CPFL Energia S.A. (NYSE:CPL)
Q2 2012 Earnings Call
August 7, 2012, 10:00 am ET
Wilson Ferreira Jr. - CEO
Good morning ladies and gentlemen. Thank you for waiting. We would like to welcome everyone to CPFL Energia second quarter 2012 earnings results conference call. Today, we have here with us the executives Mr. Wilson Ferreira Jr., CEO of CPFL Energia and other officers of the company.
This call is being broadcasted simultaneously through the Internet at the website www.cpfl.com.br/ir and on that address you can also find a banner through which the presentation will be available for download.
On phone all participants will be on a listen-only mode during this call; during the company's presentation. After the presentation there will be a question-and-answer session. At that time further instructions we all be given. (Operator Instructions) Another important information that this teleconference 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 belief and assumptions of CPFL Energia management and on information currently available to the company.
Forward-looking statements are not guarantees of performance and involve risk, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of CPFL Energia and can cause results to differ materially from those expressed in such forward-looking statements.
Now I will turn the conference over to Mr. Wilson Ferreira Jr. Mr. Wilson, you may proceed.
Wilson Ferreira Jr.
Good morning to all investors and analysts for joining us this morning for our conference call for the second quarter of 2012. I would like to start this presentation on page three of the slide deck you received.
For the second quarter 2012 highlights, the first highlight goes to sales and the concession area, strong sales up 5.3%; we are going to be there on that later. Another important point, commercial startup of two biomass operations, Bio Ipê 25 megawatts; Bio Pedra 70 megawatt, both in May of 2012, but with the acquisition of Ventos Wind Farms in June we are also declaring interim dissidence in the amount of R$640 million referring to a 100% of the results off group in the first half of 2012.
Investment in the quarter amounted to R$715 million, we will give you more on that momentarily. An important observation for our credit rating AA+ positive by Fitch to the issuance of subsidiaries debentures. On the global scale Ba2 credit rating, Aa3.br national scale by Moody’s to CPFL Renováveis and important credit ratings confirming to solidity of the group in both operations.
In addition to that, we have an important 40% increase in the average daily trading volume of our stocks and ADRs, creating almost R$50 million daily. And finally, the Agencia Estado, the Distinction Award for Companies 2012; a recognition to companies that despite an unfavorable international scenario managed to deliver outstanding results to shareholders. These are the main highlights for the second quarter of 2012.
Moving on to page four, we’ll get in more details on the highlights. We’ll start with the sales of energy in the concession area. You can see the strong growth in the captive market, up 5% and 6.2% of the consumers those pay the tariff to use the distribution system and that grow 6.2%. So 5.3 % increase (inaudible) gigawatt hour in this quarter in the concession area of our eight distribution companies.
In the bottom of the slide we see total energy sales, direct sales to end customers. In addition to the 5% increase in the captive market of distribution companies you can see in the bottom, the green bars, the effect of conventional generation and trading to customers outside CPFL Energia customers group amounting to a 13% increase. And in here, we see for the first time sales in CPFL Renováveis totaling 820. Having the set of sales on the right, we see growth year-on-year 13.3%
Operation, are considered in the revenues of the group. On the right side of the slide, we can see that we grew slightly more than Brazil in our service 5.3% vis-à-vis 5%. This is due mainly to a strong growth in the Southeast market that grew 3.6% in the seven distribution companies of the group notably and São Paulo grew 5.4% areas granted to TUSD, the South group 6.4%. Our RGE operation grew 4.8%.
On slide five we see details of sales by market segment. On slide five we observe that off this 5.3%, we had a strong growth in residential segment, 10.4% to 9.6% for the commercial segment, practically stable for the industrial segment and segment others, mainly the rural segment and public service, growing 8.4%.
It is true that for a more balanced comparison we would consider the same number of days, billing days; so when we compare, considering the calendar of the year, considering the number of billing days, reported growth of the residential segment, we had more billing days in the second quarter of 2012 than in second quarter of ‘11. We’re making adjustments. The growth of the residential segment would be 6.8% and the commercial segment 6%. So these are very strong and high value and they are certainly responsible for high revenue results in the distribution activity.
Moving on, I want to give you some expectations for the future also is important because we have a strong growth in this segment acquired into research by IPEA. It is due to some of the families' expectations in the Southeast and South of Brazil regarding the economics of the country, 78% of the families are domestic in the Southeast and a little bit of over 56% in the South.
