broadcasted simultaneously through the Internet in the website www.cpfl.com.br/ir. In that address, you can also find a banner in which the presentation will be available for download. We inform that, all participants will be only in a listen-only mode during the conference call during the Company’s presentation. After the presentation, there will be a Q&A session. At that time, further instructions will be given. [Operator Instructions]. It is important to mention that, this conference call is being recorded.
Before proceeding, let me 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 on information currently available to the Company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future.
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, I’ll turn the conference over to Mr. Wilson Ferreira Jr. Mr. Ferreira, you may proceed.
Good morning to all our investors and analysts. Thank you very much for joining us in this conference call to review our earnings results and I’ll straight our way to our presentation on page three.
Through this slide, I will be giving you an update of the energetic condition of the system. As we can see, this is a chart we showed in the last webcast that we closed the month of April with 43% of power system. In terms of reservoir level being the nationally interconnected system, 43.1% today and the expectations based on official net power system operators information, we should close the amount of May with 42.4%, therefore below our target compared to the adequate reservoir level. The bottom chart shows exactly why we are facing this situation. As you can see, this year, basically in the first four months of the year, we had a deficit in natural inflow energy. We are working in one of the worst long-term averages since beginning we have had started measuring this, and this is the main reason why we got to the Mata Velha with an insufficient level in terms of being comfortable to supply energy throughout the year.
Now obviously because of that on page 4, we’ll make some evaluations of probabilities regarding how this is going to unfold. On the bottom slide, we can see the history compared to November. We start again with rainy period. We are thinking about de novo and expectations about de novo in terms of rainfall. De novo will give us more favorable rainfall in the so called wet period in the South. So, it is expected that we are going to have more volume of energy generated. On the other hand, we are going to have generation deficit in the Northeast. We have a forecast what characterizes de novo is at the beginning of rainfall, and it will according to the forecast. In other words, if we do have de novo this year and probably is high, we can say that based on the comparison and hydrology with previous years when we have de novo, rainfall begins in November which will be fundamental. When we work with a possibility of closing November and closing the dry itself. So, we have two stimulations here. We will careful enough to include on the right side chart, the storage according to ONS scenarios. ONS is the net power system operator and it all summarized in the footnote of the slide as you can observe. So that, we can close with a 15% storage volume in November. We would need to have a minimum natural inflow energy, ENA of 84%.
On the other hand, in order to reach 30% storage, we would need to have a natural inflow energy, ENA of 104% of the growth. I would like to remind you that, during the last 10 years, as we mentioned in the last webcast, this was slightly below the average of 105% which we had in the last 10 years. So, this is probable. Then on the right, we can see the level of probability of reaching that ENA. In 81% of the cases, this is possible. So, 19% of this being less than 84%. On the other hand for an average of 104%, the probability of this being less than 104% is 70%, and only 30% probability of this being higher than 104%.
As requested by the analyst, we also provide you more critical scenario than this, and this is where we see in CPFL scenario and this is what we call the worst case scenario and it was to close in the same level of 15% and 30% storage. In the CPFL scenario, well, this considers a 3 month delay in the operation of the transmission system of the Mabhida River.
According to ONS, this is expected to being in May and this will bring the major entrance energy volume. We’re also stimulating the delay of 400 average megawatts from the wind farm from August to January of 2015. This is a more critical thing. It is more geared to the transmission side of the business, and ONS considers a thermal failure rate of 10%. We’re considering an additional failure rate of 5%, and all of that changes these volumes. I mean, we are going to have offering of energy. So, to reach the same 50% instead of needing 84% ENA, we’re going to be needed 88%. The probably of this will happen is 68% or probably that it will be worse than this is 32%. The same example applies to the 30% storage in November. We would need an ENA of 108% of the average and the probably of this happening is 26%. The probably of that we’re going to have less than this is 74%. So based on this table undoubtedly we are leaving a period of a lot of tension. We need to permanently monitor the situation. Probably is now not a favorable as we had past.
On the side of curiosity, we’re including here the curve that is more similar to the 71 hydrologic curve. This was the worst natural inflow energy in the dry period, 1934, 60% and in 1971, 85%. So, we can see that the curve in the first four months is more similar to the 1971 scenario than in the 1934 scenario. In 1971, we had 85% of natural inflow energy. In March or April, as we can see it is slightly better than 1971 in terms of the dry season. We follow the same hydrology of 1971. We would reach both in the ONS scenario and in the CPFL scenario 15% and 30% considering permanent dispatch of the thermal power plants during this period. So, this is an update of the scenario. Our recommendation is to contemplate, monitor and strictly follow-up on these conditions so that we can get prepared for worst condition.
