CPFL Energia S.A. (CPFE3) Earnings Call Transcript & Summary

[Interpreted] When we're talking about the fourth quarter of 2024, I'm Carlos Cyrino, I'm Director, Investor Relations for CPFL. And today, I'll be conducting the dynamics of our event. Today, we have with us Gustavo Estrella, Ms. Kedi and the other executives of the company. During the presentation, you can use the button Interpretation for the channels in English or Portuguese depending on need. I would also like to tell all participants that at the end of the presentation, we will start with the questions and answers. [Operator Instructions] Remember that this event is being recorded. Now I'm going to give the floor to Gustavo Estrella for us to start the presentation of the results.

[Interpreted] Thank you, Cyrino. Good morning. Thank you, everyone. Thank you for being present here in our results call for the fourth quarter of 2024. I'm now going to go to Slide 3 for the highlights. We delivered in the year an EBITDA of BRL 3 million in the fourth quarter, BRL 3.276 billion, a growth of 5.3%. So a profit with BRL 1.5 billion, a growth of 18% in relation to last year and BRL 5.8 billion profit. Our debt BRL 27 billion with leveraging of the net debt through -- over the EBITDA at 2.07. CapEx, another highlight, expressive growth in relation to last year. In the quarter, a growth of 21%, BRL 1.9 billion. And in the year, we closed with BRL 5.8 billion, basically the number of our guidance in the beginning of last year. As for the dividends, the proposal that is being forwarded from meeting is BRL 2.79, which is a total volume of BRL 3 million of dividends, which represents a number a bit over 70% of the payout in relation to the profit of 2024. In relation to business, the Generation Segment. An important highlight is the PCH Cherobim conclusion. It started operating in the beginning of January with 28 megawatts of installed capacity. Our ESG plan 2030, one more commitment linked to the climate resilience. It is a topic that, of course, affects our businesses a lot. It's important that the ESG plan be linked even more with business and with the moment of the operations of our group. We also have the ISO 56002. It's linked to innovation. It's the first company of the sector with an ISO linked to innovation of the size of the CPFL Group. And we also had an important recognition and the Best Management Award, FNQ and for CPFL Santa Cruz and Piratininga and the Silver Trophy for CPFL Paulista. Well, now when we go to the next slide, we're going to talk a bit about energy sales. In the fourth quarter, we had the performance with a growth of 1.4%. We have got used to see expressive growth in 2024 especially in the low tension, residential and commercial. This is a bit difficult -- a bit different. Residential dropped 1.7% and commercial with flat growth in relation to 2023. I think besides the distributed generation which affects these two class, we have the negative effect of temperature, which makes us not have that growth that we had in the prior quarters. But even so, we can see that in the macro line and others, the two classes continue having a positive performance, even without growth because they had a base of consumer and also due to the temperature in the end of 2023. And we continue with the levels of high consumption in these two classes. An important highlight. Industrial with a growth of 4.3%, the industrial sector. We've been observing perhaps in the last 2 quarters, it's a more robust growth of the industrial class, which confirms itself once more and gives a positive perspective of the continuous uptake of the industry in our areas of concession. When we look at the segments within the industrial class, the food segment, which is the biggest with a growth of 0.5%, we see a very good performance of chemistry, vehicles, rubber, about 7%. Now let's go to the slide of the year. As I said, residential and commercial, the big highlight is the performance of the growth of 6% in the two classes, even though there's distributed generation, this affects the consumer per capita obviously and the temperature bringing a positive impact. We closed the industry with a growth of 3.2%. This is an important number. It's robust, and with a positive perspective for 2025. When we look at the different segments, once more, chemicals, rubber, vehicles, these are the main highlights. And the growth is between 3% and 6% for each one of these segments. Well, in Slide 6, we can see the performance of the growth without the seasonal effects. So in a very stable manner, we can see the growth, which is robust for the residential class. And in the last 2 years, this has been a strong growth and also in the commercial class, the post pandemic, post 2020, stable growth, the growth of 5% to 6% -- 7.5%. The industry, a lot of volatility, 2021 still a reflex of the beginning of the pandemic in 2020, but we can see the year of 2024 as a positive year with the industry with growth close to 3% without seasonal effects. And as I said, a positive perspective for 2025. And here, we make a correlation of this growth with the GDP. Obviously, we have a large correlation of the GDP with the consumption of energy, which has imbalanced in favor of the increase of the consumption of energy and the effect of temperature bringing more consumption, especially in the low tension classes. Now let's go to the seventh slide. Distribution delinquency was a big challenge. As you can see, the first 3 quarters, delinquency with volumes above our historical volumes. We had during the year some challenges, especially linked to our billing, especially energy cuts because of storms, because of floods in Rio Grande do Sul and this made us to have difficulty to cuts, which is how we fight against delinquency. Within the fourth semester, we -- the fourth quarter and we disclosed then with 0.9 and we closed with a number higher than 2023. But if we're able to maintain this volume of cuts in high levels, then we will be able to control and we will be able to reduce it in 2025. On Slide 8 about losses. This is also challenging losses even so we were able to reduce the volume of losses compared to 2023, reaching 8.28% to concessionaires, RGE and Santa Cruz, lower than the regulatory levels, which is a positive number, with challenge is a bit lower in Paulista and a big challenge in Piratininga and the control of losses in these concession areas. On Slide 9, there's an important number that has to do with quality. We have a curve of our four distributors, and this is about 4 hours from Sao Paulo, an important highlight, and 6 or 7 years ago, it was about 15 hours. Now we're in 9 hours of deck, which is a fruit of a lot of investment in that concessionaires exchanging the -- would impose automation, digitization, which makes us reach positive numbers linked to the deck. Another important thing is all the four distributors attend to the limits, the regulatory limits of the set. So this is an important data. It's a huge challenge. And I believe that indicators what has drived our increased investments in the last few years. And here, you see a positive result, not only consolidated numbers, but also the deck with the electrical set in all the distributors of our group. Now let's move to Slide 10 about generation performance. Here, we can see the PLD in the fourth quarter, which is a fruit of the increase of the price of October last year because of the weaker hydrology. This came back in the month of November, but on average, an expressive increase in relation to the year of 2023. In relation to GSF, we are the same as 2023 with 90%. Wind. Wind farms, we had a drop in the production of generation of 6% purged the effects of the curtailment. This has been the big challenge of the generation in 2024 and possibly this year as well. We would have had growth in the generation of over 14%. So once more, it's a GSF affecting significantly not only business of generation, but also the results of the group CPFL in a consolidated form. And here, it's the availability of when with the drop because of the maintenance, some programs have not, but with a positive perspective of recovering these numbers in 2025. Now I'm going to give the floor to Ms. Kedi for her to follow with the financial results.

