CPFL Energia SA

BOVESPA:CPFE3

Earnings Call Transcript 2024-Q1

[Operator]

Good morning to everyone. Welcome to one more presentation of results of the CPFL Energy Group. We're going to talk about the first quarter of 2024. I'm Carlos Cyrino, Director of Investor Relations of the CPFL Group. And today, I'm going to be the master ceremonies of our event. We have Gustavo Estrella, our CEO; Mr. Pan, our CFO; and other executives of the company. The whole presentation will be carried out in Portuguese with interpretation to English. All you have to do is click on the button interpretation at the bottom of the screen of our platform. If you want to see the presentation in English, it's on the side of CPFL Energy. I'd also like to inform all the participants at the end of the presentation, we will start the questions and answers. All the questions will be done live and to request it. [Operator Instructions]. I remind you that this event is being recorded. Now I'm going to give the floor to Gustavo Estrella to start the presentation of the results.

[Gustavo Estrella, executive]

Thank you Cyrino. Good morning to everyone. Thank you for being here in the presentation of our call. I can't start talking about results before talking about the situation in Rio Grande do Sul, an extreme climatic event that we've had since last week. The rain is continuing and it has affected our operations down south. I believe that our focus now is not only reestablished operations and normalizing, but especially to together with the government that we can support the people that are stranded. We still have a lot of people under risk and we've been doing everything that we can to save people in this operation in relation to our business. I think talking a little bit of generation, we had an event last week, which was a dam of the 14th of July them, it was partial. We didn't have the dimension -- exact dimension. And right after that, it was a huge challenge. We had to go by helicopter. The team had to go down on core just to be able to open the level of the gates of the dam. We were able to do this. And now we have a better idea of this dam and what we have today. And here, we have good news. The structure of the dam has been preserved. It was a rupture of the top part. So it's a positive perspective of reestablishing this dam at a short term. We have 3 plants, Castro Alves, Monte Claro and Caxias do Sul. What we have today, Castro Alves is now operating again with 130 megahertz of capacity, a lot of water. It's operating at full capacity and also the challenges of 14th of July of rebuilding our transmission line. Our towers were lost due to the flooding and also the access to the plant by road. We have -- now have the rebuilding of the accesses and also as I mentioned, the -- what happened to the dam was actually less serious than what we imagined in the beginning. In the case of Monte Claros, the recovery of the energy also with a perspective, I would say, in the next few months. So in general, we're back to operating. And we hope that in the next few months, we will normalize. We are mobilizing our teams so that we can advance and bring back normality for the whole complex. When we talk about transmission today, situation similar to distribution, a series of lines that are still flooded. Unfortunately, it's raining again. So we still have a perspective of rain in the weekend. We have a series of lines that are flooded. And due to this, they turned off for security. We had 8 substations affected, 4 have recovered and 29 transmission line. We've recovered 13. An important data is that in general, the load has been remaneuvered so there's no lack of energy due to the transmission lines. Of course, what we have is a contingency operation with less lines available, but the process of operation is a bit more normal. When we look at distribution, we had over 300,000 clients turned off. Today, we have 160,000. So 5% of the total of the clients of RGE with no energy. The majority also turned off due to security reasons. We have a lot of our networks submersed and flooded. And as we -- as the water level decreases we're able to reconnect. Obviously, there's always a risk to see what type of equipment has to be repaired or has to be substituted, but in general -- in general, they're preserved, and we hope that we will be able to uptake our operations in a quick manner. Obviously, there are some areas, [Indiscernible] that go through the city, very much affected. There will be a real building not only of the network, but the region as a whole, the infrastructure, the houses. So for these more effective areas, we will have a slower uptake than the rest of the city. So this is the panorama that we have today. I think it is an event that we have never had in the stage of Rio Grande do Sul, a lot of floods, a lot of rain for a long time. The water hasn't gone down yet, and we have a forecast of more rain during the next 3 or 4 days. So we continue in a state of attention. I'd also like to register the cooperation that we've received of the Ministry of Enel, Ministry of Energy and now, our colleagues of the distribution sector helped from several distributors. Cemig made available helicopter immediately to help us to monitor and also to save people. We also had help from Seleski and all the others who made themselves available. Within our group, we have