Energy Co Of Minas Gerais Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for holding. And welcome to Cemig's Second Quarter 2020 Conference Call. We inform that all participants will be in listen-only mode during the company’s presentation. Now, I would like to turn the floor over to Mr. Antônio Vélez, who will start the presentation. Please, Mr. Vélez.

Good afternoon. My name is Antônio Vélez, Cemig's Investor Relations Superintendent. We now will start Cemig's second quarter 2020 earnings conference call with the following executives: CEO, Mr. Reynaldo Passanezi Filho; CFO and IR Officer, Leonardo George De Magalhaes; Chief Generation and Transmission Officer, Paulo Mota Henriques; Chief Distribution Officer, Ronaldo Gomes de Abreu; Chief Legal and Regulatory Officer, Eduardo Suarez; and also Mr. Rafael, Chief Participation Officer. You can also follow this broadcast by the following phone numbers: 55-11-3127-4971, and in the U.S., 1-929-378-3440, as well as by our links at our website, ri.cemig.com.br. For the initial remarks, I will turn the floor to our CEO, Reynaldo Passanezi.

Good afternoon, everyone. Welcome to not just a teleconference of results, but this is a results webcast for the second quarter of 2020. We are starting a new webcast format. And also, we are opening it with all our Executive Board. I asked everyone to be here to show you that we are together. And if you have any questions, all of us will be here, and it's very important to provide transparency and accountability to our investors. So, Ronaldo from Distribution is here; Paulo Mota from Generation; Dimas from Commercialization is on vacation, but Paulo and Ronaldo can take questions about that; Rafael from Corporate Participations; and also Leonardo, and we have the whole team present. Well, I think we can turn to Slide number 3, please. I would like to highlight the main messages that we have. And I think that maybe the main one is the resilience of the company despite the pandemic. We see an EBITDA that is recurring of BRL2.3 billion in the first half of 2020, up 12% in our results. For me, that is a clear demonstration of the company's resilience despite the situation we are going through. This is a result that occurs throughout all segments: distribution, generation, transmission, commercialization, and the holding. This is really a result that can be applied to all segments, of course, with a few differences, but all of them show resilience. We are very proud to say that a significant share of this performance, of this increased EBITDA, is related to our efforts to improve the operating efficiency of the company. Almost half of the growth in EBITDA during this period is due to our optimization efforts and increase in operating efficiency. I think this is the subject that we will follow closely with a lot of hard work, and we'll be aiming for operating efficiency and permanent optimizations. I will give you a few examples, also some signs of where we are heading. We are concentrating Cemig's activities in our main building, and we are going to vacate the building, which is currently not being used, by the end of November. We are bringing Gasmig into our headquarters. Cemig's team is coming to this headquarters. We have now an open office for our top management in order to enhance integration and efficiency. We have put the airplane we still own up for sale. I think these are examples and signs that show we are working towards better efficiency, and we have a bold target to reduce BRL150 million this year in PMSO. So, I believe this is our initial message: a lot of resilience in the company's results and a growth in our recurring EBITDA, related to our optimization efforts. The second important message is a drop in our load, which is due to the pandemic, but we see that this is improving. It was a decrease of 6% in the second quarter. Now, in the first half of the year, the accumulated amount was 4%. It's important to note that in July, it’s slightly above what we recorded in 2019. We observe that, obviously, for the integrated national system, you know that the national system discloses these figures, and we are seeing similar behavior in Minas Gerais and Cemig's areas, basically, throughout the whole state of Minas Gerais. It's quite similar, and we are witnessing a clear recovery of the load. We still have year-on-year variations, but this recovery is significant for the second half of the year and is also crucial to demonstrate that we will overcome the pandemic during this challenging period with significant resilience. So first, the low drop is decreasing. For July alone, we already have a figure that is higher than the same period in 2019. We also see that in our delinquency rate. Our delinquency in April reached significant amounts, but today we have a figure that we monitor closely, which is the ratio between collection and billing, and it is already very close to the target we set for the year. We are just 1% below that target. This also indicates that payments are improving, thanks to the public policies and other conditions that enable that recovery. We have very positive expectations related to provisions, also because we are reinstating our disconnection policies and agreements with creditors as well as arrangements with our debtors. We have very positive expectations for a better result for our ADA over the year, both because we are back with our disconnection policies—resumed in August—and also due to the other agreements we are working on with commercial debtors and granting powers. We believe we will see good outcomes stemming from all these initiatives, and this also ties into the