CPFL Energia SA

BOVESPA:CPFE3

Earnings Call Analysis

First quarter of 2024 brings challenges and recovery milestones

The company reported a 7.1% drop in EBITDA and an 11% decrease in profit in the first quarter of 2024, reflecting the impacts of severe flooding in Rio Grande do Sul. Despite these challenges, the market showed resilience with a 7.3% growth, thanks to strong residential consumption. Capital expenditures increased by 12%, reaching BRL 1.4 billion. Notably, 350,000 customers were affected by the crisis but have since been reconnected. The company has also postponed tariff adjustments to mitigate the economic impact on consumers. Looking ahead, they expect to close the year with BRL 5.9 billion in revenue.

A Resilient Performance Amidst Challenges

The company has demonstrated resilience despite significant challenges in the second half of the year. The severe floods in Rio Grande do Sul affected almost 100% of their concession area, disconnecting 350,000 customers at its peak and causing BRL 112 million in asset losses and increased costs. However, the company acted swiftly in recovery and reconnected all affected customers.

Revenue and Profit Dynamics

The company reported a marginal decline in EBITDA and profit, with drops of 7.1% and 11%, respectively. This was attributed to lower wind generation, regulatory restrictions, and negative impacts from the floods. Despite these setbacks, residential and commercial customer segments showed strong performance, contributing positively to market tariffs by BRL 155 million.

Market Performance and Growth

The company's concession area saw positive load performance, with an overall growth of 7.3% for the semester, driven by a 6.3% increase largely due to residential and commercial consumption. Residential consumption showed double-digit growth, underpinning the company's market strength. Notably, the industrial sector surpassed expectations, showing a rapid recovery with a 14% drop converting into a 7% growth by June.

Debt and Financial Health

On the debt front, the company managed to maintain a stable leverage ratio of 2.01 by issuing BRL 1.6 billion in debentures. The debt restructuring included lowering the average cost from 11.1% to 10.9% and managing the amortization schedule to cover obligations for the next two years. Despite these efforts, the company foresees challenges in refinancing post-2026.

Capital Expenditure and Future Investments

Capital expenditures (CapEx) increased by 12%, with BRL 1.4 billion allocated in line with the company's investment plan. Though last year's tariff revisions influenced these figures, the company aims to end the year with a total investment of BRL 5.9 billion, reflecting its ongoing commitment to infrastructure and service improvements.

Customer Support and Corporate Social Responsibility

In response to the floods, the company initiated various support measures, including donations totaling over BRL 3 million in essential goods and leveraging ICMS resources to further aid affected populations. The company has delayed tariff adjustments in collaboration with ANEEL to mitigate economic impacts, signaling its dedication to customer welfare and community resilience.

Operational Highlights and Recognition

The past semester marked significant milestones for the company, celebrating five years since its IPO and twenty years of being listed on the stock exchange. The company also received notable accolades for corporate governance and customer focus. These recognitions underscore the quality and ethical standards upheld in its operations, reinforcing investor confidence.

Sectoral Insights and Future Outlook

Wind generation faced challenges due to regulatory restrictions and climatic conditions, leading to an 11% decrease in output. However, the company anticipates stabilizing availability and performance of wind turbines in the coming months. Additionally, the hydrological outlook remains pessimistic, with potential price escalations forecast up to the end of the year. These sectoral insights inform the cautious yet strategic approach the company is taking toward future planning.

Earnings Call Transcript 2024-Q2

[Carlos Cyrino, executive]

[interpreted] [Audio Gap] to one more day of the results of the first quarter of 2024. I'm Carlos Serino, Director of Investor Relations of the group CPFL. And today, we are conducting the dynamics of our event. We have Gustavo Estrella, and we also have the other executives of the company.



[Operator Instructions] This event is being recorded.



I'm now going to give the floor to Gustavo Estrella for us to start our results presentation.