Please go to slide 5, where we see the highlights of the first quarter 2014. As market realized, we had an increase in sales in our concession area. I personally have never seen such high value in the residential and commercial segment plus 13.5% compared to the same period last year plus 11.3% in the commercial segment. A positive point is what result from this agreement. Disbursement from the sector fund CDE in the amount of BRL1, 170 million in the first quarter 2014 to cover involuntary exposure and thermal dispatch.
This was a very high value for the industry ensuring high level of liquidity for the disburse in our Group, commercialization and services had an EBITDA of BRL77 million in this quarter, higher than all of the value we had in 2013. This comes that there is a really in this market and the quality and strategy of CPFL in operating commercialization and services. Also, as highlighting the first quarter of this year, we had recontracting of Semesa’s energy with Furnas for 14 additional years until the end of the concession period. The expansion of CPFL Renováveis here we have to highlight. The M&A as a joint venture was better, which was approved by CADE in April of this year and by ANEEL in May. And also a highlight is the completion of construction of the last wind complex Macacos I.
There is only one pending item there regarding an authorization by ANEEL which should come according to our expectations during this week. We invested BRL240 million in the first quarter of 2014. Obviously, investing lower than usually recognizing the reserve liquidity but not impacting at all the strategy of the Group particularly regarding the discussed. We are completing our investments in renewable generation and that’s why we have had reduced the level of investing.
We formalized the payment on May 8th of BRL568 million or BRL0.59 per share in complementary dividends related to the second quarter 2013 with dividend yield of 4.8%. Economic tariff adjustment of 17.18% of CPFL that we’re going to talk about but increase of 16.6% in the daily average volume at PMSO and CPFL implementation. It’s the first time we talk about that, the creation of a Company to operate in this market, particularly in the back haul segment, with 544 kilometers of installed fiber optic network in the 10 main cities of CPFL.
Now, we’re going to you more detail on energy sales. We have some charts here regarding sales in the concession. As I have said 7% increase in the sale in the concession area, 9% in the Captive market and 1.9% in the use of our distribution system TUSD. So, a combined sales increase of 7%. In the middle table, we can see sales by consumption segment, residential and commercial. As you can see, commercial practically flat, industrial practically flat to slight decrease, but we have commercial growing 11.3%, others 11.6%, totalizing 15,707 gigawatt hour.
Sales growth in the concession area had 18.9% in energy sales in CPFL Renováveis, a drop of 11.9% and the volume commercialization and conventional generation, giving us a total energy sales to consumers increasing 12.1%. This can also be observed in the bottom chart. CPFL grew its distribution Company’s operation above what Brazil grew, 6% for Brazil, 7% for CPFL. That is notably due to the growth in this Southeast region. CPFL grew 6.2% against 5.3% Southeast growth. Maintaining our 11% commercial ability.
Trying to explain is the fact of the market. On Page 7, we have some of the explanation. We can observe here in the first quarter, we had growth particularly of residential and commercial segments 12.7%, Brazil grew 10.3%, CPFL grew 12.7% in blue. We can see the main increase happened in February, so there is a de-coupling 19.1% for CPFL, 14.6% for Brazil and the main reason is temperature. If you look at the bottom right hand corner chart, we are going to see the breakdown of consumption because of economic growth and economic effects in green, we can see practically half of these values but inline to blue, we can see the temperature impact. In other words, the temperature effect was justifies this higher volume and we see both in the top chart temperature, we can see deviation, Campinas is where we have our largest concession 32.7% deviation from historical average.
Caxias do Sul, the biggest RGE city, 26.3% and some other cities as you can see with deviations of 15% or 10% above and accumulated CDD degree of days in the first quarter. We can see that we have 715 degrees higher. It is the sum of all of the temperate and its effect, and this was in the first quarter, right. So, this is some day-by-day of the value that correspondence the positive difference between the average daily temperature and the threshold of 18 degree. So, these temperatures were indeed higher than historical values and that’s why we have these deviations from historical average and this accounts primarily for this increase in consumption.