flexibilization of ANEEL's resolution, which allowed disconnections to resume. I would also like to highlight the potential we have regarding both efficiency and service quality improvements through digitization. Digitization will indeed enable us, for instance, electronic bill payments are growing significantly, reducing reliance on more expensive channels, such as traditional bank branches. We can confidently assert that the company is demonstrating its resilience. Our belief is that the worst of the pandemic is behind us, and we emerge from it strengthened. Additionally, I'd like to point out that we had excellent results from our tariff reviews. This is a crucial topic for us. On the tariff review for transmission, we achieved positive outcomes. In our balance sheet, we have BRL430 million, which is very encouraging. It's noteworthy to mention that our transmission business is a benchmark within the sector. This results from increased O&M revenue since 2018 as we have set the bar high, with robust efforts leading to further improvements. Thus, the transmission sector is generating positive results. I must emphasize that transmission holds a significant role within Cemig, deserving appreciation compared to different multiples since it differs from other companies with a component of improvement and organic growth, which is very important and positive for value generation for the company. Subsequently, we enrolled under the COVID account; we have received around BRL1.1 billion to BRL1.2 billion. This amount is expected to reach BRL1.4 billion by year-end, depending on the situation regarding load and over-contracting. However, we have already received BRL1.2 billion, and our cash as of June 30 was BRL37 billion. Therefore, with COVID accounts, it’s already BRL5 billion in cash and a net debt of 2x EBITDA, a significant improvement compared to 3.2 in 2018; hence, a lot of financial soundness and liquidity in cash, which is sufficient to meet our obligations and investment plans. I think we can move to Slide number 4 now, where the first point I want to highlight is that we are ensuring service continuity quality. This is a critical topic for us, and we are delighted to announce our perspective of having a DEC below 10 this year, which is a record figure for us. When we analyze the year-to-date through June, it stands at 4.97. So, these first six months already result in two digits. July's figure is also positive. We have positive expectations here regarding all employees working tirelessly to enhance our DEC, which stands for average outage duration per customer. I would like to express my gratitude to everyone and the team, all our employees for their exceptional work. This ensures the quality of service—a public service of the highest quality. Achieving a DEC under two digits fills us with pride. Employees' health and safety are equally critical for us, especially considering our employees and outsourced personnel; we have 22,000 employees with 130 confirmed COVID-19 cases. Unfortunately, three of them were fatal, which highlights the efforts we have made to ensure the effectiveness of our measures. Almost all operational staff is in the field, thus keeping the contamination percentage very low, while we ensure the health and safety of our employees and support staff, both internal and outsourced, as I mentioned. Now, we are slowly restarting activities here in Minas Gerais starting next week, actually. In terms of our relationship with clients, we have our digital solutions. We see great potential here. I mentioned in the past that digitization is considerably positive for improving company performance, enhancing electronic channels, which have surged to almost 40%, up from 28%—a significant increase aimed at reducing dependence on bank branches. Finally, I would like to reiterate our commitment to social responsibility: we confirm the donation of BRL5 million in equipment to hospitals in the state of Minas Gerais, already formalized. In terms of financial sustainability, we do possess a favorable cash position and net debt over EBITDA ratio at 2x. Moving on to Slide number 5 to conclude my initial remarks, we are diligently working to optimize and achieve operating efficiency. In summary, the resilience demonstrated through our recurring EBITDA pertains to all areas of the company, focusing heavily on better management of expenses while maintaining our investment program. This investment program remains ambitious at BRL1.7 billion for this year. The reduction will not compromise investment during this cycle—it is simply an adjustment throughout the year, occasionally requiring adjustments due to current execution challenges. We understand that at times, communicating with CD administration might be cumbersome, resulting in delays. Still, overall, this investment program remains intact. This reflects the mission I’ve continually highlighted: generating service delivery of the utmost quality. I previously mentioned our DEC, and we aim to stay below two digits, maintain competitive prices, and work on optimizations to achieve pricing attractiveness through private rational decision-making. This private rationale manifests in increased efficiency efforts and works on investments that develop the company's value, enhance service quality, contribute to the regulatory base, and promote asset growth. In our transformation project, referred to as new energies, the goal is to deliver results through a winning team truly embodying the pride of being part of Cemig. These were my initial remarks, and I will now hand the floor over to Leo, and we remain available to address your questions in the Q&A.