Optimistic regarding the economic situation in the next five, a lot of optimism, 57%, 55% respectively in the Southeast and South. The present financial situation next year, as you can see the families and how they are very optimistic more than 80% in both regions 87% in the Southeast and (inaudible) robust growth 38% in the South and 68% in the Southeast; and as for reliability, again optimism more than 85% of the families are optimistic in both regions.
On the right, we can see the intention to buy is for household appliances to be acquired. So we did the survey and we observed that 98% of customers in the region that we operate, this is a survey done in the concession area of the distribution company, 90% have no dishwasher; 94% of household and we’re talking about warm regions in summer.
In the South, very cold in winter, 94% have no air-condition, 53% have no computer or notebook, 45% of the households have no microwave oven and 33% that’s surprising have no washing machine. Such households are willing to acquire durable goods and these household appliances will make a difference in the future.
The annual residential consumption per capita we have in the bottom part of the page. The situation with the CPFL Group of companies with around 695 kilowatt hour per inhabitant in 2009. Brazil in the 10 year our plan projects a household's consumption of 814. But it is true that Brazil at the same page had a consumption of 518 kilowatt hour per inhabitant.
So definitely our consumption is higher, almost 40% higher, should be maintained at that proportion at the end of the decade, we should probably surpass the 1000 kilowatt hour per inhabitant and it is important to compare with other countries in Latin America, Venezuela, Argentina, Uruguay, these countries consume more than what we intend to have at the end of this decade in Brazil.
If you look at Australia on the other hand, Australia is more or less in the same latitude of Brazil. They consume about fourfold more than what we had in 2009. This was just to show that obviously the households are doing really well at this point and this could be responsible for a significant development and increase in commercial and residential energy consumption in the country.
Please move to slide seven. The results of the second quarter of 2012 always the disclaimer, in the top line we have the results that we reported IFRS results and at the bottom especially for analysis purposes a more balanced set of results but it considers the regulatory assets and liabilities' effect in IFRS reporting this has not happened.
The Brazilian GAAP, we would consider the CBA quite challenging, the variation of household value and we also consider an non-recurring events in the bottom line and so moving forward in that revenue reaching 3,212 billion in this quarter, a 14.9% increase. EBITDA of the company reaching 913 million or 14.1% increase however the net income of 234 million 20% down.
It is important to observe in the bottom line however that, when we consider regulatory assets and liabilities' we have practically the same net revenue 3.119, 14% up for the net revenue already considering regulatory assets and liabilities' in non-recurring events at basically 19.3%, 1,062,000,000 Real and the net income is practically stable.
Exactly the same number that we had in the second quarter of 2011, 344 million. At the bottom of the slide, we see the details about the non-recurring events; (inaudible) in the same quarter of 2011, we talked about the retirement incentive program which are in the results. The results of this month show that. The provision for contingency of ISS tax on services for Campos Novos the basic network charges due to EPASA this is a nonrecurring value of 2010 accounting adjustments in UBP accounting of the generation companies and physical inventory of the distribution companies as if this has an effect in both quarters and these values are recovered at the moment that we have a tariff review.
We are also confident in the tariff review of regulatory provision, this is considering not only Piratininga value but also the value of the five more concession area in the states of Sao Paulo by the company in recent years and it’s a just 63 millions in terms of the depends 42 million effect on the net income. In addition, another regulatory assets and higher liabilities values which are quite significant and that will be recovered by the companies along the next 12 months a result mainly of the exchange variation in this period, the dollar appreciation even Company policy for such events had readjustment and they have the exchange rate of 1.18 and the exchange rate currently is around two.
If I consider all distribution companies they have purchases of energy availability, a contracts for our thermal PP, and they are all volume priced according to PLD values that also increased a lot because we have somewhat say lower rainfall. So PLD valued between R$140 and a R$180 per megawatt hour. And last year we had values of about R$80. These important variations though will be captured by the CVA account. But unfortunately in IFRS these are not considered as they used to be in the past with the Brazilian GAAP.
For the variations that we can see is on next slide of R$75 million and the results of the second quarter of 2011, effects on the EBITDA this year a 132 and the non-recurring value and regulatory assets and liabilities is 50 million for the net income in last year and 110 million for the second quarter of this year. So we consider that the results are quite positive particularly considering the gross profits for the company and activities, we'll be talking more about that momentarily.
Coming around to slide 8, we will talk about EBITDA Earnings before Taxes Depreciation and Amortization. We have here the reported the value 815 and actually (inaudible) in 2011, 815 million but then considering regulatory credit we would get to the amount of 890 million.
