CPFL Energia S.A. (NYSE:CPL)
Q3 2012 Earnings Call
November 06, 2012 8:00 am ET
Wilson Pinto Ferreira - Former Chief Business Development Officer, Vice President of Strategy & Regulation, Vice-President of Distribution Generation & Energy Management and Member of Executive Board
Alexandre Kogake - Citigroup Inc, Research Division
Márcio Prado - Santander, Equity Research
Good morning, and thank you for waiting. Welcome to CPFL's Energy Third Quarter of 2012 Earnings Conference Call. Today with us, we have Mr. Wilson Ferreira, Jr., CEO of CPFL Energia and other officers of the company. This call is being broadcasted simultaneously on the Internet at the Investor Relations website of CPFL Energia, www.cpfl.com.br/ir, where you can also find the presentation for download. [Operator Instructions]
I would like to mention that this call is being recorded. Before proceeding, we would like to mention that forward-looking statements that are being made are 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's 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. Investors should understand that general economic conditions, industry conditions and other operating factors may also affect the future results of CPFL Energia and may lead to results that differ materially from those expressed in such forward-looking statements.
Now I would like to turn the conference over to Mr. Wilson Ferreira, Jr. Mr. Ferreira, you may proceed.
Wilson Pinto Ferreira
Thank you very much. Good morning, everyone. I would like to thank you for your presence and for your presence, so investors and analysts during our Third Quarter of 2012 Earnings Conference Call.
And I would like to start with Page #3, where we have the highlights for the third quarter of 2012. Starting with the growth in our sales in the concession area, a 1% growth. In this quarter, we have 2 days left in our revenue timeline. Normalizing this, we will be talking later about that, and this would mean almost 3% growth if we adjust this. And also the commercial startup of the Santa Clara wind farms, which occurred in July. And I would like to mention that due to negotiations with the agency in spite of the fact that the farms are not connected to the network, to the grid, because of delays in the ECG, we are already receiving the resources and billing for the wind farms in Rio Grande do Norte. I would like to highlight the acquisition of the Ester power plant, and we have already published a material information. And September 28, we paid out the dividend of BRL 640 million on September 28. And the normal course of our activities from the investment viewpoint, BRL 660 million in Q3, very much aligned with our estimate, our annual estimate. And I would like to highlight the conclusion of the first area of review of Piratininga, distribution company of the group, with results that are very close to the ones that we had already informed. The market and that corresponded to an economic repositioning of 7.7% post-tariff review, and the annual tariff review applied on October 28. And I would like to talk about the maintenance of the credit score of AA+ by Standard & Poor's for CPFL Energia and for the subsidiaries of the group at a national scale. And maybe due to this moment of the market, a very important moment of a daily -- average daily trading volume in our stock, both in the Brazilian market and by means of our common stock and also ADRs in the U.S. market, we reached an average daily trading volume of BRL 50.4 million and many other recognitions for the company, for the group in this last quarter, and I would like to highlight the Você S.A. survey about the best companies to work for. For more than 10 years, we've been participating in this important survey carried out by this magazine. And 2 awards, 2 new awards, the first ones that we get, the first one, the EPOCA Climate Change Award of 2012, and especially the EPOCA Business 360 degrees and of company ranked first in this sector in the third in the general ranking in the first survey, involving not only economic results, but also corporate governance and the treatment that the company gives to sustainability and human resources and strategy. So this award, this is very much encompassing from the viewpoint of the valuation. It is more encompassing than the others. So we were very happy to get this recognition for the first time for CPFL in this list. And finally, the Carbon Disclosure Project report that highlighted the company due to its performance and the disclosure about our CO2 emissions.
Very well, on Page #4, we have the energy sales in the third quarter. On the left, we see sales of our accounting release and we see a BRL 2.7 million drop in the captive market and 11.1% increase in what would be the free market in the concession area, giving a total of 1%, highlighting a very important move here in Q3, the migration of free consumers. But also the fact that we are comparing these quarters to the number of days build, which is lower in Q3 2012. On the right, we see the volume already normalized in order to allow us to compare the segments. And this is important and, based on that, we have a 2.8% growth; in the captive market, 3.2%; in the free market, 1.8% growth.
And let's talk about the lower part of the slide, the sales in the concession area, highlighting the behavior of each one of the segments. So you can see here, and this is already in a normalized base, the 5% increase in the residential market, 5.9% increase in the Commercial segment. So both sectors, quite strong, and this moment in our economy is very positive for these 2 segments, and it is also positive for [indiscernible], as this segment is a low-voltage segment, and from the viewpoint of tariff mix, we have the best tariffs in the portfolio of the concessionaire. And the slight upturn in the Industrial segment, 0.8%, and the other segments with 2.1% increase.
On the right, the lower right, you see the configuration and the effect stemming from the 2.4% to 2.8% between residential and commercial reported at the adjusted amounts that I have already referred to, 5% residential and 5.9% for commercial.
On the upper part, total energy sales build by the company to our consumers to reported. We have the 9,795 gigawatts hours captive at 2.7% drop year-on-year. And 10.3% increasing the free and conventional for outside the group. And finally, the higher participation due to the startup of many plants of CPFL Renováveis, reaching almost 1,000 gigawatts hours, so when the comparison of this quarter to the same quarter last year, we see a growth in energy sales of 6.2%. So the sales results are important. It is a moment of recovery of our economy and we will be talking about that in detail later on.
