The document discusses key recent events and challenges facing the electric power industry in Brazil, including a 20.2% tariff cut, canceled auctions, and deteriorating hydrologic conditions. It outlines CPFL Energia's agenda for addressing issues like the risk of rationing in 2015, cash flow issues for distributors, and improving sector attractiveness. The document also provides an overview of CPFL Energia and its strategic focus on distribution, renewable generation, and high-value services.
4. • PM 579 – tariff cut by
20.2%
• A-1 Auction canceled
• Hydrologic scenario
starting to deteriorate
Key recent facts in the electric power
industry
4
201420132012
• Involuntary exposure of
discos
• A Auction (May/2013)
had no offers
• Presidential Decree
7,945: CDE guarantees
cash flow of Distributors
• A-1 Auction (Dec/2013):
only 41% of demand
was met
• Below-average rainfall
• Growing involuntary
exposure of discos
• Presidential Decree
8,221: ACR account
covering expenses with
thermal dispatch and
involuntary exposure
• A Auction: meets 57% of
demand for May/14
onwards
• GSF affecting generators
• Eletrobras delayed the
transfer of CDE of tariff
subsidies
• 11th worst hydrologic
scenario
6. 6
1. How to face the rationing threat in 2015?
27th
worst in history
Reservoir levels in SIN | % ENA of 2015 | % LTA
Evolution of NIPS Power Load in
2015 | GW
Thermal plant dispatch | GW
(1) Through November
Wet Dry Year1
SE/MW 67% 106% 82%
South 137% 162% 157%
NIPS 71% 114% 89%
CPFL estimate for
2015:
-1.9%
7. Tariff Reality
7
2. How to mitigate the cash unbalance of distributors
without funds from Treasury or ACR account?
Tariff flags | Jan/15
% change in average price in R$/MWh
Residential at CPFL Energia
Extraordinary Tariff Review | Mar/15
(1) Source: Aneel; (2) Balance of regulatory assets and liabilities (-) tariff flags not homologated by Aneel.
Accumulated CVA at distributors2
CPFL | R$ billion
Repositioning of items further apart from the tariff
coverage:
CDE Quota: from R$ 1.7 billion in 2014 to R$ 22.6
billion in 2015
Costs with energy acquisition:
• Itaipu: +46% for distributors S/SE/MW
• 18th Adjustment Auction: high contracting cost
(R$ 387.07/MWh)
• Contracts by availability during green flag pricing
Mechanism created to reduce cost volatility at
distributors and minimize the cash issue - DEFINITIVE
Considers costs of thermal generation and exposure to
PLD (hydrologic risk, ESS and involuntary exposure)
Earnings from Tariff Flags 1 (R$ billion)
2012 2013 2014 1Q15 2Q15 3Q15
0.4
0.2
0.9
1.0
1.5
1.9+109%
67%
Tariff flags
48%
19%
RTE/RTA
8. GenerationDistribution
Electric power industry: recent measures indicating higher rates of return for projects
8
Regulatory WACC [%] Auction Prices [R$/MWh]
Source: ANEEL; CCEE
HPP Itaocara
Thermal plants
by availability
+8%
+36%
+34%
Transmission
+43%
Solar Wind SHPP
+45%
+55%
+28%
3. How to regain the sector attractiveness for
new investments?
Regulatory WACC [%]
9. Application of the new methodology for CPFL
Piratininga generated a gain of R$ 43.5
million/year
9
In general terms, discussions around the methodology of 4CPTR yielded positive
results compared to the current 3CPTR rules
4th Tariff Review Cycle | Main changes in methodology
CPFL Piratininga
3CPTR
(R$ million)
WACC of 8.09% (vs. 7.50% in 3CRTP) +17.1
Remuneration of special obligations +10.4
Technical Losses +22.3
Sharing of Other Revenue +6.7
Unrecoverable Losses -8.0
Xpd Factor of 1.53% + market
adjustments/UCs (1.11% in 3CRTP)
-5.1
3. How to regain the sector attractiveness
for new investments?
RAB methodology
(3rd phase PH023)
Main Equipment: weighted
average of prices throughout
the tariff cycle
> mitigates risk of significant
price fluctuation
BAR:
maintained pricing methodology
as a function of power assets, with
restated formula
> increases BAR revenue
COM & CA:
Pool of Reference Prices - rewards
companies that buy more efficiently
>Application in PTRs from 2017
Aspects yet to be
discussed:
Remuneration on fully-depreciated assets
Non-technical losses - incentive for efficient companies
Irrecoverable Revenues - increased aging in 4CPTR
Excess demand and excess reactive - rules for sharing
10. Aneel established the parameters to ensure a minimum level of investments and
service quality
4. How to enable the process of renovating
concessions for the Distribution segment?
