CPFL Energia SA

BOVESPA:CPFE3

Earnings Call Analysis

CPFL's Q3 Performance Shows Positive Growth Amid Challenges

In the third quarter of 2024, CPFL reported a 2.4% increase in load growth, reaching a BRL 3.155 billion EBITDA—up 0.7%. Profit saw a small rise of 1.5%, totaling BRL 1.3 billion. Despite challenges like a 61% drop in commercialization due to tariff impacts, the transmission sector surged by 42.6%. The company aims for a capital expenditure of BRL 5.9 billion, marking a 17.8% growth. With a net debt of BRL 26.6 billion and a healthy leverage ratio of 2.04, CPFL maintains a solid financial outlook for the upcoming quarters.

A Look at CPFL's Third Quarter Results

In the third quarter of 2024, CPFL experienced noteworthy financial developments. Revenue rose by 2.4% compared to the previous quarter, reflecting a cumulative growth of 4.9% over nine months. EBITDA grew slightly by 0.7% to reach BRL 3.155 billion, with an accumulated total of BRL 9.858 billion for the nine-month period. However, net profit increased by 1.5% to BRL 1.3 billion, though there was a minor decline of 0.5% over nine months, totaling BRL 4.1 billion.

Debt Management and Financial Leverage

CPFL's net debt stood at BRL 26.6 billion, maintaining a comfortable leverage ratio of 2.04 on EBITDA, well within the financial covenant limit of 3.75. This positive indicator suggests efficient debt management, with BRL 2.9 billion raised at low costs during the quarter. In the first nine months, the total borrowing was close to BRL 9 billion, which indicates robust financing capabilities over an average term of 6 years.

Capital Expenditures and Future Investments

Capital expenditures (CapEx) surged by 17.8% in the third quarter to BRL 1.4 billion, with a year-to-date total reaching BRL 3.9 billion, reflecting a growth of 10%. CPFL anticipates closing the fiscal year with a CapEx of BRL 5.9 billion. This substantial investment underscores the company’s commitment to enhancing operational infrastructure and expanding its service capacity.

Operational Performance in Generation and Transmission

Segment-wise performance indicated challenges in generation, with a drop of BRL 96 million partially offset by improved wind power performance of BRL 65 million. The transmission segment showed an impressive growth of 42.6%, bolstered by a BRL 112 million positive variation. The EBITDA from transmission reached BRL 863 million, indicating operational resilience despite external challenges.

Sales and Customer Base Growth

Sales per consumption class grew by 4.1% in the third quarter, indicating solid demand despite lower growth rates than earlier in the year. Driven by an expanding customer base, residential and industrial consumption trends are encouraging, especially with the industrial sector experiencing a robust growth of 4%. The total sales for the first nine months increased by 5.2%, with 9% growth in the residential sector.

Challenges and Strategy Against Delinquency

While the company has maintained stable delinquency rates through 2024, the challenges of power cuts have emerged due to climatic variations affecting service delivery. CPFL is optimistic about improving these conditions in the coming quarters, especially as they plan to increase regular power cut volumes while tackling fraud and operational losses effectively.

Expansion into Green Hydrogen Initiatives

CPFL's innovation strategy includes a promising partnership in the green hydrogen space, announcing a pilot project in Rio Grande do Norte in collaboration with Mizu, with an expected investment of BRL 44 million. This initiative is anticipated to yield 3 gigawatts annually by 2027, demonstrating CPFL's commitment to sustainable energy solutions and future market scalability.

Forward Guidance and Market Outlook

Looking ahead, CPFL remains cautiously optimistic about managing curtailment challenges while fortifying their position in the energy sector. The management is confident about concession renewals, which should provide long-term operational stability and opportunities for further investments in innovation and client service.

Earnings Call Transcript 2024-Q3

[Carlos Cyrino, executive]

[Interpreted] Good morning. You are welcome to [one on one] session of results. It's the third quarter of 2024. I'm the Investor Relations Director, and I will be the master of ceremonies today. Today, we have Gustavo Estrella, our CEO; and the other executives of the company. The whole presentation will be carried out in Portuguese with interpretation for English. If you want to listen to the presentation in English, it will also be on our website.

We remind you that everything is being recorded. I'm now going to give the floor to Gustavo Estrella to present us the results.

[Gustavo Estrella, executive]

Cyrino, thank you very much. Now we're on the third quarter of the results. We're going to start now with our highlights of the results. So I think the load was positive with a growth of 2.4% in the third quarter and 4.9% in the accumulated of the 9 months. Our EBITDA with a growth of 0.7%, BRL 3.155 billion, the accumulate BRL 9.858 billion, our profit 1.5%, BRL 1.3 billion and in the 9 months with a decline of 0.5%, BRL 4.1 billion. Our net debt, BRL 26.6 billion with a leverage of 2.04 on the EBITDA. This is all according to our financial covenants. Our CapEx, a growth of 17.8% with BRL 1.4 billion. And the 9 months, we closed with BRL 3.9 billion, remembering that our expectation is to close with BRL 5.9 million investment.