On Page 5, we have a comparison. Accounting-wise, we grew less than Brazil, 1% vis-à-vis 1.8%, and the positive highlight for the Southeast in our concession areas, we were higher than the average for the Southeast and negative in the South, where we had 1.5% growth vis-à-vis 3.3% for the South region as a whole. And on the lower part, as you know, we work with LCA Consultants who draw our scenarios so the expectation is that over this quarter, we will see a major recovery in industrial production, which will naturally mobilize our sales up by the end of the fourth quarter of this year. On the next few slides, we are trying to give you the scenario that is the basis for our positive outlook for the fourth quarter. With the whole set of measures established by the government that we understand, one way or another, we'll drive energy sales into different segments where we operate. Some measures to offset the prices, the reduction of the IPI tax for home appliances and vehicles, and with the maintenance of these incentives, reduction of the IPI for capital goods. And the postponement of the deadline for the tax payment of these [indiscernible] tax payments show this is all positive for the recovery of the Industrial segment, structural measures that are perennial investments in new projects and stimuli for the infrastructure. We're living in an important moment of construction of roads, energy, oil and gas, [indiscernible] casa mia, you see the program we will see the volume of financing increasing very steeply, the new automotive regime. Recently, with enforce and the pre-sold and the sporting events, we are on the brink of the Confederations Cup and almost getting to the World Cup already and other measures that certainly will cooperate competitiveness and pave the Provisional Measure 579, due to the reduction of our energy costs will be important, mainly for the industry and commerce, the unburdening of the payroll for 40 sectors, the fall of interest rates and spreads and more competitive exchange rate being maintained around BRL 2 per $1, and a greater fiscal gap, allowing us to see an export reduction. And one important fact that we have in this table is the investments in infrastructure. For the sixth consecutive year, we see an upward curve as a percentage of the GDP, and in 2004, it was 0.8%, and in 2011, 2.4%, threefold increase, and an important evidence of that, although we have been evolving less than we would like. But the fact is that in 2007, in the competitiveness ranking of the World Economic Forum, we ranked 72nd; in 2011, 53rd; and this year, 48th, a slight improvement, and this is a permanent trend that stems from the structural measures that our government has been taking.
And as a synthesis on Page 7 of the structural measures as growth drivers, 17 million new jobs created in the last 8 years, reduction of poverty and social inequality, social mobility, 55% middle class in 2011. So expansion of income, credit and more access to the consumption of durable goods, a real increase of 63% of the minimum wage. I was talking about housing loans, and we've reached BRL 80 billion last year. We have already had BRL 61 billion this year, and we will close the year with BRL 100 billion being in housing loan approvals. All this has an impact on household consumption. And in the case of the lower part, lower right, the number of new connections being made in the concession area of CPFL, which is already a consolidated and mature area in 2009, we connected 2.2% of vegetative [ph] growth per year. This meant 134,000 new connections in this area, which was already one, it was already unified, the 8 distribution companies already belonged to the CPFL Energia group. And this meant 130,000 new clients being added, or 2.2% of the existing platform at the time. This year, looking at the performance until September, we have already connected 215,000 this year, 3.3% increase on the client base of the company. So certainly, you can see that there is a differentiated dynamics here. We will practically connect twice the number of consumers that we connected about 3 years ago. And on the upper part, this is the centerpiece of the slide, which is the outlook for household consumption. In 2010, Brazil reached the eighth position in the world, ranking with BRL 2.2 trillion, and stemming from this moment that we are living in the Brazilian economy, the expectation is that we should reach the end of decade at 2020, in 8 years time, with BRL 3.5 billion or the fifth position in the international ranking for household consumption, BRL 3.5 billion. And with a higher number of connections and the real growth that we see basically in the Residential and the Commercial segments, so we can see that all these data are -- have a positive bearing on the volume of sales of the concessionaires. And okay, so having said that, let's turn to Page 8, where we start to talk about the results of Q3. As we usually do, on the first line, we have the results reported in IFRS, and we can see a 16% growth in our revenues, net revenues, reaching BRL 3,454,000,000 and EBITDA growth of 9.2%, exceeding BRL 1 billion, and a drop in net income of 15.2%, reaching BRL 321 million. It is important to stress here, and you track this and we always talk about that in our releases, that stemming from the application of the IFRS, we see an important move, and which is not recognized of regulatory assets and liabilities and in order to facilitate the work of our analysts and our -- and also to facilitate the management of the company, we also report the recurrent results of the company net of the effect of regulatory assets and liabilities, such as we had before in the Brazilian GAAP, coming from the incorporation of the CDA. And here we have a better basis for comparison between and among quarters and the real performance of the company, and according to this method, we see a 14.3% increase in net revenues, an important change in our EBITDA, reaching almost 19%, BRL 1.184 billion, and the net income would be slightly positive by 6.1%, reaching BRL 425 million. And we have a very clear idea of these movements.