[Gustavo Estrella, executive]

[interpreted] Thank you, Cyrino. Good morning to everyone. Thank you for the participation in our call of the second semester. I'm going to move here for the first page. We're going to talk about the highlights, the first of all the load of our concession area. We had a very positive performance, 7.3% and 6.3% in the semester very much because of the residential consumption, the 2 consumptions with 2-digit growth. This is an important impact for us.



The EBITDA dropped in 7.1%. We're going to talk about this further forward with some effects in 2023 or 2024 and BRL 8 billion and EUR 6.7 million in the semester. The profit, a drop of 11%, the same impact of the EBITDA, reaching BRL 1.2 billion and BRL 2.8 billion debt. We've reached EUR 26 million with a leverage of 2.01 million, and the CapEx with a growth of 12%, reaching BRL 1.4 billion and BRL 2.4 million in the semester.



Also, in the highlights, we celebrated in June, the 5 years of IPO. And in September, we also celebrate 20 years since we opened to the stock exchange. We have also different recognitions in different areas. So here, the gold finance, it's the best corporate governance in Brazil, by finance law, we had an important recognition for our financial area and also the price, the modern consumer due to the focus on our clients. So these are 3 important recognitions that we had here. As I told you from different areas, this reflects the quality and the way that we operate our businesses. Now let's move towards the next slide.



Here is a summary of the impacts that we had in the state of Rio Grande do Sul, especially during the month of May, we had a lot of impacts on our business. We had in this meter the recognition of some losses in the results of the 3 business of BRL 112 million assets, decreases, increase of costs, cleaning, et cetera. So we had, obviously, this impact. Perhaps there are still some additional impacts, but the big thing has already taken place in each one of the businesses, it's BRL 112 million total. I think that we will also talk about this. It was a huge impact in our operations.



Distribution had almost 100% of our concession area, in some way or another affected by the flood of the state of Rio Grande do Sul. We reached the peak of the crisis with 350,000 customers disconnected, a lot due to safety issues. Today, 100% back on again, but we did have 350,000 disconnected customers. We also had the dam and the flood of the powerhouse of the plant in Monte Carlo were the 2 main effects. It was a partial collapse of the crest of the dam. And we also had some 8 substations, some transformers, and 34 lines affected. Everything has already been re-established but we are still in the phase of rebuilding this, as I said, a good part of our network has already been recovered and the operations, practically all of them have been recovered, but we still do have the challenge of rebuilding, I would say, especially in the distribution area.



I think in the next slide, it is a bit about how CPFL has looked at its responsibility in this state. It was a collaborative process way beyond the reestablishment of energy, but also the rebuilding of the state in general. So we have a series of actions of partnerships with other companies, not only the group but outside the group, helping us to recompose and reestablish power. We also had a movement of donations internally with a donation of over BRL 3 million, 1,580 kits of fridges and stoves. We spent BRL 6 million using ICMS resources to help the rebuilding and to help the population that was very much affected a series of internal actions collaborate is very much involved in the health and the support of the colleagues down south, not only our collaborators, but the population in our concession areas.



So we also had an important movement with ANEEL to delay the tariff adjustment, which should have taken place right after the floods of May. So we delay this until August and the perspective, this is going to be discussed in ANEEL. The idea is to delay this even more to avoid an impact in the results of the group. We have took out a loan with the B&S so that we can mitigate the economy effect and also the cash effect. So this delay of the increase is possible. And this will be discussed from next week on in ANEEL.



Well, let's move to the next slide. Let's talk a bit about our market. And as I said, a growth of 6.1%. When we look per class. This comes from the residential area and the commercial area with growth here of 11%. We see there's an effect of the temperature, and we still have an important effect of GD, 2.03%. But what we can see, I would say, due to the dimension of the craft crisis, this is a limited effect, the residential and the commercial also, but perhaps some good news that we have is the industrial performance.



We can see growth here even though there was a huge impact, especially in the month of May in the consumption of energy in [indiscernible]. I would say, in fact, that the good news is that the speed of the recovery has been a real surprise. It's much above our expectations. So we had a drop of 14% of -- this went to 3% and in June now with a positive performance of 7%. So I would say that this is very positive. The speed of the reconstruction and the recovery of the interest, obviously, affecting our business in a positive manner.