today over 100 electricians from Paulista and Piratininga available to RGE. As soon as the water goes down, we'll be able to accelerate the process of reconnecting. So this process of operation has been fundamental for us to prepare RGE so that in a small period of time, we'll be able to reconnect our clients well. Having said all this, we can go more into detail in the questions and answers. But now I'm going to talk about the results of quarter positive results. We have here one more quarter with positive impacts with a growth of 5.1%, once more led by the residential and commercial classes, due to high temperatures. And this brought to us an EBITDA of BRL 3.9 million, a growth of EUR 9.5% compared to last year and a profit EUR 1.7 million and growth of EUR 6.3 million in relation to 2023. Our net debt is BRL 25.6 billion with a leverage of 1.93 million of EBITDA following the criteria of our financial covenants, a few recognitions that are important the Enel price of customer satisfaction. CPFL Santa Cruz was recognized as the third distributor and RGE as the first place in the South region. We also had some highlights among the 12 companies that got a reward, best in management award. We had important recognition with Piratininga, Santa Cruz, Paulista and RGE. In the EZ, it's just been publicized and excellent news. The important recognition of our ESG win the second place in the general ranking and the best in the utility sector. So all the effort that the company has been doing. I think this is an important recognition in EZ and here also about ESG, more diversity on our Board yesterday, Claudia Elisa, our new independent consultant. She participated in the Board meeting. So together with other consultants, there are 2 women that we have in our administrative council. Now let's move towards the next slide. Let's talk about sales. As I said, it's a growth of 5.1% in growth in our concession area. We can see the table on the right side, a highlight for the residential area with a growth of 11.4%. Commercial with a growth of 10%. We can see that the effect of temperature is important, 4.1 residential and 5.4% in commercial but it doesn't totally explain the good performance of these classes. We can see the macro and others expressive growth in these 2 classes, which shows us this is a trend that we've been observing from the last semester. It is a change of consumer habits and this brings structural consumption long term in these 2 classes, which is a good news with more usage of electrical equipment, and we see per capita growth beyond the effect of the temperature, and it continues for the next quarters as well. Another important number, and this is a new effect is the growth of the industrial class, a growth of 2.2%, and this demonstrates to us the beginning of an uptake, of increase, of consumption of the industrial class. This trend has been confirming itself not only in the first quarter but also April and the beginning of May, and this shows a trend of increase of industrial consumption. And we hope in the next quarters, this will also take place. This is the next slide, distribution, delinquency and losses. These 2 topics, which for the next months, of course, will be the focus of attention. We see the increase of delinquency reaching 1.2% growth when we compare -- going from 0.9% to 1.22. We have to pay to pay attention -- we have the negative impact due to these climate events, the reduction of -- we can see here a drop of 15.9% of power cuts. And of course, in moments where we're living now in South -- we don't do power cuts because this is also going to impact delinquency. And we also have an increase of some consumption, nominal value with a higher bill, we have a predisposition of delinquency and also energy fraud. This explains part of the increase of loss that went from $8.44 to 8.84. So 0.4 explained by this increase of the volume of bills and also a mathematical effect. We have a concentration of market growth, low tension. And these are the classes that have elevated commercial losses. So since we increased the participation of these 2 classes, this brings a reflex in the total losses as well. We have a challenge here, Santa Cruz and RGE regulatory losses and our focus more concentrated in Paulista and Piratininga. Now here, we have the generation performance. We have the PLD of 61. We started the year very negative. The hydrology negative. It's improved in the next 2 months. This expectation for May is 93%. And we know that the challenge is that this is very concentrated in the Southern region and low in the South, North and Northeast. But in general, we have a more positive scenario and consequently, lower levels of price than those that were expected in the beginning of the year. In the wind farms, we have a low generation with a performance, bad negative performance of wind in this beginning of the year. You can see at the lower left-hand corner, the difference of a real generation, and it's very small. So we had low restriction. We had a very bad performance of winds without ONS restrictions. So with this, we'll have more cuts coming from RNS then we have the regulatory challenge, how to lead -- deal with this impact on the wind farms, not only on CPFL, but the sector in general. Now let's move to the next slide. I'm going to give the floor to Mr. Pan, and he's going to tell us the results.