And on the lower part, on the left, we have the effective EBITDA, and here, net income in EBITDA, we have a difference in the cost of energy from the past in 2010. At the time, it was not a nonrecurrent effect of recognition that we had, and it was highlighted in that quarter and put in our release to facilitate your understanding. And finally, the recognition of the revenue from the low-income subsidy, as you can see, and some negative recognitions as well, coming from the application of the new accounting method for the electric sector and BRL 17 million access here in Piratininga, the adjustment in our allowance for doubtful accounts, and we became a little bit more conservative in this.
We are reinforcing our contingencies of BRL 54 million here, then we have the positive and the negative effects of the physical inventory of our distribution assets last year. We saw a reversal in our provision in this year. Now, we already recognize the costs with this inventory, and this is a nonrecurrent event because it is recognized in the tariff review of the distribution companies. And finally, other adjustments, negative adjustments by BRL 3 million last year and 3 positive here this year. So stemming from these nonrecurrent events for the 2 quarters, we have 32 positive last year, 35 negative this year. But we must recognize another 2 elements which are important. The first one is the temporary procedure of distribution companies, particularly in the case of Piratininga, and the 5 smaller concessionaires that we have in Sao Paolo state. The tariff review -- they didn't have the tariff review in the previous year, so BRL 56 million recognized now, and when we have the reviews, we will be working, recognizing this over the next 3 years. And of course, the account that has a more intentive movement and that sometimes gives us a different idea from what it should be in the recurring results of the company, the CFU or the regulatory assets and liabilities, BRL 141 million favorable to the company. So this brings to the difference that we mentioned, adding the 2 lines of the nonrecurrent and the regulatory assets and liabilities of BRL 139 million, added to the result of what would be the third quarter in our EBITDA or BRL 104 million in the result of our net income.
Very well, so now let's go to Page #9 and evaluating the EBITDA and the net income of the company. So on the outer part, we have the 18.9% growth that already includes the recognitions, be it of the nonrecurrent effects or the regulatory effects, so BRL 39 million. On the left, so we reported EBITDA of BRL 956 million in Q3 2011 when, in fact, it should have been entered at the BRL 96 million, and the same in this quarter. We are reporting BRL 1.044 billion being reported this quarter when, driven by the recurring movements in the regulation, we -- of the regulatory, we would have something close to BRL 1.184 billion. So this is just for a comparison between the reported values. A 9.2% growth, BRL 956 million to BRL 1.044 billion. And here you have the growth in the net revenue, BRL 476 million, to great extent due to the increase of the net sales to the captive market and the adjustment, tariff adjustment, itself a 4.3%, that we saw between the quarters over the last year, amounting to BRL 53 million. We also see the increase in the volume of short-term energy, 20% growth or BRL 62 million and achieve a fee revenue of 9.7%, coming from the movement of free consumers over this period. We see then an increase in other revenues amounting to BRL 26 million, and the highlight, I have already made the disclaimer of the low income subsidies and this is non-recurring, as I said before. Then we have the effect of consolidation of CPFL Renováveis, BRL 170 million, and conventional generation of commercialization in services, an additional BRL 66 million. Deductions from revenues, basically the reduction in the sector charges in the fiscal sales tax credits, that in the last quarter we already made this disclaimer to you, amounting to BRL 72 million.
Now we have an increase in the energy cost in charges, even higher percentage-wise than the growth of our net revenues. So here, we see a 19.2% increase in the purchase of energy for [indiscernible], BRL 246 million, a 10.7% increase in charges, BRL 38 million. In the quarter-over-quarter comparison, it is important to say that due to the provisional measure in January or February, we will see a reduction, an excessive reduction in these charges. And this is important to say that the increase in the cost of energy is due to the variation in the value of the PLD from BRL 20 to BRL 31, and mainly involving current energy, the average spot price. We see an increase of 26.9% in the PMSO expenses on the next slide. As the management of PMSO, it's really a specialty of our group. So that we do not have the wrong interpretation, we make a disclaimer in the next page, showing that what seemed to be BRL 104 million growth in fact corresponds to a drop of BRL 4 million, or 1.1%. So you can see the reported value in IFRS, BRL 386 million, a 26.9% increase or BRL 104 million, reaching a reported value of BRL 490 million for Q3. And I would like to stress that these amounts, we have a whole set of events that should be better clarified. The first one is the CPFL Renováveis upward curve. We had BRL 25 million the previous year and we have BRL 49 million now. This is the growth of the company that corresponds exactly to twice the volume of energy generated and installed. So the company and the growth curve, and naturally, it should be highlighted even further in the comparison of our expenses. And on the other hand, we have the report of the distribution companies. We had a reversion in the previous year, and this year, we placed BRL 2 million in this quarter. And finally, last year, I think you remember that because we were at the end of the incentive program to retirement. So we had BRL 3 million more, totally non-recurrent, and this year, driven by the tariff review procedures, we had not only the BRL 15 million as a write off, and the accounting manual, as I said before, but we also made the reinforcement of our provisions amounting to BRL 54 million. So we made the disclaimer, but in order to be able to compare the BRL 376 million, we should compare with the BRL 382 million, which generates a 1.1% drop in the cost.
