Wilson Pinto Ferreira - Chief Executive Officer
Vinicius Canheu - Crédit Suisse AG, Research Division
Sergio Conti - Goldman Sachs Group Inc., Research Division
CPFL Energia S.A. (CPL) Q3 2013 Earnings Call November 14, 2013 8:00 AM ET
Thank you for waiting. Welcome, everyone, to CPFL Energia Third Quarter 2013 Earnings Results Conference Call. Today, we have here Mr. Wilson Ferreira Jr., CEO of CPFL Energia; and other officers in the company.
This call is being broadcast simultaneously through the Internet in the website www.cpfl.com.br/ir. In that address, you can also find a banner in which the presentation will be available for download. All participants will only be able to listen to the conference call during the company's presentation. [Operator Instructions] It's important to mention that this teleconference is being recorded.
Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of CPFL Energia management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of CPFL Energia and could cause the results to differ materially from those expressed in such forward-looking statements.
Now, I'll turn the conference over to Mr. Wilson Ferreira Junior. Mr. Wilson, you may proceed.
Wilson Pinto Ferreira
Thank you very much. Good morning, everyone, investors, analysts who are here with us in this call for the third quarter 2013.
I immediately go to Page 3 to talk about the highlights of this quarter, starting with sales. Outward energy sales were up by 4.7% and concessionaire sales for our 8 [ph] distributors had a strong performance in the residential market, 7.6%, nearly 5% commercial market, and industrial customers rise of 2.5%. Important achievements by our distributors, and a highlight as well.
I'll start off on 3 projects for CPFL Renováveis. Reminding you that we have 5 projects to deliver. Coopcana, 50-megawatt. Campo dos Ventos II and Alvorada started up between August and November last year.
Tariff readjustment at Piratininga, 7.42% in October. And as a result, we had a disbursement of BRL 167 million. CapEx of distributors in the company, in the third quarter, BRL 330 million. Payment of interim dividends amounted to BRL 363 million.
And a number of awards that the company received. It was considered Company of the Year by the Época Negócios. And something important for us as well, CPFL was recognized as one of the 10 leading companies in transparency in emissions of greenhouse gases, among the best utility companies, one of the 20 more innovative companies in Brazil, the Best Innovator Award and also the 2013 Electricity Award of Eletricidade Moderna magazine. CPFL Piratininga was elected the best domestic company and CPFL Jaguari in the category of small companies. So it was a very important quarter in performance and recognition.
Page 4, we have something important for us to start to ponder on consumption that we had over the past decade. So we have a number of charts showing why we've had such strong growth in residential and commercial areas. First thing has been the effect of the past decade and the change in income classes. As we can see, classes A and B and C rising from 55% of Brazilian household to 75%, a growth of nearly 50%, and at the same time as classes D and E, that 10 years ago accounted for 44% of Brazilian households. Now they represent nearly 25.4%. Obviously, this growth of the A, B, C classes, gives us an important outlook in terms of consumption. It is true that over the period, there was an important growth of minimum wage from BRL 390 to around BRL 670, and at the same time as the unemployment rate dropped from 12.3% to 5.4%.
So these 2 events converged together with credit to individuals, that since 2007 has grown from 12% of GDP to 15.6% of GDP, have caused the commercial and especially the residential segment to be very dynamic. And it is true and it's important to say that household consumption that experienced strong growth, 6.9 growth year-upon-year in 2009 into 2010, is losing impetus. So we're getting to 2.4%. So although we feel important growth in the residential, commercial areas, it's important to say that, in the light of this data, we should expect more moderate growth in the future.