[Yuehui Pan, executive]

Thank you, Gustavo. Going to the slide of results. This quarter, we reached an EBITDA of BRL 3.9 billion, an increase of 9.5%. All the segments presented an increase. Let's talk a little bit about each one of them. Next slide. Once more the distribution segment had a good performance with an EBITDA of EUR 2.5 billion, an increase of 9%. The highest gain came from the market and tariff BRL 352 million. The update of the financial asset of the concession had an increase of BRL 23 million due to the larger base of assets after the tariff revision reports last year. The other items increased BRL 8 million. We also had a reduction of BRL 3 million in the expenses with PMSO and pension funds. On the other hand, we had in the first quarter of 2023, the impact of the final report of the asset base of CPFL Paulista and the amount was EUR 136 million, an extraordinary effect. PDD had an increase of BRL 41 million as we -- as Gustavo has already shown us. In the next slide, we have the effects of generation. This segment reached EUR 950 million EBITDA, an increase of 2%. This result is explained due to an extraordinary effect in the adjustments and the just investment value of BRL 56 million. The readjustment of the contract prices helped with EUR 90 million and other effects totaled a gain of EUR 12 million. The performance of the wind farms presented a reduction of BRL 66 million due to the weaker winds and the ONS restructurings. PMSO and sectorial taxes was stable with an increase of EUR 3 million. In the next slide, we have the transmission segment. EBITDA IFRS reached the value of EUR 256 million, an increase of EUR 27 million with an increase of margin of EUR 15 million which is a fruit of the investments that we're carrying out and the reduction of the PMSO in EUR 12 million. The regulatory EBITDA was of EUR 253 million, an increase of EUR 76 million, especially due to the increase of the net revenue in EUR 52 million due to the readjustment of contracts. The PMSO dropped EUR 22 million. And in the end, we had EUR 2 million of others. The segment of trading, services and others had an EBITDA of EUR 118 million, an improvement of EUR 81 million, especially due to the recovery of the margin of CPFL Brazil with a gain of EUR 44 -- 45 million. The Service segment had an increase of BRL 38 million during the period, especially CPFL services and Alesta. In the next slide, we show the performance of the net profit, which was EUR 1.7 billion during the period, an increase of 6.3%. Financial results, we had a worsening of EUR 265 million, especially due to the reduction of the MTM of BRL 24 million, which is explained due to the behavior of the risk spread curve, which went up last year and decreased in the recent period in 2024 and the lower update of the regulatory assets of EUR 148 million. These effects were compensated by lower expenses with a net debt of BRL 73 million, explained by the reduction of the CDI and the IPCA, an increase of BRL 35 million in multi fines and other -- the depreciation increased EUR 26 million and taxes, a reduction of EUR 61 million. The next slide, we have the net debt and the covenant criteria, which reached EUR 25.6 billion. The EBITDA in the last 12 months was BRL 13.2 billion. So therefore, we ended the quarter with a leverage measured by the net debt versus EBITDA of 1.93%. In the next slide, we have the nominal cost of the debt, which is 11.1%. And maintaining a route of reduction with the drop of the IPCA and Selic. Right below, we have the profile of the gross debt, larger exposure in CDI, 80% followed by 19% IPCA and 1% TJLP. On the right side, we show you the amortization of the debt. Our final cash position in the first quarter was BRL 5.4 billion with more than sufficient coverage for the short-term amortizations. The medium time frame of the debt is 3.4 years. Talking about CapEx. During the period, we had an increase of 1.1% in relation to the same period in 2023, with an investment of BRL 1.1 billion. In the vision per segment, we had in distribution, a total of EUR 920 million invested in generation, EUR 50 million. And in transmission, we add BRL 104 million. The investments in the other segments were a total of EUR 20 million. Thank you. And now I'm going to give the floor back to Gustavo Estrella.

[Yuehui Pan, executive]

Thank you Pan. Well, finalizing our presentation. We have this important recognition in our ESG plan. I think here in CDP, we're classified in the A List for the Disclosure Insight action with more than 20,000 companies evaluated only 400 companies are in the A list of the 411 Brazilian companies, and one of them is CPFL. I think this is an excellent recognition. I think it shows the responsibility of our ESG plan. Looking at the social and environmental issues and also the impact on our business. So ESG has to be a long-term and sustainable plan. And I think this balancing here is very well executed, and this shows that we're on the right road. And with this classification, we reached a position, a very highlighted position. And I think it's a positive competition, not only CPFL, but other companies also are in quest of more robust ESG plans with more deliveries, more performance. This is an excellent challenge, and it's a win-win situation. I think challenges not only CPFL, but the whole sector, all the companies, they mobilize themselves to have more robust ESG plans. So this stimulates the competition, this healthy and positive competition of exchange, of experiences, benchmark marking information, and we're always open to do benchmarking. At the end, it is everyone -- if everyone is doing good, not only CPFL. This is a wonderful recognition to show that we are on the right way.