Thank you very much, Reynaldo. Good afternoon, everyone. Thank you for your participation in this video call discussing the results from the second quarter. I will highlight some key points, and then I'll pass the floor to Vélez, who will delve into the figures with a quarter-on-quarter comparison. Starting with Slide number 6 about our voluntary redundancy program, Mr. Reynaldo referenced our ongoing operational efficiency process, which has shown positive results in the second quarter, with our costs continuously declining. We see the voluntary redundancy program as having a substantial role in this reduction. We implemented this program recently and had nearly 400 employees enroll. For 2021, this will signify a BRL95 million reduction in our costs, accounting for minor replacements. While there is some outsourcing impact, that is minimal compared to the gains from the PE program. We anticipate recovering those BRL95 million quite swiftly, claiming them as a permanent improvement in our results. On the next slide, Dr. Reynaldo already addressed the COVID account enrollment; the approval granted BRL1.4 billion, with the first tranche at BRL1.18 billion, bolstering our cash and liquidity levels while reducing our leverage, thereby ensuring a solid position as we enter the second half of the year. We start this period with ample cash to settle our debts, without the necessity of new financing or rolling over existing debts. As I mentioned, this is very reassuring for the company in managing during this pandemic phase. On Slide number 8, we disclosed a material fact regarding tariff adjustments approved by ANEEL at 4.27%, backdated to May 28. We had some administrative appeals with ANEEL challenging this adjustment because we had previously received judicial deposit amounts for recovering PIS and Pasep tax credits related to ICMS. Cash has flowed into the distributing company. We proposed to ANEEL that 714 million of the BRL1.2 billion received as judicial deposit related to this lawsuit could benefit society, as it would also help in reducing delinquency. This proposal will undergo discussion by ANEEL with all distributing companies within the segment in the upcoming months. Nonetheless, we have already agreed that the 714 million can be reimbursed to our consumers, within the anticipated ten-year period we believe should apply for consumer reimbursements. The company successfully negotiated the lawsuit sum totaling BRL6 billion. Out of this, approximately 2 billion refers to a timeframe predating the last ten years, while approximately 4 billion corresponds to the share requiring reimbursement to consumers. We believe this development will produce positive effects for the company and consumers, striking a balanced situation in acknowledging our efforts since our lawsuit was filed back in 2008 advocating for consumer rights, while the company also deserves some of these benefits credited to its efficiency in addressing tax issues. ANEEL's Executive Board will ultimately decide on this matter. On Slide number 9, we delve into delinquency and losses. Presently, our losses stand at 2%, above the allowance recognized by ANEEL, which is at 11.45%. We are actively implementing various measures to mitigate losses, such as telemetering for key clients and increasing the frequency of inspections. Our goal is to eliminate that 2% gap by 2021, and our overall losses amount to 13.66%. An ongoing series of internal measures encompassing multiple aspects of the company contribute significantly here. We have robust actions, sophisticated intelligence in our processes, and we expect to diminish these losses substantially by the end of 2021. We anticipated delinquency would rise in the second quarter due to the pandemic and an economic situation negatively affecting families, with an ADA of BRL199 million compared to BRL108 million last year. Please note we did not carry out any disconnections during the second quarter, but those are expected to resume now. We have developed various campaigns encouraging delinquency negotiations, engaging low-income customers, hospitals, and small businesses. On another note, our enrollment under state law allows for offsetting debts with electric energy up through June 2019, securing recompense for the ICMS we paid to the state monthly, expected by the end of 2022. The receivable amount approximates 220 million to 240 million. We anticipate this will ultimately enable us to reverse existing ADA provisions. Thus, despite our provision being BRL199 million through June, we foresee it may reach BRL170 million by year-end due to this agreement with the state administration. Good news, indeed, showcasing the company's effort in renegotiating debts with customers and addressing the state’s overdue obligations. On Slide 10, we discuss our quality indicators. We are witnessing enhanced operational efficiency without compromising quality. Our average frequency duration per consumer substantially meets and exceeds regulatory standards, remaining favorably lower. At this point, our performance metrics stand at 2.28, while the regulatory agency sets expectations at 3.24. DEC is expected to align with our annualized results this year; hence, we are quite optimistic regarding how all this will unfold. We believe we will successfully achieve this target, and our average results show notable improvements compared to the previous year. It's encouraging to witness our DEC resolve down to below 10 this year, driven by strategic and substantial investments targeted at enhancing quality indicators. Referring to Slide 11, Cemig experienced a 6% reduction in load in the second quarter, one of Brazil's lowest figures. This distinction clearly illustrates the significant impacts of the pandemic. However, we believe our distributed company has showcased remarkable resilience in these results. In reviewing figures from June, July, and August, while preliminary, we observed a drop in April, followed by recovery in May and June. Now, July and August's metrics are higher than in 2019, indicating market recovery within the state of Minas Gerais. Note, our own load has dropped slightly below 2019 levels while free clients showed substantial gains. It's evident that our expectations for the second half hinge on trade variables; still, we aim for load distribution recovery vis-à-vis the second quarter and the overall yearly comparison with 2019. On Slide 12, the earlier-mentioned tariff review for transmission shows Cemig GT is a sector benchmark, exhibiting financial discipline regarding transmission costs. We're proud to share results from transmission tariff reviews, as previously articulated. This allowed for a RAP increase, reported at 9.13%. The recent adjustments yield creditor effects amounting to BRL430 million. The BRL430 million effect is currently non-recurring—it doesn’t contribute to cash availability right now. Yet, moving forward, it will reverberate into substantial revenue for our transmission division. As for Cemig GT, we’ve recognized an uptick in revenue beginning in August reaching an average of 1,954 gigawatts, surpassing what we previously recorded in March last year. The incentive-based sector faced some demand reductions but conventional clients demonstrated significant recovery rates. Our outlook remains favorably cast in terms of earnings for the third and fourth quarters of 2020. Of course, we must remain vigilant regarding market fluctuations and the ongoing pandemic ramifications affecting Brazilian society. Moving on to Slide 14, we maintain active relations with our free clients. The generation sector has experienced minimal delinquency through proactive approach. We've successfully accommodated bill deferrals for differences incurred between contracted and actual consumption over a period of up to 36 months. Our continued engagement on overdue bills with customers has yielded encouraging metrics, effective negotiations led to substantial reductions in delinquency. These constitute positive developments despite evident challenges this quarter. I’ll now return the floor to Velez to analyze the second-quarter results and also contrast them with the first half of 2020 compared to the first half of 2019.

