CPFL Energia SA

BOVESPA:CPFE3

Earnings Call Transcript 2020-Q4

[Carlos Cyrino, executive]

Good morning to everyone. Welcome to the presentation of results of the fourth quarter 2020 CPFL Energia. I'm Carlos Cyrino, Investor Relations Director. And today, I will be conducting all the dynamics of our event. We have with us Gustavo Estrella, President; Mr. Pan, Director, Vice President, Finances and Investor Relations; and the other executives of the company.

Due to the pandemic of COVID-19, all the executives are connected from home. So we apologize if there's any failure of connection. We reinforce that we'll be working soon to reestablish communication if there's any problem.

The presentation will be carried out in Portuguese with interpretation for English. All you have to do is click on the button Interpretation, which shows up on the lower bar of the tool of the platform. If you want to see the presentation in English, it is in the site of CPFL. [Operator Instructions] This presentation is being recorded.

I'm now going to give the floor to Gustavo Estrella, our CEO, for us to begin the presentation of the results.

[Gustavo Estrella, executive]

Okay, Cyrino. Thank you. Good morning, gentlemen. Thank you, everyone, for the participation in our call of results. I'm going to now talk of the main highlights of the year. One is the load in the concession area. We have a positive performance, 2.6% in the fourth quarter '20 and minus 1.7% in the year, which is a positive performance and special with the uptake that we had after the second semester of 2020. We will be talking more in details about the performance of our market.

With this, our EBITDA is BRL 1.921 billion, a growth of 10.4% in relation to 2019, the fourth quarter and for the year, BRL 6.8 billion, a growth of 6%, if we compare this to 2019. The net profit, BRL 897 million (sic) [ BRL 989 million ] 15% in the fourth quarter if we compare to 2019, BRL 3.703 billion, 34.9% in relation to 2020. Our leverage, we closed with a net debt of BRL 15.7 billion, a leverage of 2.19x net debt EBITDA. And here, we use the criteria of finance numbers.

We conclude the plan also, a very relevant plan. This is one of our commitments of IPO 2019, the integration of CPFL Renewable to the CPFL Group. We merged the CPFL Renewables Renováveis, and we start already to observe a reduction of financial costs, operational costs and also the recognition of fiscal credits. We also had a positive impact for the whole sector for the GSF in the free market. We counted BRL 140 million at the end of the year, the impact on the EBITDA in 2020. We also have about BRL 80 million to be accounted for in 2021.

In relation to the investments, this was also a long discussion about our CapEx plan, and we decided in 2020 to keep up and preserve our investment plan during the pandemic. We did this, delivering investment of almost 25%. In relation to 2019, it's the highest volume of investments in the company, BRL 2.8 billion, BRL 880 million just in the second quarter. As for dividends, what we're going to declare a payout of 50%, BRL 1.731 billion, BRL 1.50 per share.

And what is important to make clear is our strategy is precisely the strategy of the group already a long time balancing growth with dividend payment, and we have the expectation of some opportunities for investment during the next few months. So the strategy of the company is prudent, preventive, and we declare the dividends of 50% of the profit in 2020. The idea is to evaluate the opportunities of growth. Eventually, if this does not -- if this invest -- we will then declare the rest of the dividends during the year of 2021.

It's important to mention also the strategy of growth continues being determined on the financial discipline. So all our metrics of return and the perception of value, all these -- the precondition to advance in the growth process, and this continues exactly in the same way. Therefore, we are looking at opportunities, and we have a rationale of value we follow. And if we don't, we don't, as we didn't in the past, and then we proceed to distribute the dividends during 2021.

Here, I think this is a mark for the company. In 2 companies of the group, I'm going to talk a bit more about this. But in CPFL Santa Cruz, we have the lowest index deck effect in the story of the company. Special rates we -- this is lower than the limits. Tariff readjustments positive in the year of 2020 with a very positive perspective for 2021, the impacts of the IGP-M and also the investments. I've just said our record for investments in 2020, and this reflects with the tariffs of our distributors. We also have the entry of operation of the project of the wind complex of Gameleira from the second quarter of 2021. This is 2.5 years before the ANEEL's official deadline. It's also a victorious process, very well executed, not only because it comes before and it's also a reduction of our risk.