Thank you, Gustavo, and good morning, everyone. I'm going to discuss [Technical Difficulty] financial results [Technical Difficulty] a growth of 5.3% over the same quarter of last year. And in the next slide, I'm going to talk about the performance of each section. In Distribution segment, EBITDA reached a value of BRL 1.9 billion, a decrease of 8.7% or in amount of BRL 179 million, explained by the reduction in market tariff. Despite the growth in market volume, they had a negative impact due to the tariff adjustment in Parcel B was a negative in Paulista due to the negative IGP-M in the period. And also, we had some effect of Parcel A. The negative impact was offset by several factors. First one, was concession financial assets with the increase of IPCA and the second one was a decrease in PMSO and a reduce of Private Pension Fund cost. And the next section is Generation segment with an EBITDA that reached to BRL 1.1 billion, a 45.4% increase or in amount BRL 346 million. The result was impacted by four one-off effects. The first one is regarding Enercan. It is noncash effect referring to the provision resulting from the testing of the recoverable volume -- value of the asset. We had a negative effect of BRL 334 million in the first quarter of last year and a positive effect of BRL 56 million in fourth quarter of '24, which gives us a difference in number in amount of BRL 390 million. And the second one is the reversal of liability in total amount of BRL 123 million. That is also a noncash effect that is related to the MME ordinance about the small hydrogen plants physical guarantee review, which was first issued in the year of 2015 with a new resolution, which was disclosed in 2024, it established a different system to measure a lack of generation and it favors technical discussion, so which made it possible to reverse the provision. And the third one is about a fair value adjustment related to Lajeado investment, that is also a noncash effect in the amount of BRL 90 million is the total variance from last year with a negative effect of BRL 40 million in the fourth quarter last year and a positive effect of BRL 50 million in first quarter of this year. And the last one of add on is the agreement between CPFL and the Pedra Group in the amount of BRL 191 million to the end of -- with that agreement, we end the consulting early. The recurring performance of the segment despite a better wind is driven by some negative impact of the curtailments and the negative impact in the first quarter is BRL 49 million. The next section is transmission. The regulatory EBITDA reached to BRL 192 million, a drop of BRL 71 million, which is mainly due to a RAP adjustment in the '24 and '25 cycle, which was negative due to a tariff revision. And next, we talk about trading, service and other segment. EBITDA in the quarter reached to a total of BRL 18 million with a decrease of BRL 41 million compared to the same quarter last year. Explained by a lower margin in our trading business, amount was negative BRL 89 million and a one-off effect we have explained in the Generation segment, which was the agreement between CPFL and the Pedra Group and also the effect of ordinance 30. We move on to the next slide. Our net income totaled to amount of BRL 1.6 billion, an increase of 18.7% over the prior year's quarter. In addition to the variation of BRL 165 million in EBITDA, the main effect was the following items. So on the financial result compared to the same period of last year, we have a gain of BRL 170 million, basically due to a better result of mark-to-market, which was explained by increase of risk spread curve and also expenses with the debt due to a decrease in CDI compared to first quarter of last year. That was offset by increase of debt and IPCA. Also monetary adjustment on tax credit and late payment interest and fines also contribute to the increase. In the next slide, we have our performance for the year of 2024. Our EBITDA reached to a total of BRL 13.1 billion, an increase of 2.4%, which was mainly due to a Generation segment extraordinary effects, which were offset by the curtailment. In Distribution segment, we have a 1.8% reduction with the impact of Rio Grande do Sul flood and the increase of ADA. And we move on to the next slide. Our net income for the year increased by 4.1%, totaling to the amount of BRL 5.8 billion. The biggest impact was the financial result, which was mainly because of the decrease in MTM. The amount was BRL 258 million, which was explained by a change in the risk spread curve, which increased last year and decreased in the year of 2024. So mark-to-market is a timing difference and -- which will be profit-neutral in the whole term of the fund. In this slide, we have the net debt in the covenant criteria that ended in the year with BRL 27 billion in total. The adjusted EBITDA was BRL 13 billion. So we ended the year with a net debt-to-EBITDA ratio of 2.07. It is important to remind to our investors that our financial covenant criteria is 3.75. So our current leverage remains at a very comfortable level. Regarding dividends, our proposal is payment of BRL 3.2 billion, equivalent to BRL 2.79 per share, which will be subject to the approval in AGM on April 29. Moving to the next slide. We have the -- our debt amortization schedule, which is compared to our cash of BRL 3.5 billion at the end of the year, give us a net cash coverage of 0.82x for our short-term amortization. Below, we have the debt in nominal cost, which is 12.2%, which was mainly affected by the increase of CDI at the end of the year. And on the other hand, we show the gross debt profile with most of our debt linked to CDI, actually 81% of the debt linked to CDI, 18% of the debt linked to inflation and 1% linked to TJLP. Finally, I'd like to highlight the funding -- some of the funding operations that we did in last year, which reached to a total amount of BRL 7.7 billion with an average cost of CDI plus 0.2% and an average turn of 5.41 year. And also, I would like to highlight two transactions that we will conclude this year. First, the amount of BRL 800 million from BNDES Innovation funding for the smart meeting project with an average cost of CDI minus 1.42%. That is a very good cost for this important project. And second, the NDB funding, which we're going to sign in March. The estimated cost for this debt will be around CDI minus 0.44%, which we will swap it to CDI. The next slide is about our CapEx. In 2024, we invested a total of BRL 5.8 billion, which was 14% more than the previous year. That is in line with our project. In the breakdown of the segment, Distribution segment will reach to a total of BRL 4.5 billion in investments in expansion projects, system improvement and modernization. In Generation, we invested a total of BRL 411 million in maintenance, plants and farms. And to conclude, we concluded the construction of Cherobim, the small hydrogen plant. In Transmission, BRL 758 million were invested in reinforcement and improvement of our lines and transmissions. And the next slide, please. Next slide shows our CapEx plan for the next 5 years with a total investment of BRL 29.8 billion in which BRL 24.7 billion will be in Distribution and BRL 3.7 billion in Transmission, about BRL 1 billion in Generation and BRL 382 million will be in Trading and Other Services. So that's our performance. So I will give the floor back to Gustavo.

