Energy Co Of Minas Gerais Q3 FY2023 Earnings Call

Good afternoon, everyone, and welcome to Cemig's Third Quarter 2023 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 on the globe icon located on the bottom of the screen, choosing interpretation, and then choose the language of your choice, Portuguese or English. For those that are following 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 third quarter 2023 earnings call and webcast with the following executives. Reynaldo Passanezi Filho, CEO; Dimas Costa, Chief Commercial Officer; Leonardo George de Magalhaes, CFO and IR Officer; Marco da Camino Ancona Lopez Soligo, Chief Participation Officer; Marney Tadeu Antunes, Chief Distribution Officer; and Thadeu Carneiro da Silva, Chief Generation and Transmission Officer. For the initial remarks, I now turn the floor over to our CEO, Reynaldo Passanezi Filho. Mr. Passanezi Filho, the floor is yours.

Good afternoon, everyone. It is a pleasure to be here with you in this new quarter, bringing consistent results, thanks to our strategy and our discipline in terms of capital allocation and efficiency. These are the highlights for the third quarter: an EBITDA of BRL2 billion, net profit of BRL1.2 billion, annualizing it. I think this is the reality of the company. We are talking about an EBITDA of around BRL8 billion a year and a net profit close to BRL5 billion. These are very significant numbers that show how successful our strategy is. You see here the figure, the 28% growth in the adjusted EBITDA quarter-on-quarter and 20% for the net profit. How are we able to do that? It's important to mention our strategy and our management approach. We have a very simple strategy which is to focus on the state of Minas Gerais and to be winners. We are running the largest investment program in the company's history, focused on the areas that we know and the businesses that we know. We are no longer investing in minority shareholders or projects outside of Minas Gerais, and all our efforts now are to invest in Minas Gerais clients. This is a very clear strategy that ensures our capital allocation is done in the businesses we understand, such as distribution, generation, transport in Minas Gerais. We also have a trading company that sells throughout the country. So we are investing in gas in Minas Gerais and distributed generation in Minas Gerais. We are concentrating all our investments here. This is the capital allocation we have been making. This is the main investment program. We have the investment figures, which I'll go over. We have BRL954 million, almost four times the amount of the investment compared to 2018. These are very consistent numbers for a capital allocation in regulated sectors with known profitability, especially when we invest in generation with associated PPAs, ensuring guaranteed profitability and following our divestment process in areas that are not a priority. Once again, we succeeded in the auctions of the SHPPs and concluded the sale of the Baguari Plant. These were two non-strategic assets for the company. We are focusing on Minas Gerais and aim to win, achieving record investments and capital allocation in areas we understand with assured profitability while always seeking greater efficiency. We aspire to remain within the regulatory standards, one of our corporate mantras. We are delivering consistent results. The EBITDA is within the regulatory limits, and our operating expenses, losses, all of those remain within the regulatory limits. This is one of our permanent objectives to aim for efficiency always. We are available to take your questions later on, but once again, we present a quarter of very consistent results showcasing the new reality of the company. This is a dynamic company that is investing significantly, and we assure you that these investments will bring substantial value to shareholders, society, and the people of Minas Gerais.

Thank you very much, Reynaldo. So now I would like to turn the floor to Leonardo George De Magalhaes, our CFO.

