Energy Co Of Minas Gerais Q1 FY2022 Earnings Call

Good morning, and welcome to Cemig's conference call. We're releasing the results of the first quarter of 2022. This conference call is being recorded and will be made available at the company's IR website, where the presentation is also available. At this time, I'd like to turn the floor to Carolina Sena, Superintendent of Investor Relations. Carolina, please you may go ahead.

Good morning. My name is Carolina Sena, Superintendent of Investor Relations at Cemig. We begin the release of the financial results of the first quarter of 2022 with the presence of Reynaldo Passanezi Filho, CEO; Dimas Costa, Commercialization Director; Eduardo Soares, Regulatory and Legal Director; Leonardo George de Magalhães, Chief Financial and Investor Relations Officer; Marco Da Camino Ancona Soligo, Participations Director; Marney Tadeu Antunes, Distribution Director; Thadeu Carneiro da Silva, Generation and Transmission Director. For the opening remarks, we turn the floor to our CEO, Mr. Reynaldo Passanezi Filho.

Good morning, everyone. I'm pleased to present the quarterly results, which have been excellent. Cemig is proudly celebrating 70 years as a key player in the national electricity sector, beginning with President Juscelino Kubitschek. Over these years, Cemig has contributed significantly to Brazil’s electricity landscape through distribution, transmission, and engineering across the nation. I'm grateful to all current and retired employees who laid the groundwork for our remarkable history. We are excited to showcase our results from the first quarter of 2022, which reflect our commitment to the strategic plan established by the Board in January 2021. This plan focuses on transforming lives in Minas Gerais through our energy services, and we are determined to achieve this by being extremely efficient both technically and financially. Since 2018, we have made significant improvements in operational efficiency, reducing costs and regulatory losses. Between 2009 and 2018, we consistently exceeded regulatory expenses by an average of BRL 700 million annually. Today, we are proud to report that we've aligned with regulatory expense limits, allowing for substantial adjustments. Our reduction in losses has also shown remarkable improvement, achieving a reduction of more than 1%, which is expected to result in significant financial gains. These achievements equip us to pursue an ambitious investment plan in Minas Gerais, focusing on both distribution and transmission. We have also made strides in improving technical performance, specifically in wind energy generation. This proactive effort is expected to yield substantial revenue growth. Looking at our future investments, we plan to invest BRL 22.5 billion in our core operations over the next five years, deliberately focusing on distribution, generation, and transmission – entirely under Cemig’s control. Our historical investment levels from 2009 to 2018 were often below depreciation, making this increase especially critical. We are committed to enhancing our infrastructure, converting grids, and introducing digital services to improve customer experiences. Moreover, we have divested from nonstrategic assets, having completed the sale of Light last year and recently closing the sale of Renova, which reduces significant risks for the company. These actions align with our goals for efficiency and sustained growth amidst external challenges. Our commitment to sustainability continues with recent initiatives. Cemig is dedicated to a net-zero goal by 2040 and emphasizes the importance of renewable energy in our portfolio. We are collaborating with regulators and universities to advance our capabilities in areas like hybrid technologies and hydrogen, positioning us as a leader in energy innovation. To summarize, Cemig’s journey over the past 70 years has been remarkable, and we are determined to maintain our momentum. We are achieving record EBITDA and net income while delivering high-quality services. Our focus remains on our strategic plan, centered on core capabilities in Minas Gerais. Thank you for your attention. I will now hand it over to my colleagues for a financial overview.