[Interpreted] Okay. Let's go to the last slide, which talks about climate change and resilience. I think here's highlighted of some projects that are going to help our operations. The first one is in Distribution. It's the smart meters. I think this is a project that we've been studying for a long time. We were able to make it feasible. The way that it's been doing, so we're going to start this year with 200,000 smart meters and the expectation is that this -- the deadline will be at least 1.6 million up to 2029 with an investment of BRL 2 billion (sic) [ BRL 1.2 billion ]. I'm sure it's going to bring in a positive impact in the perception of quality on the side of our client. In Generation, it's a huge challenge, whether it be the safety of dams, the monitoring of the assets. Today, we have a platform here in Campinas in the center of operations to monitor and operate the 55 dams that we have here in our group. So with an investment of BRL 10 billion, today, we are able to do this in a much more automated and efficient manner than what we did in the past. And in Transmission, here, we have a research and development project of BRL 6 million using artificial intelligence, so that we can monitor all the areas with the transmission lines and so that we can understand if there's some type of problem in the network and do this in the best way possible so that we really can work and avoid any problem on the network. So these are three examples of large projects that we have on the table. As I say, very much linked to our operation with our ESG plan. And we know that our biggest challenge today comes from climate change. We lived through this last year, not only in the south with the floods but here in Sao Paulo as well. So the expectation is to invest and understand how we can improve our operation, considering a more volatile scenario and uncertain that we have today. We're now going to the session of questions and answers.