Good afternoon, everyone. Thank you very much for being here in our video conference call for the results of the third quarter of 2023. I'm going to address some highlights before diving into the details on the results. First, I would like to discuss the asset sale. This is the execution of our strategy since 2020 when we disclosed our intent to divest complex assets over which we had no control. The sale of the SHPPs was very successful, with a premium of over BRL100 million cash that will be added to the company’s cash reserves. We know that this strategy adds value for our shareholders, and these funds will be part of the company’s cash by the end of the year. In addition to that, we also completed the sale of Baguari HPP in October and expect to conclude the sale of Retiro Baixo in the fourth quarter. These are significant funds that will help us to meet our financial obligations, moving forward with our asset disposal proposal, including our divestments in light Renova, Axio, and others. We are particularly focused now in this second half of 2023 on these power plants: SHPPs, Baguari, and Retiro Baixo. Cemig is a reference in ESG, present in crucial ESG indexes both nationally and internationally. I would like to draw your attention to two significant programs. The first involves our involvement with the communities around our dam areas through environmental programs and educational lectures in local schools. We believe it’s our duty to be close to these communities. Another program significant to us is the first AGRIVOLTAIC project in Brazil, a partnership between Cemig, Epamig, and CPQD. We aim to produce food beneath the solar farms. This is an innovative initiative that could transform the landscape of solar parks. We think it has great potential for value creation that aligns with our company’s ethos. Now, concerning our investment program, it's a bold one, planned at BRL5.4 billion for 2023, and we have already invested BRL3.3 billion in the first nine months, which is 42% higher than what we invested in 2022. Cemig is increasingly investing significantly. When compared to the investments from '18 and '19, it's five times more than what was done four years ago. Most of our investments have been in distribution, BRL2.3 billion, with an additional BRL123 million in transmission, and other sectors of our business. We fully expect to execute our distribution program 100% this year, with similar expectations for generation, although part of the distributed generation and gas investments will be postponed to early 2024. However, these initiatives are ongoing, and we are optimistic about their completion, generating additional revenue for the company. We are seeing a history of growth in sustainable businesses with minimized risk, which will create value for our shareholders. For example, the expansion of our solar farms, Boa Esperanca and Tres Marias, is already 80% complete and soon will generate revenue and EBITDA for the company. We maintain a renewable energy metric of 100%. Now let’s dive into the third quarter results. As previously mentioned, we delivered consistent results: close to BRL2 billion in EBITDA, with a 57% growth observed in our trading company’s performance year-on-year in the third quarter. Our operating efficiency metrics for Cemig D are showing improvements, with lower operational expenses than the regulatory limit. Even with the growth of distributed generation, which saw a 1% year-on-year increase in our market, we continue to ensure that our losses are covered fully by the tariff. Our net profit is close to BRL1.3 billion in declared interest on equity for 2023. This company adheres to disciplined capital allocation, investing in profitable assets, especially in regulated sectors where returns are assured. We know that this approach is attractive to our investors, and our dividend yield, projected to be between 8% and 9% this year, reflects this commitment. We are a company that delivers consistent results, with the right capital allocation and investments that minimize risk, all while providing attractive dividends. Now let's discuss the results in detail. Carolina Senna will continue the presentation.

Thank you very much, Leonardo. So moving on into each one of the businesses, let’s start with the Cemig consolidated results in 2023. This is a clean result without any nonrecurring effects. The recurring EBITDA grew by 28% compared to the same quarter last year, and our profit was up 20%. I want to draw your attention to the recurring result. As our CEO mentioned, we anticipate closing the year with BRL8 billion in EBITDA. Now moving to the operating costs and expenses in the consolidated figures, we did observe a reduction in costs, but PMSO was up due to increased outsourced services, which rose by BRL57 million. This expense relates directly to our investment program and our improvements to serve consumers through preventive and corrective maintenance. In the long term, we expect a reduction in corrective maintenance costs, but for this quarter, we faced higher pressure regarding maintenance and cleaning transmission line pathways, typical for Q3, resulting in higher outsourced services expenses. However, we are still performing below the regulatory OpEx, despite these higher costs. On the other hand, there’s an increase in resolution 1,000, necessitating larger service coverage. Financial compensation is required when we don’t meet some of these service metrics, and with increased investments in our distribution company, more write-offs are expected. Now regarding our cash flow for the first nine months, we generated BRL6,336 million in cash flow. We are currently reimbursing tax credits to consumers and have paid interest on equity mid-year while still accessing the capital market due to our robust investment program. We also completed the settlement for a SAAG put option provisioned in our balance sheet. Ending the period with BRL4,168 million in cash, we also have BRL1 billion in interest on equity and dividends due to be paid by December 31st. Moving forward with our investments program, I’d like to highlight our debt profile. Remember, we have a higher toll power payment in 2024, which is the Eurobond for Cemig GT, BRL1500 million to be paid starting in December 2023. We can buy back this debt without penalties. Our leverage currently stands low, below 1 times. However, we anticipate this will naturally increase due to new funding and investment programs that we are executing. By 2025, we expect our leverage to reach 2.5 times. Now turning to Cemig D's results, in this quarter, I have finalized 100% of the adjustments for the tariff review. Analyzing the recurring EBITDA, we noted an increase of almost 7% without any nonrecurring effects. All effects here relate to 2022 and not 2023; our profit rose by 4.4%. As Leonardo noted earlier, this market grew by 1%. Despite analyst expectations for higher growth due to the recent heatwave, we've faced a significant impact from distributed generation, with 17% of our total captive market moving to distributed generation, no longer part of our base. This 1% growth signifies that our investment program is addressing pent-up demand and attracting new industries to Minas Gerais, supporting growth within our concession. If we look at transported energy, there was a 4.2% growth. For a clearer picture on distributed generation, you can observe the Cemig D market versus the market that has migrated to distributed generation. As mentioned, even with the substantial distributed generation market growth, Cemig D was able to accumulate a total growth of 1.6%. We have 2.5 gigawatts of load yet to be connected, which depend on ongoing investments. Thus, one of our most important programs announced is the Energia Mise energy plus program for substations, with two substations already finished and 15 more expected to be completed by the end of 2023. Regarding distributed generation, comparing September 2023 to September 2022, the market migrating to distributed generation grew by 57%. The bottom section indicates the orders prior to the law change, with Law 14,300 affecting connection budgets. In 2022, we fulfilled 102,000 orders for Micro GD. We are meeting all regulatory limits for distribution; currently at 10.57%, we remain below the 11% regulatory limit, which was accessed back in December 2021. This success is thanks to various initiatives such as inspections, replacement of old meters, and regularization for low-income communities. Digital collection channels are growing, with 63% of our collection now coming through these channels. Notably, fixed or instant payment systems now comprise close to 18%. This shift is beneficial as digital collection has lower associated costs. The receivables collection index is very close to 100%, achieving 100.53% year-to-date in the third quarter. Finally, concerning the operational efficiency within our tariff curve, Cemig distribution remains well within its OpEx limit, 4.7% lower than the regulatory threshold. Our EBITDA of BRL163 million shows a 7.6% increase over the regulatory set point, reflecting Cemig distribution’s progress toward regulatory compliance in terms of losses, OpEx, and EBITDA. Regarding Cemig GT, we've begun migrating the trading company to Cemig Holding, explaining the additional results here. We've provided a supply and demand balance that enabled our trading firm to achieve better results with a 112% increase compared to the same quarter in 2022. The only nonrecurring event noted was the impairment reversal for the SHPPs. Our net profit increased by 201%. In blue, you can see the share of EBITDA transferred to Cemig Holding this quarter. Gasmig has also reported remarkable results, with EBITDA for this quarter up 42.6% and a net profit gain of 24.1%, driven by regulatory tariff receivables and increased volumes of gas supplied to free clients. Concluding my part, I’ll transition the floor back to Leonardo George for his final remarks, followed by the Q&A session.