To have a better idea of what is happening, please go to slide 8, where we have the profile of residential consumers of CPFL Paulista and CPFL Piratininga. And we can see that, 23 refers to refrigerators and freezers, 13% electric fans and now more recently air conditioning equipment. And this consumption, if you look on the right side of the slide, the consumption of refrigerators and freezers practically doubled, actually more than doubled, compared to winter time.
And I explained the same in the past that, because of the difference in temperature, we have to maintain a constant temperature and we have compressors working longer and the same goes for electric fans and air conditioning and there is practically no air conditioning and fan consumption in winter. So, we see a 183 kilowatt hour in winter time increasing to 237 kilowatt in the summer and this is a lot higher when we have an important differences in consumption. Indeed, the refrigerator consumes about 2.5 times higher consumption than in winter.
Now let’s turn to slide number 9, where we share results for the first quarter of 2014. As we usually do, on the first line, we have IFRS results and on the second line, we have what we call managerial results IFRS added to the proportion of consolidation for generation and also we have the regulatory assets and liabilities and non-recurring items accounted for. So, under the final view of IFRS, we have a variation there, an increase of 8.2% in net revenue, a drop of 25.4% in the EBITDA and a drop 57% in the net income, and we will talk more about it.
I always like to do the comparisons with a managerial results with recurring results of the Company. I would say that, they are truer in terms of volume of assets and it makes easier for analyst to work with these figures. So, by those results we had a stable growth, we had a EBITDA growth and remember that this quarter we had the comparison to a tariff reviews from the largest distributors in the Group and we will talk more about that as well.
On the other hand, the operations of commercialization and generation also included. And in the net income we have a drop of 7.9% that was due to indicators of the Company. There was an important increase of the CDI in this quarter. So, I would say that, in the EBITDA, we have visibility because we have generation and commercialization offsetting the drop in distribution. On the net income, we had worse results due to the indebtedness conditions. These were the main reasons for the variations.
On the bottom part of the slide, we have the breakdown of all figures on the first line. We have the proportional consolidation of generation and let me remind that, here in the IFRS, we don’t have a full integration. We consolidate basically – participation. So, this consolidation is necessary to be done. We have the regulatory assets and liabilities in last year especially we had an agreement with CDE and in last year we also had that coverage of the biological risk and we don’t have that this year.
So the figures express that something that hasn’t been done in January of this year besides the hydrological risk. And the comparison of non-recurring events, we have legal and judicial expenses that we had last year and this year we had exposure to MRE in the first quarter of last year, and in this first quarter, it was especially related to CPFL Renovaveis and its project. And then, we have the smaller figures for reallocation of costs with basic losses also effective tax, fiscal adjustment and also the write off for assets that happened last year and that planned.
So, this would add in the comparison of IFRS, and also adding the managerial amount from BRL787 million, we would reach BRL1,086 million and that explains that a lot of these variations due to regulatory assets and liability and we do have this proportional consolidation.
Let me try and explain on page 10, these effects especially of the CDE coverage through monthly disbursements by factor. And on page 11, you will see that we have had BRL9.2 billion coming into the factor. And you can see that, in January, we had from CDE BRL1.3 billion just to cover the involuntary exposure. Part of that BRL181 million that we mentioned of regulatory assets of our distributors, we didn’t have coverage of that to additional dispatch for thermal.
From February beyond after this BRL221 million decrease, we have here the coverage of this involuntary exposure of BRL3.2 billion plus BRL0.92 billion of thermoelectric, and in March BRL2.3 billion for involuntary exposure and BRL1 billion for thermal dispatch and that adds BRL9.2 million. And remember that, we had the reimbursement for this operation of BRL1.2 billion and right after than BRL11.2 billion adding BRL12.4 billion, BRL9.2 have already being used just to pay for those additional expenses in the first quarter. So, we still have BRL3 billion or something along that.
It’s important to show this analysis that this was a successful auction, the A auction 2,046 average megawatt were contracted and what we have declared in January was an exposure of 3.6 average gigawatts that’s estimated deficit due to seasonality of consumptions of distributors was of 2.4. So we reached the 2.46 coverage of 85% of ANEEL up to the end of the year. Arguably, this is at a higher price changing from BRL263 for thermal and BRL271 for HVPs.
On page 11, we can see the impact on CPFL. We have received BRL1,170 million and here we have average 200 megawatts of exposure. We heading the auction to 57 average megawatts and from May on, we are very comfortable because in total sum of the Group, we are doing well. But this is a Group position, so we have a long position in some and short in other distributors. And also I’d like to highlight here, the tariff adjustments of Paulista and considering a spot price of BRL632 megawatt hour and I’ll show how real this is in terms of future exposure, exchange rate at 234, IGPM at 7.2%, the CDE quota would add BRL415 million.