10
CPFL Energia distributors renewing their concessions in 2015
The parameters do not pose a risk for CPFL Energia group distributors
• 19 distributors do not currently meet financial requirements valid from 2020
• 16 of 19 do not meet quality requirements either
Possibilities for
Consolidation
1) DEC/FEC 3Q15 LTM; 2) EBITDA 3Q15LTM; 3) QRR (RTA 2014); 4) Net Debt (Sep/15); 5) Regulatory reference simulated with Selic at 12.87% p.a. Indicator must be ≤ 1/0.8*Selic in
2019 and ≤ 1/1.11*Selic in 2020.
Net Debt4/(EBITDA – QRR) vs Limits 2019 and 2020
EBITDA2 and EBITDA (-) QRR3 vs Limits 2017 and 2018
FinancialOperating | Consolidated 5 Ds
1
1
SAIDI
SAIFI
11. 11
5. How to solve the impact of GSF for generators?
• Hydroelectric generators may mitigate the hydrologic risks by paying a risk premium
• Unique rules for Regulated (ACR) and Free (ACL) Contracting Environments
• ACR: generator pays premium (of up to R$9.50/MWh) to mitigate the effects of GSF
• ACL: the generator acquires at least 5% of the physical guarantee allocated in ACL in existing
reserve energy through 2018 (risk premium of R$10.50/MWh)
General Rules
• Number of plants: 41 (7 HPPs and 34 SHPPs)
• Exposure Level: 760 MW average
• Exposure ACR: 77% (586 MW average)
• Exposure ACL: 23% (174 MW average)
• Refund of 2015 GSF: up to R$ 158 million
(impact on EBITDA)
CPFL Perspective Next steps
Approval by Senate:
Nov. 24, 2015
ANEEL
Regulation
Necessary corporate
approvals
Adhesion of generators: by Dec. 18,
2015
12. • Did not allow electricity sales in the free
market
6. How to re-submit HPPs not renewed in 2012?
12
Change in rules of auctions of un-renewed generation concessions:
PM 579/12
• Allows electricity sales in the free
market (up to 30%)
PM 688/15 (Official Letter
384/15)
• No payment of granting bonus
• Winning bid offering the highest
discount from the ceiling tariff
• Did not remunerate investments in
expansion
• With payment of granting bonus
• Winning bid offering the highest
granting bonus and lowest tariff
• Remunerates investments in expansion
Auction became more attractive and indicated
more adequate prices
14. Dry periodWet period
(91% of thermal
plants)
With an ENA of 90% of LTA and thermal dispatch of 70%, the expectation is to reach Nov/16 with
reservoir levels close to the average of the 1997-2014 period.
Reservoir Level Scenarios for 2016
1. Hydrologic scenario
14
15. 15
2. Macroeconomic scenario for 2016
GDP | YoY change (%)
Inflation | IPCA inflation - YoY change (%) Payroll | YoY change (%)
Source: IBGE and LCA
Industrial Production | YoY change (%)
16. Evolution of PDA
in R$ million
Collection ruler | 14 actions aimed to find the most effective recovery
16
3. Delinquency and PDA
17. Distribution Segment
4. Outlook for CPFL Energia
17
4CPTR is already a reality for CPFL Piratininga and will be
implemented at the 5 small distributors in 1Q16
New parameters valid for distributors with renewed
concession
Balance of CVA tends to decrease as cumulative values
are transferred to tariffs
• CPFL Piratininga: Oct/15
• CPFL Santa Cruz / CPFL Leste Paulista / CPFL Sul
Paulista / CPFL Jaguari / CPFL Mococa: Mar/16
• CPFL Paulista: Apr/16
• RGE: Jun/16
Expected
behavior for CVA
balance
18. Generation Segment
4. Outlook for CPFL Energia
18
Expansion of CPFL Renováveis
Expenses with GSF for the portion adjusted by the ACR
rule will be avoided from 2016 and the risk premium will
be paid only from 2020 (new cash outflow), after the end
of refunding
Note: Physical Guarantee (annual) and prices restated through
Beginning of agreement
term of Morro dos
Ventos II wind farm
Annual revenue:
R$ 18 million
Startup of Campo dos
Ventos and São Benedito
wind farms
Annual revenue:
Free Market
Startup of SHPP Mata
Velha
Annual revenue:
R$ 16 million
Startup of Pedra
Cheirosa wind farm
Annual revenue:
R$ 60 million
Startup of SHPP
Boa Vista II
Annual
revenue:
R$ 48 million
2016 2017 2018 2019 2020
20. CAGR 2010-
LTM 3Q15
11.6% 20.6%
3.0%
EBITDA EBITDA Margin
CAGR 2010-
LTM 3Q15
4.3%
-0.1%
Trading2
173
Conventional
Generation
1,388
CPFL Energia Consolidated2
4,033
Distribution
1,99349%
34%
4%
13%
Renewable
Generation
509
Net Revenue | R$ million EBITDA | R$ million Net Income | R$ million
LTM 3Q15 Breakdown of Adjusted EBITDA1
R$ million
20
CPFL Energia - Overview
• Largest private player in the Brazilian electric power
industry
• Leading distributor through 8 subsidiaries
• Second largest private generator holding interest equal
to 3,129 MW3 of installed capacity, of which 94% from
renewable sources
• Leader in Renewable Energy in Brazil
• One of the most profitable operations of energy
Trading and high-value Services.