However, on Page 5, we can see what must be done to support the growth of Brazil in this new decade. And what we can see is that, despite the increase in our investment rate, owing to the gross fixed capital formation and getting close to 20%, we are still behind Latin American countries, 21.7%, and the average, the world average 24.5%, and even the BRICS average without China, and China contaminates this data because it's rate is nearly 50%. So, excluding China, we have 26.1%. So this, for sure, has to be the #1 priority in any candidate for the presidency to perhaps to support growth in Brazil. Obviously, in this agenda, we must consider that the global competitiveness index is very much below our potential. We rank 56 among 148 countries, and here, we can see something that is really very clear in the voices of businessmen. In the basic requirements, we rank 79th in institutional environment; infrastructure, 71st; macroeconomic environment, 75th position. Reminding you that we are among the 6th, 7th top economies in the world. So when we look at this ranking for Brazil, it's really disappointing. And we see that there is a lot yet to be done. Here we see efficiency enhancers. In higher education, 72nd position; labor market efficiency, 92nd position; financial market development, 5th position. And obviously, what has attracted a number of companies to Brazil, the size of the domestic market, 9th position among the 148 countries. And innovation and sophistication factors, we do a little better. In business sophistication, we ranked 39th and innovation, 55th.
When we look at the factors pointed out by businessmen, we see a road path. Inadequate infrastructure is mentioned as one of the problems, by 19.7%. Tax regulations is a clear problem to be tackled, 16.8%; inefficiency, government redtape, 15%; restrictive labor regulations, 12% of answers. Corruption, this was the cause of street protests in June, and inadequately educated workforce, others. In fact, as a conclusion for this slide, we see that we must really work hard on infrastructure. I think we see a resumption, and today we're having a transmission auction and we expect to have, yet, 2 energy auctions this year in addition to infrastructure auctions. So this is very important to perfect this regulation. And industrial development and technological policy adjustments in fiscal policy, first to give more transparency, and maintenance of social policies so that we can continue having an increase in population income and population satisfaction.
So, after this initial analysis of the market outlook that really underpins our growth and the outlook that we expect to see for this decade, let's see energy sales on Page 6 in the third quarter.
So we can see that there was a growth in the concession area of the 8 distributors of 4.3%. And this results from a growth in the captive market of 4.1% and 7.4%. But 7.4% are industrial -- large industrial consumers, which is good news because when we break this growth down among consumption classes, as I've told you before, residential growth, 7.6%; commercial, 4.9%; industrial, 2.5%; and the other classes, 3.4%. Please note that in the comparison among distributors, in terms of consumption, in the Southeast, where we have 7 of our distributors, we grew 3.6%, whereas the Southeast grew by 2.2%. So at the hinterland of São Paulo is showing robust performance.
In the south, we have RGE operations, nearly 40% of the state. The most developed industrial area, growth of 7.8%, against the region's growth, 5.8%. Obviously, our operations are doing better than the Brazilian average.
Brazil grew 3.9% in consumption where CPFL in concessionaires grew 4.3%. It's also important to say that adding concession areas, getting to 10,084 gigs in energy sales for end consumers, commercialization and conventional generation grew to 300 and 576. And [indiscernible] sale, Renováveis, we grew 53.5%. So overall operations, distribution, commercialization, conventional generation and energy sales, we had a growth -- a 4.7% growth. So getting to 14,551 gigawatt hours.
So, now on Page 7, we see the result of IFRS, as we always do. To simplify your reaction, we do IFRS with the proportional consolidation without regulatory assets and liabilities and nonrecurring items. So we've had a decline of 2% to BRL 68 million in IFRS, BRL 3,367,000,000 in the quarter. And very soon, I'm going to justify that.
EBIT growth of 13.6% to BRL 127 million. And net income, stable, BRL 1 million in the quarter, a drop of 0.4%. It's important to talk about the recurring results, particularly because in this quarter all tariff reviews have already been done. So we have a clean quarter. So all of the results by RGE and Paulista, which are our largest operations, have been posted in addition to Piratininga results. So we have a growth in net revenue. And the managerial revenue to BRL 3,588,000, a drop of BRL 163 million in EBITDA, slightly more than BRL 1 billion, BRL 1,012,000,000; and in net income, a drop of 38.6%, so to BRL 282 million, the last slide. So you can see that this determines the change from IFRS to what I call managerial recurring IFRS.
So here we have the proportionate consolidation and, to effect, the third quarter 2012 and third quarter 2013. The variation in regulatory assets and liabilities, 85 in last quarter and 135 negative this year. And here we have a number of nonrecurring events. Delivery of energy with delay, BRL 52 million, offset by the assets of distributors and an increase in productivity, rationalization of activities, et cetera. So we've had the sale of some property in this quarter, and we will repeat that in the next quarter. So we have the reversal of ESS provision. Conventional generation CPFL Renováveis, BRL 13 million. And then we have the adjustments in delinquency estimates that happened last year, BRL 54 million, and other adjustments, smaller, this year.