Thank you, Reynaldo. Good morning, everyone. Thank you for joining our conference call to discuss our earnings for the first quarter of 2022. We will cover the execution of our investment program, which aims for nearly BRL 500 million this year. In the first quarter, we invested BRL 423 million, slightly below our expectations. However, our entire team is committed to accelerating this program, with numerous substations and ongoing projects expected to be completed in the coming quarters. We believe the program will pick up speed soon, helping us meet our budget expectations. We're optimistic about our investments this year, which are intended to form part of the base for 2023. Last year, we invested BRL 1.6 billion, significantly exceeding our historical average. This year's ambitious program, together with adjustments in the tariff review following losses from the GT tariff cycle, positions us well for the future of our distribution arm. Our quality indicators are strong, showing considerable improvement since 2019 when we were exceeding regulatory thresholds. This quarter, we maintained our commitment to enhancing service quality with a rate of 9.26%, close to the regulatory limit. Achieving better financial results alongside improved operational quality is a consistent outcome we are proud of. Regarding collection, our indices remain favorable, approaching 100%, with our ARFA ranking among the best in the Brazilian electricity market due to various actions taken by the company. Initiatives like daily monitoring, new collection methods, and fewer disconnections have all contributed to these results, as well as expanding our digital collection channels from about 35% in 2020 to 54% in the first quarter of 2022. We have also launched a voluntary retirement program to further enhance operational efficiency. This program, which runs between May 2 and 20, offers severance packages to employees who wish to retire, helping us control costs and allow for new talent to join the team and support our cultural transformation. As mentioned by Reynaldo, the sale of Renova is expected to positively impact our second-quarter results with a cash injection of approximately BRL 400 million and an additional BRL 60 million in cash, along with fiscal credits. This sale enables us to concentrate our strategic efforts on investments within Minas Gerais, moving away from managing other stakes. Sustainability remains a priority for our company, as we operate entirely on renewable energy. We are working on various ESG initiatives that align with our strategic plan. We have released our annual sustainability report adhering to the highest international standards, and most of our energy is sourced from renewable sources, including our acquisition of 1.2 gigawatts of renewable energy and the market sale of renewable energy certificates.