Some awards that we had, the first of the institutional investor research, we got the most honored title for the high performance, CEO, IR professional. It's very important, and it reflects the importance that CPFL gives with the relationship to the market in general.

Abradee award also in relation to ESG, the finalists were all from the CPFL Group and the best of the Southern region, Santa Cruz and Paulista and in the South RGE, the best company and in the evaluation of the clients, CPFL Santa Cruz. This reflects our strategy of operation, especially in the relationship with our clients.

In relation to the awards, we have 2 important recognitions in Valor 1000 and Época Negócios 360º. For the second year, we get the first place in the power sector. And these probably are the most important awards of the Brazilian market.

As for diversity, we had the election of Mrs. Wang Kedi as a Board of Directors member. And as for green hydrogen, we announced a partner pilot project in the state of Rio Grande do Norte. This is a partnership with Mizu and it is something that is going to bring a series of new insights of how to work and develop this market in Brazil.

Now let's move to the next slide about sales. The first -- third quarter, we had a growth of sales per class of consumption of 4.1%. Once more, we have a positive performance with a growth of 4%. These are percentages -- these are lower percentages than we had in the first quarter of the year, but we have to remember that we had an increase of the consumer base. And these 2 classes are very important, and this makes it more similar than the previous semester. But even so, it maintains the market in a high consumption.

The big highlight is the growth of the industrial market with a growth of 4%. And I think this gives us a clear dimension of an uptake in the industrial -- it was lower and in the light of what's happening in the fourth quarter with a positive performance of 4%. We can see on the right side, the performance of the main industrial sectors of our market. We see food with a small decline, 0.8%, but all the others with robust growth, chemicals, rubber, vehicles, metallurgy with important growth. This is one more quarter with a positive impact in the average temperature, especially in the state of Sao Paulo with an average temperature in this quarter, which is higher than last year.

Now let's move to the next slide. The accumulated sales of the 9 months. We see a growth of 5.2%. And this is very much impacted by the first quarter, the residential and commercial areas with rate of 9% and the industry of 2.6%. So clearly here, it's a positive sign that the industry is growing more and has a good perspective when we look at the months forward. On the spreadsheet on the bottom part of our slide, we can see that [ AGD ] continues bringing a positive impact, an impact of about 2% in the consolidated. So we continue having an expansion even though we have this in our concessionaires.

Now what about delinquency. We have a delinquency, which is stable during this year of 2024. It's high. So we have a certain difficulty and a challenge to reduce our delinquency during this year, we followed with cut volumes lower than the historical volumes of last year. But due to a serious effect especially climate events, whether it be in Sao Paulo or in Rio Grande do Sul. This made us reduce volume of power cuts. And the expectation from now forward is an uptake of these volumes, and I would say a more positive forecast in the control of delinquency. We start seeing a positive reflex already in this fourth quarter. The year is going to be very much impacted by these 9 months, but we feel a positive delinquency rate during the next quarter.

Well, the next slide, we talk about distribution losses, small increase. These effects are similar to the effects of delinquency and also a series of events that makes us -- makes it difficult to fight fraud as we had this year and also the expectation of an uptake, we had an average of 80% of inspections and also with a more positive forecast in the control and the reduction of our total losses.

The next slide is the generation performance. Here, we have an effect in the increase of the PLD because of the drought in the third quarter. We had especially in the Southeast and this scenario starts changing during the last weeks with an improvement in the hydrology and already with perceptible reflexes in the reduction of the spot market. We always comment this the excess offer has natural pressure to lower prices, and this can be altered depending on the hydrology if it's worse or better. And this is what happened in the recent part and I would say now with a more positive expectation on the point of view of hydrology during the next years.

The GSF, we closed with 81% with the accumulated of 9 months, 90% practically aligned with the year of 2023. In wind generation, here, the big impact of the quarter is the effect of the curtailment. We can notice that without this effect, we would have had the best performance of winds, a growth of 19.5%. When we include this effect of curtailment, this increase ends up in a reduction of 3.7%.

As I said, we are very focused to get an alternative for this curtailment not only to CPFL, but for the sector in general. Our availability is stable, close to 95% in all our wind farms.

Now we're going to talk about each of the business segments, and we can see the variation of 0.7%. From one quarter to another quarter, we have a negative effect in distribution of 3.5% after generation with a growth of 0.6% and transmission with a growth of 42.6%, in the segment of commercialization, a drop of 61%.

