Energy Co Of Minas Gerais Q2 FY2022 Earnings Call

Good afternoon everyone. Welcome to Cemig's Second Quarter 2022 Earnings Video Conference Call. We inform that this call is being recorded and will be available at the company's IR website, where you will also find the company's presentation. Should you need simultaneous interpreting, the feature is available by clicking the globe icon located on the bottom of the screen, choosing interpretation, and then the language of your choice, Portuguese or English. Should you choose to follow the call in English, you can also select mute original audio to mute Portuguese original audio. Now I would like to turn the floor to Carolina Sena, Investor Relations, Superintendent. Please Carolina you may proceed.

Good afternoon. I’m Carolina Sena, CEMIG’s Investor Relations Superintendent. We now start CEMIG’s second quarter 2022 earnings call and webcast with the following executives: Dimas Costa, Chief Commercial Officer; Eduardo Soares, Chief Legal and Regulatory Officer; Leonardo George de Magalhães, CFO and IR Officer; Marco Da Camino Ancona Lopez Soligo, Chief Participation Officer; Thadeu Carneiro da Silva, Chief Generation and Transmission Officer. For the initial remarks, we turn the floor to our CFO and IR Officer, Leonardo George de Magalhães.

Good afternoon, everyone. Thank you very much for being here with us in this conference call for the results of the second quarter of 2022. Once again, we are bringing results that we understand to be sound and consistent. On Slide number 3, we have our main highlights related to the second quarter of 2022. Adjusted net profit of R$1.1 billion, 62% higher quarter-on-quarter comparison and also robust cash generation EBITDA close to R$1 billion, R$1.8 billion is significant variation when compared to the second quarter of 2021, 37% higher. Other highlights involve operating efficiency. We had another voluntary redundancy program with almost 300 employees enrolled and a total program cost of R$49 million. This helps the company in its efficiency, and it has paid off in around eight months even when we hire the same number of employees. We are now bringing in employees that are starting their career, which helps in the culture of the company. They’re very motivated and are also at a lower cost. With these 300 employees, we understand we will achieve positive results. The fourth topic here, the highlight in the quarter that involves the tax credits on ICMS, is due to the Law 14385/22 that was approved. Our tariff adjustment already paid R$2.8 billion. That is related to a period that is over 10 years of tax reimbursements. This is a different interpretation from what the company had taken. We had understood that we should return to consumers 10 years of tax credits, and over that would already be a result for the company. Because of that change, we had to make a provision in our balance sheet of R$1.3 billion; that’s why the adjusted result is much higher than the real result in this quarter. Other distributors also made the same provision, and we understand that this deserves a special note. With the management of this tax credit in our results, we had good arguments to advocate for our rights, even if we had to face a legal discussion on the topic, and we do understand we have good arguments in our financial statements. We mentioned that we are talking to our legal aids about possible developments here, so unfortunately, we cannot disclose much more information, but we still maintain our position. In terms of renewable investments, we invested R$137 million a year. In GT we have in our strategic planning already approved from R$1 billion to R$2 billion up to 2025. We had this investment in this quarter and we hope that very soon we can bring you good news in terms of distributed generation and centralized generation as well. On the next slide, we have our investment program. We have a very bold investment program for this year, almost R$4 billion. Just in distribution alone, this is an important year for us. That’s the last year before the tariff review, with R$3.2 billion in investments. We have invested in the first half of the year almost R$1 billion in the distribution company, far from the R$3 billion that we had planned for the year. But we have a special highlight here for July, which is out of the investments in the semester, where we invested almost R$300 million. We are confident that investments