Net Income Net Margin
1) Adjusted by regulatory assets and liabilities and non-recurring items; excludes holding company; 2) Commercialization in the free market and Services; 3)
Considering CPFL's share of each generation project
21. 21
Debt
Leverage1 | R$ billion
3,570 3,830 3,886 3,736 3,835 3,755 3,971
Adjusted EBITDA1.2
R$ million
Adjusted Net Debt1
/Adjusted EBITDA2
Inc. CVA adjustment
to cash balance
Exc. CPFL
Renováveis
If we exclude
CPFL Renováveis,
the group's
growth driver,
leverage ratio
would stand at
2.66x
Evolution in cash balance and CVA3 | R$ billion
5,622
4,8084,8014,999
4,134
2,616
+17%
YTD CVA receivables through 3Q15 affecting our cash balance.
Adjusting by this cash balance, the net debt/EBITDA ratio would be 2.98 times in 3Q15
1) Criteria adopted in financial covenants; 2) LTM EBITDA; 3) Balance of regulatory assets and liabilities (-) dynamic pricing not homologated by Aneel.
23. J
H
M
A
B
D
C
L
K
E
G
I
F
Creating
value
Destroy
ing
value
Regulatory EBITDA
ActualEBITDA
CPFL has been creating value through Operating
Efficiency
23 1) Source: CPFL; Bank of America – Merrill Lynch Report (Jun. 17, 2015)
100%
Creates
value
Destroys
value
Operating Efficiency
Regulatory PMSO / Actual PMSO (%)
Regulatory EBITDA vs. Actual EBITDA1
Expectation to resume real EBITDA
growth after the application of 4CPTR
CPFL Piratininga: +12.0% in
Regulatory EBITDA
CPFL continues to create value with actual EBITDA exceeding regulatory EBITDA
3CPTR
Regulatory EBITDA vs. Actual EBITDA
CPFL Historical (R$ billion - constant currency)
Actual EBITDA
Regulatory EBITDA
+28% +40%
24. Transfer of operating costs
in 4CRTP
CPFL Group leading the efficiency ranking
24
1) CPFL Santa Cruz, CPFL Mococa, CPFL Leste Paulista, CPFL Sul Paulista and CPFL Jaguari have efficiency rates in 4CRTP ranging from 77% to 100%,
with the rates under 4CRTP exceeding the ones in 3CRTP for all companies.
Efficiency is measured by the gap between the company and the benchmark
Disco
Relative efficiency –
reference for cost
target
(4CPTR)
122%
126%
126%
Transfer of operational costs above
real costs
% of Relative Efficiency of Larger
Distributors1
Y=kmofgrid,marketandcustomers
X = costs
Efficiency Threshold
93%95%
98%100%
3 CRTP
4 CRTP
76% 69%
Industry
Average
99%100%
25. Smart distribution was a key
theme addressed by the Project
"Energy in the City of the
Future"
Vision of the Future of Distribution
is directly associated with
Smart Grids:
• The smart grid technology will provide increased
network monitoring capabilities and greater
quality and commercial opportunities
• Smart Grids will boost the amount of information
available, which will be used in innovative ways
to optimize operations and services
CPFL is preparing itself for the future challenges of
Distribution
25
26. Emergency Dispatch
26
The past:
The future:
System intervention
or self-healing
Automatic failure detection Real-time information
for customers
Intelligent meter
• Reduced unnecessary travel;
• Shorter average service;
• Reduced SAIDI (optimization of possibilities of network
maneuvering);
• Greater customer satisfaction (real-time information);
• Optimization of service to nearly 600,000 tickets every
year.
Gains
27. Reading and Delivery
27
The past:
Reading Energy bill Delivering the bill Payment
Making the payment
The future:
Smart Metering Center
and/or automatized
software
Data networkIntelligent
meters
Bill via e-mail
and/or app
(consumption
management)
• Greater employee safety (reduced travel and exposure
to risk)
• Data gathering from load curve and customer
consumption profile;
• More sustainable process (reduced use of paper).