As for the ESG, we're going to talk a bit more about this further forward, but we have [ CPFL ] with some market rates. This is also an important moment for the company. Some main rates BOVESPA and some specific rates in our ESG agenda, the ISE, ICO2 and also the ESG portfolio of the Santander Bank. We will also recognize the Crédit Suisse and the global ESG report as one of the main preferred shares of the analysts, and this reflects our agenda in terms of ESG. And we're going to highlight this further forward.

We launched our sustainability plan, 2020-2024, and we entered the leadership with impact program with global impact the ADS3 (sic) [ SDG 3 ] to talk about health and well-being. We also started a pilot project of electrification of the operational fleet. We start with our regional in Indaiatuba, BRL 23 million for vehicles, 100% of our fleet electrified. Of course, the expectation is that we are able to extend this project 4,500 for the group. And also linked to this theme of ESG, we're also part of the supplier engagement leaderboard of the CDP. This means we understand the commitment linked to ESG, not only our commitments, but also the commitments of the chain. So we also embark all our supply chain and linked to the themes of the ESG.

Now let's move towards the next slide. Here, we talk about sales. In the fourth quarter, we can clearly see a signal of recovery in the consumption of energy in our concession areas. We close our load with a growth of 2.6%. We highlight the growth of the 3 clients, 11.5%, and we can see a large different sales in the consumption segment and our sales in this quarter were impacted by the [ 863 Resolution ] where it says that we now have to invoice our clients of the A group within the next month. So this was a change of the calendar and invoicing.

So this is an impact in the sales, and it's important to highlight the impact does not bring impact on the results due to the computation of the non-invoice. So there's no result in 2020, impacted by this change of the Resolution 8 duty. What we do is this adjustment, and we can see that this hits 1%. It's aligned with the concession load. We can see the growth per consumption class. We see that it's a consumption that's led by residential class with 5.5%, followed by industry here with 0.1%, if we adjust the impact of the Resolution 863 and the migrations of the plants to the basic network.

We can see that the industrial class was also very positive with a growth of almost 5% in relation to 2019. The commercial class also has a relevant impact with the Resolution 863. But even so, we see that the commercial class has a huge challenge, a decrease in consumption of over 5% but a decrease in consumption if we compare to 2019.

Now let's go to the next slide. 2020, we closed this year with a drop in the concession area of 1.7%. When we remember the beginning of the pandemic in the second quarter, the estimates and the expectations of consumptions were much worse. I believe that we are closing the year much better than we expected. So a drop of 1.7% in our concession area. We can see here, we also have the impact of the Resolution 863, of course, much lower than the second quarter, but it's also percentages that should be removed so that we can analyze this market in a more precise manner. We can see here the sales, a drop of 3.1%. We have to remove the 0.8% of the Resolution 863, another 0.8% of the effect of the migrations. So we can see here a drop of about 1.5% in the performance of the market, very positive and due to the challenges of the pandemic that we had last year.

We have more or less the same design in the fourth quarter. The growth of the market led by the residential area showing a certain recovery of the industry and the commercial class still suffering a lot due to the effect of the pandemic.

We made a slide here to show you the growth per class in 2020, adjusting the number due to the effects that I mentioned, the Resolution 863, the migrations, the generation, the calendar invoicing. Here, we can see the numbers demonstrating the real trend of performance of each one of the classes. What we can see here is that the residential class adjusted with all these effects, an average growth of 3.7% in the year, negative growth here in the first quarter, but already recovering in the second quarter.

The industry, we can clearly see a huge impact concentrated in the second semester. And in the third semester, we see clearly a recovery closing here, the fourth semester with the impact of -- high impact. The commercial class also has a recovery, but it maintains negative the whole year, closing with almost 5% drop. And the others here basically the impact of the rural class that did not suffer a lot during the pandemic and has a performance always positive during the whole year of 2020.

Next slide, please. In relation to delinquency and losses, we can see that we closed the fourth quarter with the full of BRL 52 million, 0.69%. Here, there are 2 important points. The growth in relation to the third quarter of 2020 and the growth in relation to the fourth quarter of 2019 have to be adjusted in this comparison. We had a series of renegotiations during these 2 prior quarters, which makes us have a large variation in relation to the fourth quarter. And when we see historical medium 2016, 2019, average delinquency, 0.6%. And we can see that in the fourth quarter, we got closer to this historical medium. So that's the main indicator. There's a huge effort here of our team.