Thank you, Leo. So, I will now transition to discussing the second quarter results and subsequently touch on the first half of this year. On Slide 16, I’d like to mention some comments critical for understanding our results. In terms of our holding, we noted a market restatement of Light resulting in a positive impact of BRL475 million. Keep in mind that Light is recorded in our balance sheet as an asset available for sale. Due to it being a publicly-traded entity, we must perform mark-to-market adjustments each quarter for our stock value. Thus, we did experience a favorable impact of BRL475 million in our results. At Cemig Distribution, we experienced decreased energy sales of 6%. For our captive clients, the decline was 8%, while transmission fell by 3.5%. The voluntary redundancy program expenses also impacted our figures, with a cost of BRL46 million attributed here. For Cemig GT, the primary result driver involved the sale of energy at the lower limit within the flexibility contract range. The tariff review for transmission contributes positively, allowing an improvement of BRL430 million in our EBITDA. The expenses allocated for the voluntary redundancy program in Cemig GT recorded BRL11 million. Furthermore, our Eurobond marking to market effect generated a positive contribution of BRL71 million in Q2 2020 compared to the prior year's Q2 2019, which also bore a positive effect of BRL558 million. We’ll transition to Slide 17, which explains the variance impacted by the mark-to-market for Eurobonds and associated hedge instruments. Here, we saw hedges add BRL487 million in positive variation, while the debt amount faced a depreciation of the real, incurring a negative variation of BRL416 million. Thus, the overall financial result showcases a positive BRL71 million thanks to hedging, Shifting to Slide 18 capturing the energy market for Cemig Distribution during Q2 2020, we noted a load reduction of 6%, with transported energy for Cemig Distribution down by 3.5%; the captive market recorded an 8% drop. Examining this during consumption categorization, we noted dips across all segments, except residential consumers, as households remained at home hence the rise in residential usage. Transitioning to Slide 19, we address our EBITDA and consolidated net profit. Here, we analyze the non-recurring operational effects impacting our long-term performance. Based on adaptations, the adjusted EBITDA reflects a decrease of 6.8%, swinging from BRL1.07 billion to BRL939 million in the second quarter of 2020. Net profit rose by approximately 5%, moving from BRL415 million in Q2 2019 to BRL435 million in Q2 2020. For Cemig GT we measured EBITDA dropping by 33% not accounting for tariff review impacts. The second-quarter EBITDA totals BRL341 million, largely influenced by reductions in consumption among free clients which led to lower billing. Consequently, net profit also illustrates a decline of 63%, from BRL88 million in Q2 2019 down to BRL7 million this year. The distribution's results reflect positive outcomes. Excluding PIS and Cofins credits, net profit grew from BRL407 million last year to BRL535 million this year, marking a 31.4% uplift rooted in operational efficiency endeavors.