Gains
28. Payment overdue Dispatch Disconnection Dispatch ReconnectionMaking the payment
Disconnection and Reconnection
28
The past:
Making the payment
The future:
Smart Metering Center
and/or automatized
software
Data networkIntelligent
meters
Energy disconnection
• Increased safety of employees (reduced need to travel and confront customers);
• Reduced delinquency (improved disconnection management, more subsidies to propose bill due date, etc.);
• Improved understanding of customer profile (more gathered data available).
Gains
31. • Operating Efficiency with Innovation &
Technology
• Strategic Growth
Note: Reference ID CPFL plants between 85% and 93%, ID from 2016 between 92% and 94%
(1) Abrage Annual Report 2014; (2) Companies' filings
CPFL Geração: operating efficiency and strategic growth
Average availability by Agent | HEP (%)
Domestic Agents1 International Agents2
31
CPFL Geração Strategy
• Leader in operating efficiency, becoming an
international benchmark
• Enable growth with value creation
33. Evolution of Installed Capacity (MW) - CPFL Renováveis
Visible growth through development of high quality pipeline
1,039MW of projects with a highly confident execution profile, ready to sell energy in the next 12 months
Pipeline of projects in three of the four renewable sources
3,453MW
Ready to sell
energy in the
next 12
months
33
CPFL Renováveis: Evolution of the Company's
portfolio
SolarBiomassWindHydro
34. 399
519
148
34
70 75 42
251
19
1,032
150
285
365 385 375 161
280
294
46
200
370
940
175
532 131
13
1
1 3
CPFL Renováveis: Portfolio Diversification
Source: Company - ANEEL and company websites; Updated through Nov/2015;
Note: (1) Installed capacity in operation (MW) and considering players with at least 1% of market share.
Largest player in the renewable energy industry1
Small hydro
(SHPP)
Biomass
Solar
Wind
333
2,135
Under construction
1,802
940
844
532
400
375385 366
336355
232
297
434
Biomass
Solar
Wind
Small hydro
(SHPP)
34
35. 35
CPFL Renováveis: Recent evolution and Strategic
Guidelines
Adjustments to EBITDA
Energy Generation (GWh) EBITDA (R$ million)
CAGR
32.0%
Note: (1) EBITDA excludes non-recurring effects. Between 2013 and 2015, the two main non-recurring impacts were the cost of GSF and
extraordinary energy purchases to meet contracts.
• Efficiency of Operations
• Growth with value creation
CPFL Renováveis Strategy
• High operating performance and efficacy in
management, supported by controls,
processes, systems, organizational structure
and institutional presence
• Creating value by implementing generation,
M&A and innovation projects
CAGR
EBITDA 30.3%
ADJUSTED
EBITDA1 34.6%
37. Ranking of Trading Companies
CPFL Brasil: the best operating result despite the
lower energy volume compared to the competition
37 Source: CCEE (Public Reports); Companies' Financial Statements. There are no financial data available for all key commercialization companies
General Market Share – 10 largest | 2014
EBITDA (R$ million)
EBITDA – Key Players | 2014
38. 38
CPFL Brasil: Portfolio Evolution and
Strategic Guidelines
CAGR
2010-15
13.2%
CAGR
2010-15
31.5%
• Profitability
• Volume
• New Products
CPFL Brasil Strategy
• Continue to figure among the top commercialization players,
maintaining EBITDA margin and maximizing value
• Grow sales of conventional and incentivized energy, expanding
presence in retail
• Explore synergies through energy management services offered to
customers
Free Customers | Conventional + Special
Free Customers | Special
41. 41
Sustainability
Actions
Raising awareness
about the
strategic relevance
of the
Sustainability
Platform
Establishing formal
sustainability
targets for internal
leaderships
Results - 2015
Integrated platform
based on the
strategic plan, with 6
themes, 17 leverages,
63 indicators and short
and medium-term
goals
Sustainability goals
published on CPFL's
website (of all
indicators, 82.5% have
been achieved1)
Officers and
managers have
sustainability goals
Recognition
• Component of ISE since its first
edition, in 2005
• 40 companies of 19 industries
- Market cap of R$ 1.2 trillion
• Component of DJSI Emerging Markets
for the fourth consecutive year
• 86 companies achieved the Dow Jones
requirements (17 Brazilian, of which 3
are in the power industry)
• Component of MSCI for the second
consecutive year
• Formed by companies with the highest
ESG standards in their industries
• Transparent reporting of greenhouse
gas emissions since 2006
• Best company in Management of Water
Resources in Latin America - 2015
Welfare
Until 1999
Social Responsibility
2000 to 2006
Corporate Sustainability
Added to business from 2007
Level of
incorporation of
the theme
Sustainability
Increasingly more comprehensive concept of responsibility
Note: (1) Data for 2014. 2015 data will be available in Feb/2016.