We can see here in the chart below with the -- we have the resolution where we could cut, and we can see the billing. In the fourth quarter, we reached the highest levels of cut in the history of the company. So we cut 872,000 (sic) [ 732,000 ] clients in the fourth quarter. So we were able to control and bring the delinquency to this historical. When we see the losses, it's also a huge challenge due to the pandemic.

When you see the calendar, we have a loss aligned with the fourth quarter of 2019. This also is a reflects of a lot of hard work fighting these losses, which in a complicated time. So we have loss, but it's practically aligned with what went on in 2019.

Next slide, please. Here is the performance of the deck and effect. I think once more, this is a mark for the history of the company, we reach here in Santa Cruz and the RGE, the lowest levels in our history. And the challenge in Santa Cruz is to reduce the level of deck effect, which is already very low. We can see here, we went from 5.56 to 4.89 and effect of 4.25 to 3.68. In the RGE case, the challenge was huge. Historically, we had, especially the deck, much higher and the challenge became even larger when we acquired the RGE Sul, which also had higher levels of deck. And this made us design a plan of reduction of the deck, and this plan started way back in 2017 with a series of actions, increase of investment, complete redesign of our operation so that we were able to focus and reduce this.

This is a mark in our history, with a drop of almost 4 (sic) [ 14 ] hours to 10.83 from 2019 to 2020, really relevant. The challenge was huge. We were able to so this in effect, also a bit lower challenge, but 6.25 to 5.27 here. The challenge once more is a reduction in the deck that was already lower. We can see here the effect, regulatory effect in 8.15. So the deck is much lower. So I believe this is a challenge. This is a mark for the company during 2020.

Next slide, please. Well, let's talk about generation now. Here, we have, in relation to the PLD, we have a growth of the PLD, which reflects the increase of prices that we had at the end of last year, a growth of 30%. But in the average of the year, due to the effect of the pandemic in the second semester, a drop, an average of 21.7%. The GSF practically aligned with 2019, a drop of 1.9% and 3.7% in the quarter, if you do an annual comparison.

Here, you can see the flow of our HPPs drop, remembering that in the majority, they are located in the south, where we had drought during 2020. So this is an important drop of the flow of our [ UHF ]. In the SHPs is similar, less critical than the first case, but also affected by the Southern and Southeast region, partially compensated by the area of Mina Gerais, where we had an increase of flow, and this made these effects a bit better. But the flow of 2020 was worse than 2019.

In the wind generation sector, we have here 2 movements, 2 impacts, 2 main impacts. These are contrary movements. One of them is the wind in 2020, a bit worse than it was in 2019. And this is a negative reflect of our generation capacity. And we had an increase in the availability of our machines are directly affected by the OEM services and this broad growth in the availability in the average of the year of 94% to 96.7%, and we were able to have higher generation than 2019.

The next slide, please. Okay. So now I'm going to give the floor to my colleague for him to continue the presentation.

[Yuehui Pan, executive]

Thank you, Gustavo. Good morning to everyone. This slide, the EBITDA in this semester was BRL 1.9 billion, an increase of 10.4%. The distribution segment had a good results again, with an increase of 11%, confirm the finance asset of the concession had a high of BRL 187 million. Due to the higher IPCA, the PMSO had a high of BRL 42 million due to high and the legal fees. But it is important to mention that the operational expenses continued dropping. In the pension plan, there was an increase of BRL 15 million. The PDD was higher, BRL 13 million. Because last year, we did some large deals with hospitals and other institutions. The current PDD level corresponds to our historical mean, as Gustavo has already shown. The other variations add up to BRL 6 million.

In generation, we add here the conventional and the renewable segments. The EBITDA was of BRL 768 million, a high of 8.5%. The main effect was the gain of the GSF in the free market, with BRL 140 million. I highlight that this amount is still preliminary. We have projects of CPFL Renováveis, where the gains have not yet been accounted for. Therefore, we can expect an additional value for the result in 2021.

Another positive effect was the updating of the tariffs of the contracts, a total of BRL 34 million. On the other side, we had some negative impacts in the period, a low of assets, BRL 44 million. Changes in the depreciation, taxes of the assets of EPASA to adequate the end of the contract to BRL 25 million; a high of the UBP due to a higher IGP-M, BRL 21 million, the seasonality of the PCH contracts, negative BRL 14 million, among other effects.