So we have in the last line the fluctuations that we've just explained. So we've had a negative BRL 53 million in the third quarter and BRL 238 million in third quarter 2012. And they follow the same effect in net income in the third quarter of 2012 and 2013.
So now let's talk about the behavior of the EBITDA, Page 8. So we've had this positive variation of 13.6%. We're talking about EBITDA reported in IFRS. And [indiscernible] to see the 3 movements that we've just highlighted in that table. So, from last year to this year, we have the regulatory assets and liabilities, BRL 85 million; nonrecurring events, BRL 55 million; and proportionate consolidation of BRL 98 million. So the same thing is done on the right-hand side, BRL 91 million proportionate consolidation, so very few nonrecurring events, BRL 8 million; and finally, the regulatory assets and liabilities, BRL 135 million.
So what we are explaining are the 3 bars, revenue growth and cost reductions and PMSO cost reduction. So, starting with revenue, we've had a 2% decrease in net revenue. Basically, here, we have the effect of utilities tariff reviews. So the 75% will only happen now by 2018. So we have the total effect, BRL 141 million. It's not only the tariff review. There is also the regulatory effect earlier this year when you compare with last year. So here we have captive market. We've had a drop of BRL 166 million. And on the free market that pays [indiscernible], here we have a hike of BRL 25 million. So, net, we have BRL 141 million drop.
Here we have a slight compensation by Conventional Generation through [indiscernible]. CPFL Renováveis up by BRL 31 million as a result of the start up of a number of assets. Not this one that we just mentioned. And in the Commercialization and Services, we've had a growth of BRL 41 million when we compare it to last year. So this justifies the slight drop in revenue, the negative effect of distribution, practically totally offset by conventional generation, Renováveis and commercialization.
On the other side, the good news. A decrease in energy cost and charges impacted by the decision to lower tariffs earlier this year. And naturally, by the injection by CDE to lower tariffs and for dispatches. So we can see a 54% net decrease in sector charges, BRL 206 million. And here, reminding you that this is net of the BRL 132 million from CDE, which partially mitigated the tariff. By the same token, we have a 6.3% net increase in energy costs, particularly thermal dispatches. So from -- it was BRL 106 million, but here we've had an injection of BRL 225 million [indiscernible] consumers. So CDE resources is the sum total of these 2 amounts that I've mentioned.
And finally, talking about decrease in operating costs and expenses. PMSO, this has been a strong focus with CPFL. I'm going to talk about that later on, but just comparing quarter-upon-quarter. Here we have sale of assets, particularly properties and vehicles. It's mostly properties, owing to this streamlining of activities and processes and automation of processes that I've mentioned. We have a smaller leased area now.
Here we have, again, 2 events, adjustments in delinquency estimates that I just mentioned. This happened last year, so it becomes positive, but last year it was negative. We had a reinforcement of provision, and other nonrecurring effects in third quarter. This was basically [indiscernible] BRL 15 million.
Now, following on, we've had a reduction in PMSO CPFL Renováveis, BRL 5 million; increase in services, BRL 12 million; and write-down of distributors assets worth BRL 16 million. Equity method up BRL 5 million and private pension fund, down by BRL 2 million.
Now just reminding you that you can see an important increase in the PLD from BRL 131 to BRL 179. And the exchange rate fluctuation used to be 2.03, now it's 2.23. So this largely explains the drop in -- 3.8% and the growth in our EBITDA to BRL 165 million plus 13.6%.
Now, here on Page 9, we talk about manageable expenses and how we have reduced that to adjust to this new level of tariffs. So you see that, in nominal terms, the 9 first months of the year, this year, if we compare to the same period 2012, since we've had working harder with distributors to prepare us for this operation, we have here a reduction of BRL 20 million. And it's important to say that, for personnel, materials and services, we have a typical indicator, an index, which is the PCA [ph]. So, on a real terms basis, we're talking about a reduction of BRL 137 million or a 12% only in the comparison of the year to September 2013 to September 2012. Remember that we talked about a potential, up to BRL 150 million. So when we look at 4 quarters, we will come close to these values that I had mentioned. And here we have reductions in personnel, 8% in personnel, BRL 37 million. And also, material service and others, here, bigger, 16% or BRL 100 million. And this reflects important initiatives by the company, but led by a very important project, which is the zero-based budget, which the company adopted in 2012.