[Operator]

Now we're going to open to the session of questions and our answers, and we'll take the order. [Operator Instructions] The first question comes from Andre Sampaio from Santander. Andres, thank you for your participation. Go ahead with your question.

[Andre Sampaio, analyst]

I want to ask a quick question about the distributors. The focus is to understand this crisis, how this is influencing the distribution. We know that the focus in renewal, the focus is for better quality, but how are these adverse climate events being treated? Of course, the companies have to be more prepared. But at the same time, there has to be flexibility in the goals of each city. So I'd like you to comment about this. I think it would be important for risk management. Let's put it that way.

[Gustavo Estrella, executive]

Thank you for your question. I believe that the topic of renewal is a bit on the side. Now I think the ministry and the government, everyone is very engaged looking at Rio Grande do Sul to try to figure out how can we help. There's a series of specific regulations to see how we can help and support the state. I think this is taking the attention of the whole government, and I think it will be like this during the next days. So it's a topic on hold. There's no news on the renovation. I agree with you that it's very clear to us. It's this route of going in quest of higher quality. Now I think how the decree will come -- will be in quest of this higher level. I think what we're going through now, especially in Rio Grande do Sul, you can have a higher or lower proportion, but this is the reality in Rio Grande do Sul. If we look at last year, we had 13 extreme climatic events. If we look from September on, we had record rain in September and then another one of the same proportion in October, another extreme event in January. Now this one. So this has been a reality I think in all the areas of concession. Here in Sao Paulo also we went through situations that we've never been through before. But Rio Grande do Sul is recurring. These events have been reoccurring, and I have no doubt that the regulation, the new regulation that will be proposed, it has to forecast that we are going to have a more adverse scenario and that at the same time, it doesn't make any sense for you to work with regulation that was defined 30 years ago with a completely different reality. But today, we have more technology. We have a greater capacity of offering quality, superior quality for our client. And we also have extreme moments such as this where the regulation one way or another. What we need is a concession that is feasible long term, once more that balance between the operator, the client and the regulator. This has to be observed the whole time so that we, in fact, have a positive environment that allows for investment, that allows for quality to our clients with a long-term perspective. We always say that you have EUR 28 million investment and of the EUR 28 million, we have EUR 23 million to be done in distribution. I can only make this investment if I have this perspective, this visibility of regulatory stability and a long-term vision for this operation. Otherwise, this plan is compromised. So I think this balance our feeling is that there is a concern within the ministry to respect this balance. And for sure, what has to be done is observing this climatic situation that unfortunately will happen again. So we need regulation. We need to modernize, but we also have to pay attention to this new reality. So that the sector remains sustainable long term.Â

[Operator]

The next question is Daniel, Safra Bank. Daniel, thank you for your participation. Go ahead with your question.

[Daniel Travitzky, analyst]

I have 2 questions about Rio Grande do Sul, the first one is, of course, very sad what's happening there, but thinking on the dynamic of the operation of RGE, you mentioned that you're doing efficient work as much as possible to reestablish the energy. But I'd like to understand how this dynamic is going to happen relative to the consumption because they had a huge problem in cities, which were sort of abandoned. So how do you expect this uptake of normality to happen and also the energy consumption. And if you're discussing any flexibilization about to the regulator deal with this topic. And the second question also about the asset base. You had some losses of the equipment that are going to be -- have to be recovered. How do you think that the evolution is going to take place as of this? So I would like to thank you if you could reply to these topics.Â

[Luís Henrique Pinto, executive]

Daniel, it's Luis here talking. Thank you for the question. Right now, we have a reestablishment plan of all the area that's been affected in Rio Grande do Sul, we put together operational logistics. It's ready. We have helicopters. We have teams from other locations, which are ready. So as soon as the water allows and it reaches a level where you can reestablish, we will go in strongly to reestablish these areas, especially in the city where as a higher density of clients and reestablish this in a quicker way and be able to revert this condition. Our expectation is that the quicker the water lowers, this is going to favor the people to get back to their homes, clean up, We're discussing with Enel and the ministry, the possibility of using mechanisms that we have within the sector to stimulate -- let equipment for these people. But we've had examples of other similar events and everything is normal a few months later. So -- this is -- we're not so worried about the consumption. The most important thing is to prepare the logistics to reestablish as soon as the water allows. As for the assets, it's good to say that the impact that we had in the company was 5%, 8%. So it's not in impact as the company as a whole. Of course, we had problematic areas, but we were able to reestablish our assets already working in 95% of the company. And in those affected areas what we can observe is that network in the metropolitan area where we have a higher density of clients. It was not -- there was not such a current there. It was a slow flooding. So the equipment was not spoiled. As soon as the water goes down, our assets, we'll be able to work on them and we'll reestablish quickly. In the area of Itajai, where we had a strong current. We had bigger problems, but we've already gone there, and we've seen that we will be able to use a lot of assets. And what we can't, of course, we will substitute but without an impact on the asset base. So if it had been higher, larger area, it would be worse, but it was restricted to 8% of our company. And we are going to have to substitute. The only impact that is more relevant, but not significant is the transformers, and we are already prepared to substitute. And we're always going to do this with a depreciated one. So we hope that there won't be a big impact in our asset base.Â