There was a reduction of that disbursement of BRL145 million. That’s why we had a lower increase on the initial one, because we were using a previously established quota BRL450 million and that quota was reduced. We also have EFF and EER charges of a BRL152 million and the CDE for BRL172 million, because of that the personnel increased 17.4% and – 66.54%.
You can see that, the tariff increase is basically due to the increase of energy and power that has this impact of 17.4%. So, there is tariff impact 12.84% and this is exclusively due to the amount updating of all tariffs in terms of energy bills.
Now let’s turn to page 12, and I’ll go into the breakdown of the Company’s EBITDA as well as net income. As I have said, in terms of the managerial, we have increase from 1.01 to 1.086 half percent. So, these are detail to your left, we have the regulatory assets, we have non-recurring events and the proportion consolidation, as I said before. And here I am bringing the details of the 25.4% drop in IFRS from BRL1,055 million to BRL787 million. So, that is explained by net revenue of BRL282 million increase and here is a positive highlight which is distribution. That has two elements. One element is that, we have just detailed that the market mix of market volume because we have average tariff that are better than the industry.
So we had a gain there, but we had a negative effect for tariff due to tariff review specially our lease in RGE that happened last year. Therefore, we are not there in the first quarter. So, we are using these two effects, the tariff review that account for 75% of the distribution activity in the Group and on the other hand we have better volumes, especially due to temperature effect on the economy in the first quarter.
We also have due to the seasonalization of conventional generation increase of BRL15 million. In CPFL Renováveis, we had new undertakings coming in along last year, so we have an extra BRL30 million and the commercialization and services activities we had a lower revenue, but you can see that this drop in revenue is BRL44 million, but we had energy build at more competitive prices. So, we do have a drop of BRL105 million. So, the revenue is coming down 44%, but we were able to have broader margins and we will talk more about that.
So, first, an increase in revenue. Second element, the increase of cost energy BRL661 million already net of disbursement of BRL911 million. So, here we are talking about an increase of BRL1.5 billion, a little bit more on that. So, obviously we see that increase of BRL730 million in the energy bills at the distributor for CPFL Renováveis we have a delay. In the undertaking, we had an exposure and then specifically here that was contracted from April 1st on. And then commercialization and services, I just said, we acquired energy a BRL105 million cheaper than last year and in the conventional generation BRL17 million. So, the element that is determining here is that, we increase the revenue into BRL180 million but we have an increase in cost due to purchasing of energy and we had a small decrease in operating cost and expenses BRL20 million, a 5.8% decrease.
We have non-recurring in fact fewer from last year those legal and judicial expenses from last year. They are non-recurring and the other ones are recurring, a drop of operating process in Renováveis was BRL1 million also third party services decreased BRL5 million and increase in others were BRL28 million. We had an increase with personnel there of BRL13 million. There is a collective bargaining agreement, PMSO services of BRL11 million.
So, adding all that up, we have equity method for the consolidated – with BRL65 million and that is under the equity method and these are also under the tariff review for those Genco and the privatization fund activity that had a drop of BRL 8 million vis-à-vis last year. So basically, we have an increase in revenue of 8% across the increasing energy cost, which is a very typical situation that has to do with TOV and thermal energy. And on other hand, we have a reduction of 5.8% in operating cost and expenses and that explains our EBITDA variation.
In the next slide, we do a comparison of an important process of cost reduction for the last two years. In actual amount, we have dropped almost 4%, exactly, third party services from a BRL118 million to BRL104 million. And nominal figures, as I have said, drop of a little bit more BRL5 million from BRL111 million to BRL104 million and that explained a variation of RPM. So, those BRL10 million nominal is what we have in terms of nominal growth and BRL13 million of real or actual reduction when we did that comparison.
Now, turning to page 14. Let’s do an assessment of the net income. As I have said, in managerial wages, we would have a drop of 7.9% for BRL129 million in the first quarter of last year to a BRL396 million for this quarter. Taking away the non-recurring effect and regulatory assets and liabilities, we have than a drop of BRL405 million to BRL174 million comparing the two quarters.