Thank you, Leonardo. So we'll present the results of the first quarter of 2022. We'd like to highlight once again the results of the commercialization activity, Cemig as the largest commercialization company in the country has once again brought robust results for this activity. Part of this activity has already migrated to Cemig H. So consolidated what remains Cemig GT and H, we get to an EBITDA with BRL 262 million in the first quarter. As already been mentioned by Leonardo, the importance of the PDVP in 2022 generating greater operating efficiency and cost reduction, bringing new employees to the company through highlighting the equity income with a growth of 55.9%, a gain of BRL 184 million. When we look at Cemig D, similarly, in the first quarter, the intense rainfall that happened, especially in Minas Gerais decreased the volume of energy distributed that also occurred in the first quarter since it rains until February, but that's when we see in the captive market, the drop was higher, the rainfall brought a reduction, especially in the rural category, in irrigation. We remain in transport for clients in line with the 0.3%. Cemig GT, in addition to the strong commercialization activity, we also have the FX effect, the foreign exchange in the first quarter was below closure from December. So there's a positive effect in the financial results of BRL 255 million. When we compare with the first quarter of '21, it was the opposite effect. We had a negative effect of BRL 619 million. Now looking at the growth of EBITDA and profit, we can see that Cemig presented recurring growth of about 16%. We had some effects that impacted EBITDA in the first quarter of '21, the sale of Light in January, and the review of the tax effect. But excluding them, we see imported growth of close to 16%. On the net profit side, we see growth of almost 50%. In addition to the effects mentioned, we also had the effect of FX exposure, as I mentioned before, in 2022, this was a positive effect since the FX was below the closing value of December. As for Cemig GT, we see the results; as we mentioned, the commercialization activities that took opportunities from the market and brought an increase of 26% on EBITDA, achieving BRL 944 million. Then the income effect when we removed that FX exposure effect; we see growth of 82%. At GT, there's already part of the EBITDA that migrated to Cemig H. Even with the beginning of this transfer of activity to Cemig H, Cemig GT still had a highlight position in the group. At Cemig D, as we mentioned, rainfall has affected consumption, and market demand in the captive market. Excluding the nonrecurring effect of the tax provision we talked about, the EBITDA had a very small reduction of 1.7%. Excluding this effect, despite the intense rainfall, the company presented an increase of 10.6% in its recurring net profit, achieving BRL 376 million in the first quarter of 2022. Now breaking down the market, as we talked about, in the captive market, we had a reduction of 6.6%, especially due to the rainfall on rural customers because of irrigation. There have also been some customers that have been reclassified in this category for not meeting health regulations. It's important to note the increase in the injected energy achieved at 5.3% of the energy consumed at Cemig D. Next year is an important year because of tariff reviews, and our market will be adjusted. These effects will be mitigated since the 14300 bill addresses this point that affects not only Cemig but all distributors in the country. Here, Reynaldo already mentioned that we are within or below the regulatory OpEx and above the regulatory EBITDA, and this accomplishment of the EBITDA was in the fourth quarter of 2021. Looking at OpEx since 2020, we've been able to remain underneath the regulatory parameters, the main impacts we have in the realizes, the post-employment program that we're working to mitigate the effect of the post-retirement costs in Cemig's balance sheet; we addressed that in the fourth quarter with life insurance. We still have health plans and funds that are ongoing. When we look at EBITDA, as I mentioned, at the end of 2021, we were able to exceed the regulatory parameter for EBITDA, achieving in the first quarter of 2022, BRL 655 million. As for operational costs and expenses, Cemig has been working strongly to maintain its costs below, especially the regulatory parameters. The PMSO had an increase of 4.5%. But when we look at the effect of inflation on costs that was 11.3%, it remained below noting the reduction of expenses with personnel, the collective bargaining at Cemig, the base date is November. That was the inflation in the personnel costs, but there was still a reduction of 8.2% as a highlight of the increase of our services for maintenance of electrical equipment and IT expenses, which are important investments to bring quality and efficiency to the services provided and the post-retirement with the actuarial assumptions for the rates which were very high in 2021 and have affected the costs. But as for the other costs, there has been an increase but those costs that are transferred to consumers that are the energy purchase costs and gas purchase prices. These effects are evened out with the tariff adjustment. As for Gasmig, Gasmig is having a more and more important role in the Cemig group. We see in 2021 due to the thermal dispatch, the volume sold was above the previous years. In the first quarter, despite this thermal dispatch being reduced, there was an important EBITDA growth of about 11% and a net profit of about 20%, 2.9 million of cubic meters negotiated per day, especially with industrial customers. Gasmig should be noted, was in the tariff review process ongoing that was concluded in April 2022 with some very important effects for the company. Despite the average reduction of 10.05% in the tariffs, we need to highlight the WACC. There was a reduction to maintain it in line with other players, other companies that also distribute natural gas. We maintained it similar, the WACC is very important, 8.71%, regulatory EBITDA for '22 is BRL 620 million. With this tariff review, Gasmig renewed ahead of time its concession contracts for another 30 years. It will go to 2053 and there was a payment of grant bonus that was integrated into this remuneration base. So the net remuneration base at Gasmig after the review is BRL 3.4 million, and all PMSO costs were recognized in full by the regulator. That's a very important item for the company, and it will bring greater returns. Noting, as was mentioned, Gasmig has a huge potential for growth in the state of Minas Gerais since the state still lacks a lot of gas supply, especially in the interior of the state. Now I'll turn over to Leonardo, and who will talk about the consolidated debt profile.