Now we are reporting EBITDA of R$913 million would a 14.1% increase which added to the credits that the company has in terms of regulatory assets because of the PLD extends variation etcetera the recurring value would be 1.62 billion corresponding to a 19.3% increase vis-à-vis the previous year. In this explanation, that can be clearly seen here. We see an important variation of regulatory assets and liability.
So we are going to detail now the reported numbers, the 14.1% increase in EBITDA from last year to now 14.9% of net revenues which is due mainly 35% increase in sales to the captive market and as average tariff readjustment of our distribution company of 5.3%, particularly half of this revenue increase is due to this item.
Also the integration of CPFL Renováveis 122 million plus conventional generation and commercialization in services operating more strongly than in the previous year, also using secondary energy, amounting 210 million and finally 6.5% increase in revenues from third.
6% and 5% increase in revenues from another 21 million and with the increase in revenue but it is also increase in deductions from revenue 3.7% and 228 million in this quarter.
As you know rotation of our independent auditing firm and following the guidance of Deloitte, our auditing company now, we've started with the reclassification of PIS/COFINS tax credit based on depreciation for deduction from revenues. It is the first time, that we mentioned, this has not effect whatsoever on net income but we did that tax. Credit in our financial line.
Now the reclassification of tax credits of PIS/COFINS based on depreciation are now included. Earlier this was [49%] increase in the net income. This is what just the regulatory assets with a 23.5% increase in the energy cost end charges of this 26% increase in costs with purchased energy for resale 324 million. Here the PLD and exchange rates are important, 11.1% increase in charges, charges that always increase in January of every year. Some concession areas do not include that in their tariffs, until they have the tariff readjustments of R$30 million to R$34 million will be somewhat recovered by CVA.
It's important to mention. I talked about the exchange rate 158 to  and it's also important to mention PLD, a 164.55 in the second quarter of 2012 and it is to be 20.45% in the second quarter of 2011. So we see a greater increase in the cost of energy and charges.
The good news is that we had a reduction of 12.3% in our operating costs and expenses to 56 million. And for this year in the same quarter we had the retirement incentive program and the extraordinary provision of ISS tax in the Campos Novos HPP amounting to 10 million.
On slide nine I will give you our personnel, material, services and other costs, PMSO. We have here reported amount of 456 million with the second blue bar in the top graph. However it is important to highlight that in the 456 million, we would need to remove the non-recurring events that ISS provisions which I mentioned a little while ago in the physical inventory of assets. These are amounts recovered in the revision processes.
And the retirement incentive program which would give us a PMSO, recurring PMSO of 387 million when adjusted. And to this reported amount of 456 million, there is this reduction that we had highlighted of 56 million, 33 million for personnel charges and 23 million for material, third party services and others to finally reach a reported PMSO of 400 million.
And incorporated 28 million for the consolidation of CPFL Renováveis, and 7 million for the physical inventory of assets underway to conclude the tariff review cycle. So this is a comparison report to the amount of reduction of (inaudible) and in adjusted value reduction of 5.8%.
And at the bottom we see why all of that is happening. I will try to capture with my team some important items. Because of our already zero based budget we see (inaudible) improvement in airline tickets purchasing. We increased the average time for advanced purchases. We had a 15% reduction in the price of airline tickets. Paper consumption also showed a 36% reduction. We are now using more email; we are restricting printing in the company, so a 36% reduction there. And increase in Xerox copies (inaudible) we had the removal of local printers and that brought about a 77% reduction in the unit cost of printing.
And these are quite significant and substantial values. Operationally some things also happened. For example vehicle fleet, monthly about R$3 million reduction in our vehicle fleet cost reduction of kilometers driven, optimization – optimizing use of vehicles pools, fleet management, telemetry equipment. Collective initiatives, we also started segmenting our customers with specific action plans for each segment.
And finally one highlight for the quarter reading and delivering of bills, the R$2 million to R$3 million reduction there and with the alignment of the various charge; I think for all distribution companies or systems.
They also sent by email and layout changes in the new paper type for warnings and re-warnings. So these are some measures that we have adopted in the company and that all together accounted for this reduction which is pursued by us and which is part of our strategy to prepare the company for tariff review cycles that will be coming up.
On page 10 I give you report on our net income. Here the same comment is made for, if we look at recurring net values, net of regulatory assets and liabilities we are talking about a 0% variation compared to the same quarter of last year for the reported value. We see a $20 million reduction we talked about and EBITDA increase of 14% of R$115 million and here and first reduction in the negative net financial result, 30.9% increase, 56 million, mainly due to an increase in interest expenses of the company, about 19% increase in interest expansions amounted to R$58 million, consolidation of CPFL Renováveis R$44 million.