[Operator]

Now let's move to the next question. It comes Victor from JPMorgan. Thank you for your participation. Go ahead with your question.

[Victor, analyst]

My question is similar to Daniel, but is there any criteria -- not exactly now because you still have to recover what has been lost, but an impact -- if the impact on volume is large since this revision is only going to take place in 2028. Would it be good to ask for an RTE on the way depending on the volume impact?

[Gustavo Estrella, executive]

Our expectation is that will regulate the situation in the next few months. It won't be a long-term impact, but we are discussing with the ministry, with Enel. We're raising all the possibilities of what's going to be invested, the cost, the losses to be able, if there is a significant impact that we hope won't happen that we have space to do this. There would be no problem. But in principle, with what we've already checking, we're already doing a complete diagnosis in the whole area. We've already gone into everywhere. We're already doing a diagnosis, and we don't expect a significant impact. So the tendency is that we will solve this in the next few months without the need of an RTE. But if it is needed, we have the space and we are discussing this with the regulatory agency.

[Operator]

thank you, Victor. We have the next and last question. It's Victor Cunha from BBA. Thank you for your participation and go ahead with your question.

[Victor Cunha, analyst]

Changing the subject. I'd like to know... load reduction, 7.5% annual growth -- and how have you seen the low dynamics?

[Yuehui Pan, executive]

We have followed the market. The evolution of load, the load has higher due to the levels of heat. We have this reflex in the distribution, we will have a load revision with the increase not so intense, we -- what most have impacted the price today has been less low dynamic, but the dynamic of rains. Gustavo mentioned that in the beginning, we had January, February, March with relatively low levels. So -- the bilateral negotiation within the market surprise are going down, but we had a reversion in April and May, very much based on the south. We had EUR 146 million, made 28% of in, which makes the prices from BRL 150 to BRL 95. We followed this evolution closely to see how this is going to reflect. And there's also initiative offer in the system because once the rain comes, the prices have a trend, the trend is to lower the prices, if it doesn't come, and that's a great point of attention. The rain is very much associated to the southern market. If -- if the southern market gains more relevance from June, then there's a tendency of higher prices. I'm going to allow [indiscernible] to talk about the load impact here.

[Unknown Executive]

Victor. Well, as for GD and the group, just how to have an idea in our concessionary in 2023, we closed the year with DG representing 11% of our capital market. We continue in growth rhythm for distributed generation, especially the solar roofs that represent 95% of our installed capacity and for '19 -- sorry, 2024, the distributor generation is 14% of our captive market. We have been growing the units, the generating units, the solar roofs have continued growing, it grows but not in an accelerated fashion. Today, we have an average. In the last 3 months, we have an average of about 400 requests of solar roofs per day. So the rhythm continues, but a bit lower and we'll probably close the year with 14% of the capital market represented by distributed generation, okay?

[Operator]

Well, we don't have more questions. I'm going to now end session, if there's any question, the Investor Relations group is at your disposal to clarify just before giving the floor to Gustavo, I'd like to remind you that on the 15th Wednesday, we'll have one more investor education, talking about trading and forming energy prices. So we hope that you'll be present. If you haven't registered I think it's do register. It's part of our plan for investors. So thank you very much, everyone. I'm now going to give the floor to Gustavo Estrella for his final considerations.

[Gustavo Estrella, executive]

Thank you. I thank you for the participation in each and every one of you, journalists, investors, I think one more robust results and a positive perspective of load impacts due to temperatures for the next months. And I would like to make an appeal those of you who can help the state. Please do so. We are very close to the day to day, and we feel that it's a very, very serious situation. Those of you who can cooperate in any way. This is very welcome. We still have a lot of people that need help right now. Thank you very much, and good morning and a good day to everyone.