Thank you, Carolina. As shared in previous discussions since our 2020 strategy unveiling, we are committed to executing this strategic planning effectively, achieving key goals along the way. This includes divesting complex equity interests while reallocating capital—with divestiture being a distinct reality for Cemig when compared to past years. We're optimistic about opportunities to invest in renewables and expand into retail electricity sales—an emerging market for us—creating value for our stakeholders. We are also focused on digital transformation and managing floating generation sources alongside renewing generation concessions. This is a process we've monitored closely, and we aim to exercise our rights effectively to extend these concessions for 30 more years. Thank you for the opportunity to present these results; we are now open to your questions regarding the company's strategy and its results.

We will now start the Q&A session. Please ask all your questions at once, then hold for the company's reply. To ask a question, please use the Q&A icon located at the bottom of your screen. Your names will be announced so you can ask the question live, and a request to activate your microphone will appear on your screen. If you'd prefer not to ask your question live, please let us know, and the operator will read it aloud. Our first question is from Antonio Alex de Morai, Arauz. Please, Marco Soligo, the question is about Cemig and Taesa. How is the divestment process? Will it be concluded by June of 2024? Thank you.

Hello, Antonio, thank you very much for your question. We do not have a perspective of a sale of our Taesa in the short term. The expectation is no; we do not believe it will be sold by June of 2024. That's it, Carolina.

Thank you, Marco. Our next question is from Carolina Carneiro, sell-side analyst from Safra. She has two questions. First, for Dimas. Cemig had a relevant result in its trading company. Can you comment on the PPA and environment in the free market regarding prices and terms? The platform has indicated an upward trend following the record temperatures in October. Can you comment on that, please?

Can you hear me? Can you see me?

Yeah, I can see you and I can hear you.

I apologize; I had a technical problem. It seems like it's a question from Carolina. Good afternoon, Carolina. Could you please repeat the question? I had some trouble with my audio.

Sure, I will read it again. Ms. Carolina Carneiro is asking the following: Cemig had a relevant performance in its trading company. Can you comment on the PPA environment in the free market regarding prices and terms?

Regarding PPAs, since the beginning of the year, there has been a decline in energy prices, spurring client interest in self-production with Cemig. A line of clients sought self-production driven by the low prices over the next few years. Thus, we observed a decrease in PPA viability. Moving into 2024, we may see better pricing mechanisms to facilitate some self-production contracting. While we believe that overall prices will remain low for some time, we anticipate possible improvements due to decreased photovoltaic equipment costs. The identification of new opportunities might emerge by 2024, yet we are awaiting resolution for PPA dynamics. Regarding the temperature trends, while we may witness increases during peak hours, they will not lead to significant pricing shifts in the short-term and are not indicative of long-term market trends.

Thank you very much, Dimas. Our next question is from Guilherme Lima, sell-side analyst from Santander. For Marco Soligo, regarding divestments, has there been a decision on the Gasmig sale? Would you be selling the stake or detaching assets?

Guilherme, good afternoon. Thank you for your question. The process of de-stratification from Cemig related to Gasmig isn’t a decision made by Gasmig itself. The process is in a holding pattern for now.

What can we expect regarding this alliance concerning the sale of the stake or the asset?