The currency effects from energy from Itaipu to the distribution company, 60 million an increase of net 15 million. It's important to mention that the company has benefited not only from the increase debt stock because we have such a robust CapEx and acquisition processes.
And we’re also benefiting from an important market intelligence in funding which is our funding is CDI packed, but it was 2.8, CDI of 2.8% in the second quarter, 11.21% in the second quarter of 2012 and more recently we had a drop of TJLP which is an important indicator for the financial commitments and obligations of the company.
Savings and financial expenses amounted to about 65 million. On a positive side, we had a 65% decrease in UBP 70 million namely due to the non-recurring net effect adjustments of a generation company UBP accounting.
In addition to a worsening in the financial result, we had an increase in depreciation and amortization of 52%. And that exactly is some of our analyst, we know that you have this question in your mind that reclassification of these (inaudible) that was happening at the base of the revenue that we highlighted a little while ago is directed here at the same proportion. That’s why we’re having no effect on profit increasing the line of depreciation and amortization item.
This item has a main element, the consolidation of CPFL Renováveis R$56 million and on the other hand reclassification of PIS/ COFINS tax credits based on depreciation for the reductions in revenue, 50 million. We consider to have a surplus of 20 million for the pension fund and we have a reduction of income tax and social contribution amounting to 5 million real.
So we reported results which is 20% lower. However our recurring results considering additional investments to grow the company, we are breaking even 0 to 0 comparison. R$640 million real, that's the result for this half year or distributing 100% of net income as dividends amounting to R$640 million or R$0.60 per share to be paid in the last day of September. For those who were investing the dividend yield is 6.1%.
Next on page 12, as we said before we will break it out the CapEx company and the major acquisitions. They are not all listed here, just the main one. For the CapEx of the company here we highlight the last 12 months and that's 715 million over the quarter, 339 in distribution, 371 for generation and 5 million for commercialization and services. And the total over the last 12 months is 2.447 billion; strong investment and distribution therefore concluding the format of our basis.
Regulatory basis for each one of distribution companies and for generation naturally a very intense program remarkably in the area of renewables adding 2,437 billion and in this area this is where we are in renewables that’s where we had better operations of positions over the last 12 months.
I just made a point in mentioning the major ones, Jantus Wind Farm, the acquisition of (inaudible) and Bons Ventos Wind Farm, both in operation. And if we add these two transactions we have almost 2.600 million and 1.400 is cash operations and 1.200 billion in debt taken by these transactions. Here we are mentioning debt because the closing is this quarter, but we have additional 112 million.
If we focus on this picture alone, if we add 2.437 billion over the last 12 months as CapEx we would too have the fruit of these acquisition, cash expenditure of about R$1.5 billion or adding to something to around 3,900 billion as investment to grow the operations of the company in each one of the sectors we are active in and that has an impact on debt.
Now on page 13, we report the result and just as an importantly, well the debt at the end of the second quarter is R$11.8 million and here we have an important consideration to make, the company also understands and I have been highlighting in this presentation the impact related to the format of how we account for according to IFRS.
We had negotiation with all our finance agents and here we have a calculation that has an impact in our covenants and this calculation is just the company EBITDA according to the operation as you can see we have proportion of consolidation of CPFL Renováveis for IFRS 100% of the debt, but the financial covenants we will have another share and the same goes for CERAN, also posting for IFRS 100% and consolidating 65%.
Naturally we have inclusion of CBA account; it is the core of the company’s results at the date of operation, and naturally we also mentioned proforma EBITDA of assets involved in acquisitions. Out of this measure our EBITDA known as adjusted EBITDA and basically it is the EBITDA of the core of the company’s activities of R$4.182 billion now compared to R$11.8 billion as leverage. Therefore we have a net debt, adjusted net, debt adjusted EBITDA ratio of 281 and this is therefore the indicator used by our finance agent to assess our covenants better always greater than 365.
On the other hand, if you were to consider only the criteria of IFRS as reported, our net debt EBITDA ratio would be 333; it’s important to mention and also to give Lorival and his team congratulations for having made this achievement and negotiating with our finance agents; we are very comfortable now when we report these results vis-à-vis our debt.
On the other hand, the debt profile, it remained unchanged this quarter that was concluded in June 30th. About 61% of the debt is back to CDI, 31% long-term interest rate and this is basically operations with BNDES of PSI, the programs to sustain our investment and growth and on the other hand 3% which is back to IGP and that the recognition of the company’s debt potential funds or long-term debt.