Now let's move the effect distribution, this drop of 61%, the big negative impact comes from the market and the tariff, although there's volume growth. We have an important effect of the tariff due to the variation of the Parcel B that had a negative adjustment because of the GPM. So this is reflected in this financial impact in our results added to the effect of losses, the increase of losses that we had during this year.

This also brings us a relevant impact in our market, but tariffs, the PDD with a negative effect of BRL 33 million, we also commented the maintenance of the higher levels of PDD and here a reduction -- a positive reduction of the PMSO of BRL 10 million. And the financial statement gives us a positive impact due to the variation of the IPCA from 0.27% to 0.57% in this quarter.

In generation, as we can see the effect of the restrictions of BRL 96 million partially compensated by the best performance of winds that we had with BRL 65 million. In transmission, a positive variation of BRL 112 million in the vision of the IFRS with an increase of margin of BRL 110 million, the main impact here. In the regulatory vision, we have a drop BRL of 82 million due to the adjustment that brought this RAP readjustment which brought this readjustment.

Now the segment of commercialization and services, we have a negative impact in our margin of trading due to this volatility of short-term prices, a negative impact of BRL 45 million, partially compensated by the better performance of the services with a growth of BRL 12 million.

Financial results, we have BRL 59 million. So we have to highlight here a positive variation of the CDI with a drop of 3.22% in '23 to 2.55% in 2024, but we have an accounting effect with a negative variation of BRL 70 million. Without this impact, we would have a better performance due to the drop of the CDI.

When we look at the 9 accumulated months, then we have in distribution, the better performance linked to the growth of the market, and bar tariffs, especially in the first quarter of the year. In generation, the restrictions of the ONS that are impacting the energy cuts, more or less compensated by the best performance of the winds this year when we compare to last year. In the segment of transmission, we closed with an EBITDA of BRL 863 million and the regulator revision, an EBITDA of BRL 652 million with a growth of BRL 19 million in comparison to the quarters. And in commercialization and services BRL 199 million. The positive impact is the performance of the service arms.

Now we're going to talk about the financial results, the variation of BRL 355 million, the large effect here, almost BRL 300 million coming from the mark-to-market, we did a registry -- a positive registry, which was very relevant for the mark-to-market, and we give this back and it brings us a negative impact of almost BRL 300 million.

Leverage, the total debt net BRL 26.6 billion with a leverage of 2.04. We always remember the covenant of [ 3.75 ]. So the level of leveraging is comfortable with a relation to our financial covenants, one more quarter with a positive highlight. We got BRL 2.9 billion with a very low cost and when we look at the accumulated of the 9 months was also almost BRL 9 billion with an average time frame of 6 years, -5.7 years. So we have a good condition of the market. We are substituting and we are working with our debt and we don't have it short-time expiry dates.

For indebtedness, it's about 6.5%. Index is the main CDI with 81%, inflation with 18% in the variation here. In amortization, we can see that all the emissions short term, we have a concentration of this amortization schedule for us to plan in a well-disciplined way, go back to the market to refinance these debts in good conditions, and that's our expectation to do this during the next quarter.

As for the CapEx, we closed with BRL 1.4 billion, a growth of 17%, very much concentrated in distribution [indiscernible] and [ 24.1 ] in relation to 2023 and the accumulated 9 months, we -- BRL 3.9 billion with a growth of 10%, and the expectation is that we can deliver the CapEx of BRL 5.9 billion.

And lastly, I think this is very important project green project. So this project has been officially launched with the government of Rio Grande do Norte in partnership with Mizu. And after these investments, we should produce 3 gigabytes a year. The investment is [ BRL 44 million ] and we are going to substitute this for hydrogen. So the conclusion of this project in 2027. And an important fact here that was responsible for our choice of this project is that we really should choose a project that we understand as we gain in the technology and the usage that this be a business model that can be scalable.

So we hope we can learn a lot for this project so that we can make the cost cheaper, make the technology competitive so that we can scale this business model and then use this hydrogen in much more -- just this project that brings in a positive impact in the reduction of COG, 12.5 [ tons ] avoided, but it is a pilot project that we hope to scale as technology becomes more competitive.

This is the information. I'm now going to give the floor back to Cyrino. Thank you very much.

[Carlos Cyrino, executive]

Thank you, Gustavo, for your presentation. [Operator Instructions] The first question is from Marcelo Sa from Itaú.