The first one we detailed, a drop of 25.4% in the EBITDA or BRL268 million. The second one which is worth about our financial income net, we have a BRL65 million loss exactly due to the increase of that BRL5 million loss exactly due to the increase of that charges and you can see in the upper our index mix by the CDI and this year that is 9.9%. So, that explains the increase of debt cost.
We also had some mark-to-market loss of BRL4,131 million. It was a minus BRL26 million and we should recovery that. In the funding end, different variation, a smaller variation of minus BRL11 million and we have financial updates of financial assets that is BRL27 million positive. We had 6.8% increase in depreciation and amortization of BRL18 million and also income tax and social contribution considering the lower results, we had BRL134 million less of income tax and social contribution than we last year.
Well, now, I am doing assessment per segment. It’s important to follow-up the segments individually to make it easier for you in the analysis process. So, on page 15, we have the bottom-line here. Distribution, an increase of 7.3% in net revenue, 19.4% lower EBITDA. So, that is already integrating and acknowledging accounting for all these types of tariff review and the net income drop of 28.5% because the CDI is more applicable to the distribution. So, some highlights. The increase of 7% in volume, the implementation of third cycle of tariff review has the negative effect as I said and we have BRL10 million in assets write-off for PMSO, as I already said.
We also now look at conventional generation and renewable, increase of almost 35% in net revenue. I think here we have two major impacts, the new assets in Renováveis and new liquidity prices for energy generators, and this has a positive effect in the EBITDA reaching 25.3%, BRL506 million and net income of a BRL156 million, remember that Genco is financing TJLP long-term and we did not have much variation there. So, the positive impact that comes from the EBITDA is expressed in the net income.
In commercialization and services, as I already have said, there is a drop of 2.3% in the net revenue, reaching BRL553 million vis-à-vis the same quarter of last year, but the EBITDA increased 257.8%, BRL77 million a very positive quarter, and I believe it reflects operations coming back for CPFL and nonetheless inline of little leverage activity. We have the same figures for income tax of almost was BRL51 million.
I believe this is a positive quarter for generation of renewables and commercial realization and services. I am not going to say, it’s negative because that’s happening at every five years now. This is typically four for CPFL and it reflects one year when there is drop of results due to the tariff review. And here we have our homework to keep on reducing managerial cost to be able to mitigate those effect. That is positive, but here we view that are very closer to the markets expectation and here we see an opportunity due to the size of the Group’s capacity and instrument level weather ABZ or shared services and especially now as we have Mark coming in, I believe we have a positive prospective to mitigate the results.
Please turn to page 16. We are going to talk about our indebtedness, stable leverage indicated on BRL3.58 billion, BRL12.8 billion in debt, given the funding strategy of the Company recorded adjusted EBITDA up BRL3,570 million, and the highlight goes to the CDI increase, an impact on the total cost after debt 1.85, averaging to 9.1 and that has an impact increasing from 8.4% to 9.1% and from 2.4% increasing the 3% in TJLP and we can see 68% CDI, 22% TJLP, 7% Prefixed, PSI 4.55% and 3% recognition of the debt. We closed the quarter with this cash and with 4.243 cash coverage.
And we are now on slide 17, and then average of tenure after debt of a little over 4 four years. Short-term debt only 8.1% of the total debt. As you see, we enjoy a very comfortable position in terms of the financial and cash position of the Company.
On slide 18, we talk about generation activities, highlight goes to the Macacos wind farm that has been completed. Turbines assembly have been audited by the agency. We are only awaiting annual resolution which we expect for this week. It is a 78 megawatt project, BRL161.5 LFA per megawatt hour and now we see another three projects of the Company to be delivered in 2016 Campo dos Ventos wind farms, São Benedito wind farms and we can see 82 plus 172 megawatt and PedraCheirosa wind farms which what we were awarded in the last minus auction 51.3 megawatts of installed capacity.
In the next two slides, I would like to mention about this initiative of creating CPFL Telecom. It is an activity that allows us to have one more opportunity to create value. I would like to remind you that the telecom market is in full growth. It grew a lot for percent last year with investments of BRL26.5 billion with important growth drivers and NFL putting pressure to push the quality of 3G, 4G deployment, broadband expansion. We have important offices in this area which is translated into opportunities for new entrance.
In this scenario, we direct to global players CapEx and the telecom long-term future is more intent in data traffic and fibers, and there is an important government plan to make a relevant investments in telecom infrastructure. So, we are talking about number of growth drivers to lead us to this market, and CPFL has a number of competencies, which in our assessment allows us to create value in this market further because we already have a good grade coverage or popularity, we have rights of usage and we are neutral player in the market.