The segment of trading, services and others had a high of 31.3%. Lower volumes in the trading have been compensated by higher prices in the segment of services, good performance of CPFL services and CPFL efficiency.

Here in Slide 12, we show you the performance of the net profit, which was BRL 898 million, a high of 15.5% in relation to the same period last year. Besides the variation of BRL 181 million and the EBITDA, we had in the financial result of worsening of BRL 10 million. The depreciation were BRL 25 million, and the taxes had a negative impact of a BRL 63 million.

In the financial results, we have to highlight some effects. The first one is the MTM. After a gain of over BRL 250 million in the first quarter, we returned a part of that result with the improvement of the spreads of risk -- risk spreads in the market. On the other hand, we had a gain of BRL 71 million with interest and fines and delays of payments of energy bills due to the increase of the IGP-M. And then the expenses with the net debt had a reduction of BRL 37 million. This is explained by the drop of SELIC and by our liability management plan that reduced the average cost of the net debt. As for taxes, we had a best result when we compare to last year. And this explains the increase.

On the next slide, we're going to show you the results of the year 2020. EBITDA grew 6% or BRL 386 million. We highlight here distribution, which grew 6.5%, favored by the good performance of the market, the tariffs highlighting the performance of the residential class and the financial asset of the concession. Still referring to distribution, I would like to highlight 2 points here that even there have been lower variations, they deserve to be highlighted. The PDD, we had a reduction of 3.6%, BRL 8 million. In spite of all the challenges of the pandemic, we were able to keep delinquency under control. PMSO, we had a reduction of BRL 34 million in the distribution. And this represents a reduction of 1.3% compared to an inflation of approximately 5% in 2020.

Another highlight is the generation with a high of 6.6% or BRL 167 million. This is a result mainly of the gain with the solution of GSF for the free market, BRL 140 million. Besides this, we had contract readjustments. These gains were partially compensated by the weaker result of EPASA and large payment of UBP due to the IGP-M. I would also like to highlight the cost reduction obtained especially due to the integration of CPFL Renewables or Renováveis to the group. There was a reduction of BRL 22 million, with employees, material and third-party services.

Now the net profit or income improved 34.9% or BRL 959 million. This result was very much favored by the lower CDI and the cost of the debt, which generated a gain of BRL 376 million, besides a positive effect of MTM with BRL 117 million. The gains with fines and interest rates also added BRL 112 million during the year. On the other hand, the updating of the regulatory assets dropped BRL 71 million. And we did not have an extraordinary financial income generated by re-IPO resources last year as compared to what happened in 2019. We also had a positive effect on taxes due to the fiscal credits accounted for in 2020, adding up to BRL 323 million.

The next slide, please. We have the indebtedness of the company. The first graphic shows that the net debt is BRL 15.7 billion and EBITDA, BRL 7.2 billion. The leverage which is measured by the net debt is 2.19x. I'd like to highlight here that we are proposing for the payment of dividends relative to the results of 2020.

With this macro scenario that we have nowadays, and considering that we are evaluating potential M&A proposal is to pay dividends worth BRL 1.7 billion or BRL 1.50 per share. This represents a payout of 50%. And if these projects are -- we're going to be evaluating them. And if this doesn't take place, then we'll implement a new proposal to complement the payment of dividends. That means that we are assuring to you, our shareholders, the balance between the growth and the yield.

About the debt profile in the chart on the bottom part of the slide, we have the cost of the debt, whether real or nominal. The increase is due to the variation of the IPCA during the period, but the real cost is negative. It is helped by the SELIC rate, with its historical minimum and by the inflation of 4%. Now -- and the composition of the gross debt, we can see that the largest exposure is indexed to the CDI with 76%. The cash at the end of the semester was close to BRL 4 billion, with a coverage rate of 0.71x. The amortizations, short term. The medium-term of the amortizations is 2.53 years.

Thank you very much. And now I give the floor back to Mr. Estrella. Thank you.

[Gustavo Estrella, executive]

Thank you. Thank you very much. Well, continuing our presentation. Here, we have our CapEx for the year of 2020. So we can see here the distribution, BRL 2.3 billion, a growth of 13.9% if we compare to 2019. In general lines, the investment for expansion, modernization of the system, infrastructure and IT, a series of projects that have been carrying out last year.