Regarding net profit, the recurring figures advanced from BRL152 million in Q2 2019 to BRL285 million in Q2 2020, yielding an 87% increase. On operational costs and expenses, analyzing PMSO—management expenses, when stripping out exceptional provisions from last year, we recorded an over 8% reduction in Q2 2020 in comparison to Q2 2019. This leads to more than BRL70 million savings. Critical to observe, on Slide 22, is out of our full budget for 2020; we anticipate further reductions in materials and services by BRL150 million already visible by Q2 results now. Slide 23 brings specific figures for the first half of 2020 compared to the same timeline in 2019. The Light investment saw reductions of BRL134 million over the first half of 2020. Our fair value adjustments for Centroeste netted BRL52 million. For Cemig Distribution, an approximate 4% reduction in energy distributed is recorded; for the captive market, a 6% drop is evident, while transmission figures showed a 1.3% decrease. Additionally, we expect an expense allocation of BRL46 million from the voluntary redundancy program and an ADA coverage rise accounting for nearly 91 million. Our allowances for doubtful accounts at Cemig GT likewise face the ramifications of the contracted sales within the defined flexibility parameters, coupled with the tariff review impacts and Eurobond adjustments which resulted in unfavorable variances totaling BRL367 million for H1 2020 in comparison to a positive effect of BRL677 million for the same period in the previous year.

Discussing slide 24, Cemig Distribution's energy metrics demonstrate a 4% decline in the first half, alongside a 1.3% drop in the transmission segment, while the captive market reflected a 6% reduction. Upon analyzing consumption categories, the residential segment stands out as an exception, showcasing growth at 2.8% between the first halves of 2019 and 2020. On slide 25, we note an increase in adjusted EBITDA exceeding 12%, as our CEO highlighted earlier, growing from BRL2.34 billion in the first half of 2019 to BRL2.284 billion in 2020. Meanwhile, our net profit on a recurring basis reached BRL1.022 billion in this quarter, reflecting a 20% increase. Moving along to Slide 26 regarding Cemig GT, we see that EBITDA increased by 2% if we omit non-recurring impacts nearly reaching BRL1.026 billion. However, net profit faced a 15.8% reduction, primarily due to hedge effects which couldn’t be offset by other factors. Similarly, for Cemig Distribution's performance detailed on Slide 27 in H1 2020, our EBITDA rose by around 13%, totaling BRL1.029 billion. Recurring net profit also rose over 41%, illustrating growth from BRL340 million in the first half of 2019 to BRL481 million in 2020. Notably, our Slide 28 reflects ongoing expense reductions; PMSO decreased by 8.2% in the first half compared to last year. Slide 29 compares Cemig Distribution's regulatory performance against actuals. Our operating costs reveal a regulated cover of BRL1.323 billion, with realized results BRL196 million higher than anticipated coverage.