Now, moving onto Page 10. We have the third quarter 2013 results. Net income, the same explanation holds here. So, from the middle to the sides, we're talking about a recovery, managerial recovery. And here in the middle, we have the net income, BRL 356 million and another BRL 355 million that we're reporting now.
Four columns. First one is the growth of EBITDA, 13.6% increase that we just mentioned, BRL 937 million to BRL 1,065,000,000. In the second bullet, we had an increase of BRL 121 million in negative net financial result. This is a result of the update of distributors' financial assets, BRL 86 million, that math that we incorporated in the balance sheet last year. No impact on dividends. However, we have a net increase in debt service charges, owing to the increase of the primary basic rates, 7.9% to 8.6%. So we've had BRL 28 million and others, BRL 7 million.
So this is basically what gave us this negative result. We've had a small 3% decrease in depreciation and amortization of BRL 8 million. And here, income tax, owing to a higher taxable base, owing to the growth of EBITDA, BRL 15 million. So this by and large, explains this variation from BRL 156 million to BRL 155 million in net income.
Now, on Page 6 (sic) [Page 11], we talk about debt and control of financial covenants. We can see that there was a slight reduction, from BRL 12.6 billion to BRL 12.2 billion, And this enabled us to keep our ratio moving from 3.42 to 3.53. And this was the result of the adjusted EBITDA with a group of nonrecurring that we reported last quarter.
Note that the nominal cost of the debt is still 8% and basically the increase is owing to the negative inflation, variation from 1.2 to 2. Inflation was around 6%, now it's slightly below 6. [indiscernible] long-term interest rates. In 7% pre-fixed, the PSI program's down 2%. The contract with [indiscernible] foundations.
Page 12. Just to tell you about the financial health of the company, BRL 5.4 billion. We closed the quarter with BRL 5.4 billion in cash. And the cash coverage is sufficient for 2.4x the short-term amortizations that we have in 12 months. As you can see, 2.2. Our debt is slightly better in terms of the average tenor, 4.08, and short-term also decreasing a little bit, around 14.4% of the total debt for the group.
So it's a very comfortable situation, financially very healthy as well.
Slide #13. We have the startup of 3 projects, 2 co-generators of biomass, Coopcana and Alvorada, practically constructed at the same time, and Campo dos Ventos, which is a wind farm in Rio Grande do Norte.
Coopcana and Campo dos Ventos in Q3, 50 megawatts of Coopcana and 30 of Campo dos Ventos, and Alvorada started up in Q4 and added, until the end of this quarter, an additional 50 megawatts, 130 additional megawatts in operation.
As you can see, the annual estimated revenues from these projects, we're talking about BRL 64 million overall in estimated annual revenues. And I would like to remind you that in renewable operations, we have an EBITDA margin that is close to 80%. These are 20-year contracts, and this is very important. And the startup is very relevant for Renováveis.
And on Page 14, we have the challenge of delivering an additional 2 projects, the Atlântica and the Macacos Wind Farms.
Yesterday, the situation was detailed, and it's important to say that Atlântica, we already have 10 generators ready to operate and 5 that are being assembled for final assembly. So this is scaling up the 40 generators as of this month already, and also going into the beginning of next year, and the complex, the Macacos or Macacos Wind Farms, which is slightly smaller, 78 megawatts and 120 megawatts in Atlântica, BRL 155 megawatts hour. And in the case of Macacos, we started the final installation, and we have a deadline up to April next year. Campo dos Ventos and the São Benedito Wind Farms are linked to the free market, and they depend on transmission lines. And they are scheduled to start operations in 2016.