in the second quarter will accelerate, and that’s why we believe that we have a second semester with an execution performance that is much higher than what we have seen in the first half of the year. The second quarter, we were able to invest much more than we invested in the first quarter of 2022, and even considering the figures of July, we will have a second half of the year with higher investments compared to the first half of the year. We will try to reach the R$3.2 billion that is our original plan. This is just, also for transparency and showing our commitment to the market and our performance. Now, in terms of alignment to the ESG practices of the company, it is very important relating to the 'S' from ESG. We have approved a policy here for human value, diversity, and inclusion policy with the board. CEMIG is a company with 100% of renewable resources, so sustainability issues are part of the company’s history. We are implementing a very important program called Minas LED. We are going to switch the public lighting of 600 municipalities to LED. We expect a lot of savings for the city halls and city administrations as well. We are also acquiring almost 1.6 renewable energy certificates, and we have got a certification of these certificates that we issued and are certified by important agencies. Now talking about the financial results of the company, our trading strategy is posting excellent results. We have a great strategy here that is a winning one. In this second quarter of 2022, we increased 18.4% the volume of energy sold to consumers in the free market. I highlight here once again that trading is now divided between Cemig Holding and Cemig GT. Remember that the transferring of contracts to Cemig Holding is going to provide better transparency for the numbers and will also provide us better tax efficiency. We also talked about the renewal of our headcount, thanks to the voluntary redundancy program and also equity income with positive results here in the second quarter of 2022, partly related to our investments in Santo Antonio. We were able to reverse provisions that we had in the second quarter. Also, PIS and Cofins tax credits had a negative effect on our results, but this is a one-time situation. The volume of electricity distributed this quarter was higher by 1.34% year-on-year, slightly lower in the captive market, but in transport, it was 3.7% higher. So total, again, over 1% growth in the market, which is very similar to what we have seen regarding growth in other markets in Brazil. In this quarter, we had a negative effect of the FX due to FX variation and also the mark to market of our euro bonds, which had a negative effect of R$294 million. If you look at it, we did have a positive effect in Q2 2021, with R$408 million compared to the negative effect of R$249 million, which is again a negative effect for the second quarter of 2022. On the next slide here, on Page 8, we have consolidated results. We can see results that have nonrecurring events affecting 2022. However, something that draws our attention is the financial write-off of reimbursements to be received. We did have that in our financial statements related to indemnities and reimbursements that we expect to receive from plants of Lot B that were auctioned in 2015. We capped them, and the most significant here is Três Marias, where we had R$800 million posted, and we expected to receive these amounts now by a resolution that has defined the criteria that should be used for the evaluation reports. We developed the report and will send it early in August. On the other side, even with a reduction of R$172 million in the results, we have R$650 million to receive, which I think is more tangible now because we are getting closer to receiving that. We are discussing now about this report and expect to receive that amount in the near future. About the consolidated result in the quarter, we see that adjusted net profit increased 47%, with EBITDA increasing 25%. When we analyze the second quarter of 2022, the most significant event was the provision of the PIS and Cofins tax credits. But with EBITDA growing 37% and net profit 62% net of non-recurring events, that is the company when thinking about its current operations adjusted by those one-time events is still posting positive results. We’ll talk about operating costs and expenses. I will turn the floor to Carolina, and she will move on in the presentation.