And in order to make it even more clear, on Page 11, we -- so you -- in detail, our personnel expenses and materials and services and others on a quarterly basis. So you can see on the first line, on the upper line, you can see the amount, the reported amount on a nominal basis. In blue, we always see our expenses in personnel, and in green, better use services, others and third parties. So here, you can see a 2.2% growth in Q1, comparing Q1 2011 to Q1 2012, and you see a drop here in Q2 and 1.1% drop between third quarters, third quarter 2011 and third quarter 2012. It is true that in this period, we see a growth in the IGPM, as you can see on the lower part, of 3.7%. It is comparing the first quarter, 4.4% compared to the second quarter's, then 7.5% in the third quarter's comparison.
So if we normalize based on the effect of the IGPM, we can see that in the Q1, we see a drop of BRL 9 million in payroll, and a BRL 3 million growth in MSO on a real base. And comparing the second quarters, also stemming from the important reduction due to our retirement program, we see a BRL 40 million reduction in MSO and CDI [ph] personnel, already producing the expected results in the third quarters, a drop in personnel of BRL 10 million, MSO dropping by BRL 22 million, BRL 78 million reduction overall in PMSO on a real base, in a comparison of the 9 first months of this year vis-à-vis the 9 first months of last year. And I would like to remind you that we had an expectation of reduction in the real base of personnel, around BRL 25 million. And our estimate was BRL 50 million due to the application of the CBB, and something similar to that, due to the application of our shared services center, deer [ph] hasn't reached an end, but we have already reached almost BRL 80 million in 9 months and this expectation of BRL 120 million will be very close -- the final result will be very close to that. So this is very important for you to understand, based on the IGPM and inflation that are on the upper range of the target. So it was important for me to mention this to you.
Next, on Page 12, we have a breakdown of our net income. So we'll be breaking down not only the 6% growth but the drop by 15%. And primarily, it stems from our growth in our EBITDA, 9.2%, as was just described, up BRL 82 million, and also a reduction of 15% in the financial result on a net basis, which was negative of BRL 31 million, that's the second part. Basically, here we have a reduction of financial revenues of BRL 62 million. Obviously, there is an important reduction in CDI in the balance of the company -- the net balance of the company, still very rigorous, but lower as a result of the company's acquisition using part of its cash. And on the other hand, we have a reduction in financial expenses at 7.3%, or BRL 31 million. This total amount, here we highlight that actually there is a significant reduction, the contribution of CDI reduction in our financing accounts for 60%, approximately. So we have BRL 66 million reductions in our expenses, financial expenses, and also lower expenses with [indiscernible] billing tied to exchange rates at BRL 25 million and consolidation of CPFL Renováveis. Now we are the controlling party with BRL 69 million. And a nonrecurring event related to increase in penalty over payments related to the integration of Paulista network amounting to BRL 20 million. For the integration of these assets in the net base of the company for tariff review purposes next year, these amounts have to be considered until October this year.
So that was provision for this quarter.
Update of the planned UDP, we started mentioning this last month. So that's only a quarter-on-quarter comparison. And also increased appreciation and amortization stemming from depreciation of generation projects at Renováveis, product and resulting depreciation and changes in [indiscernible], as I mentioned last quarter, with our new procedure adopted by the company. Our surplus is BRL 20 million lower for pension funds. There's still a surplus, but BRL 20 million lower compared to the first quarter of last year. And also as a result of the reported income, there is a decrease in income tax and social contribution. As a result, this quarter, our net income reported in IFRS is BRL 321 million, also stemming from the net result of nonrecurring events, particularly regulatory assets and liabilities. Our recurring income is BRL 425 million this quarter.
Moving to Page 13, leverage, BRL 12.7 million, that is posted net debt, 2.94x the net debt-to-EBITDA ratio on an adjusted basis via our covenants. Please note this amount is comparable to covenant [ph] with BRL 375 million, and from the moment CPFL adopted that measure in all its financing, that's the result we have. And this is only on the reported basis, our EBITDA. The reported EBITDA with this back would amount to BRL 345 million by IFRS. But I'd like to stress that the company recognizes about -- almost 2 years ago, we mentioned this topic about the potential volatility in reported amounts under IFRS, stemming from the non-consideration of CDA. So we decided to have all our financing, including this index of the adjusted EBITDA amount, which is recurring to the company. Therefore, at BRL 294 million. Another highlight is the cost of debt which keeps on going down, again at 4.5% in real terms, 9.8% on a nominal basis. And with base distribution of 64% in CDI, 27% in long-term interest rates and already with a relevant stake of 6% in prefix. So these are PSI programs with a 2.5% interest rate. I'll go over that later. IGP amount has to do with effect we have with this foundation on our long-term financing. IGP is an index of pension plans.
Please note that where there is net cash position in late September, now we have to BRL 664 million.
On page 14, we can check the figures more clearly. And now we show the profile of amortization of our debt. The cash amount of the company shows enough coverage for 1.3x our short-term amortization. In other words, we exceeded 2013, and we paid a little bit of 2014, as shown on this slide. In 2013, we will have BRL 968 million in the short-term over the next 12 months, and in the last quarter, additional BRL 554 million. Midterm would be 4.5 years, that's the tender, and in the short-term, accounted for almost 1% of the total.