The company presents very comfortable leverage levels, close to 1x the EBITDA. We see that in this quarter, the cost of debt had an increase, a result of the increasing interest rates and inflation. This is a scenario issue that Brazilian companies will go through 2022, maybe '23, with this increase before it starts to go down. This is something that we understand to be a scenario related to the economic scenario, the macroeconomic scenario that Brazilian companies in general are experiencing. The company's debt profile is very comfortable today. In 2024, we have the maturities of eurobonds at BRL 1 billion. The company is very mindful of the possibility of reducing this wall in 2024 with the use of some instruments, either repurchase of bonds or U.S. dollar block that allows the company to have no FX exposure risk in 2024. The company now has the best moment understanding how to generate more value to shareholders and work towards the reduction of these maturities concentrated in 2024. Our cash flow is very robust in the quarter, close to BRL 3 billion. It was efficient. We had higher costs with the purchase of energy. We had about BRL 1 billion on the cost of energy purchases that were not in our tariff and will be integrated into upcoming tariff adjustments. This cash generated was sufficient for the company to meet this higher cost of energy purchases as well as the payment of loans and funding of BRL 830 million this quarter, as well as the company's activities and investments, closing the quarter with a comfortable cash level of BRL 2.5 billion. These are the information of the quarter. We always like to close with this slide showing the commitments made by Cemig with the market and with our shareholders. These results that the company has been showing as we complete them quarter-over-quarter with consistent growth, and they're a result of the different actions that the company has been implementing related not only to positive financial results but the improvement of operational quality for the Cemig Group as a whole. The objectives that have been fulfilled. We have many that are related to quality and service to our customers, operational efficiency, liability management of our bonds, the divestment aspect at Renova and Light that we did in '21, as well as the strengthening of Cemig D's investment program, partially achieved because they're still ongoing as the divestment of nonstrategic assets, restructuring of the retirement benefit plans at this time. We're discussing with the trade entities, with employees to discuss this aspect that generates value to the company, and we have the possibility to achieve a convergence in understanding, and our digital transformation process where the company has been investing heavily in 2022. Our digital transformation process has already started to present positive results as we mentioned. The percentage of collection through digital channels exceeded 50% in 2022 compared to slightly more than 32% in 2020. That's also a result of the investments that the company is making. In progress, renewal of concessions, investment in renewable generation sources and grow retail electricity sales. The company is paying attention to this very closely in '23 and '24 will have important years for this process of market opening. Cemig has a history of success in service, as the market started to open for the service to free customers, we understand that this is also a time for the company to take an opportunity as we are prepared to also serve this market.

Our first question from Natalia, sell-side analyst.

First, congratulations on your results. I'm here to ask if you can give us more detail about the energy allocation strategy in Cemig GT that led to an improvement in margins in the quarter? Also, if you can please tell us more about the benefits of this contract allocation at the holding.

Natalia, thank you for your question. This is Dimas, Commercialization Director. About your question, the quarter results, I'll try to answer both questions in one. The first question is that we transfer and we're in the process of transferring energy from GT to the holding, especially or only the energies acquired from third parties. Third outsourced energy responds for 3/3 of our portfolio due to the history of the loss of the plants, and for us to maintain our market, we chose to acquire energy from third parties. The first in the short and midterms and now in more long term. So we are in this transfer process, which brings a gain and the tax aspect to the fact that these energies are directed to the holding; we have this tax benefit. In combination with that comparing '22 to '21, we had an increase in sales at around 20% in the amount traded. This is occurring at the same time when we started the auctions in 2018. The beginning of delivery was more affordable energy when we bought, and the beginning of delivery started now in 2022. So we had a sales increase at a good market price at the same time, as the beginning of the entry of these energies that we acquired in the bids. In December, we made a sale of around 300 megawatts and BRL 200. When the market was believing that the power would be expensive, and we believed it would go down, there's a structure there in the hydro meteorology analysis that indicated a good year as it was in terms of rainfall. So we made a sale of around 300 mega at around BRL 200 versus the PMD of around the minimum for the quarter, which also brought significant gains. In combination with all that, with the turn of the year, most of our contracts changed in the anniversary adjustments at the end of December, so we still have a percentage of around 18% of our contracts corrected according to the IGP-M index that's also higher than the IPCA index. This 18% has also contributed greatly to this improvement in results. I don't know if I've answered everything you asked.

Next question Francisco, sell-side analyst, BBI.

Can you hear me?

Yes, Francisco. Go ahead.

I have a few questions, but I'd like to elaborate more on our colleagues' previous question. The impression that we have, at least looking at the numbers, is that GT in this first quarter sold around 3,300 megawatts of energy combining GT and holding, the commercialization business at the holding. When we look at this total volume, it represents about 75% of the guidance for the year of energy sales is 4,370 in the last guidance. So my question is, is everything remains constant? We should imagine that the sales volume in the second, third, and fourth quarters should not be much higher than the guidance of 4,300? Of course, to make up for the fact that the first quarter was lower and the guidance is an average for the year. So that's the question that is related somewhat to our previous question from our colleague. And if it is so, would that be related to the ramp-up of sales of incentivized energy? But in the guidance, this 1,515 mega and we're not certainly if all this is being delivered to Cemig and if they're selling all this volume or if it's to be gradual throughout the year? So that would be my first question.