Okay. Now talking about consolidating operating costs and expenses. Here, we see that there was an increase of 14.3%, but we usually say that these are quality costs. We had already announced that 2022 would be an investment year. We would invest a relevant amount in IT, and we are already seeing results in the improvement of service and also in disconnections and reconnections. These are expenses that bring benefits to the company, and we are also seeing that in regards to higher collection. We also have our voluntary redundancy program and part of that is inflation that has increased costs in 2022. Now the debt profile, the consolidated results. In 2024, you already know that we have a $1 billion debt to be paid, and that debt goes up if the FX increases. We already included here in our schedule R$1 billion that was issued by Cemig D, which is due in 2027. It’s important to show the progress of our ratings. From 2018 to 2022, we went up in the ratings agencies, and we are AA+ with Fitch and S&P, and AA at Moody’s. We see that we had a growth in and increase in our cost of debt due to the Cemig rate, and it has to do with the macroeconomic scenario. But we think that in 2024, this cost will come down. On the other hand, we are at a very low level of leverage, at 1 time net debt over adjusted EBITDA. Therefore, we are in a very comfortable situation regarding our debt or leverage. In consolidated cash flow, we started 2021 with almost R$3 billion. We are ending the second quarter of 2022 with almost R$3.8 billion. Part of the cash came from CVA tax credits, and we paid almost R$1 billion in debt. We also paid dividends at the end of July. We raised R$1 billion at Cemig D. The investments that we already talked about are at an accelerated pace for 2022. Now talking about Cemig D; we can see that what affected strongly the results here were the tax credits already mentioned by Leonardo before. On the other hand, we did have additional revenue from the use of infrastructure distribution. We know that the results were a little lower than the first quarter. But we understand that with the adjustment now in the second half of the year, of 8.8% for Cemig D on average, we will have an improvement in the cash generation of the company. The electricity market was up 1.34%. As mentioned in the captive market, we had a slight drop of 0.8% in rural. We can highlight that because many rural clients do not remain in this category since they did not meet the criteria of ANEEL. They were recategorized for commercial clients, which increased by 18%. Cemig D is still having a problem with GD. Currently, 5.7% of used energy comes from injected energy. However, with Law 14,300 after January of 2023, this will no longer be a problem for distributing companies. Next year is a year of tariff review, and our market will be adjusted as well. Regarding filing losses, we are still within the regulatory limits. This is an achievement, and our goal is to maintain ourselves within those criteria. We are continuing with the same initiatives: maintaining inspections, changing meters, and legalizing illegal connections. Just with that, we saved R$160 million when we complied with the regulatory losses. Talking about delinquency, we have some highlights here. We have a collection rate very close to 100%. This is a very successful result. We are increasing our digital payment options. PIX has contributed greatly here. This growth allowed us to decrease costs by 6.74%. The highest level of collection for a distributing company still comes from special agencies, and the highest cost of collection when compared to other receiving options and losses. When we compare the first half of 2021 to the first half of 2022, we have some differences here. When we look at that increase, we did have an increase here, but collection was up 56%. We are still working on disconnections to control the delinquency levels of the company. Going back a little, because the market already knows about the tariff adjustment for Cemig D, the anniversary was May 27, 28 but this year was a postponement. The adjustment only happened after June 22, at an average of 8.8%. We have not seen the effect of this adjustment in covering Parcel B, and we will only be able to see these results now in the second half of the year. As I mentioned before, we were successful in raising R$1 billion in Cemig D with two debentures series with average tenures of five and seven years. Here our OpEx and regulatory EBITDA, we see that we are performing a bit over the regulatory OpEx. However, it’s important to show that we are committed to ending the year within the regulatory limits. The second half of the year, with the average of 8.8% increase in tariffs, will contribute to meeting that commitment. In the EBITDA, we are above the regulatory limits as we have achieved in the past. Now regarding Cemig GT’s results, we see that the recurring result was surprising. We grew the EBITDA by 87%. Even highlighting here the fact, which Leonardo already mentioned about the reimbursements for the company, Gasmig, we always bring you the slide to show its performance. We see that EBITDA was up 0.6%, and this result is in line with the expected recurring EBITDA for Gasmig. Last year, we had an increase because of thermo dispatch. It was an exceptional year, but we are very happy with Gasmig’s results. This is a recurring result. Now we are going to start our Q&A session.