This quarter, as you can see on Page 15, we also had other funds from BNDES [indiscernible] for CapEx, and we also had the approval and disbursement of BRL 606 million. And under this format, 55% of the amount is on long-term interest rates, growth [ph] spread, and 45% prefixed, that's 2.5, the average cost of the breadth is 5.56% per year. And the tender is up to 10 years maturity. This is very important because it does change already. We're highlighting this, by the way, because it happened in early October, therefore, after the third quarter. But in the first weeks of October, we will see a change in the debt profile, CDI accounting for 62%, long-term interest rate at 22%, and prefixed at 7%. So 35% of our debt taken with long-term BNDES funds. And as a result, our cash early this month is already stronger, to something around BRL 3.3 billion, and therefore, we can have a cash coverage to 1.6x amortization in a short-term basis, remaining at 1.94. And we have a short-term debt accounting for 11.6%, slightly below our September position.
Now on Page 16, just reporting a review on maintenance of our credit rating at the gold level, by the way, positive. And here we just want to highlight Standard & Poor's rating. Diversification and generation, investment in Renováveis, the growth in the contribution of this segment for the CapEx in the group, stability and efficiency of the distribution business and proper level of liquidity and good access to long-term credit deferred [ph] used by the group.
So CPFL Energia and its subsidiaries maintained the credit by S&P with a stable outlook over 2012.
On Page 17, just a breakdown and report. The third cycle of the Piratininga tariff review, exactly as we expected. The company had the highest growth in our group. We imagine a tenant review with a reduction in EBITDA around 30%, and that's exactly what happened. There was a change in the depreciation rate from the provisional to the final value, stemming from the use of a new accounting manual and also depreciation turn. The normal base, BRL 2 billion growth, BRL 2.5 billion, but on that basis BRL 1.233 million, and we have mark [ph] before taxes. As a result, the partial fee is BRL 554 million, and that's the amount that is interesting to the distribution company. It is based on that, that we can have effective results. Repositioning was about BRL 435 million, and tariff adjustment subsequently left end consumers or the financial economic repositioning with 7.71%, not only the tariff review, but also the use of the adjustments for annual tariff adjustment index, close to 7.71% with 1.08% financial component but 1.5% for low-voltage, and almost 10% for high voltage. The average feedback is 8.79%.
Next, on Page 18, we show our segments and our [indiscernible] of the distribution segment challenges. Now we have the first disco [ph] using the 7.5% WACC, and that will take a huge operating efficiency and a huge efficiency to allocate capital. I believe this financing that we reported to BNDES is evidence of our actions in that sector. It is a consolidation moment. Brazil was very poorly consolidated. The 3 top players at 35%, and the consolidated world was at figures higher than 60% or 70%. And now the market is fragmented, but this is a profile of all our distribution companies. Half of them are large, half of them are small distribution companies with less than 1,000 gigawatts per hour, and a higher number of companies in the Southeast and South with 32. One of the challenges for distribution, they have to do with operation and consolidation that will happen in the future.
On Page 19, we report a very low effect, virtually insignificant when it comes to the use of MP 579. When it comes to distribution, less than 3% of the group accounts for renewals at distribution companies with excellent operating indicators. In the economic effect, this MP 579 does not reach distribution companies, particularly because they are insignificant processes to reduce the regulatory WACC. It already happened for distribution companies.
Please bear in mind that, owing to the 3 tariff review processes, the company's had a reduction of 42% in Parcel B or when it comes to distribution tariffs. This efficiency is possible thanks to processes properly done by the agency and, on the other hand, we have 2 small Hydro plants that were included in distribution companies and they account for less than 1% of our installed capacity. And there will be the subject of the application of MP 579, establishing a tariff for these generation companies in order to amortize them. Not only will we start to think about renewal of concessions as of 2027, privatized distribution company, and as of 2032 or '35 with our generation companies. We are very comfortable with the group as a whole.
On Page 20, we show a little bit of our expected effect, trying to break them down to 3 segments: generation, commercialization and distribution. For conventional generation, what we propose is barely high enough to cover operating costs plus spread, the spread incentivizing the efficiencies or the efficient operation of these plants. Obviously, there are important challenges in the power plants that are about to be renewed. In addition, we also have amortization of non-depreciated value. Exactly, as it happens now, with the net base of distribution companies and to CPFL, obviously, like we said before, concessions are on a long-term basis, maturity as of 2032. Our exposure right now is virtually none. And it's important to stress that we already operate at costs that are lower than the ranges proposed as we could see in the release, released by ANEEL last Thursday.
As the free market commercialization renewed energy is cheaper, at least as proposed by MP 579, would be exclusively to ADR and the regulated market, therefore, will have lower prices when it comes to buying distribution companies today.
It still has to be further assessed once we have the approval or not of all the generation companies, and then we have a clear picture of what might happen to the free market. But if we consider that some of these generation companies could be sold in the free market, it is possible to assume liquidity restrictions, but these a little bit before this anticipation. And the A4 segment, which was migrating with approvals or both period of 6 months now will follow the same rule that we have to the conventional segment.
For CPFL, this environment is clearly more competitive. There will be pressure on margins. The company's performance stands out in commercialization, and I believe that [indiscernible], particularly for the A4 segment, will be more technical. I also believe that companies that have consolidated or have credibility in the market and thus by benefiting, such as CPFL. It will be critical, particularly for smaller consumers, to have good reliability, and that's what our company can -- or can add to these potential free consumers.