We can be attractive for any telecom operator that needs to grow and expand their services in CPFL concession area. We have a good knowhow for credits deployment, we provide a lot of services through CPFL and we have the technology that also provides a basis for our other nation project for the power grid and smart grid. So, it is a positive combination of our competence with the correct momentum of the telecom market.
On slide 20, we have the characteristics of the assets that we are putting together to operate in the telecommunications market what we call metropolitan optical grid back haul. We make a comparison here with the power system. Back haul is the distribution activity and backbone is a transmission activity. So, we are positioning ourselves in the back haul side of the business with the metropolitan optical grid, which allows the grid to be used by the operated to have access to customers.
So we meet their demand for infrastructure and capacity of the operators who need to have this capacity in the fibers just like this drawing –. And where are we implementing our strategy? Well, we’ve made an evaluation and we identified a number of cities. In the State of – 42 or the most economically attractive cities with a greater concentration of users. In the selected cities, we have 7.3% of the Brazilian GDP and telecom market estimated to be BRL13 billion per year. So, it is an important opportunity.
We have divided our action into two phases. Phase one, which we will complete along the month of May. We will be accessing or making this infrastructure available to 17 cities, a total of 649 kilometers of optical cable. In Phase two, another 25 cities a total of 618 kilometers of optical cable. In April, we have 544 kilometers of cable deployed, 10 cities being served. We have find our first contract with one of the operators, a contract that was entered last month and now we’ll start the commercial activity of our Phase one to serve operations that needs to use our infrastructure and we are quite optimistically regarding the results of this activity looking forward. We will be following the situation of this activity in the coming webcast.
Please go to slide 21. Just to say there, we are performing a little bit better than IEE in New York because of foreign exchange conditions looking slightly better than Dow Jones index. Offshore performance followed these indicators, highlight goes to an increasing volume, either in trading volume of about 60% increase and in terms of daily volume trade routine, that was up 16.6% reaching 44.4.
With this, we finish this presentation and we remain available for questions.
Ladies and gentlemen, we will now being Q&A sessions. (Operator Instructions). Our first question comes from Sergio Tamashiro, SAFRA.
Sergio Tamashiro – SAFRA
Good morning everyone. Wilson, I have a couple of questions. Starting with generation. You mentioned, the strong results of generation, the generation side of the business, particularly conventional 15 million, renewable another 13 million. So may question is, what can we expect for the coming quarters? What going to happen with these results? What GFS are you imagining for the coming quarters? And this breaks down in distribution and EBITDA very similar to the better generation. So in the long term we are looking at 2015, looking at a more normalized situation, what could be the EBITDA mix in terms of generation, distribution and commercialization?
Hello, Sergio. Thank you for the question. As per the seasonality effect, we understand that this is a permanent effect. We are covered for the second quarter, so the seasonality factor is permanent. It will remain throughout the year. As for GFF, that’s different. We work with an expectation of average values during the year. We could reach [50%] and this has an impact. We can’t still pin point. We cannot yet pin point but CPFL is the best – the contribution of CPFL in MRE is almost 1.5%. So, our impact self by GFF is quite reduced, but undoubtedly this is a risk that we have to manage looking forward.
Let’s review results, and the expectations of results for the Company. We have this quarter in distribution – we also have the effect of so called tariff reduced cycle. We now have 5 years where we expect to gain efficiency and have market gain. Undoubtedly, the distribution results will continue to be superior to that of generation. This is our flagship in terms of affirming the EBITDA and growth numbers we are talking about the EBITDA, it will be slightly over half coming from distribution and the other remaining half, it would be basically 40% coming from generation and 10% coming for commercialization and services operation. This would be more or less the EBITDA mix.
We expect EBITDA to grow from distribution because we have higher efficiency for market conditions or in the case of IFRS due to the re-composition of the tariff for what does not covered by loans or by CDE and this is what we are considering where this will be offsetting coming years.
Sergio Tamashiro – SAFRA
Going back to seasonality. At least the way I understand this, you had considered seasonality moving this first quarter, you left more energy available to be sold in the spot market and now in the coming quarters, you will need to offset that. In other words, now you will have to purchase energy in the spot market and have less storage for the coming quarters. In other words, you won’t be able to keep the strong results of this first quarter, the result would be the worst.