I would like to highlight one important thing here on this page. As you can see, our cost strategy for the company is based on 3 pillars: the ZBB, zero-based budget and the ZBB process. The biggest scope is our shared services center on one hand, and this is our main strategy for the corporate area, which is the shared services center, because the operations can be much more efficient when they are placed in 1 single site, 1 single system to be managed. So like a production of the corporate activities and the -- so it -- which would give even more efficiency in our distribution or the smart grid. We are implementing mobility operations as well. I mean that this is already occurring. This has already been implemented in RGE and Piratininga, starting in Paulista now. I'm talking about an EBITDA up to September coming from this BRL 24 million. This is just a reference for this kind of activity, which is higher than BRL 100 million of reduction for the overall operations when they are all streamlined, be it due to the optimized logistics or teams -- or the few of the teams, and we can reestablish things automatically in seconds. And of course, regarding the fleet of the company, which will be due referenced and -- with UBS. So we can bring emergency aid very quickly, optimizing displacements and the use of tablets for communication in real-time to allow for dynamic dispatch or automatic routing of teams and online update of field services' progress. And on the other hand, we have another important item, which is the telemetering of Group A-, something like 25,000 customers accounted for about 50% of the company's consumption, besides the possibility of measuring in real-time and the load consumption by consumers. We can have real-time fraud detection. About 50% of everything that is sold by the company will -- can be identified very quickly here and, thereby, eliminating frauds due to the level of control that the company will have as of the installation of this telemetering system. 9,000 installed up to October, and by the middle of next year, the whole client base of Group A. And this started to be implemented this year and already BRL 24 million in 3 quarters being achieved; 40% of the operations in mobility and in telemetering, something like 30% of consumers. So we can expect quite a lot. We are already reaping the results, and we are very much satisfied. Then our consumers will be very much satisfied as well, because there will be a reduction in the FEC or EFC and with a higher control of the control of our system in real-time.
In summarizing these achievements in the quarter, I would like to mention what we said in Q1. On Page 16, we were talking about new projects of CPFL Renováveis. We talked about 328 megawatts to be added this half year, and 130 have already been installed and the other 198 are on their way, as we've reported.
The second thing we talked about the recovery in the industry, 2.7%. It was less vigorous than we would like to see, but it's not 0. It's not negative as some people estimated. We are talking about a growth of 2.5% in Q3. And especially, our commitment on the part of our management, which is productivity gains, reduction and cost optimization with a whole set of strategy. The ZBB and the shared services center, that have already brought about savings of BRL 137 million in 9 months alone. We are talking about something close to BRL 18 million per month in savings.
Maturation of the Tauron project, which has already brought BRL 24 million in these 9 months and coming from this higher rationalization, so to say the possibility of selling idle assets, about BRL 47 million. And on this page alone, we have over BRL 200 million in savings in 9 months.
On Page 17, we have the stock performance. In the first 9 months, BOVESPA was not good in ADR, and our company is slightly better than it is. On the other hand, because it's a company where the revenues are totally in reals, which is affected by the performance of the ADRs because of the devaluation of the Brazilian currency and the average volume dropped about 20% and the trading grows 35%. And we are very happy to show you that we have been included in the Dow Jones Sustainability Indices for emerging markets. 800 largest companies of 20 emerging countries are evaluated, and 80 achieved the requirements established and among the -- 17 Brazilians and among Brazilians, we belong to utilities, and CPFL is one of them.
And on Page 18, I would like to share with you the recognitions and the company of the year by Época NEGÓCIOS, one of the 20 Most Innovative Companies, also an award from Época together with A.T. Kearney and the Carbon Disclosure Project. I think this is very important, especially due to the commitments of CPFL with sustainability. To be the best in the utility sector is a very good recognition of the endeavors made by the company, and there is a very big competition between Jaguari and Piratininga here, and Piratininga won the Best National Company award with the lower losses index and best operational performance. And also in smaller companies, Jaguari as the Best National Evolution, lower losses index. So this is what I would like to share with you this quarter. And together, with the members of the executive committee, we will be answering your questions
[Operator Instructions] Our first question comes from Mr. Vinicius Canheu from Crédit Suisse.