As to distribution, we understand that the rules and requirements for quality performance will be higher. Naturally, there'll also be an impact of the change in the contract process and allocation of quotas. We have insisted and we already have statements by the government in the sense that an occasional contract will not reach a service, which is very important to all of us.
As to distribution, we have the rules, the new rules or requirements for quality in this sector that will be detailed further on by ANEEL, and any potential changes when it comes to contract of energy and allocation of this energy vis-à-vis via the distribution companies. To CPFL, what we expect as potential impact, these are limited impact considering we have a low exposure for concessions, particularly lower concessions that will be due in 2015. As Wilson mentioned, it accounts for 3% of the company's EBITDA and stronger assets will have long-term concessions and the stronger the CPFL believes them to be due as of 2027.
Wilson Pinto Ferreira
Wilson is back. This is Wilson again. On Page 21, we showed the main economic impact by this measure, particularly when it comes to payroll and inflation. It will have a potential reduction of inflation rate, possibly 20% reduction, which is something significant to be taken into account inflation-wise. And on the other hand, it might improve distribution mix, more sales for residential and commercial segment. For the investor activity, the impact of the tariff can have several natures. Some factors are not so exposed to competition and, therefore, they have to work on the margins again. And there are several factors that may lower their costs to increase competitiveness and gain more market share. So that's what we expect in the industrial segment, increased consumption and lower idleness when it comes to demand contracts. And as of 2014, we'll be maintaining consumption and hiring demand contracts, considering further stimuli to the economy that already require investment in the industrial activity.
On Page 22, we gave you a timeline of the different steps of MP 579. 2 have already happened. And October 15, the majority of distribution companies show their interest, and the same goes for transmission. And some companies, some generation companies, have not fully complied. But in the statement of interest, we have unanimous decisions when it comes to the 3 segments. On October 1, we had the draft of attendance, the release of tariff, and generation and transmission companies were called to sign these addendum. And this is expected to happen within 30 days or until December 1.
Once we have this posting on December 11, we have the approval of the few SD numbers coming from this potential compliance. On January 1, this new generation and distribution tariff will come into force. And on January 21, we're going to have the final certification of crude distribution companies, and that's an important move. And next we have to wait for generation compliance so we can come to the final quotas, to be recognized in an extraordinary decision by distribution companies on February 5. The schedule is very aggressive. But at least it's the first move. So on the first day of the month, it happened according to our schedule.
Now very briefly, let's move on to the next slide, just to follow our generation project for Renováveis. Over 2013, as you can see, we have a set of projects planned and 94% concluded. Please note that this is contracted as IFA at BRL 365 already financed by the BNDES. And we'll be starting up in the first half of the year. Our 2 TPPs our co-generation and biomass Coopcana and Alvorada starting up at the same time at similar stages, one at 38% the other at 41% concluded, financing already approved by BNDES. These plants will get into startup in the second quarter of 2013, totaling 120 megawatts or 47 average megawatts due in 2013.
On the next page, we show the startup of our windfarms, Macacos Complex, also LFA, to be analyzed by BNDES. It's for alternative sources. Campos dos Ventos II and Atlântica Complex, both starting out in the second half of 2013. And all the wind farms today about to be analyzed when it comes to financing by BNDES. Wind farms Campo dos Ventos and Atlântica Complex have tariffs for the auction reserve -- reserve auction at LFA for 2010 of BRL 152 million.
Next on Page 25, we show Campos dos Ventos I and Säo Benedito. These projects are scheduled to be delivered in 2015 considering the delays we have in our transmission system, to be sold in the free market. Additional 254 megawatts to be installed and to startup by 2016. That concludes our presentation.
Now just very briefly on Page 26, we show our stock performance. Ever since the issue of the measure, maybe with the clarifications that are being delivered, we show lower volatility. However, over this time frame, we've also been slightly affected, going down 9.3% vis-à-vis 15% from IEE, or a part of the variation of Ibovespa at 9%. For the year, we performed above Ibovespa and IEE or ADR, as we also had a drop of 9.8% this quarter, vis-à-vis growth of Dow Jones at 4.3% and positive performance for Dow Jones precedent high [ph] at 2%.
Like I said, the highlight is higher volume at BRL 50 million daily, growing 43%. When it comes to daily volume and stock performance, as you can see on the right, our performance is above IEE and above Ibovespa.
I conclude on Page 27. With this important recognition by the common disclosure project in 2012, CPFL was considered as one of the best disclosed credit notes or ranks, particularly when it comes to climate changes in a set of assessments to generate values to stakeholders and also unique corporate governance, supplier engagement, innovation, renewable sources, smart grid, the electric car and so on and so forth. CPFL was mentioned in the report as a highlight thanks to having described its actions very straightforward with quantitative details. That's something key to all of us.
Please bear in mind that CDP gathers about 670 global investors that manage assets of about $78 trillion, so this recognition is particularly important to our health.