Perhaps, the highlight is that we purchased energy to cover first seasonality, and we are comfortable with this energy purchase. In terms of the gain in the first quarter, it will be maintained, not for GFF.
Sergio Tamashiro – SAFRA
Okay. Bur energy purchase for the coming quarters, did you do it this year or in previous years?
Well, because in the beginning in the year, I haven’t got the price here to show you. And another question about distribution, we mentioned that the main factor contributing to growth in distribution was the higher temperature. So, what about employment and income? So, excluding the temperature effect, what could we be using in our growth modeling for 2014 and beyond, growth is 4% or 4.5%.
Sergio Tamashiro – SAFRA
And this year?
Well, this year it was 4%.
Sergio Tamashiro – SAFRA
Thank you for the question.
The next question comes from [inaudible].
Good morning to all. I have a question at telecom business. Actually, I would like to understand, how the revenues going to be recognized and if there is going to be any offset in the tariff so as to maintain low tariff for CPFL customers, because in the current regulatory framework, if you’re using the [discounts] you end up having to get something back in this comes to consumers. So, how are you designing those? Can you split fiber optic from the distribution grid so you won’t have to get this back as a low tariff and perhaps it would be better to work to the definition of the first cycle to perhaps get into this business with more assurance that there is going to have the adequate return?
Marcelo, CPFL Telecom is a Company where there is our own corporate tax payer number and authorization to operate or buy in itself. Other companies could have done that too. It pays rents to distributor company. Now obviously in the process it’s sharing gains. This is exactly what it pays to the distribution company. As anticipated in competitive bid and just like any other company, it uses the infrastructure. In its business plan, there is no need to share its revenues to the consumers only the expenses that are related to the use of the infrastructure shared.
Okay. Thank you very much.
Vinicius Canheu with Credit Suisse.
Vinicius Canheu – Credit Suisse
Hello. Thank you for the call. My question is about the distribution. You mentioned that, now that we had all reviews, it’s already time for the next one. So, at least to start a new cycle. NAO last week in an event, they said they intend to disclose their main target for the next cycle and next two or three months. So, I’d like to know, what the market can expect in a very realistic manner in terms of changes that we will now on the fourth cycle.
Can we see any relevant change in the capital clause, anything different about the Company? So, what is CPFL view about that considering what we have seen in the last two or three cycles, which was a pressure in the distributors cash and to transfer that price to consumers?
Well, we have a positive expectation about these new rules whether because of the process and a long integration process of all the agents and that has been happening already. And process itself of opening to anticipated contribution and to have a longer period of changes for the second half of the year, that shows more maturity on the part of the agency regarding those process.
So in terms of processes, we did have advancement. The two important things are how things are happening and with a whole set of interactions. It’s always difficult to talk about expectation but I risk myself, but we analyze the Company’s results and the comparison of the quarter, you can clearly see that – may be in the past, we didn’t have a whole set of tools to establish PLD or the spot price and I believe that we can talk about at least 630 because they have had already in that mix in fact and we were able to maintain all procedures and that was simpler for the agency to establish the figures, and that will bring a lower to CDE in the future when we have a more organized process.
I believe we are starting on that and we consider it a favorable trend. Second favorable expectation has to do with walk. In the last cycle, it had an impact and I believe for many companies do not but they’re having problems with liquidity and in a specific moments like that, when we have the CDE, operations might become infeasible to CPFL as a Group. We have a better condition to export. But as a distributor, we just save the same hit in terms of cash costs whether by financial statements and may you analysts can have a clear revision of that because these contributions are important to cost own capital and cost of indebtedness.
So you can see that clearly that, we went from 6.5% of CDI and went to 9.9%, and all of that now talking about the down side, I understand that should be acknowledged by the regulators. Here, we have to acknowledge what is really happening. So, there is an increase of third party capital cost and on capital as well, if this is not acknowledge, the investments in these areas will be compromised and that is not adequate for the regulator.
So besides these improvements, we have a whole set of rules that have to do with transfer of what we call a typical year and tariff year and we have values in here. And then, we are working I think on regulated way and we understand this acknowledgment of non-forecasted like purchase of energy and charges that will also have a more precise management considering the tariff year instead of several year. I believe there is a set of important discussions.
We have advanced already in terms of the operating costs. These are small improvements and I believe that we also have to expect an improvement in process regarding the accounting of the regulatory remuneration basis.