Now on the next page, it’s important to show the solid cash position of the company closing the quarter with more than R$2 billion. Having paid this quarter, about R$750 million as dividends and third to the investments made and that we made reference to before. However, the debt coverage is for 1.2 times short term on observations of the company, short-term, R$1.735 billion for the next 12 months. So there is plenty of cash for this operation.
As to the company’s financing profile, 4.3 years and the short-term of 12 months only with 11% of the total. However, the company is very much linked naturally with macro-economic scenarios and obviously it is not insensitive to this more complex scenario when it comes to the world scenario. So for this reason, more precisely we had a pre-funding in July to finance our operations of distribution basically that said, so by debenture issuance, and (inaudible) modality, a very successful operation amounted to R$1.3 billion at an average cost of CDI plus 0.8% per year with a seven year tenure.
So this refunding will allow us to be preventive when it comes to our future debt and funding, well, we already have very good operations in this modality, expanding our list of operations international regions, worked by CDI and here we also have close to R$3 million at an average cost of 104.7 CDI. So these are very successful operations, very competitive cost and the best benchmark in the sector.
And we feel comfortable, as you can see, no the next slide. In late July, our cash position was close to R$3.6 billion and it covers more than two times short-term motivations and they improved our debt profile to 4.4 years and also short-term around 10%. So our finance company and also have prepayment operations for next year.
On the next page, just an important report of credit rating, both for CPFL Renováveis and also the three discos that was the subject of 1.3 of debentures. I would just like to highlight now the variation. It is the first time we do that for renewables. So since we report our experience in the construction and building of SPP, the strong shareholders of the company, diversified energy, it is the only renewable platform with three sources. Then, SSP, biomass with stable cash flow, and we can ensure long-term financing.
And now for debenture issuance, here we report the market position and the asset base of the group with strong cash generation ability and moderate leverage and robust liquidity and positive strategies to expand generation.
Now on page 18, I would just like to give a brief report of the tariff review. This is the schedule of our first operation of CPFL Piratininga, which started in June 19th Aneel submitted the audit to the company and in July we had a public hearing and also we published the first documents and then we will have interactions until October.
On August 16th we had our face to face public hearing suggestions and also class entities and consumers will be present. On 17th we will be closing the hearing and it is the final term. And then we will be submitting a final proposal for the company on August 18th we will have a meeting with (inaudible). So probably on October 12th we have a meeting with Aneel’s Board and then we will be publishing the tariffs.
On the next page, let us try to be more didactic; let us show the moves behind these results. In the upper part we have a table of the main data. I know this is important for each one of the analysts. This is just to show that Aneel usually publishes or disseminates consumer’s perception, in this case 8.8% negative.
However, the carrier repositioning or maybe the light users of all the tariff review elements amount to minus 3.4; unlike, 8.8; 8.8 is consumer perception because they work with two different bases, not only the economic base of readjustment but also the financial one working on recovery or payment basically CVA. So important is to consider the repositioning is minus 3.4 as economic value and at the bottom of the chart our team tried to show the movements of the regulatory data just to give you a sense of clear idea of this movement.
First of all, the regulatory EBITDA of the second cycle of the company which happened by the end of the process was 236 million Real. What happens over that time? First of all for process effect, there was a monetary update. Please note that the monetary update at the base is 32.91% for this period and that highlighted in the news at the bottom of the slide.
And EBITDA and basically we have EBITDA here so it is monetary update which is the asset base updated by IGP-M complete with 78 million in the previous WACC. But as you know the process review, tariff review included a WACC reduction so that phase updated that allow us to have 9.95 remuneration.
Now it can be 7.5% therefore 2.45% less and considering that phase it leads to a reduction of 51 million that I mentioned before. So we would be starting the cycle with a monetary update and WACC reduction with a result of 263 million Real as EBITDA, regulatory EBITDA, pro forma EBITDA before the third cycle. And then we will see what happened between the second or the third quarter.
First of all, investment by the company over the cycle. Investments that have been reported to you as I have just broken down before 101 million Real is incremental at the EBITDA base according to the regulatory WACC and to this move as part of the process we also have assets of the protected base on an incremental basis 100% depreciated basically from the hatched or the protected base of the company. So they've been fully amortized, depreciated, so there is no further remuneration there they have to be written off so that’s the effect you invest over the period exactly to make up again the life cycle that some assets that have already expired.