In generation, we've reached BRL 283 million. Basically, the 2 projects under construction that we have here today and wind complex of Gameleira. Here, we have in transmission, BRL 184 million (sic) [ BRL 134 million ]. The project want to -- for these consumed BRL 134 million of investment. These are investments and especially our arm of services.

Here, we have the perspective. We go from this investment, we increased this investment even more in all the businesses of our group. We're going to reach BRL 3.4 billion. And in the horizon, these are BRL 15.4 billion of investments and the main is the distribution, BRL 13.3 billion. This investment, it presents an increase in relation to last year, and especially led by the distribution. We have a series of new investments to fight default with long-term investments. So these are investments incorporated to our operational base.

Next slide, please. Here in relation to the eolic Gameleira Wind Complex, starting now in 2021. As I mentioned, we anticipated this. This would be January 24, the defined date by ANEEL. So this is the semester 2021 with the contracted energy. The initial -- in the beginning of the [ PPI ] at the time of the bidding process and also process contracted in a perspective. The CapEx, 5% below also the time frame, the cost. And this execution was very well done in the Gameleira Wind Complex.

Next slide, please. Well, lastly, it's very important to mention here, our sustainability plan for 2020-2024. We have a series of results reached here in 2020, especially a challenging year for us, but our 3 pillars of our plan, we were able to have important advances in all of them: smart solutions, sustainable energy, society shared values. These are very important themes for 2020, almost 10,000 units of transformers and intelligent solutions, 100% of group A, with more than 35,000 smart meters installed and operated. Over 52% of our total consumption is telemetered. We increased the digital channels. Over 110 million attendance -- services. This was a reflect of the pandemic last year. An expressive growth in digital bills, over 2 million bills and now 3.47 million clients, a growth of 54%.

And shared value, it's a program, CPFL in hospitals. We have accumulated values of BRL 72 million in investments. It was BRL 51 million in last year, and 84 hospitals benefited. And our expectation is to reach BRL 150 million and 314 hospitals benefited of the CPFL hospital program. This was a huge challenge last year. We advanced this.

And even in the communication way, this sustainability plan, we did a first event dedicated to this, to the market. And we spoke about our plan. We made all our challenges public, 15 goals linked to this sustainability plan. It's already now knowledge of the market expectations of investments, and the market currently can follow and monitor the execution of CPFL. So I think this entry is an important mark in the ISE portfolio in Santander, the recognition by Crédit Suisse. These are important topics, and we have to demonstrate to all our investors and stakeholders, community, clients, everyone in general, everything that we've been doing, and it is a lot. So all linked to the sustainability issue.

So these were the main messages that we had today. Once more, I thank you for your participation. And we will now come into our question-and-answer part of the event.

[Carlos Cyrino, executive]

Thank you, Gustavo. Thank you, Pan. Thank you for your presentation. So now let's go. [Operator Instructions] We have some questions here already, some people who have requested.

So the first question is Carolina Carneiro from Crédit Suisse. Thank you, Carolina, for your participation. And let's go to your question.

[Carolina Carneiro, analyst]

I have two questions. The first question is about the location of capital on the numbers. Here, we see that you have -- the leverage has been dropping. Compared to 4, 5 years ago, the leverage was about 3.5x. And now after the IPO, 2.5x, and now we're talking about 2.2x leverage. So with an expectation of generation, EBITDA cash off of the readjustments due to the IGP, which accumulated should help a lot. So I just want to understand why the definition now of 50% of payout is given that your leverage would allow an M&A -- a large M&A vis-à-vis this expectation of cash flow to be generated in the future. So is there a need of cash flow? And is that why you took the decision of having a payout of only 50% given the situation?

The second question in relation to the bidding process that we would have. The ANEEL has recommended in some players like you recommended that in the past, perhaps the economics of this tender would be challenging due to the issues of the problem. So does this make sense to -- for this bidding process to take place if very -- if it is anything that we know that would make this asset more attractive?