Vinicius Canheu - Crédit Suisse AG, Research Division
My question has to do with generation. This week, the government defined the ceiling prices for the A- 1 auctions. So there will be project for the next 3 years. And we see that next year, we will have a determination of contracts, and the amount of energy is very relevant -- of contracts and this is very relevant for CPFL. I would like to know your position regarding that because your contract is about to expire.
Wilson Pinto Ferreira
Thank you, Vinicius, for your question. We are still working on our basic strategy, so that our contract with Funda may be extended. And of course, with conditions different from the moment this contract was signed, we do not consider the participation of Serra da Mesa in the A-1 auction so far.
[Operator Instructions] Mr. Sergio Conti with Goldman Sachs.
Sergio Conti - Goldman Sachs Group Inc., Research Division
My question is about the technical notes by Enel for the public hearing for the fourth cycle of tariff review. A series of suggestions that were made by the market and based on what we talked about with investors, we understand that these are very reasonable and constructive. But I believe that the major suggestion or proposal that was a little bit more controverted was the extinction of cycles from now on, that is to say having a more ongoing regulation than a discretionary one. So what is your opinion about the proposal that was submitted by Enel for the fourth cycle? Do you see this as a positive development or a negative development? Do you expect any adjustments in that?
Wilson Pinto Ferreira
Sergio, I'm going to give the floor to Eduardo because he can answer your questions better than I can.
Sergio, this is Eduardo. I'm very much in contact with the regulators, and I think this public hearing is very-- the public consultation is very good because it's the opportunity that we have to have the agency listening to us and maybe having a better methodology from now on. And one recurring question or doubt on the part of the market is that we would be eliminating the cycles. And this is not true. We are not going to have it looked per year. The intention of the agency is to have a methodology. And once the methodology is defined, if you look ahead, we will be able to calculate in a more easier manner without any change in the criteria regarding whether it has an environmental risk or no, or what is the window to be defined in order to look at the country risk and these things. So as far as we are concerned, this is a very positive opportunity, and we are trying to give our best contribution to the process.
Wilson Pinto Ferreira
Thank you, Eduardo.
[Operator Instructions] This is Carolina Medeiros from CanalEnergia.
When you talk about distribution, what about the renewal, in spite of concessions, in spite of the fact that you're not going to participate right now? And in distribution, do you have any involuntary exposure? And how do you see this issue of the involuntary exposure in the A-1 auction, starting by the last one, the A-1 auction?
Wilson Pinto Ferreira
So the tariffs have been recently defined, and we were very much concerned. And we are no longer concerned because we believe that the government was sensitive and established prices that can attract generators for each one of the 3 products that they made available. So we thought we could have involuntary exposures. But due to the fact that the prices are more adequate, now this exposure would certainly be extensively mitigated or even zeroed due to the price conditions that were presented. This is one point. About the renewal of concessions, it's important to say that we do have 5 distribution companies -- Disco of the company, 4 coming from the old CMS that we acquired from Campos Energia Group, Santa Cruz. And they will all be the object of renewal of concessions. And what is important to highlight, and we always repeat this, is that Disco -- and I would like to reiterate what Eduardo said when he answered Sergio's question, the process of tariff review has to be slanted. Okay, there were some progresses over time, but there were some themes, for instance, regarding a definition of the WACC, that has to be -- the Disco is an investor that invests every day. It's impossible for a Disco not to make an investment or not to have expenses when a crisis hits when there is a variation of the SELIC rate or the exchange rate and all the financial conditions that are involved. So Enel today, recognizes this, and this is very important. It's important to provoke this kind of debate. But by strengthening the process and making it more clear, you make it more predictable for those who operate and those who evaluate the market, such as, with your case, investors and analysts. And we believe that this is the main objective of this interaction of the regulator with us. And as we said before, differently from what occurred in the case of a generation company and that [indiscernible] that saw their concessions expire. Because, over time, over 30 or 50 years, there were not able to amortize their investments and an investment that is made in one shot. In the case of Disco, this is not the way it works. It's a daily investment. About 1/2 of the investment continues to be met at any time to have 100 of investments, and 50 is the net base that is being remunerated. So the renewal terms have to be different -- differently from the others when you already amortized your investments. In this case, you have a daily investment and the investment continues to be made every single day to be amortized in the future. So having this situation, as I described, we were not surprised by the fact that there was no specific rule established at the moment of renewal, and that this periodical review being the base for the renewal of concessions in 2015. A lot is being said about the quality of services delivered, and one of our Discos will be the object of the renewal. And this is one of -- but once that won an award. And we are very comfortable because be it from the viewpoint of quality of service or ELC or FEC, we -- EFC and ELC, we are a benchmark from the financial side, which is something that will have to be considered, given the investments should be made in the concessions to automate them and also to incorporate smart grid and telemetering, so that we may provide higher or better services to our consumers. This will be -- will have to be considered by the agency when the moment for the renewals come. And we are very comfortable regarding our performance and the perspective for renewals.