Well, let's move to the next slide about default. We can see a recovery, but still much higher than last year. We have defaulted a delinquency of 1.8%. This is an increase of the consumption that we mentioned here. So the average ticket is 13% in the last year. So this brings a challenge in the payment of bills, which is very important. This has affected our delinquency and also the challenge that we have of maintaining the volume of power cuts due to the storms, whether it'd be in the beginning of the year, especially in the state of Sao Paulo, but also in Rio Grande do Sul. And of course, it may very much concentrated in Rio Grande do Sul.



So we have a challenge of recovery of these power cuts and we can see a recovery, but even still lower than last year. Our expectation is that we'd be able to accelerate our Power Cup program so that we can recover this delinquency. Our perspective, in general, is to reduce, but I would say this would be slow due to the challenge that we have, not only the average ticket of the accounts but also the reestablishment of the levels of last year of power cuts of last year.



Now let's move to the next slide about the losses in distribution. We can see here a distribution of the increase of losses in all our concession areas. Here, we also have the topic of the increase of accounts. And this, of course, increases the stimulation to fraud, but we also have a mathematics here when you have low-tension classes where the losses are concentrated, growing much higher than the high pension market. And mathematically, this brings a higher percentage of losses. So the delinquency and the challenge also to reduce, but we have a huge challenge with the increase of the inspections, monitoring, et cetera so that we can deliver a lower level of losses up to the end of the year.



Now this is about generation. Here, we can see stability in the spot price in the second quarter due to the low hydrology in the last months, the expectation is of the increase of the PLD as of July, and we can see this price escalating going up to October, November. And the uncertainty is big due to the issues. But I would say that the perspective is negative in relation to hydrology. We've had a very negative hydrology in general in Brazil, very high and concentrated in the southern area, especially Grande do Sul. We know our capacity of storage. It is limited downside.



So we really have to have hydrology recovery in general so that we can revert this tendency of prices short term. And the forecast is more pessimistic. So the price is up to December, they reflect this perspective and this increase of prices. We must remember that the offering of the system continues. So the first normality that we have of hydrology, we will go back to the basis in the PLD due to the impact of the rain. The GCF also reflects a bit of this cut and the increase of hydroelectric energy. So this brings us a GCF, which is quite low. Wind farms. We continue the challenge of the restrictions of the E&S.



So we see a decrease in generation of 11%. Urging the effect of these cuts, we would have a reduction of 6.4%. So basically, the performance of the business is a combination between this restriction and also the low performance of the wins in the first semester. The availability we have here a challenge with 4 wind turbines, which brought availability down and we have the perspective of getting back on track in the next months.



Well, let's go now to results. As I said, a drop of 7.1%. Distribution, 150 generation 71, transmission 25, commercialization 25. Let's move to the next slide. Here, we go to the detail of distribution with a drop of BRL 115 million. We can see here a positive impact of the market tariff of BRL 155 million. The residential and commercial areas are responsible for this positive performance. And now we have the non-recurrent effects. The first one are the effects of the floods with the impact in distribution of BRL 84 million. The increase of costs, the loss of assets, BRL 67 million, the concession financial assets with the reduction of the IPCA if you compare '24 to '23 and our appraisal report, the numbers in 2023. Of course, this is because of the raising of tariffs. It won't exist this year. And we have a negative effect of BRL 60 million. The PDE4 million and 14 million PMSO private pension plans.



Now let's move to the next slide about generation. The effect, EBITDA is EUR 71 million. It comes from wind generation, less wind, but the big effect, EUR 20 million comes from the restriction of the ONS, EUR19 million, the climate events in the state of Rio Grande do Sul, so loss of assets and EUR 6 million of PMSO in different sectors. Here in transmission, we have the IFRS effect, always the same base of the regulatory EBITDA. And in our vision, we can see that this reflects much better the performance of transmission. Here with the positive growth of the EBITDA of BRL 25 million pulled by the revenue of the wrap.



