Energy Co Of Minas Gerais Q1 FY2023 Earnings Call

Good afternoon and welcome to Cemig’s First Quarter 2023 Earnings Video Conference Call. We informed that this call is being recorded, and will be available at the company's IR website, where you also find the Company's presentation. Should you need simultaneous interpreting, the feature is available by clicking on the globe icon, where you find interpretation on the bottom of your screen. By choosing interpretation, you can then choose the language of your choice, Portuguese or English. Should you choose to follow the call in English, you can also select mute original audio. Now I would like to turn the floor over to Carolina Senna, Investor Relations Superintendent. Please Ms. Senna. You may proceed.

Good afternoon, everyone. I'm Carolina Senna, Cemig’s Investor Relations Superintendent. We now start Cemig’s first quarter 2023 earnings call and webcast with the following executives: Dimas Costa, Chief Commercial Officer; the Chief Legal and Regulatory Officer; Leonardo George de Magalhaes, CFO and IR Officer; Marco Da Camino Ancona Lopez Soligo, Chief Participation Officer; Marney Tadeu Antunes, Chief Distribution Officer; Thadeu Carneiro da Silva, Chief Generation and Transmission Officer. For the initial remarks, I would like to turn the floor over to our CFO and IR Officer, Leonardo George de Magalhaes.

Good afternoon everyone. Thank you very much for being here with us in this conference call for the results of the first quarter of 2023. These are great results. Very positive. Once again, another quarter with sound results. And in this initial slide, we have some highlights for the first quarter. The EBITDA was very good, R$2.1 billion. This is a recurring EBITDA for the company, showing an 8% year-on-year comparison from last year, which was already a good quarter. And we were able to repeat in this first quarter this very good result. A balanced portfolio shows that this quarter the company needs several businesses, whether distribution, generation, or trading, especially these three areas have greater potential to generate cash and results, and the results were indeed positive, over R$1.3 billion in profit, a 5.7% increase when we compare it to last year, which was also a good quarter. Therefore, this allows us to be very optimistic for the results in 2023. We'll comment more on that on the next slides. The divestment of minority shareholders is an important event, and in this first quarter, actually in the second quarter, we will draw your attention to the tariff review for our distributing company on May 28th. As soon as we have the results for the tariff review, we will have a video conference to specifically comment on those results. You are all invited. This should happen by the end of May. Also, the reduction of post-retirement liability will have positive effects on the company's results. On this slide, we'll talk more about our divestments since 2019 up to 2023, focusing on the first quarter of 2023. We fully sold the Santo Antonio asset. We diluted from 15.51% to 7.58% in 2022 but did not follow the capital increase in Santo Antonio. And then in 2023, we concluded the complete sale of this asset to Electrobras, bringing in cash of R$55 million. We also sold assets such as Baguari for R$393 million and Retiro Baixo for R$200 million, operations that depend on some approvals in legislation but should be concluded in the second or third quarters of this year. More importantly, we achieved R$2.1 billion cash inflow in the company, emphasizing that thanks to these sales of assets and avoiding the need for R$1.9 billion cash injection to maintain that original stake, leading to savings of R$5 billion for the company. When we talk to the market and Eddie here, of course, the R$1.1 billion in tax credits and also positive reduction in financial guarantees and PPAs release to purchase energy reflects our strategy. In terms of our investment program, this is a program of R$5.4 billion for 2023, last year we invested R$3.6 billion. As seen in this slide, the current investment is higher than the company's average in past years, beginning the year with nearly R$800 million. The company has adapted to this new volume of investments, which is larger than in the first quarter of last year. We are confident these investments, especially for Cemig Sim and generation, will prevail in the second half of 2023 and will be profitable for shareholders. This is our ESG commitment; the company operates 100% on its renewable matrix and participates in all relevant sustainability indices nationally and internationally. I would like to highlight the 1.3 million families enrolled in our social tariff program, which is growing over time, showing a positive social effect and a reduction in delinquency. Moving on to the results, we have a new healthcare plan with a restatement of liabilities affecting this plan. The initial effect was R$57 million, with optimistic views on future positive impacts on the company's balance sheet. We understand it already demonstrates our commitment to reducing post-retirement liabilities. We are discussing this topic with unions and employees. The initial effect shows relevant efficiency costs through the restatement of our healthcare and pension plans. We transferred third-party contracts from Cemig D and Cemig GT to Cemig H with a positive impact on EBITDA of R$243 million in the first quarter from our trading company, enhancing tax efficiency. Our figures clearly show amazing results due to accurate market analysis and pricing strategy for future energy needs. We recorded a significant growth for Cemig D, 3.1% compared to Q1 '22, 8.1% of total volume now in distributed generation. For Cemig GT, we experienced foreign exchange effects, with R$60 million positive and a previous R$255 million gain. Our focus is also on liability management and renegotiating debt due to FX exposure.