We have a question about the payment of dividends and interest on equity. Is there a possibility of payments of interest on equity and dividends to be quarterly payments? Leonardo, can you comment on that?

Our bylaws define the payments of those every six months. Considering our investment program, we consider that our policy now is the right one. If we maintain 50% payout for payments every six months, we can assure payments for our investors. This way, we can also carry out our investment plan sustainably. That’s why we believe we are able to maintain our policy of payment every six months. I understand that there is an expectation of results for this year, and the second half of 2022. We believe we are going to have a very attractive return for our investors.

There is another question from André Domingos from AZ Quest Investments. About the plans, which concessions are due in 2026 and 2027? Are you going to require renewal? Can you talk about the process? And about the bond that is due in 2024, what is the strategy of the company? Are you going to prepay it in 2023? Or are you going to extend the debt?

Now about the plans you are talking about Emborcaçâo Nova Ponte and Sao Cemig, right? They represent an important share of our generation. Yes, we are interested in renewing these concessions. We are working on this topic and considering the periods of time stated in the regulation. We have a workgroup discussing the alternatives, the best scenario to renew these concessions. We are very interested in these renewals. About our bonds for 2024, I don’t know if you remember, André and everyone else as well, that in 2021, we posted a strategy about the liability management for the bonds. When we said that we were going to have an initial tranche where we would buy back $500 million in those bonds, we would have a second one up to 2023. We believe we have around $500 million to pay at maturity or close to maturity with no type of premium, which should work. I can tell you that we have executed the first tranche, and our strategy is to work through this process in stages for this liability management. The company will maintain its strategy. We understand that these movements buying back bonds are natural and should happen ahead when the company understands that this is the right moment at the price of the bond in the secondary market, the FX rate, and so on. We have defined the strategy. We’ll keep the strategy, we understand this as the right strategy, but now we are just waiting for the best moment to execute this liability management in order to reduce the concentration of this bond in the long term. If we can, however, if we compare the cost of issuing new bonds in the international market, the costs are too high. It would be better for the company now to have a local issuance. This is what we foresee under the current scenario, and that’s our expectation.

Our next question is about the divestment of Taesa, please. I would like to know more information about the possibility of divestment of Taesa.

I will turn the floor to our Participation Officer, Marco.

Hello, thank you very much for your question and good afternoon to everyone. Well, the company is interested in divesting some of its stakes. Taesa is one of them. Right now, we are talking to stakeholders and as soon as anything relevant happens, you will know about it. We will inform you as usual.

That’s it. Thank you. Next question from Pedro Kretz. He’s asking about the reduction of installed capacity that went down to 180 megawatts compared to the first quarter of 2021. He would like to know why this reduction happened? I would turn the floor to Thadeu. Also, there is a question related to the company’s approach for green hydrogen energy?

Thank you for your question. There were two reasons that caused the reduction of our installed capacity. First, we sold our stake in Renova. Second, we diluted our stake in Santo Antônio, and that happened at the end of the first half of the year. Regarding green hydrogen, we are working on that with Gasmig, and we aim to have off-takers involved, thanks to its penetration in the state so that we can produce green hydrogen when needed. Thank you very much.

Next question from a sell-side analyst. MME has opened a public hearing about the assured power review of HPPs. Can you comment on preliminary data? I will turn the floor to Dimas, our Commercialization Officer.

Good afternoon. Thank you for your question, and good afternoon, everyone. Yes, we have that reduction of shared power, and Cemig is following that. There are two different blocks within this sector of the generation sector. We are following that up and we do not have a final position. Right now this is in the hearing stage, and we are analyzing that with the whole segment, but there is no clear position on that yet.

Thank you very much, Dimas. Now moving on, we’ll turn the floor to our Financial Officer for his final remarks and talk about the final slide, which is the slide that we bring to the market with our commitments.

Well, every quarter we publish this slide showing all the commitments made with investors and how these commitments are going. You can see that a number of them have been achieved. They are related to the technical and operating efficiency of the company in terms of divestments. These have been done such as Light and Renova. We still have and are working on our divestment processes. These are complex processes, which involve various resources. I’m confident that in the midterm we’ll be publishing other investments. We understand that those assets are complex, and we were successful in divesting there. We will continue with digital transformation, restructuring, retirement benefit plans. We have a strong IT department, and we see good results with our clients. We aim for progress, and this will add value to the company, particularly in renewing generation concessions and investments in renewable generation sources in the second half of the year. In the short term, we expect to bring good news to the market about our planned investments and also the growth of retail electricity sales. This represents an opportunity to increase margins. This second quarter was marked by the provision of those tax credits as mentioned. Also, this was the last quarter before our tariff adjustment, which will have a full effect in the third quarter of 2022. This allows us to be very optimistic regarding future results of the company. In the third quarter, we’ll have an investor meeting to discuss our strategy in more detail. You will be informed of the date as it is finalized. So that’s it. Thank you very much for your participation.

The video conference for the second quarter 2022 Cemig's earnings call has ended. The IR Department is available to take any further questions you might have. Thank you very much, and have a nice afternoon.