So we give the feeling, have the sense that we invested more than depreciation so 111 of incremental investment and 89 million as EBITDA of write off of assets that were fully depreciated and then there is another remark on the quality f the cost end of company and here we have different volumes and adjustments made by the regulating agency as we can see in the asset audition reports already delivered according to the new methodology of the accounting reports for the electrics.
So we have a slight adjustment of 16 million anyway we would be starting and basically that’s what included and those reported a top 258 million Real of regulatory EBITDA of the company please note that at the top you will see on the third line and think the regulatory EBITDA G which adds C which is our reintegration regulatory quota, and also F which is capital remuneration or the net based multiplied by WACC before taxes 259 million Real that's the regulatory data of the company and at the bottom I just wanted to show the move of the EBITDA that time from the movement that happened over the review monetary correction the use of the WACC investment or incremental investment, written-off assets 100% depreciated and our adjustments.
Now on page 20 just to report finally here we have the start ups of Bio Ipe 29 megawatts Bio Pedra biomass larger 70 mega watts a PPA or a contract of lead of 1154.12 which will also give annual revenue of 33 million Real per year.
And next on page 21 you can see the conclusion of first wind farm that we'll build directly 188 megawatts and this farm is located as you know in Rio Grande do Norte, Santa Clara wind farm. It was the subject of the first auction that took place in late 2009 we started construction in 2010 financed by the BNDES 65%, 35% ratio and this asset also has left contracts at December and updated by the end of the last year a 20 year contract and it will also bring revenue amounted to 112 million Reals per year.
And this is important to show as you’ve been following us. Some of our farms, this is not the only farm. Some of them were completed within the timeline, July 1st; our farm was available for the system. However, the commercial operation depends on a SEG that is not ready yet.
The company has a protocol with all the documents at the agency level showed in the form availability and we are confident that these are the documents required to be in compliance with the revenues as the layer.
And on page 22, here we report the status of the main projects under construction. Salto Goes with 80% concluded financed by the BNDES, that’s an SPP. So the SPP will be starting up in the first quarter of next year and the two HPPs for biomass under construction, started at the same time.
The difference of completion is related to the licenses. The whole process is expected to be completed in the second quarter of next year, two of 50 megawatts, two HPPs and now they’re being analyzed by the BNDES. On page 23, it would show the amounts of asset to be in 2013. 104 on average basis and here basically we’re foraying into wind assets. The Macacos complex with 25% concluded and still capacity of 78 megawatts Campos dos Ventos 2 well adds to 30 megawatts and for Atlantica complex recently acquired in the second half of the year of 2013 amounted to 120 megawatt.
We have already requested financing by the BNDES and they will have a PPA with the system as you can see on the right Macacos 137-30 megawatts per hour Campos dos Ventos 2 133-70 and Atlantica 147. They are all in the currency of December 2011. Now just concluding 2014 two further projects underway; Campos dos Ventos this is the largest 138 megawatts and Sao Benedito additional 116 adding to 254 megawatts.
Start ups scheduled for the second quarter of 2014. This is for the free market. Financing has already been requested to BNDES. I would just like to conclude first highlighting how happy we are to be awarded having the Distinction Award by Agencia Estado in 2012 and also the ABRADEE award. RGE was awarded as the best distribution company in the south. Paulista and RGE were also acknowledged thanks to the management quality and CPFL Leste Paulista responsibility in 2012.
I conclude just shown on page 26 our actions and our stock performance. Here we have the efforts daily volume that improved about 40% just confirming the importance of that operation of the stock bonus or the split of shares generating more liquidity and today we are trading about R$50 million on a daily basis, 30 million in New York and 20 million here in Sao Paolo BOVESPA. And stock performance over the last 12 months, the company has performed above ISE and above IBOVESPA as you can see at the bottom chart. So these are my remarks and with my team I will be happy to take your questions. Thank you very much for your attention.
Ladies and gentlemen we will be starting out the Q&A session. (Operator Instructions) And our first question comes from (inaudible).
My question has to do with the consolidation of the distribution industry. This has been for a long time a topic of CPFL since the IPO. One of the many impediments was the credit cycle or review cycle. But now that we have the first tariff readjustments coming out and the capital market is already reflecting the impact looking forward, I want to know can we in the next year or months follow these movement or it time to wait and only when the reduction cycles are over should we have some kind of movement specially by CPFL which if not the main player one of the main players in the industry?
Unidentified Company Representative
I would like to start answering things. No doubt the tariff review is the main driver for a consolidation to occur. In this case we have a tariff review which requires from concessionaires is much higher efficiency level than ever before. We are talking about the input in reductions in the operating results of the companies because of an almost 25% reduction in the regulatory WACC from 10 to 7.5.