[Gustavo Estrella, executive]

Carol, thank you for your questions. I'm going to start with the capital allocation. I think it's important once it's more to register that the reduction measure of the payout is very much preventive. And I think it shows the idea that we don't know exactly what opportunities we'll have in the next few months. I think we have a series of opportunities of assets coming out of the market. I think the idea is to be preventive to evaluate all the opportunities that we have on the market and that we will have during the next months, so that we can guarantee that it won't be due to a lack of capacity of investment that we're going to lose opportunities. I think that once more, it's much more preventive and I would say even conservative.

So what is our plan? The idea is to evaluate these opportunities. Evaluate, like we always have done, so there's no pressure per growth that will make us do differently. It will be the same as we've always done. So evaluating the opportunities, if they're good, if they generate value to our shareholders, we will follow this new investment. If by any chance, we're not able to make this feasible, it's very clear to us that this balance between growth and yield, it is an expectation of the market. I would say, even of our controlling shareholders.

So the expectation and strategy, the idea is that after this analysis and this evaluation of these assets, we'll sit down, reevaluate what we were able to implement and what we were not able to implement. If we can, we follow with the payment. So it's very clear in our minds. It's very simple, and we are very careful. We evaluate these opportunities during the coming months, and we will talk again about dividends further forward. I believe that basically, the strategy of the group has not changed. It's preventive, and it's the opportunities of growth that we see coming in the next months.

Your second question of [indiscernible], I think we've talked a lot about [indiscernible]. I believe that it is challenging, we -- a challenging asset. We don't have -- this is not closed yet. It does bring additional risk, which has to be very well understood. And the company has to advance in this project. All of this is being evaluated, so we don't have a closed and formal position around this. But I would say that it is a challenge due to all the risks that we see in this asset.

[Carolina Carneiro, analyst]

Gustavo, a follow-up. I think there are a lot of other people wanting to ask questions. Are you looking at other segments because there are -- is the segment of sanitation in your scope?

[Gustavo Estrella, executive]

No, not right now. It isn't.

[Carlos Cyrino, executive]

Thank you, Carol, for your question. Now let's go to the next question. The second question, I'm going to ask Marcelo Sá from Itaú BBA Bank. Thank you for your participation. Proceed with your question.

[Marcelo Sá, analyst]

I have two questions. I think the first is about M&A. Following the first question, if there's any possibility or if it's being discussed to have a combination of CPFL with state grid transmission assets. That's the first question.

And on the regulatory side, I know that there have been a lot of conversations with ANEEL and the market about the possibility of tariff deferment taking place this year. I would like to know how these discussions are panning out, what you've heard. And about the fact that there's going to be a meeting at 2:00 in the afternoon of ANEEL to discuss measures that can be implemented due to the pandemic. So do you think there will be any measure like the suspension of cuts like we saw in the first wave?

[Yuehui Pan, executive]

Thank you for your question. So about the first question, the kind of possibility of the opportunity. [indiscernible] And of course, I would tell you that in the past 2, 3 years, we had a lot of progress and recently, in the headquarter, we also have, of course, the controlling shareholder has some kind of progress in their management team. And this matter is on the top list and is under discussion. I would say if there's anything that deserves the disclosure to the market, we will let you guys know in the first time. Thank you.

[Gustavo Estrella, executive]

As for the regulatory topic, this subject is on the table. We also are very concerned with the tariffs. I think the numbers of last year, the default, this topic is very sensitive. I would say the scenario is still very uncertain for 2021. We have here an apparent confirmation of the initial with the values lower than last year. We know that last year, this emergency help -- amount, the money that people received helped a lot to fight against before. And this year, now the market the scenario of the pandemic, our worst moment, how -- we have to see how the economy reacts. So delinquency is, yes, a real factor of concern today.

As you know, with all the readjustments in the case of CPFL, so removing Santa Cruz and the old contracts, we have the IGP-M, which was high in 2020, continues high this year. But what we're doing now is to pass over the high IGP-M in our tariffs in this beginning of the year. So we are sensitive in discussing how we mitigate the effect of the tariffs. And this is a precondition, I would say, very much aligned so that we don't lose any type of economical right. We're discussing this, putting on the table, deferring the impact -- the cash impact, but without economical losses for the company.

So it is a sensitive topic, and we are, yes, very concerned, and we're discussing with ANEEL about the alternatives. This, I think, will happen for all companies, not all in the CPFL, the market in general. And I think it's a benefit for everyone, the client that doesn't receive a high readjustment right now for the agency and for the companies as well. And does anyone want to add anything?