[Interpreted] Thank you, Gustavo. Thank you, Kedi, for your presentations. Let's now move to questions and answers. [Operator Instructions] We have here first question, [ Mario ] from Safra Bank.

[Interpreted] I would like to understand what you think in relation to the terms of the renewal of concessions of the distributors that were presented by ANEEL this week?

[Interpreted] Mario, I'm [indiscernible] from regulatory topics. There was an evolution. When we compare to the concepts of public consultation, some important points were dealt with. For example, the residual time frame of the contract, the more objective evaluation of the contract and with a wider scope. So we think it was an evolution. We're going to carry out an internal evaluation to continue and decide what's going to -- what decisions we're going to take.

[Interpreted] Let's move towards the second question. It's [ Jerome Pedro ] from Santander Bank.

[Interpreted] Congratulations for the results. I'd like to understand the perspective of 2025. And I'd like to understand how the dialogue with the regulators are, if there's anything new, if there's any important point?

[Interpreted] Thank you for your question. As I said, in our presentation, it was a huge impact in our results in 2024. The loss of results in our vision of BRL 272 in 2024. And with the perspective, it was no change, very negative for 2025. We continue having more intermittent energy in the system. And this trend is to worsen the curtailment. Today, I think we have two fronts. The first one is a technical front that involves agents, ministry, ANEEL and [ NES ]. So we had a series of meetings with these -- all these agencies trying together to discuss a way forward and the possibilities, technical possibilities of what can be done. Remembering that what has been mentioned very correctly, the safety of the system is priority. And I don't believe that any of us will give this up. So with this premise on the table to understand what technically is possible to be done, we understand that some things are possible so that we can minimize, so to speak, the impact of the curtailment. But for a definite solution -- definitive solution, I think this moves towards another front, which is a front of public policies. We took a decision as the country to grow matrix with renewable energy for obvious reasons, due to the Brazil characteristics and the potential. But today, we live with a huge intermittence in the system, so how can we solve and maintain the system in general sustainable long term, whether it be for the investors that already are investing, that never imagined that they would have any time of curtailment, the way that we have today. Last year, I had at some moments of the year, thermal diesel oil being dispatched at the same time that I had wind cuts. So this is a challenge that we will have of a matrix that more and more is renewable and more and more intermittent. This goes by a public policy. So how to deal with this for investors and the new investments? Today, we have a matrix with an excess offering, but at some moment, we'll need new investments. And for these new investments, I need an environment that allows me to invest with security and renewable generation using the natural location of our country. So I think this goes through these two pillars. It's two areas where we work a lot, and there are technical issues to solve with short-term impacts, but in a structural manner, we have to discuss this with public policies to deal with the curtailment from definitely and so that we can continue growing with clean and renewable energy.

[Interpreted] Third question that we have is [ Luis ] from Itau BBA.

[Interpreted] I just have a follow-up of the first questions that was made about the process of the renewable of the concession. So first of all, I'd like to understand the expectation in relation to timing. So when do you expect the signature of this new contract? And how do you understand the impact for the next tariff readjustments in the second semester since this new contract imagines the exchange of the GPM for the IPCA?

[Interpreted] Well, the timing following the schedule of the decree with the maximum time frame of August. If they decide to sign the contract, it should be signed before and the decree was published. We have then 30 days to manifest our sales. If we're going to do this and then after we follow the program that is forecasted in the decree. As for the readjustments, there's no specific procedure when there's a contract transition. So it will follow the rules that are part of well-established procedures.