Finally, on Page 28, this is our centennial month, and we'll be opening, so a lot depends on our solar plant to be inaugurated in São Paulo, about BRL 14 million starting up in the fourth quarter or at the end of this month. The power plant in Campinas, all the panels have already been assembled and the other final parts of the electrical installation. Please note that the participants of our sixth investor meeting, to be held on December 4, these participants will have the chance to visit the first and the greatest solar plant in the state of São Paulo. These were our remarks and, with my team of officers, we'll all be happy to take your questions. Thank you very much for joining us today.
[Operator Instructions] Our first question, Alexander Kogake, Citigroup.
Alexandre Kogake - Citigroup Inc, Research Division
My first question has to do with Provisional Measure 579. What about the A4 migration, and for consumers' migration, does this measure have any impact on your migration and on prices? And what about the effect on the price of conventional energy as well? The second question is the following: I would like to know what you think about the proposal for a public hearing by ANEEL last Thursday, which has to do with the allocation of 100% of the transmission costs stemming from the 579 provisional measure to consumers only, and we know that today to split half and half, more or less.
I will answer the first part and Fabio, our planning officer, will answer the other. Regarding the A4 migration, the movement is almost imperceptible so far. It is not something to be highlighted right now. Also, regarding the price of conventional energy, our expectation, to be verified based on the drop of the price of the purchased energy in this DisCos market, is that certainly the cut price and the TUSD of DisCos will make the breakeven for renewable energy to be lower than the one that we estimated or that we saw in the market during this semester. In the same proportion as the drop of the average purchase price of distribution companies before and after the provisional measure, we expect a drop in the same proportion in reals per kilowatt hour, around 15. It could reach even 20 megawatt hour. The drop in the purchase price or the competitive price for the free market for special consumers. I had already emphasized that it will be tougher, so sales will be more technical, and also these consumers didn't have a burden for the entry and the exit of DisCos. Their movement was quite free, so to say. In order to benefit from alternative sources and with this new rule that they will have a 5-year term, they will have to do the math and they will have to have a reliable supplier so that they can do this change in a safer manner. This is where I believe that our group, due to the fact that we have a very big experience with distribution and a safer distribution commercialization because we're not speculative, we may have an advantage there. And now I would like to give the microphone to Fabio, our planning officer.
Could you repeat the question, please?
Fabio, last Thursday we show a technical proposal by ANEEL that proposes to allocate 100% of the transmission costs deriving from the 579 MP only to final -- or end customers, and we know that it's distributed between generation and distribution. Have you evaluated this technical note?
We already expected this to be allocated to the end user so that it could bring about the reduction that the government wants. We didn't expect generation to have any reduction whatsoever, because then you would not be transferring this benefit to the consumers. We are still analyzing the figures, but anyway, we already expected this.
Wilson Pinto Ferreira
I would like to go back to the previous question, Wilson. Now that you have a 5-year term to migrate, it will make a significant difference for you in terms of the incentivate [ph] market. We must have long-term and this would be a second advantage of our operation, because all of the bulk that we have in the free markets would be allocated to this more technical and most restricted to consumers. I am sure that we do have this kind of support and that it will be making a difference for the special consumers in the A4 market.
Mr. Márcio Prado from Santander.
Márcio Prado - Santander, Equity Research
I would like to ask a question about the migration of the A4 customers and others maybe to the captive market in order to take advantage of drops in energy prices because of this provisional measure, the 579. Could you talk about the energy balance of the CPFL distribution companies? We see at least minus 3 and minus 5 options. We see that there is an exit contracting of the factor. I would like to know if you and the CPFL have already carried out some simulations of what the 579 means to you and the mandatory allocation of electric energy to the regulated market? And there are other factors such as the terms [ph], and maybe you could say a few words about that?
I'm going to talk about that very superficially. The question is very good and I place the other offices of the company to our disposal to better clarify. But the view is the following. I also expected, potentially, an excess contracting and the only thing I recommend to you is to get to the PSI website, and there are consultants for this team and they have a very clear demonstration that if you're not over contracted now, and in the case of the group's distributions companies exactly this, you will not be over contracted due to the incorporation of these quotas. You have 2 different moves here. You have a move that potentially renews concessions and it is around 12,000 average megawatts, 13,000 megawatts. And on the other hand, you have -- just to make it clear, if you consider the replacement amount, that is to say, the amount that distribution companies would have mandatorily to re-contract in 2013, this will be done by means of these quotas. But at the same time that you will have, if everybody accepts, you will have 12,000, you will have an exit movement of 3,000 average megawatts or 3,000-and-something, which corresponds to [indiscernible]. So if you look at the replacement, it would be 8,500, but something like 3,500 that will be exiting. You will get to exactly the same 12,000 that theoretically will come on board. So we do not expect any excess contracting or over-contracting of distribution companies stemming from these replacement quotas, be it for the replacement amount or the exit or the final exit of the team. On the other hand, in the seminars that we participate in and coordinate, for instance, [indiscernible], coordinated in Mato [ph] in a seminar 2 weeks ago, we had the participation of the regulator and EPA, et cetera. And they also talked about that, and they said that the movement does not intend to cause an over-contracting and, should this happen, this would be considered in order to transfer this tariff. So we do not expect any negative impact coming from over-contracting. And besides, we do not believe there will be over-contracting. I would like to add something, Wilson?
If today, we see a migration of clients -- electric-intensive clients, A4, for CPFL. In the short run, it would be difficult because you do not have a relevant over-contracting. There wouldn't be a problem in terms of receiving or getting these clients on board.