This will require from companies a financial efficiency and operating efficiency levels which are much higher than ever before. And undoubtedly consolidation is an important element in the activity which is clearly sale related for consolidation to happen.
Now if we have all the conditions for consolidation to occur we can get some concessionaires because they don’t have scale. And some of the utilities will not be able to operate within the new parameters, but we need to have these conditions in place. But it's not sufficient. Why is it not sufficient because on the other side of the equation we have the seller. The consolidation first, it has to make sense for the buyer. We will have to bring in technology, skills. No need to impose any higher efficiency level to the concession. But it needs to be paid for it. They need to create value.
So I can talk – for part of the CPFL Group. We are very criteria driven. We are financially disciplined and we do have in place all the necessary conditions to face the consolidation process and to participate in this expansion. But there is also the other side of the equation. And we have to have the ability to buy at the correct price just to able to create value for shareholders and for our consumers and customers. We have to bring benefits of our efficient operations to the markets served and we need to be able to create value to our investors to obviously trust us and they want consolidation to bring good results for the group.
It will allow us to have more scale, more synergy, more efficiency and at the end of the day, it will translate into an increased operating result for the company and better net income or else it doesn’t make sense. At this point, the reviews are just getting started and they create the right conditions. From then on, as you know it is a negotiable process. We’re attentive to the opportunities, we have differentiated skills and competencies and we can create value to the different target audiences in the consumer segment and the shareholder segment. Thank you.
(Operator Instructions) Our next question comes from Mr. (inaudible).
Still talking about consolidation and from the standpoint of the regulator, firstly what about the PMSO? Do you believe that with all of these reduction, you will have a PMSO much lower than the regulatory PMSO and along those lines, do you believe that ANEEL well ANEEL was saying that they could try to press on the inaudible) holding gain to end customers. Do you think that the regulatory agents will continue of requiring more and more efficiency from the distribution companies?
Unidentified Company Representative
Yeah sure, we are working to have a reduction in the PMSO of the company and undoubtedly the goal is to make it lower than the regulatory PMSO which has been a tradition in the past cycle, that's how distribution companies behaved. This is our goal and I think I am sharing with you a part of these results in this quarter and I am sure that we have other things underway that will allow us to make these adjustments in the next 15 months because we have to review cycles, starting in October extended to February when we have the other five distribution companies then in April in Paulista, our highest assets and in June for RGE.
So we have the timeframe for these changes in transformations to allow us to work within the new reality, ideally below the values proposed by the regulatory agency. On the other hand the regulator is always keeping an eye on a higher efficiency for the whole system. And I always highlight that the mission of ANEEL is to mediate with several interests.
There's an interest on the part of the consumer and there's also an interest on the part of the investor. In order for consolidation to reach the intended result by the agents and the regulatory agency, you have to promote some kind of balance. This process becomes unfeasible for investors. Consolidation will not occur and they won't derive the efficiency and quality gains expected. While we won’t see, what we would see would be a loss of the operations and that would not interest sustainability for this system.
I believe that ANEEL is quite a mature regulatory agency. This process what we had on 50 years from privatization and they want to promote this kind of balance. It's no use capturing everything because if you capture everything and there is no prospect of remunerating investments made in consolidation, this consolidation will not come to be.
Again consolidation is an option of qualified and efficient investor to create value to all stakeholders. They will not just make money, they will make money but they also share efficiency, quality, customer care. For the stakeholders, customers this is followed by lower tariff, but it has to allow (inaudible) innovation to the investors of the process will now become feasible.
So I candidly believe that the regulatory agency will be (inaudible) we will see when our consolidations to occur with all of the expected benefits including the listed remunerations of investors like us.
Thank you. My second question has to do with your debt levels that has been increasing a lot. Well perhaps not a lot, but close to optimized levels. But looking forward with a reduction in EBITDA but with a very aggressive CapEx program more than R$700 million per quarter, how do you see your debt level in the end of 2012 and 2013. And they still don’t have cash generation coming from these investments. Do you believe that you would not be allowed to make more acquisitions?
Unidentified Company Representative
Well, I tried to explain our leverage levels and we think the correct metric, the metric that we incorporated compared with 281 have a movement that actually resulted from the reduced EBITDA of operation should decrease likely between 15% and 20%. Of the operations that remain; Piratininga is the operation that we always mention as the company that could show the highest decrease; you can have the market growth for this greater over the cycle, so these values can get close to 30% but for the total of our operations, I was talking about 15% and that will be a reduction of that amount. It is true that at minus 3.4 for Piratininga the final tariff that we have to include and through the annual readjustment that will happen.