[Interpreted] Thank you, Luis. Just to add this procedure that he mentioned is, in fact, to do the mean with the GPM and IPCA. So for example, let's see Paulista that's going to have a readjustment in April. It would be from April to the -- it would be in '26 it would be up to August, which is the date of the signature and afterwards this from August '25 to April '26 IPCA. So this mean will be done until all the companies have 100% of the IPCA.

[Interpreted] We don't have more questions at the moment. So we do have a question [ Carol ] from Safra.

[Interpreted] Just taking the opportunity of the queue, now that this renewable concession has gone and we have the rules to remind how things are doing in relation to the capital allocation, rethinking the strategy because the risk of some concessions was relevant. Do you have visibility of possible investments in the segment, especially to Distribution? And this in the past was in your interest and also the curtailment of renewable generation. So how is this going? And then going back to the initial question of Mario, there were something about the cap revenue, is there any possibility of this? Is this an interesting regime for concessions, such as CPFL and more mature concessions? And do have any detailing of what this could be that ANEEL mentioned in the premise?

[Interpreted] Thank you, Carol, for your question. Well, as capital allocation, I think it's still early for us to talk about the dispatch came out today, but it's an important step in the line of having a perspective long term in the sector of distribution, which is very important. So we publicized here, we disclosed the CapEx of almost BRL 30 billion and almost BRL 25 billion are in the Distribution. And main prerogative is to have a long-term vision. And we know that these investments, they mature in 10, 20, 30 years. So it's an important step in the direction of the uptake of this long-term perspective. This helps our operation, helps our planning and also for our current business, but also looking here for potential opportunities in the market if they show up. So clearly, we have -- we are interested in growing in our business. I think in Distribution, our main business, biggest expertise and opportunities will be evaluated by our group. And I believe that perhaps the prerequisite for us to do this would be to have a more stable as we believe that we'll have from now on. So I think today, it's an important step in this direction. When we look at other businesses, we continue looking at transmission with potential opportunities. We're going to have the auction this year with a lower volume than prior years. But we continue analyzing this. And we have a position and a way of working in these auctions, which is much competitive than the last year. We proved this at the last auction. We're very -- always very close in all the lots where we participate. So we always put transmission as a form of growth, whether it be via auction or also our CapEx, BRL 4 billion over the next 2 years is also important investment. In Generation, this continues being our challenge. We talked here about the curtailment, and this is, in fact, a big challenge. At the moment, when we have an excess of offer that we have today and the risk is at all the nonmanagement for renewable generation, but it's very difficult for us to be able to have new projects linked to generation. I would say that today, capital allocation, we have a perspective -- a more positive perspective to distribution because of this uptake of the long-term perspective and for transmission due to the auctions that are still taking place and the possibility of growth via new investments. I'm going to give the floor to [indiscernible] about the question of renovation. Thank you.

[Interpreted] Well, in relation to the model, we expect it would be something similar to revenue cap. So we can't state a preference model of model 1 or model 2. So we have to wait to see the proposal that ANEEL will present so that we can take a decision in a more definite manner.

[Interpreted] Could you please make -- I'd like a follow-up. This is going to be decided once the rules are disclosed. And then you can take the decision. Is that -- did I understand correctly, there's nothing defined yet?

[Interpreted] Exactly. The forecast would be after the first tariff revision after the defined rule. This is a change. And then once ANEEL has defined, we'll have a cycle to take this decision.

[Interpreted] Thank you for your participation and your questions. We don't have any more questions. I'm going to end the session of questions and answers. And I'm going to give the floor to Gustavo Estrella for his final consideration closure, and I wish you all a good afternoon.

[Interpreted] Well, ladies and gentlemen, thank you for your participation in our results call. I think we ended 2024 with robust results even though we had challenges in the year whether it be in generation, curtailment, whether it be in distribution, with these climate changes and the climate events, extreme climate events in Sao Paulo and also Rio Grande do Sul. I think that we show that we have a lot of resilience in our operations, and we are on the right way, the investment that we made, bringing us results in our operations. So we continue in the same line looking forward with more than BRL 30 billion in investment, improving the network, investing in technology, the smart metering will bring a huge impact to our operations with reflexes in the quality for our clients. So I think that we follow this perspective in a regulatory environment, which is more stable with the advance of the renewal of the concession. So we can operate not only our current business the way that they should be operated, but also with potential new opportunities that might show up. So thank you very much. I thank you for your participation. I wish you all a wonderful afternoon. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]