Francisco, thank you for your question. It's almost a continuation of Natalia's question. We, as every year, will start to allocate energy as best as possible. Our seasonality contemplates that. You've looked at it with a lot of knowledge there, but there was seasonality in line with where we concentrated our consumption, our energy more in the second half of the year and a little bit more in the first half than the second. There is a ramp-up because we also have, as I said, there's been an increase in sales of 20%, and these energies will come in. Throughout 2022, we had almost the amount already guaranteed. There's already a 20% sales increase, but we're in a sales process where we will meet the guidance reaching that target that is proposed at the guidance. But it was basically, as I said, it's a seasonality movement and a ramp-up for sales increase. Did I answer?

I just wanted to add a follow-up in qualitative terms. If you were to make an educated guess of how you see GT's results for the rest of the year, GT plus the trading at the holding, altogether, assuming that the current levels. GT's EBITDA plus the trading in your opinion, should it be in line with the first quarter of '22, should it be higher or lower? I would guess higher, but I'd like to hear qualitatively your opinion about this.

Qualitatively, you mean in terms of sales volume?

No, in terms of EBITDA.

Looking at the first quarter, it should be higher, and it will be higher. We face an internal challenge to achieve more than BRL 1 billion in EBITDA for 2022. It is attainable and not just a goal. The results from the fourth quarter suggest we can reach around BRL 1 billion in EBITDA in commercialization and trading.

Our next question, Andre Sampaio, Santander.

I have 2 questions. If I could start with Santo Antonio. If you can tell us a little bit about how it's progressing and the capital increase negotiation. If you have any information about the other partners? And also about Santo Antonio, if you can comment whether there's any other lawsuit or arbitration that we can expect for the coming months or years? The second question would be, if you can tell us about the evolution of works to reduce the post-retirement liabilities.

Hello Andre, this is Marco, the company's Participation Director. About Santo Antonio, we already released that we are not interested in capital allocation. Speaking for Cemig, we will not allocate or invest any money in Santo Antonio. As for the other partners, we have nothing to comment. As for the arbitration, to the best of my knowledge, there are no new arbitrations coming in, in the next few years. Just to clarify, this is my 11th day in the company. I haven't heard anything about other arbitration processes aside from Santo Antonio. For post-employment, post-retirement, Leonardo will answer.

Thank you for your question, Andre. We recognize the complexities involved in the post-retirement processes, which include restructuring our pension and health plans. Since 2020, we've been in negotiations and have engaged consultants to aid in developing our restructuring proposals. Our aim is to create a financial plan that mitigates Cemig's risks while providing more flexibility for participants in managing their resources. We believe it would benefit both parties to be part of this restructuring process, and we are optimistic about the outcome. For the health plan, the restructuring entails discussions with trade entities to reform the plan available to both retirees and active participants, which can be complex and time-consuming. We have successfully negotiated a reduction in our life insurance obligations, one of the three post-employment liabilities, which has led to a decrease in our balance since the end of 2021. We are hopeful about the progress of the other two processes as well, as we understand that pension plan issues requires approval. The process has commenced and is expected to conclude by 2023. We believe things are advancing well, and we anticipate that in 2022, we may receive positive news that could reduce both our balance sheet obligations and the annual expenses reflected in our financial statements. These are intricate processes, but discussions are ongoing with the relevant trade and regulatory bodies, including those related to the pension plans, and we hope to share positive updates in an upcoming conference call, similar to what we reported in the fourth quarter regarding life insurance.

Moving on to the next question, Daniel, Safra.

I'd like to ask you to please talk about the announcement of the suspension of the CapEx guidance. I'd also like to understand the perspective for the tariff review next year. Is the suspension of this guidance will affect in any way the perspective of asset base for next year's tariff review? My second question, if you may. If you could talk about the divestment process of your stake at Taesa, how this is moving along? What your mindset is?