It is true that we are going to see a decrease. And now let’s look at the flipside of the coin. The result of these investments above depreciation, we are having smaller reductions than some of our peers regarding the so called tariff review cycle. On the other hand, we have very large investments underway; some of them already giving us results. I tried to you show you three investments in renewables that generated this kind of leverage.
We had commercial startup investment of around R$1 billion to produce no type of EBITDA, and that now are showing some revenue; I gave the briefing, you have your own methodologies to evaluate how will be getting remuneration of these investments.
So I should say that we don’t really expect potential variations in the next two years and regarding our debt level ratio in this metric of 2.8, it might increase slightly about three times but very distance I would say from our covenants and if the company wants to take the initiative to make some acquisition for using our financial capability. We’re talking about 0.8 times the EBITDA that our leverage capability and acquisition operation, an EBITDA of more than R$4 billion as we had.
In terms of GAAP, the company has is controlling shareholders because only 70% of the company is in the hands of these investors, and in order to fund an acquisition in a more adequate way. In the future, we can always resort to the issuance of stock, something advantage of the position as the company we fit of ABR and ON in Brazil.
In that track, this feature would allow the company to have a share issuance in less than a month. So, very candidly, we’re not worried about that. We feel comfortable, we manage an optimal capital structure and you can also observe that the market now allows longer operations from longer extension operation and with that arbitration becomes even more comfortable and we’re talking about good financing.
We’re talking about financing for the acquisition or long-term working capital and other financing modalities of the company, practically 40% of the company funding comes from funds from the BNDES both for CapEx operations for the distribution company and renewable generation and the very elastic maturities.
So, that is not a concern in our radar. We don’t there is a slight upward movement. You know, I am reacting to your question without details data, we can give you a more detail but we should not have an increase of above three, in the metric that we use which is the more real metric and we also have the possibility of issuing more share. Thank you.
(Operator Instructions) Excuse me. That concludes the Q&A session. Now I would like to give the floor back to Mr. Wilson Ferreira Jr. for the final remarks. Please go ahead.
Wilson Ferreira Jr.
Once again I would like to thank you all for joining the conference call for the third quarter. Once again I would like to highlight some of the concepts that really will make it easier for you to analyze the IFRS accounting method. Should be further broken down in order to consider the recurrent results of the company, primarily when there is volatility of the main indexes that affect distribution and the current accounting method does not make that so clear to all investors. So it is up to analyst in this assessment. They have a very important role and it is important for the company, both in terms of negotiating with suppliers, with proper covenants and particularly for the company it is very important to have this acknowledgement in order to provide a great capital structure and also envisaging the future scenario.
The operations that I mentioned today and also my colleagues when it comes to pre-funding we all see this as a sign of our financial discipline which is critical to us. We are very bullish when it comes to the company's activities and each one of these activities over the quarter will have good results for distribution for instance. The good performance of our market in generation particularly because now we can have a higher operating efficiency and the use of secondary energy generating more revenues to the group.
And we also highlight commercialization, the market is very dynamic. We have been well positioned. Our organization chart approved last year has already delivered good results. The company is opening representation offices in Rio Grande do Sul, Rio de Janeiro and in (inaudible) looking for prospects and trying to have a more efficient structure, trying to really have new clients and go for clients with innovative strategies.
That's important to be highlighted. And finally and naturally, the topic of Renováveis renewables. We had a chance to share a little bit of results of this important strategy for growth. It is important to say that for the whole group, our strategy is oriented not only for growth but also innovation. The program has been very much encouraged both by the controlling shareholders, the company's top management and then on top of that that I believe that part of the results we shared but innovation should bring gains of value, more efficient processes and thanks to better efficiency we can lower our costs.
We have a good team focused on those activities. We are very optimistic with the same results that we are beginning to have. We still need automation and distribution be it in terms of measurement or monitoring of our working teams as well as automation of keys and a modest distribution grid which is very long.
And also the use of more efficient materials or more reliable materials. So we can perform our activities and altogether it will bring all the benefits behind more efficient operations, better quality of service and better costs.
So that's a take home message that encourages the group in all our activities, not limited to distribution even though it is the most demanding cost wise. But it goes beyond. It also includes generation, commercialization and services. So we are very happy to have you here with us and we have a final optimistic message towards the future lined naturally to the strategy that we've been working together with our shareholders. Thank you for your attention.
CPFL Energy’s conference call is concluded now. We would like to thank you all for joining us. Good afternoon. Thank you.