Energy Co Of Minas Gerais Q3 FY2022 Earnings Call

My name is Carolina Sena, Superintendent of Investor Relations at Cemig. We are starting the earnings conference call for the third quarter of 2022, and I would like to welcome Reynaldo Passanezi Filho, our CEO; Dimas Costa, Chief Commercialization Officer; Leonardo George de Magalhães, CFO and IR Officer; Marney Tadeu Antunes, Chief Distribution Officer; and Thadeu Carneiro da Silva, Chief Generation and Transmission Officer. I will now hand it over to our CEO, Reynaldo Passanezi Filho, for the opening remarks.

Good afternoon, everyone. Once again, it's a pleasure for us to hold this conference call with the opportunity of discussing with all of you another quarter of consistent and solid results that Cemig achieved. These results are consistent, they're solid, and they verify the suitability of our strategy. It's a strategy of focusing in Minas and winning, making investments in the activities that we know in the territory that we know, which is Minas Gerais. And doing that with financial discipline, being disciplined when allocating funds and at the same time seeking the highest efficiency. So the results once again prove the success of the strategy. We'll start with investments; I believe you can see clearly the recovery of the company's investments, adding up to BRL 2.2 billion year-to-date in the first nine months. This is more than two times what the investment was in 2017 and 2018, so I'd say this is a clear demonstration of an acceleration of the investment program. This year we will open in the distribution area more than 14 substations with a historical average of six, which has an extremely positive effect on value generation by increasing our revenue generation base and as a result, increasing the company's revenues. Also in generation, we have approved an additional 220 megawatts peak in investment projects. We have a program that is being implemented, showing the numbers you've seen that BRL 2.2 billion and we have new projects already enabled, all of them with strong value generation for clients associated. Here, we're talking about the approval of two major projects in photovoltaic plants: Boa Esperanca, with 100 peak megawatts and Jusante with 87. In Cemig Sim and distributed generation, we have more than 30 large megawatts and investments in nine photovoltaic plants, totaling over BRL 1 billion in generation projects. As far as investments, I think this is the main message: to invest with capital discipline, appropriate allocation in distribution, transmission, and the regulatory market with known amounts and known returns, and in distributed generation and generation, always with capital discipline linked to the destination of that power to known clients. Regarding OpEx and operational efficiency, our mantra of being below the regulatory OpEx is something we have been able to achieve since last year, and we remain committed to this. This is to guarantee an EBITDA above regulatory EBITDA, generating cash through efficiency and investing that cash in projects with a strong capital discipline that will add value to the company. This is the overview of the strategy—capital discipline and efforts for greater efficiency. This has also been successful, as all of you recognize. We divested in Light and Renova and reduced our stake in Santo Antonio; this process will continue. So, these are my comments to reinforce what our strategy has been, focusing on Minas and delivering with strong capital discipline, seeking efficiencies, and concentrating our efforts on activities where we have a competitive edge and can generate value to all shareholders and to society, providing high-quality public service.

Thank you, Reynaldo. We will continue then with our presentation and I turn the floor to Leonardo George, our CFO and IR Officer.

Good afternoon. Thank you very much for attending our conference call with the earnings of the third quarter. Reynaldo talked about the consistent results that Cemig has achieved and how Cemig has always been a reference in ESG practices; ESG is in our DNA. This quarter, we want to highlight the renewal energy certificates that we distribute to our clients of Cemig Sim. The Cemig Sim REC certifies the renewable source of our energy, improving the reputation and value of this green energy supplied to our clients. At the beginning of electrification for part of Cemig's vehicle fleet, our new investments in Jusante and Boa Esperanca comply with our goal to invest in renewable energies. Our matrix remains 100% renewable, with 97% of it from hydro power; however, we plan to change this matrix to include a share of solar and wind power. Moving forward to our next slide, we will discuss the results directly connected to the third quarter. The highlights are on Slide Number 8, where we show that we continue transferring commercialization contracts to Cemig Holding from Cemig GT. This is a strategy we released to the market a while ago that we would continue transferring trading contracts to Cemig Holding because we understand there are several benefits. As a result, we've generated BRL 452 million in EBITDA in the first nine months of 2022. Cemig D has shown great results, and we will elaborate more on this shortly. We have reached 9 million consumers, which we are very proud of, focusing on quality and agility in service. Once again, our quality indicators remain within historical regulatory standards, showing notable performance. The positive impacts on our results also stem from our investment in Santo Antonio, which yielded BRL 200 million in cash with a profit effect of BRL 136 million, due to negotiations with Andrade Gutierrez. This quarter's foreign exchange effects were significant, showing a negative balance close to BRL 68 million. For the nine-month results, we see positive results, with adjusted EBITDA showcasing nearly 20% growth year-on-year. The EBITDA for the first nine months exceeded BRL 5 million, and net profit adjusted for non-recurring events is also witnessing a 50% increase compared to 2021. It's essential to note that profits for 2021, which formed the base for dividends, were enhanced by non-recurring events, like the effects of the renewal of concessions and GSF agreements positively affecting results. Although the ICMS provisions introduced a BRL 1.3 billion effect in our 2022 results, our profit remains strong, demonstrating Cemig's robust cash generation ability. We are optimistic about the year's final results and our capacity to provide attractive dividends for our shareholders. In our next slide, we will delve deeper into the quarterly results and I will ask Carolina to continue the presentation with more visibility on the effects that have impacted the third quarter results.