Hello everyone, and thank you Leo. So starting with the initial results for the consolidated ones, we have a recurring EBITDA result of 8.1%, lower amounts are non-recurring. This quarter includes the sale of interest in Santo Antonio and the restatement of post-employment liabilities with the healthcare plan, which did affect our results. When we look at net profit and remove the Eurobond effect, we delivered a positive result of 5.7%. These results reflect the performance of the company's initiatives, bringing benefits to analysts and investors. In terms of commercialization, our trading activity has transitioned to Cemig holding. So, R$243 million left Cemig GT to Cemig H, affecting consolidated results. Moving forward, we are consolidating operating costs and expenses, with a growth of 12.3% mainly due to personnel costs, influenced by wage adjustments for the Cemig D database since November, and increased outsourced services tied to preventive maintenance. Our consolidated cash flow showed robust cash generation for the company at R$1.6 million. We are still dealing with tax credits that require reimbursement to consumers in the next tariff review cycle. Also, we've been managing loan financing payments and debentures totaling R$444 million. This quarter marked R$738 million in investment activity, resulting in a significant cash balance of R$3.1 million supporting our investment program. Regarding our debt profile, as Leonardo mentioned, we've executed various liability management schemes related to Eurobond, with a noteworthy maturity approaching in 2024. Our leverage remains below one, providing confidence in our program. We believe we will achieve over R$5 billion in investments for 2023. In the results from Fitch ratings, S&P AA+ and AA reflect Cemig D’s strong recurring EBITDA growth. Notably, our clients are migrating to GT; thus, in this quarter, the recurring EBITDA rose by R$13.1 despite some reductions in client counts.

Well, this is something that we bring to you in all quarters. This is something that we've brought since 2021, our strategic day in our last Cemig D. We stressed our strategic planning; we're being coherent and meeting all our promises. We maintain operating efficiency, EBITDA over the regulatory EBITDA, losses are under regulatory limits, and we've also managed our liabilities effectively, reducing our debt from R$1.5 billion to R$155 million, with expectations to further reduce FX exposure by year-end. We emphasize our Cemig D investment program, which notably has a significant social impact and bolsters the economy. We're offering more energy and making strategic investments that provide expected returns. We're also divesting from non-strategic assets, having completed the most complex sales. Our restructuring of post-retirement benefit plans is already showing results, predicting better outcomes in the upcoming quarters. Moreover, we are investing in digital transformation, IT, and renewable generation sources to address future challenges and opportunities, with growth anticipated in retail electricity sales. We are prepared to play a significant role in the free market, holding a strong position as the largest trader for end consumers in Brazil. Also, we have renewals of concessions for our plants, adhering to the electric sector framework. In summary, it has been a great quarter, and we are available to take questions you might have on topics needing greater clarification.

We will now start the Q&A session.

I have the first question and I will ask Marcio Luiz to answer. The question is about the divestment in to ISA. How are the negotiations with ISA regarding the purchase rights?

Hello, Carolina. Hello everyone. Good afternoon. We are talking not only with ISA but also with the market. Everyone knows that the company wants to divest from that participation. We are working to finalize the process and having great conversations with ISA. We have a positive relationship with our partner and an open channel to discuss everything about this topic. That's what I can tell you right now.

Thank you very much, Marcio Luiz. So now let's continue with the Q&A session. The next question is for Thadeu, our Chief Generation and Transmission Officer, and it comes from Tiago, an investor.

Good afternoon, everyone. What is Cemig’s perspective for transmission auctions this year? Several lots are in the state. Are you going to be aggressive there or more conservative?

Good afternoon, everyone. Can you hear me well? Yes, we can hear you well. First, thank you for this question. Yes, we are going to participate and we will be very competitive in the transmission auctions this year. We aim to guarantee the minimum return our shareholders require, but we will be measured in our approach, focusing on synergies to ensure we can be awarded these lots. We have as an objective at least one lot in the auction scheduled for June 30th.

Thank you very much, Thadeu. The next question is for our CFO, Leonardo. Can you comment if you are expecting new reversals in the post-retirement issue for Cemig regarding the healthcare plan? How was the migration of your current employees? And also, do you expect the good results in EBITDA to be recurring?

Hello, Julia. Thank you for your question. About the post-retirement benefits, we understand that in the initial migration allowing current employees to enroll, approximately one-third accepted the new healthcare plan, and this effect is evident in our balance sheet. We believe the company will adopt further actions to reduce costs. This new plan is beneficial for both employees and the company, marking a win-win situation. We expect that in the future, with other actions, we will further lower these costs for current employees and also support retired employees with a sustainable plan. Regarding EBITDA, it was a very positive quarter, with significant growth of close to 4% and a 15% increase in the molecule price adjustment. Therefore, Cemig could achieve R$250 million in EBITDA in Q1 2023. We are very optimistic about Cemig's results. While we cannot project multiplication by four, we anticipate continued relevant results as Cemig looks to grow its operations this year.

We no longer have questions. I will turn the floor back to our CFO and IR Officer for the final remarks.

That's great, Carolina. I would like to thank you again for being with us on this conference call. It is a very positive result. We are optimistic about 2023. We always tell you quarter-after-quarter that we are delivering sound results to the market. The valuation and appreciation of our shares reflect the trust that investors have in the company. Our IR area is available to talk to investors and answer any questions that might not have been addressed in this call. Good afternoon. Thank you very much, and have a nice weekend.

Cemig's first quarter 2023 video conference call has ended. The Investor Relations superintendency is available to take further questions if needed. Thank you all very much, and have a nice afternoon.