[Operator Instructions] Now we would like to close our question-and-answer session. And I would like to give the floor back to Mr. Wilson Ferreira Jr. for his closing remarks.
Wilson Pinto Ferreira
Once again, I would like to thank you, all, very much for your attention and for participating in our earnings conference call. And I would like to reiterate, I started by talking about this, that, of course, the company in the power sector and distribution, they have tariff cycles. And these tariff cycles, one way or another, are developed so that there may be an adaptation to the new market conditions, more specifically, the financial market and the return on equity, return on -- and also to share efficiency gains with consumers.
I always say that this process is very sensitive. It's a sensitive issue. We have been evolving in this process. But evolution has to be consistent and ongoing. So it's important to stress that the debate between the agents with the agency or the players with the regulators is fundamental for us to guarantee sustainability to the segment, which is the most important in terms of meeting the demand of final customers. And we have already left the third cycle behind, applied into our largest concessionaries. And there was a reduction in tariff, which is something that has to do with the decision by the government in terms of reducing them beyond the tariff review. And so we -- I would say that this is a new beginning. This is the beginning of the fourth cycle. And in the fourth cycle, due to the market conditions, we are expecting a major growth in our concession area in Q3. Maybe, it's a little bit of what we will be seeing the next few quarters and years. We are sure that we would be having important growth, and this is good for this group. And we trust that due to these interactions, we will be able to work with a level of -- with a higher level of efficiencies than the one that we have been working with, and we were able to share some of the actions that we carried out beforehand in order to be able to implement as soon as we have the conclusion of the cycle, which is the most adequate way to do it. So be it in terms of the ZBB, or the results from the ZBB and/or the shared services centers and its results, or be it regarding the implementation of smart grid and its results. All these are instruments that the group developed to mitigate the sharing of the tariff production with consumers. So we always want to remunerate the capital invested. And so these actions for cost reduction keep us in this perspective. We're focused on remunerating the capital invested by everybody. And it is important to highlight the performance that we have been achieving at CPFL Renováveis. We had an important year, and the company carrying out its IPO when concluding 5 projects, 3 of which are already in operation, and the last 2 are at the final implementation stage, and 1 is already in the 10th phase. So we believe that it's important to share this perspective because both in terms of distribution, where we are the biggest players, and renewals energies, we are also the biggest players, the highest volume of contracted energy. And this year, we will have 1,500. I think it's important to see the ramp up of the company in 2 years. It was really very major. And now we will start to see the consequences or the fruits of this work. And the 1,500 megawatts are 100% contracted in the case of Renováveis and also indexed. So this is another important information. And due to the dynamics of the Brazilian economy, the theme of commercialization and services that had a nontypical year in 2013, be it in the first half because of the unfavorable situation in terms of prices, but also stemming from the regulatory changes, so that we could have a more real POD, will be an important signal to all consumers.
The market was very much reduced vis-à-vis what we estimated. But we are a major player, and we don't stop working. And we did a lot of work in terms of going to the market and conquering clients. And we have over 200 clients, and we are very bullish about these activities, energy, commercialization and services in such a way that the bulk of the operations of the group -- we are very pleased with the perspective we have, low operating costs, and they are on a downward trend. And our outlook is for an increase in our revenues in generation and commercialization and a very bullish view for the future. And together, we will be able to see this in the next quarter. Thank you very much for your attention again.
CPFL's conference call is closed. We would like to thank you for your participation and wish you a very good afternoon.
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