Now let's talk about commercial services and others, EBITDA of BRL 5 million. This effect due to the -- compensated by the effect of service. The loss of profit is because of the EBITDA evaluations. We have a negative due to the contingencies also compensated by the expenses with net debt due to the reduction of the [ Selic ] in 2024 in comparison to 2023 When we look at the first semester of 2024 and the variation of business here, we can see distribution already with a positive effect, very much pulled by the market and the tariff. Generation continues with the 2 effects of lower wind generation and the ONS restrictions. Transmission, practically stable, and commercialization and services also due to the service pulled by the service on.



Now when we see the profit, we have a drop of 1.5%. We can see the financial results explained due to the IPCA in 2024, affecting the financial assets and also the mark-to-market with an effect noncash of BRL 223 million.



Next slide, we're going to talk about leverage, BRL 26.2 million with a leverage of 2.01. Perhaps the big highlight here what we did BRL 1.6 billion with issuances with the debentures. The first one is the 0.19, which is a very competitive value and also a positive effect of the medium of CDB incentives about 10.1 years. That's the average term to pay back without affecting the average cost of our issuances. Here, when we talk about average cost. We see a low reduction between the first and 2 from 11.1% to 10.9% and BRL 6.9 to BRL 6.4 million currency. When we look at the composition of this debt, 80% comes from CDI, followed by the inflation in 19% in the amortization, which we see here BRL 3.9 million, which is enough to cover everything 2 years ahead, and we clearly can see the challenge of refinancing as of the year 2020. This is an effort that has already started. So we hope that we will be able to reduce this from 2026 and elongate this for longer-term terms.



What about the CapEx? We have a positive variation of 12% in relation to 2023, BRL 1.4 million. This is a natural movement because last year, we revised the tariffs of our distributors, and we continued with our investment plan with EUR 2.4 million and the expectation of closing the year with BRL 5.9 billion.



I think this was an information. I thank you all for the information, and we are at your disposal for questions and answers.

[Carlos Cyrino, executive]

[interpreted] Thank you, Gustavo, for your presentation. [Operator Instructions]. We have a question from Mario from Safra Bank.

[Unknown Analyst]

[interpreted] Hello, everyone. Well, could you please comment about the expectation in relation to the conclusion of the new terms referring to the process of renewal of the distribution contracts? Thank you.

[Gustavo Estrella, executive]

[interpreted] I think that this process is with ANEEL. And you have to -- I think this auction process is delayed. And the conclusion, the spectacular opening of the auction would be early. So this has not yet happened. So I'm considering a public bidding process of 45 days a tender. The discussions after this time frame expectation is that this process will be delayed, so it's difficult to precise this, but I don't have any idea of when this will take place.

[Carlos Cyrino, executive]

[interpreted] We don't have any more questions. So we will then end the Q&A. And before giving the final words for Gustavo, just hold on. I think we have another question here. No, let's go to our final words. I would like to reinforce the invitation on the 29th of August, we are going to do a site visit. I think this is an important moment, so if you are interested, please get into contact with the Investor Relations department for us to organize this trip.



Now I'm going to give the floor to Gustavo Estrella for his final considerations.

[Gustavo Estrella, executive]

[interpreted] Thank you. Well, once more, I thank you all for your participation. I think that we are showing here a resilient result due to all the challenges that we've had here in the second semester. I think with a more positive perspective, as I said, of recovery and rebuilding of Rio Grande do Sul in a speed much faster than we imagined. This is the very positive perspective of the growth of the market. It follows the trend, especially in the low tension glasses and the lower social costs, and also the uptake of the industry . In this semester, we continue waiting in the regulatory agenda, Mario mentioned here, especially due to the definition of the renovation of the possessions, which directly affects our distribution business, but also with a more positive perspective.



So I thank you once more, and good morning to everyone. Thank you so much.



[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]