[Marcelo Sá, analyst]

First question, if you could comment a bit, what was the impact of this change of the ONS? How did this impact your assets? And how is it impacting this fourth quarter. I'd also like to understand the decrease, a significant decrease, and also to understand on the regulatory side, which is ongoing of a change of classification if there's going to be some type of compensation. But if you could explain how these conversations are evolving, please.

[Unknown Executive]

Well, The changes still don't have a significant effect. It's something that we have to wait a bit more to understand the impact. In our case, some restrictions were reduced in [ Seara ]. In specific case, the number of cut increase in Rio Grande do Norte. So there was a bottleneck in [ Seara ] which was removed, but this bottleneck went to another point in the chain. So in Rio Grande do Norte, the cost increase and as for the exchange, the ONS the volume that we had in August, but we had the entry of new lines, so the expectation is that it would be higher than August last year. And also -- so that we can use the offer of energy that we got since then.

So we continue talking with the ministry and with the ANEEL. Operational-wise, we didn't have a significant reduction in the cuts. There was a reduction, but it's small. Some specific areas, you'll see a significant reduction. We have some cases like that, which is where we had a specific bottleneck. And with the entry of some lines of equipment, this was extinguished. But in general, the cuts in the Northeast, they continue still in a relevant amount. In relation to the discussion about reclassification, we continue this conversation, this technical and regulatory information. We've had several meetings with ANEEL and ONS and we're still waiting for an official response about the reclassifications. We still don't have an answer and this discussion is ongoing.

[Carlos Cyrino, executive]

Let's move to the second question that comes from Daniel from Safra Bank.

[Daniel Travitzky, analyst]

I would like to ask about the dividend dynamic. Moving forward, also the concession renewal, which has effects. I'd like to understand when do you expect this to happen, in fact. And when could we expect these dividends take place again as we saw in some occasions in the past.

[Gustavo Estrella, executive]

Well, it's 2 terms that correlate and that we deal with separately. I think which are the conditions that we understand that are possible for us to maintain the VNR topic the way that we counter today up to the end of the first concession, I think this is a discussion that has happened not only in CPFL, but involving all the other companies, also the regulating agencies and especially the audits.

So I think this is a technical term for us to understand this. This brings an impact in the -- so it impacts the effects of the dividends. So I think it's the volume of the dividend, much more the volume than a payout issue. So we were purging this effect of the VNR and the payment of dividends since it's a noncash effect. So on our side, we understand that as it does not affect our cash flow, it does not affect the execution of our investment plan, and it was not affecting in this recent past distribution of dividends, we understand that it's less relevant topic.

It's much more an accounting issue. And we -- due to the stability of the results, we understand that we have arguments that we can maintain the VNR up to the end of the first concession. And this is being done for the investor. I think the strategy that we are taking is the same strategy that we were undergoing before this discussion.

[Carlos Cyrino, executive]

Well, we don't have any more questions now. So I'm going to end the presentation. Before going to the final considerations, I have two messages. The first one is the Investor Day. You've already received it. You have received the invitation with the agenda. It will take place in Campinas on the 10th of December, and we count on you. And one more message which is very important is to bring -- or to introduce Ms. Wang Kedi who is the new CFO of the CPFL Group. Please introduce yourself.

[Wang Kedi, executive]

Everyone, I'm Kedi. It's my pleasure and honor to work with such an outstanding company like CPFL and CPFL has had a long-term good relationship and established deep trust with the investors and with the market. So in my term of service, I'm going to do my best to keep building this strong open and responsible relationship with our investors and this market. So I'm looking forward to work with every one of you. Thank you.

[Carlos Cyrino, executive]

Thank you, Ms. Kedi. I'm going to give the floor for the final considerations of Gustavo Estrella. Thank you very much.

[Giuliano Ajeje, analyst]

Thank you very much, Kedi. Welcome to CPFL. It's a pleasure to have you with us. Well, we're closing our call. We have 1 more quarter with consistent results. We have a positive performance of the market, and this brings us a positive perspective. when we look not only the end of this year, but 2025 when manufacturing will start again. It brings a positive impact and a positive sign of the dynamic of economical growth, which always reflects on our business in general.

We have 2 topics under discussion, the curtailment and expectation, which is still positive that we will reach a solution of this challenge for the sector in general and not only generation but also the stability of the sector. In general, the perspective of growth, new investments, et cetera. So we have a positive dialogue to find a sectorial solution for this complex topic that we have today.

Another important topic is the concession renewal. We also have a positive vision that we're going to get there. We are close to the conclusion of this process. The important thing is that it brings us this stability and this long-term vision for such an important segment as distribution long term that allows us to continue our programs of investment to go after innovation and quality for our clients because these are topics that we're very focused on with a positive perspective to conclude short term.

So I thank you all for your participation in our call, and hope to see you in the next quarter. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]