For the regulatory EBITDA metrics on Slide 29, we measured a recurrent EBITDA at BRL1.025 billion. In this quarter, our operational metrics identified the EBITDA falling short by BRL300 million relative to the regulatory EBITDA. Our cash flow generation is summarized on Slide 30; in December, it stood at BRL1.300 billion. For H1 2020, our cash generation reached BRL4.2 billion. Over this period, we repaid debts exceeding BRL1 billion and allocated BRL700 million towards investments. Cash on hand in June amounted to BRL3.7 billion, not factoring the BRL1.2 billion received from the COVID account by end of July. To our debt profiling on Slide 31, today's consolidated result reflects a comfortable state. Notably, our maturities showcase a 3.8-year average duration. We seek to extend this; nonetheless, between 2020 and 2023, we face minimal maturity challenges. Should we also analyze based on cash generation figures, we can assure strong liquidity. The Eurobond scheduled for 2024 is noted within this category. As for net debt, we assessed numbers around BRL12.2 billion; evaluating present value ensures an adjusted net debt of BRL8.9 billion. The clear picture indicates that most of our debt is in US dollars, complemented by 24% in IPCA debt and 23% in CDI terms. It’s crucial to emphasize that dollar-denominated debts are backed by hedging instruments converting them into CDI equivalents. Our debt cost shrank remarkably since 2018, dropping from a nominal rate of 9.67% at year-end 2018 to 4.3% by June 2020. This drop reflects not only CDI reductions but also integrative effects of US dollar-denominated debt hedging. Our current debt pricing positions us favorably should we consider new contracts moving forward. Our CEO previously mentioned when we assess leverage indicators, total net debt over adjusted EBITDA stands at 2x as of June 2020, a quick recovery from almost 3 to 2 in June. This signifies a significant rebound in our financial health. Moreover, total net debt against equity locates at 34.5%, anchoring a robust structure.

On Slide 32, as we near the conclusion, let's address Eurobond covenants identified as the most restrictive. To illustrate, in June, Cemig GT showed a net debt over EBITDA ratio of 2.85x, well below the 4.5 limits set for that covenant. This detailed breakdown reflects assurance regarding compliance tracking. Similarly, the holding company’s net debt over EBITDA ratio rests at 2.12x against a permissible 3.5, evidencing a safe standing. Lastly, I would like to highlight September 15 as a date to be marked, as we are hosting our 25th Annual Cemig Meeting with capital markets. Yearly, this event is vital; it was intended for May this year, but adjustments were made due to the pandemic; thus, we invite everyone to partake digitally this year, anticipating your presence. That wraps our presentation regarding the second quarter outcomes. Now I'll invite the floor for the Q&A session.

First question from Marcelo Sá from Itaú.

Hello everyone. Thank you very much for the call. I have two questions. First, I would like to understand the primary goals the company has now? Reynaldo has been with the company for a relatively short period. Can you elaborate on the targets from your perspective? My second question addresses asset sales—historically, this has been a significant focus for Cemig. What actions can you progress this year? Specifically, regarding Light's shares or Taesa. Do share your thoughts.

Hello Marcelo, thank you very much for your question. Yes, it is indeed true that I've been here for a brief time. The pandemic has pushed that to about six months. Cemig is a major company with consistently defined objectives, and we follow the targets indicated in the 2020 budget. Our main emphasis is on DEC, average outage duration per consumer. This year marks the fifth year of concessions, so we must comply with DEC metrics—a pivotal performance clause. Maintaining our DEC below 10 hours is a lasting achievement—indeed, a significant milestone. I am focused heavily on enhancing operational efficiency, ensuring investments provide substantial value, and strictly adhering to private-sector decision criteria. I realize we are amidst a pandemic, but I engage with stakeholders actively, prioritizing these three major areas: Quality service provisions are intrinsically linked to DEC. Thanks to digitization, we are experiencing great results—especially in the realm of virtual services. We actively pursue enhancements in customer service through digital channels, increasing our telemetering capabilities, and advancing automation for our operational dispatch areas. These two core objectives—efficiency and digitization—are our guiding stars amidst the currents, ensuring our investment program remains strong across the company. We are contemplating a public call shortly that will further amplify our production and provide customer advantages. Growing our production capacity is paramount. We also intend to conduct a strategic review, examining not only our current operations but also the future-oriented tactics we employ. Our 8.5 million client base equips us with vast distribution potential, culminating our brand’s strength as a leading commercial entity. We must harness these opportunities and prepare well for the future. In the short term, I can confidently assert we have shown resilience as evidenced by our results. In the mid to long term, we will work diligently to capture maximum benefit from our modernization endeavors. Our investment and divestment plans—Ronaldo or Rafael, do you wish to comment further?

