Brazil’s CPFL studies 4GW in renewables assets for M&A

IN DEPTH | Its last contracted wind farm is spinning, but with money in the bank and China State Grid behind it don't expect Brazil’s CPFL Renováveis to stand still, writes Alexandre Spatuzza

With R$1.4bn ($450m) in cash – and accruing revenues from its newest wind farm – Brazil’s CPFL Renováveis is studying 4GW in renewable energy assets for possible acquisition in a market where greenfield opportunities have been drastically reduced after almost two years without tenders.

“We will be looking at all possibilities of growth. But while waiting for new tenders, we are studying acquisitions and even the possibility of developing projects for the non-regulated market,” says CEO Gustavo Souza.

Souza referenced the 4GW of potential M&A targets while talking to Recharge during the official inauguration of the company’s last project to be contracted at a tender in 2014, the 48MW Pedra Cheirosa wind farm in the northeastern state of Ceará.

Located close to the seashore amid the coconut and manioc plantations of small landholders, Pedra Cheirosa – perfumed stone in Portuguese, which is itself a translation from the indigenous Tupi-Guarani word Itarema and the name of the municipality where it is located – has become a symbolic project for CPFL Renováveis.

Not only do the 80-metre steel towers support the first Siemens Gamesa G114 2.1MW machines to be installed in a regulated-market project in Brazil, but Pedra Cheirosa is the first wind farm to be inaugurated since the conclusion of the takeover of CPFL Renováveis by China’s State Grid earlier this year.

“Renewable energy will have great future in Brazil,” said Huang Futao, a State Grid vice president and the Chinese group’s only representative at the inauguration.

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Although the Brazilian government has promised to hold a renewable energy tender before the end of the year, local analysts expect it to be small compared to the average of 2GW contracted annually between 2009 and 2015.

And Souza will consider his options over how much of its 900MW tender-ready projects pipeline will be sold: “We will always be looking at the minimum return to our shareholders,” he said.

CPFL Renováveis considers itself to be Brazil’s largest renewable energy company with a total of 2.1GW in operation, of which 1.3GW is wind. The rest includes small-hydro and biomass plants, and 1MW of solar.

With a national tally of 11.4GW in operation, Brazilian wind firms – except CPFL Renováveis – will still be building the last 6.6GW through to 2019. But the future is still as unclear as it was when the tenders were abruptly cancelled last year, as the government is now working on a deep revision of the country’s power sector model, promising to change how tenders work.

For CPFL, this is the time to improve its finances, backed by the financial strength of global heavyweight State Grid, which also invests in transmission and is said to be considering thermoelectric projects in Brazil.

Pedra Cheirosa, in fact, is key in this strategy, since it started operations almost 18 months earlier than its PPA contract, which was originally due to kick-in only in mid-2018. So its power will be sold on Brazil’s spot market – where prices can be three or four times the PPA price of R$156 per MWh – until January 2018, the new start date for the contracted supply deal negotiated with power regulator Aneel.

On the financial side, the company has been testing the waters in the capital markets. A recent R$250m issue of local currency bonds, says Souza, came in relatively cheap as investors recognised the heft of CPFL Renováveis’ backers.

“The presence of State Grid as a shareholder means that for us the financial costs in capital markets are very close to the [cheap] financing from the [National Development Bank] BNDES. This means that we are thinking about raising 30% or more of the financing from capital markets for future projects,” explains Souza.

Renewable energy projects in Brazil have always relied on the BNDES for around 60% of a project’s value, because its 16-year loans are some five percentage points or more below private banking rates or capital market costs.

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Despite efforts by the BNDES to increase the amount of corporate bonds in renewable energy as it reduces its own footprint, this typically does not go beyond 10%-15% of a project’s total cost.

Although Souza didn’t say whether new bond issues are planned to improve the servicing of its R$6.5bn debt, the company seems to be looking to the long term when Brazil’s renewable power sector gets back on track.

To be sure, a significant part of CPFL Renováveis’ growth since it was founded in 2006 was initially through M&A, which accounted for about 700MW of its 2.1GW operating assets. So the company is going back to its roots.

For now, inaugurations like Pedra Cheirosa will become rarer after the company’s final greenfield renewable energy project is concluded next year: the 26.5MW Boa Vista II small hydro project in the town of Varginha, in the southeastern state of Minas Gerais.

“Hope to see you next year in Varginha,” said Flávia Carvalho, the company’s chief communications officer once Pedra Cheirosa was officially operating.