[Andre Luiz Gomes da Silva, executive]

No. I think the deferring -- well, first of all, good morning to everyone. Good morning, Marcelo, I think you said very well. Marcelo has a second question about the measures to suspend cuts that ANEEL will decide in the meeting at 2:00. The expectation, Marcelo, is that ANEEL, as it has been publicizing and the suspension will be focused in social tariffs, tariff consumers, those -- the limit is June 30. So it's much more limited than the measure of last year. And during the same period, we will be without having to do the compensation due to transgression of the individual minute -- limits of continuity. Not that we're not going to pay the same thing that happened last year, but it's due to the eventual flow of this suspension to the low class consumers.

It's an expectation. This meeting is going to happen at 2:00, so we'll have to wait for the formal deliberation and the discussion that will take place in the collegiate directors at 2:00, but it's very much focused and the debate is being carried out. The preliminary notes with the consumers, the low-class consumers.

[Marcelo Sá, analyst]

Perfect. I'd like to follow-up Pan's response to see if I understood. I understand this is a discussion point that you had in the past, that it evolved in the company during the last years and that if I understood, this is one of the most relevant points that is in the head of the control. Is that this could be a real possibility at some time, but this will be shared when a decision is taken to the market. Was that what you meant, Pan? Is that what I understood?

[Yuehui Pan, executive]

Yes, you are absolutely right. And there is some -- definitely, this is always in the mind of the -- on the top list. This is a huge strategic topic. And as you said, if there's any progress to service our release to the market, we will let you know. Just confirm. Thank you.

[Carlos Cyrino, executive]

Thank you, Marcelo, for your questions. Now we're going to move to the third question, Flavia of Goldman Sachs. Thank you for your participation. We'll proceed with your question.

[Flavia Andreatta Araujo Sounis, analyst]

My question is more related to OpEx. We saw sequentially an increase in the cost of the [ CPMS ] besides the increase of the legal costs compared. So I'd like to better understand what happened sequentially. How recurrent this is or not? And also if you could detail a bit better what's included in these legal expenses, this high increase of legal expenses, which called our attention.

[Carlos Cyrino, executive]

Thank you, Flavia. So responding your question in relation to the PMSO. In this quarter, specifically, we had an increase due to some legal expenses. Of course, when we look at the OpEx of the year, we see a reduction of OpEx. And of course, a lot of this is influenced by the pandemic, especially with actions towards digitization, new payment methods, all the mobile that was implemented during this time, the service -- client services also in our operations. I believe that part of this PMSO perpetuates into 2021, especially related to these topics. But in the fourth quarter, we did have, in fact, influence of the increase of legal expenses. I think it's important to comment that part of these expenses were labor issues that take place during the year.

Obviously, that during a pandemic, this was thrown to the end of the year. It's very much spread out. There's no huge event to mention. There was also a reversion last year in Piratininga, which adds to these values. We also had some other arbitration processes. So no relevant value. And I think that some regulatory fines that also happened in the sector, no expressive value. Of course, we're always paying attention to try to revert the situation in the future. So I think what I bring to you, Flavia, in relation to the legal expenses, that there's no impact of any specific relevant factor. It's very much spread out.

And I'd like to reinforce another point of the PMSO. So when we talk about inflation because if we get our PMSO reduction compared to the inflation that we saw in Brazil, that was high. This brings us not only a saving, but it's -- if we compare this to the inflation, it was higher to the decrease in the semester.

[Flavia Andreatta Araujo Sounis, analyst]

I would like to follow up and try to understand a bit better more specifically thinking about third-party services, employees. I can see considerable growth. What can be considered recurrent in the third quarter? Or is this...

[Carlos Cyrino, executive]

There's a big difference. It's about 20% difference here in our numbers. So if we get the second quarter and the third as a base, we were at a time of -- more critical time in terms of learning and making some changes. So looking at this increase of expenses, the legal expenses, I don't think it's a good indicator. So what do we have here that can perpetuate next year, we can think about the gains of digitization, new technologies, especially the digital side of services of clients, new means of payments.

This brought some interesting gains. For example, payment means in terms of tariffs. And when we increase the digital payment means, we reduce the tariff, 1/3 when we compare to the physical channels. So of course, in this route, we have a certain reduction, and this should continue.