I believe that is a whole fact of simple measurement that has done in the last cycle. It has generated undesirable effect because it’s not adequate that EU have a regulatory balance sheet and an economic balance sheet because we have important differences. In terms of investments, especially because some of the write-off due to the non-recognition or non-acknowledgment of that expenditure as an investment, it should have been booked as expenses and that amount should have gone back for operating cost.
So, here, we do have a loss and we have room for improvement. Actually, the idea is that, we have incentive for investments and for acknowledgment of investments as well because it does bring benefit and that’s simple approach process, because the process is too complex, and I believe the County will turn the process into a more transparent one and may be the word transparent is the one that add besides what we’re discussing here transparency has to be the purpose of the agency.
So that, the tariff review process does not become a surprise. So the review amount is what is expected by the market, by the operators and by the agency itself. If we do have large difference in expectations here, then I believe we do not have a positive processes if that happen. So, I think there is a conversion of the final results of those assessments will turn this process valid to that seasonality and transparency.
Vinicius Canheu – Credit Suisse
Okay. It’s very clear. Thank you very much.
Our next question comes from Mr. [inaudible] Citigroup.
Good morning everyone. You had a strong result in this half of the year. So, you had higher margins and what kind of performance that we can expect for the segment for the end of the year? You are talking about the commercialization?
Well, I will ask here of the commercialization area and if can bring in more information.
Our objective here in higher risk operations is to work with planning and to tell at a higher price than the price we purchased at. Fabio and his team in this quarter were able to make it happen and I believe he can bring more information on that. Obviously, we had a strategy in terms of seasonality. Higher prices in the first quarter that was expected in terms of our strategy and I’m sure that up to the end of the year. We’ll also have this perspective for the commercialization area.
As it has been said in the first quarter, we have the target of the EBITDA for the 2013 and we have a positive expectation of course with a higher spot price and we also improved the result of the fourth quarter, but we have the expectations for the next month as well. Thank you very much.
(Operator Instructions) . We are now concluding the Q&A session. I would like to turn the floor to Mr. Wilson Ferreira for the final remarks.
Okay. Once again, I would like to thank you all for participating on this earnings results call. I would like to say that as the CPFL Group, we feel about the operations and we made a brief summary here, we are focusing on the cost management process that has a positive impact on distribution activities. I believe it’s important to highlight in the generation activity, the conclusion of project especially CPFL Renováveis. We focus on the last quarters and that is due to the exposure we have. We ended up having delays for two large projects in the Company.
This is a concluded situation, everything was solved and we have transactions and accountabilities that will be worked on with suppliers that some way caused the delays. So, we do have offset instruments, but not from now. Now, we have a full mature operation with an M&A transaction that should be concluded in the next month, in 60 days we believe this is going to be concluded. And on commercialization and services we are along and from now on that also brings us favorable expectations about the scenarios with good results on it.
That is the positive, the good side. Now everything that we should pay attention to. Two main topics. First, on the energy point of view, we are in a very sensitive moment, we have to constantly monitor it to pay attention and we know how important this matter to the Government is and how close attention the Government has to pay to the matter and we all have to manage this very sensitive moment, and also important this perspective of ANEEL, for us, on one side, that represent additional volumes of generation in the South, a better hydrology in the South is going to happen now. And on the other side, a certainty level that we are going to have, the Southeast rainy season is starting at the right time and that really shows a better probability of the phenomenon happening.
On the other hand, with that liquidity in the factor that happened due to operations whether from Government, CDE or loans, and we have a remaining amount on the account which is needed for April and when we develop the system, we need to keep on using the system and we know that the offset of the 85% of the exposure. I would say that, largely, we will need extra funding but that shouldn’t be too high, but we will need that. We have covered already 85% and this is an important perspective. I would like to highlight the initiative of this job down to a market alternative, so that we can have an adequate level of liquidity and the energy system coming from distributors.
So in summary, I want to say that, we’re very positive in terms of the Group’s strategy and the Group position vis-à-vis preparation. And on the other hand, I would say that, we should really pay attention to next month. It will be very important especially in terms of the energy monitoring, but I believe we are able to face business challenge. I believe it has been positive already because we had improvements whether in the regulation allowing for a new solution, whether in other process with the agencies, we talked about the tariff review so that we can have a higher sustainable level in the sector from now on.
These were our final remarks. Thank you very much for your attention.
That concludes CPFL Energia audio conference. Thank you very much for your participation and have a nice day. Thank you.
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