Moving on to the specific results of the third quarter, we continue to see the effects of the migration of trading activity to Cemig aid. The presentation is consolidated, but we always highlight this especially when we get into Cemig GT slides. The non-recurring items still have a positive effect in 2021, and excluding those effects, we observe a cash burn rate increase of 4.6% and recurring net income growth of 56%. Comparatively, the company's operational costs and expenses have risen by 15.2%, particularly related to post-employment issues due to the annual actuarial report. This recurring increase impacts our costs, which we have already addressed in terms of life insurance, and we are actively working to address other items relevant to retirement benefits. We also experienced an increase of BRL 55 million in third-party services, which is a significant expense that generates revenue for the company owing to investment in the quality of services provided. We are implementing the IBM System to unify all communication channels, which will improve client communication and enhance collection agency expansion. Regarding our consolidated cash flow, our operating cash generation was nearly BRL 6 billion. This is crucial, considering we need to deliver a robust investment program, which was previously communicated to the market at BRL 22 billion for investments in Minas Gerais. Over the year, we also managed the restitution of fiscal matters in tariff payment with dividends and loan payments. Despite everything, we are closing this quarter with close to BRL 5 billion in cash, signifying our robust cash generation that will support our investment program. Concerning our debt profile, the leverage stays below one-time. We continue to manage our liability, evidenced by a BRL 500 million buyback in 2021 and another planned for 2023. In Cemig D, we already have an average tariff increase of 8.8% this quarter. The adjustment for Cemig distribution results is delayed this year but we anticipate impacts in the third quarter. Despite losses to GT due to captive client migration, we recorded an impressive recurring net income growth of 16%. Within the energy market context, we note a stable quarter-on-quarter performance with movements in the captive sector. We can say Cemig D remains committed to regulatory limits on operational efficiency while improving service provision through various initiatives, including smart meter installations and illegal connection regularization. Our delinquencies have remained low, supported by growth in digital payment channels contributing to the significant savings for the company. In summary, Cemig D consistently meets regulatory operational standards and has contributed positively to the Cemig Group.

Thank you, Carol. With continued improvement in the results despite the reduced power distribution, we maintain good results. This slide presents commitments to our investors and stakeholders regarding how we've delivered. We've met various commitments such as staying within key efficiency indicators and partially divesting from non-strategic assets, such as our shares in Light and Renova. We are halfway through restructuring the retirement benefit plan and expect to communicate good progress towards improving our P&L soon. Digital transformation and technology investments are crucial, highlighted by our agreement with IBM, positively affecting service quality. Ongoing commitments, such as concession renewals, are closely monitored. We also recognized potential prospects linked to renewable energy investments. Observing the energy market opening could generate beneficial synergies to enhance our trading. This wraps up our summary of the third quarter earnings. We believe that the results have been consistent, and we stand ready to take any questions regarding the earnings results and the company's operations.

Our first question comes from Andre from Santander, a sell-side analyst. We will now open the audio for you to ask your question. Please go ahead.

Good afternoon. I have two questions, the first about the level of leverage that has decreased greatly. I would like to hear from you if we could expect an increase in dividend payments, or if this space will be used for planned investment growth. The second question pertains to the divestment process and the retirement liabilities—what is the timeline for resolving these two issues?

Thank you for your questions, Andre. Regarding your first question, our strategy anticipates a robust divestment program in the coming years—most notably in the near term. Our investments, held within regulation for distribution and transmission concessions, will see us fund these in a sustainable way, while maintaining leverage close to our policy of twice our EBITDA. We believe maintaining a 50% payout for dividends is the most suitable strategy. Last year's dividend yield was around 8.5%, which we feel is adequate. This strategy allows for investments that generate revenue and value while keeping leverage within acceptable limits. Regarding the timeline for presenting results related to retirement benefits: these structural discussions involve talks with consultants, unions, and legalities, which can take time. However, similar to the successful restructuring in 2021 regarding life insurance, we are optimistic about this area. We hope to present positive results by the end of 2023, contingent on favorable negotiations. The same goes for divestment; some assets, previously challenging to sell, have been divested. For example, we have expressed interest in selling Taesa and project to accelerate this process next year. It's tough to give exact timelines for such significant asset sales, but capital allocation for our upcoming investments is always our focus.

Excellent, thank you.

If there are no further questions, we will conclude the Q&A session. I will now hand over to CFO Leonardo George de Magalhães.

Thank you for your participation in our event. Once again, we believe our results have been positive and we remain optimistic about the company's future. The company has consistently delivered its commitments to the market. We hope to hold our Cemig Day soon, where we will share the strategic plan with more clarity, detailing our objectives. In the last few years, we've successfully met many of our established targets and commitments, and we are optimistic about maintaining this trend. Cemig Day will be a chance for us to engage closely with investors, and we will announce the date soon. Thank you again for participating in our earnings call.

Cemig's third quarter of 2022 conference call is now closed. The Investor Relations Department remains available to address any questions or inquiries. Thank you to all participants. Have a great afternoon.