So this is a question, and the second question will be more technical here, and maybe we can continue to talk about that after the call. But usually the hedge is about 3%. The provisional measure generated 5% hydrologic hedge. Do you agree with that?
And today it is complicated for the company's distribution companies to receive these client set. We have to migrate from the free market in the short run. So I would like to confirm how you see this. I would like to better clarify what I said about liquidity. The consumers that have a higher volume of energy created in the free market are the conventional consumers. They are not the special consumers. In number of clients, they are almost similar. But in volume of energy, the conventional segment is overwhelming. I would say over more than 80% of the free market is the conventional consumers, and they do not have a way to go back to DisCos. It is important to stress that. I imagine that the average purchasing price of distribution companies after the effect of the 579, it depends on the DisCos. We have some simulations where it should be between 110 and 120 we have per kilowatt hour after the effect of the free market for these large consumers is selling at BRL 100, more or less. So these customers are not going to benefit from this drop in prices. They didn't pay this price at the captive market anyway and they will continue to pay the same price that they paid in the free market. What occurs is the following: those who are catering to the market, the conventional market, most possibly are companies, not only these, but possibly part of these companies that have concessions to be renewed today could be operating in the free market. And these companies, if they adhere to the 579 proposal, that is to say the renewal, they would have to earmark this volume of energy generally into the captive market to these quotas, and this is what we understand should bring about an impact on liquidity, on the liquidity of the free marke,t, because we will no longer have that backing associated to the free market and it will be associated to the captive market. This is our expectation regarding the theme of the A4 market that you referred to. I would like to remind you 2 points. When I say that DisCos are not over-contracted, I would like to mention that most of them, also because of the lower performance of sales this year, they are more on the 103 side than in the middle of the range. And I would like to remind you that although distribution companies have the 3% range, a good planner operate with 1.5 upwards and then 1.5 downwards, not only 3 downwards. And in our group, we operate in such a way that we have our supply between 100 and 103, that is to say 101.5, so that we have leeway in any event. If you operate very close to 103, if a crisis comes, you become over-contracted and you end up losing volume. And the planning process, a more efficient planning process, is the one that positions the company in its purchases between 101.5, more or less 1.5%. So only in this case and in this case alone, if you remember what I said, will you see that if there is a move that we do not believe will happen -- I would like to stress that, if we see a move of A4 special consumers on the free market to the captive market, depending on the volume, then you would be able to absorb that if you already have the 1.5% more volume already contracted in the distribution companies higher than the efficient intermediary point in order to absorb the turns of consumers, and besides the potential effect, as I said before. We cannot say that it is absolute or arithmetic or linear. The amount of contract plus [indiscernible] in the amount of quotas, and I do not believe [indiscernible] we will see a strong move of return of A4 consumers to concessionaires. And the A4 segment in Brazil, we believe, has between 20,000 to 30,000 consumers and, in the CCEE, we have a volume that's lower than 1,000. So we're only talking about a handful of consumers that could maybe return. I don't know whether I have answered. But anyway, if you want to talk with our people later after the call, then please feel free to do so.
[Operator Instructions] Now we would like to close the question-and-answer period. And I would like to give the floor back to Mr. Wilson Ferreira, Jr. for his closing remarks.
Wilson Pinto Ferreira
Very well. Thank you very much for your presence and for your participation in our earnings conference call, and we affirm our belief that we are living a very special moment in our sector, be it due to the perspectives for a recovery of the Brazilian economy, and we wanted to place in our report the whole set of elements to show you that the next few months will be very energy-intensive for residential, commercial and industrial sectors. And we have already gone through the first tariff review process. And the result is very close to what we had planned for. And very clearly, we recognize the good application of the tariff review criteria done by the agency. So I think it is important to stress this. This is a positive data for the sector. And finally, regarding 579, I would like to mention that we are living an important moment today where the regulatory framework that provided for the reversal of these access or the [indiscernible] these assets is occurring as planned and according to schedule. And this month, there will be a stronger direction of Society with Congress so that we may get the final approval for this definition that is still lacking for the sector. And I believe that, in the next few days, we will be coming to a conclusion of this. And this is very important for the ambitions of CPFL, which is a group that has strong controlling shareholders, long-term controlling shareholders, and that establishes for the company a whole set of ambitions that must be consolidated. And I believe that, stemming from this, we will see a movement of consolidation. The company has been preparing itself and been acting with the necessary financial discipline and potentializing all our skills and all our expertise, especially our operational excellence and the capacity to produce energy and to innovate. So we understand these skills of the group will be important in this new moment of the sector.
I would like to reiterate our trust in renewable energy. That is a bet that we made about 3 years ago and that materialized most strongly last year with the creation of CPFL Renováveis, and that has been delivery all the projects according to schedule and very active in terms of consolidation that will be a reality also in the sectors, especially now after 579 provisional measures. So this is an important moment in which CPFL restates its long-term commitments with the country and you will be able to have our skills coming into play and being seen as very important by everyone in this moment of consolidation. So once again, I would like to thank you very much for your participation in this call.
CPFL Energia's conference call is closed. We thank you for your participation and wish you all a very good afternoon. Thank you.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!