Marcelo, this is Paulo. To add to Reynaldo's remarks, we are developing projects that emphasize value addition. Cemig possesses a revered legacy in terms of generation within HVPs. We have embarked on new projects across various sources, focusing on wind and solar. For illustration, we’ve made modest investments with our recent wins in the last year’s auction for a wind plant. Progress on this front seems promising, and we are considering other opportunities that align with market evolution and sector dynamics. Notably, our TPPs remain under consideration depending on market changes and, critically, sync with our commercialization strategy—it serves as a key differentiator. Enhancing the robustness of our commercialization company is vital, as it amplifies the project's valuation and bolsters overall performance. Our daily operations emphasize efficiency in transmission, where we are establishing benchmarks while harnessing growing technological advancements.

Thank you very much. Allow me to leverage the discussion about strategic positioning; the prevailing strategy has focused on procuring energy from entrants participating in auctions. However, now it seems the company’s approach is shifting towards investing in its own projects to fuel growth. Is this accurate?

Indeed, Marcelo, we aspire to capitalize on opportunities. The aim of understanding our clients' needs is not a strategic shift, as I’m not prepared to declare a change. However, we do acknowledge the need to bolster our generation capacity. Given the essential process of postponing and renewing plants, having our own production would certainly provide advantages. Under current discussions, our stances remain proactive and considerate as we extend towards the subject of privatization for our plants commencing with availability requests. We advocate for transparency while carefully managing the shareholder engagement timeline.

Good afternoon. In light of pandemic conditions, could you illuminate the trajectory for the forthcoming years? Furthermore, could you comment on management costs? Do you expect reductions in the next quarter and, if so, in which areas would those savings occur?

Felipe, while I struggled to grasp your inquiries clearly, I will yield the floor to Vélez, who seems to have captured your questions better.

Hello Felipe, good afternoon. I struggled to understand your questions, but your primary inquiry related to energy pricing, correct? The secondary question pertains to our management cost reductions. Allow me to comment. Regarding energy pricing, by the end of our last year’s estimates, we forecast pricing closer to long-term averages around BRL150; however, with pandemic effects, we adjust this. For now, we believe nearing BRL150 is likely by 2022 or 2023. Currently, energy prices stand between BRL100-110, increasing slightly next year. On PMSO, as highlighted, significant attention is directed at cost management this year, aided by pandemic-induced initiatives. We expect additional BRL150 million reductions primarily through materials and services, which we're witnessing already in Q2 results.

Thank you. Just to circle back, I believe my phone had a hiccup. My first inquiry was about commercial losses during the pandemic. Can you elaborate on the projected trend of losses in the ensuing years? I recognize steps are being employed, but are they adequate in combating these losses?

I'll address this question, Ronaldo Gomes from Cemig Distribution. We completed a substantial structural analysis concerning losses by year's end, focusing on resolving last-mile challenges. Our retention of investment proposals is ongoing, so we can tackle these matters effectively within our tariff reviews. This year, we are collaboratively efforting on the DEC also supported by improvements up to July, achieving the targets set forth. Yes, we have a structural issue dictated by inadequacies that prompted us to initiate replacement on outdated equipment. This coincides with our active investments in inspection procedures. We anticipate further inspection increments and deliveries in the latter half of the year, surpassing the 2019 totals accomplished within the first half. Thus, we have an extensive series of strategic, systemic actions targeting faulty connections, and we further incorporated tele-metering strategies. We believe we will attain significant improvements over the latter part of 2020 with these initiatives, expecting losses under regulatory coverage and addressing the 2% advantage from Slide 9 during 2021.

Thank you very much for that clarity and apologies for audio issues.

No problem, Felipe. Thank you.

If there are no more questions, we will return the floor to the company's management for closing remarks.

I would like to extend my gratitude to everyone for being here with us during the call. Our Investor Relations team remains available to respond to your questions, should you have any further inquiries. We hope to see you at our Cemig Day. Thank you very much.

The Cemig teleconference has concluded. Thank you for your participation.