About this alliance, we are working towards the total sale of our stake, focused on selling all assets.

Thank you, Marco Soligo. Next question is also from Guilherme Lima, and I will ask Leonardo to comment on it. Leonardo, he is inquiring about the CapEx and guidance for 2023, specifically asking for more information on GT and gas for 2024 and how other segments will perform.

Our investment program for 2023 stands at BRL5.5 billion. We have fully executed the planned investments in generation and distribution this year. Some components may carry over into the first half of 2024, but we expect to complete close to 85%-90% of the total investment program. This demonstrates the success of our execution strategy. The slight delays in execution are typical of our comprehensive program, but all investments will be fully realized by 2027, with our total projected investments in this period amounting to BRL18.5 billion. The internal organization—supply, logistics, execution, and hiring—is all in place, ensuring we meet deadlines. Our message is clear: we intend for a large portion of the BRL5.5 billion investment program to be executed this year efficiently, with just a minimal carryover to early next year.

Thank you, Leonardo. Our next question is from Fillipe Andrade, sell-side analyst for Itau BBA. I will ask Dimas to answer that. The question is, considering the recent market volatility of the hourly spot price, how does Cemig foresee price behavior in the wet season?

Fillipe, thank you for your question. As I previously mentioned, certain adverse factors instigated a dispatch for TPPs. While we expect weather conditions to improve during December and January, enabling Angra 2 and 3 to return to operation, we predict increased hydraulic reserves contributing to more stable price patterns during peak usage. Therefore, despite anticipated minor spikes in the spot price, especially during high temperature fluctuations, we don't foresee significant long-term impacts on price behaviors tied directly to rainfall. The conclusion of the dry season should see our reservoirs at high levels.

Dimas, thank you. He has another question for you. Does Cemig believe that the price volatility might affect its results in trading for 2024?

We are anticipating impacts in 2024 trading results, but this comes from a general price drop rather than volatility in spot prices. The market has shifted markedly, and while temporary turbulence may happen, these broader macroeconomic trends are what we’re primarily focused on.

Thank you, Dimas. Next question is for Marco Soligo. For Gasmig, Marco. The inquiry comes from Guilherme Lima at Santander. What can we expect from Gasmig's EBITDA if the BRL230 million reference is accurate, and what should we anticipate in terms of EBITDA for this company moving forward?

Hello, Guilherme. Thank you very much for your question. Yes, you may take that annualized EBITDA figure as a recurring one, and for the next year, you can expect organic growth. With projected volume growth, we anticipate substantial and consistent EBITDA figures for Gasmig.

Only two questions remain. The next one is for Thadeu. Please, Thadeu, will Cemig participate in the upcoming transmission auction in December?

Good afternoon, everyone. Thank you for being here today. We will not be participating in the auction in December. The lots that ANEEL is offering do not align with our current operational synergies.

Thank you. Our final question is for Leonardo. Leonardo, this inquiry comes from an investor from Liberty. Can funds from the non-strategic sales potentially be utilized to enhance dividends or interest on equity for shareholders?

Thank you for your question. Our strategy focuses on sustainable practices, seeking to invest in value-adding assets, particularly in regulated markets offering attractive returns for investors. Simultaneously, we want to maintain a dividend policy that proves profitable. It's crucial to invest and add value while offering dividends among the most competitive in the sector. Today, we maintain a dividend yield of around 8% to 9%, alongside a manageable leverage ratio, currently close to 1 time of EBITDA. Considering our planned investments for the coming years, we expect to reach a more balanced leverage position, likely around 2.5 times EBITDA. While corporate dynamics are ever-evolving, we believe that a 50% payout is a very attractive dividend with few electric sector companies offering yields like ours. Our strategy aims to balance attractive dividends with investments in low-risk, profitable assets to meet strategic objectives and enhance shareholder value.

Thank you very much, Leonardo. We have no further questions. I will turn the floor to the operator to conclude the call.

If there are no further questions, we end the Q&A session. I would like to turn the floor to CFO and IR Officer Leonardo George de Magalhaes for the company’s final remarks.

Once again, thank you very much for joining us in this earnings video conference call. Once more, we demonstrate consistent results, allowing us to be very optimistic about the company's future. We are sharply focused on operating efficiency, continually seeking improvements while surpassing our regulatory benchmarks. We also aim to invest in remarkable assets that generate value. Our divestiture strategy targets stakes where we have no control; we want to streamline focus—this includes Taesa, Alianca, or Belo Monte—our interests here have diminished. Thank you all for your participation; our IR division remains available for any future inquiries or comments you may have. We believe these results are very positive, and we anticipate even better outcomes for 2023, benefiting the entire company. Thank you once again.

The earnings video conference call for the third quarter of 2023 for Cemig has ended. The IR department is available for any further questions you may have. Thank you very much for your participation, and have a nice afternoon.