It's difficult to give you a specific number because we're still in a pandemic. We don't know how this is going to pan out in the future. So if we talk about the third quarter, perhaps it will make sense when we analyze the next months, but it's still difficult to tell you for the rest of the year. It will depend how on the recovery in terms of the pandemic and other issues.

Well, now going to the next question, the question of Giu of UBS. Thank you for your participation in our event. Please ask your question.

[Giuliano Ajeje, analyst]

I have two questions. I would like to be more -- I would like to talk about the [ C3E ]. We understand it's a challenge. I would like to know what do you see the challenges to the ICMS. How you're working on the modeling of this, of the C3E? And can you merge the assets with the [ ACCS3 ]? The different indexes, the IGP-M and if you have the authorization of ANEEL to merge these assets?

And the second question that I have also related to the IGP-M, if it makes sense for you to change the IGP-M indexes for the [ ICP ] to extend the concession. Have you analyzed this possibility you could actually alleviate the tariff pressure doing this within compensation, you would reduce the risk, average and long term? So it's these two questions.

[Gustavo Estrella, executive]

Okay. As we mentioned, I think it's a highly complex asset. I don't know exactly what you're saying. I would say it's an operational challenge as well, not only the balance sheet or the financial statement. So it's a challenge to turn around a company. And it's, of course, a challenge with the accounts. So here, you have discussions in relation to the pension plan, to the payment of the ICMS, which is pending, which is an account which goes up daily until the tender date. So you have financial questioning, which is also important. So all these challenges together, that we insert in the model to see if, in fact, we can close the accounts.

About the concession, as you said, here, we have a challenge of merging, which is different than we had in the RGE. First is the difference of contracts. One is a new contract, and we are still in the old contracts of RGE. So you have additional complexity here. And you also have the fiscal credit, which also has to have a price. We didn't have this discussion with RGE, so we have it here. So I would say that the complexity is bigger when we talk about an eventual merge of the assets with -- different than what we did with the RGE South.

About the change of indexes, I think this is a discussion, which is very complex and almost impossible to forecast how the IGP-M and the IPCA in the future is going to -- how do you put a price on this. So this is the challenge.

And the second point is the concession extension. This is a different discussion than the generation case. Our scenario here is of renewing the concession. We're in the first cycle -- first concession, and we work with our basic scenario with an automatic extension, of course, checking all the quality indicators, the ANEEL. We are going to renew this to a new contract model. It's a given. And there, we will evaluate the IGP-M IPCA automatically. But if we talk about concession extension in a scenario where we consider it given that we're going to have the right to the second concession, I think it's the same as what we discovered -- we discussed in the case of the [ GCE ].

[Carlos Cyrino, executive]

Thank you. Well, guys, we don't have any more questions. So we will now close the session of questions and answers. And if there's any question, please talk to Sonia, Investor Relations. She's always available to clarify anything that has not been clarified.

And I'm now going to give the floor back to Gustavo Estrella for his final considerations.

[Gustavo Estrella, executive]

First of all, I'd like to thank you all for your participation. We're now going to end the year of 2020. It was a very challenging year for the company. It was a year of a lot of uncertainty. And we had to remodel all our businesses. We had to focus to -- on the health and the safety of all our collaborators. And I think we had a very positive result. I think we were able to retake an uptake of consumption, an uptake of our results after the second quarter, which was negative for the whole market. And I think we're beginning to have good recovery results from the third quarter, preserving the main projects of the company, the deck, the tech and our investment program.

I think these are examples that life has not stopped with the pandemic. And we struggle a lot to keep up our short-term operations, also maintaining the focus and the vision long term. We are in the infrastructure sector. We need investments long term, and I think we were able to do this, balancing all the short-term challenges, but knowing that we're going to continue to have a long-term perspective and building this future for CPFL. I think we were able to do this. We have here a year, which is going to bring us a lot of challenges. It depends a lot in the -- how quickly the economy is going to recover and how the vaccination program moves along, and we see that we're much more prepared to -- for these challenges and for the opportunity.

Thank you very much for your partnership during last year. Thank you very much, and see you next time.

[Carlos Cyrino, executive]

We're now going to end our conference of the results of CPFL Energia. We thank you very much for your participation, and we wish you an excellent afternoon, a wonderful weekend. Take care. Bye-bye.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]