Daniel, thank you for your question. As for the guidance, there's no connection to the tariff review. We are very optimistic with our tariff review. We believe it's a process that will be important for Cemig D in terms of cash generation and profitability in 2022. We understand that we have a lot of investments to make this year and that these investments will be considered within next year's remuneration base, along with the market adjustment. We are optimistic about Cemig D's results. The guidance effects released in the last guidance last year in May, there has been a cold year, we should tell something up to the market versus require us to do that. We shall have a Cemig day in the third quarter to discuss more about the company's strategy regarding investments and our expectations for future results. In the third quarter, we will have the opportunity to discuss the future of the company. We are very optimistic about the future.

So Daniel, we maintain our interest in the sale. We're studying intensively with the contracted banks to format the sale because it must be something good for all partners. Considering we're in May, we would really like to conclude this process or at least sign the contract this year if we succeed in the process. What I can tell you is that we are very dedicated, and we want to make it happen.

Next question, Louisa BBA.

It's a follow-up to Daniel's question. Part of the question was already answered, but I'd like to understand if the suspension of the guidance for the coming years is more related to the restrictions in the global supply chain that would impact the development of renewable projects that you already have in sight. I'd like to understand if that was the main motivation?

Louisa, thank you for your question. I'd just like to make it clear that the guidance suspension is not related to any sort of reduction in the company's expectation of future results. This is basically related to the fact that it's been 1 year from the last guidance, and our next Cemig day will occur in the third quarter. We understand that that's when we need to provide information to the market; it's best to suspend that guidance since it's been more than 1 year. There's no relationship with that and the frustration of future reductions or future results or a reduction of expectations.

Congratulations on your results. What is the expectation of the proceeds distribution in 2022 in terms of percentage figures?

Thank you for your question. As for the dividend, we have a dividend policy that's the payment of a payout of 50% of our profit. In 2021, the dividend was very attractive, it was above 8%. Considering our results expectations for 2022, which will be positive, we consider that the dividends will follow the same policy and will provide a very attractive yield to our investors. Of course, we need to wait for the years to develop, but our expectation is that it will be a year with positive results and consequently attractive dividend to our investors.

Can you hear me?

Yes, we can.

Congratulations on your results. I actually have 2 questions to ask you. The company has an investment CapEx from what I calculated here from what I saw is at least BRL 5 billion. I would like to ask my first question: does the company intend to focus on wind, power, renewable energy, and so on? How does the company expect with the holdings? Should this develop in the medium to long term, if the company no longer buys energy? I apologize for my language, but the energy from other companies are being self-sufficient.

Thank you for your question. In the past, we purchased energy due to restrictions on our investments. To maintain our market presence, we opted for long-term purchases to build our portfolio. Now that we have the capacity to invest, we are starting to decrease our reliance on outsourced energy. We're planning an auction in June to acquire pipelines for solar and wind power generation, along with some energy we might source from third parties. Our goal is to transition towards our own energy generation. We are actively investing and acquiring pipelines, which will be evident in the auction we will conduct in June. This aligns with our current investment capacity. Did I answer your question?

Yes, if I may add another question. I apologize for intruding but if the company went down to the 25% minimum, I would not see anything wrong. But since the company intends to participate in this auction and invest in other areas in the state of Minas, as already mentioned in different municipalities and so on, does the company intend to participate in public bids, for example, for energy transmission? In this case, the cash disbursement wouldn't be or you are the ones who know the amount should be paid. But wouldn't it be better to get a cash reduction to give stamina for the company and in that case, reduce the dividend so that the company has more stamina to participate?

Thank you for your question. We understand that maintaining the policy of 50% of dividends is sustainable and gives the company the possibility to continue to invest, maintain its leverage at low levels, giving attractive returns to our investors in terms of remuneration for the investments in the company. I take this opportunity to thank you all for participating in our results earnings conference call. We have very robust results, and we have reason to remain optimistic about the company's future and the results of coming quarters. We conclude our results conference call for this quarter.

The conference call of the earnings results of Cemig's first quarter of 2022 is closed. The Investor Relations department remains available to answer any questions and doubts. Thank you very much for participating. Have a great day.