Energy Co Of Minas Gerais Q1 FY2025 Earnings Call

Good afternoon, everyone. Thank you for waiting. Welcome to Cemig's First Quarter 2025 Earnings Video Conference Call. If you require simultaneous interpretation, you can access this feature on the platform by clicking the globe icon at the bottom of the screen and selecting your preferred language, either Portuguese or English. If you decide to listen in English, you can mute the original Portuguese audio by selecting that option. This video conference is being recorded and will be accessible on the company's Investor Relations website, ri.cemig.com.br. The complete earnings call package will also be available there. Additionally, you can download the company's presentation through the chat icon in either Portuguese or English. During the presentation, all participants will have their microphones muted. We will begin the Q&A session after the presentation. Now, I would like to hand it over to Carolina Senna, Cemig's IR Superintendent. Carolina, the floor is yours.

Good morning, everyone. I am Carolina Senna, Cemig's Investor Relations Superintendent. We start now the first quarter 2025 earnings video conference call. And with us, we have Reynaldo Passanezi Filho, our CEO; Andrea Marques de Almeida, CFO and IR officer; Cristiana Maria Fortini Pinto e Silva, Chief Legal Officer; Marco da Camino Ancona Lopez Soligo, Chief Generation and Transmission Officer; Sergio Lopes Cabral, Chief Commercialization Officer; Marney Tadeu Antunes, Chief Distribution Officer; and Luis Claudio Correa Villani, Chief Information Officer. For the initial remarks, I would like to turn the floor to our CEO, Reynaldo Passanezi Filho.

Good morning, everyone. Welcome to our earnings call for the first quarter of 2025, another quarter where we post, as you can see here, resilience and results; sound results. Of course, we had some impacts in our trading company. Andrea will go into the details. But it is important to highlight that we had an EBITDA of BRL1.8 billion, which is a very significant figure. Also, we have positive results in all segments, except for the trading company, and we reported a net profit of BRL1 billion. We are paying dividends, here, interest on equity of BRL541 million. Also, a very significant event to finance our investment program are the ventures, BRL5 billion and the ventures. But what I would like to highlight here is our mantras and our direction. My goal is to carry out the largest investment program in the company's history. We will see our CapEx, the investment program. It is still ramping up; we have grown six-fold in our investments since 2018. This is a significant figure. We went from BRL950 million of investments in 2018 to BRL5.7 billion in 2024, and we anticipate reaching BRL6.3 billion in 2025, which shows investments growing 18% from 2024 to 2025. As all of you know, these investments will mature in the tariff review, and then we will be able to assess the financial results of these investments after the tariff review, which is going to happen in 2028. It is essential to understand the characteristics of these investments; most of them, over 75%, are dedicated to the network and infrastructure. We are talking about investments in distribution, transmission, and gas. All of that involves network development. This is a topic that is currently being discussed; if you follow the energy transition, you see that investments in networks are crucial for this energy transition. One-third of energy investments are in networks, and this is what we are presenting. 75% of our investments are dedicated to infrastructure and networks. As you all know, this is a regulated investment with guaranteed profitability, which provides great stability to the company. Our second mantra, which is also very important, is efficiency. Our first mantra is to focus on Minas Gerais and win in Minas Gerais. This is very important. These investments are in areas where we have knowledge and sectors that we understand about regulated sectors, and they yield results, stability, as well as profitability. Profitability is guaranteed. The second mantra is efficiency. We are operating within regulatory standards, ensuring cash generation. We are compliant with the regulatory expenses, which are called regulatory PMSO. Therefore, everything within the tariff complies with the expenses, allowing us to have cash generation to finance all this investment plan. We are not using our cash for expenses or with regulatory losses that exceed the regulatory metrics. So, once again, our first mantra is to focus on Minas Gerais and win by implementing this investment program, which is very important to imply that this investment program is already contracted in addition to being in regulated sectors. We can say that we have a lot ahead in this growth process because today it is already contracted. We know that it takes time to start moving, but it is already in place and contracted. Our second mantra, thus, is efficiency. We will always focus on that, it is in our objectives, and we intend to remain within the regulatory expenses and losses. We are also working on organizational restructuring already, looking for more efficiency and being closer to clients. Maybe this would be our third topic here, which is working with efficiency and being closer to clients while improving results and all the results metrics such as CAIDI and CAIPI, and the results with clients, which is regional distribution. This is a very important topic. We had a company that was very centralized in the past. Today, we have developed six regional areas and 17 regional high-voltage management units. Here we are talking about Uberlândia, Montes Claros, Governador Valadares, Juiz de Fora, Poso Levi, and of course, the Metro region, Belo Horizonte. What was centralized in Belo Horizonte in the past is now divided into six regional management units or regional superintendencies. They are larger than other concessions in some cases, considering the size of the state. Our purpose with these superintendents is to be closer to clients to understand their challenges in different areas. This aim for more efficiency allows us to recognize potential optimization situations. We are already realizing the benefits of these new regional units, and I congratulate everyone who has taken up these new positions. Our Distribution Officer can elaborate on that, but we can see a clear objective of greater integration in the areas, more efficient use of physical spaces, and consistent improvements in efficiency. We also have Cemig Agro, which is a crucial topic that aligns with investments. Agribusiness is a primary growth driver of Minas Gerais' economy. For us, it is vital to drive agribusiness with investments, which we refer to as Mina's three-phase plan, enhancing operational efficiency and improving service quality. We are adding here the reinforcement of our teams with several new units with 228 new electricians. The objective is clear; we seek greater proximity with our clients. It is essential to uphold these mantras. The first one is to focus on Minas Gerais and win with a prudent and cautious investment plan, yet very bold, always aiming for our efficiency metrics, both regulatory and beyond them, while enhancing service for clients. Additionally, I would like to highlight innovation and modernization. In restructuring the company, we have developed the regionalization strategy. We also have a dedicated IT area. I would like to congratulate Luis Claudio Villani, our new Chief Information Officer. This reflects our investment in innovation and modernization. We are rolling out a new ADMS, a new SAP S4/HANA that brings significant advancements in digitization. This will enhance our integration between IT and OT, streamlining processes to improve efficiency and service quality. When we talk about IT, we are in a great situation; we can improve efficiency, along with enhancing service provision. So, welcome, Villani. This covers my initial remarks. Now, I would like to turn the floor over to Andrea; she will discuss the wonderful figures we have, such as BRL5 billion in debentures, and then we will be available for the Q&A session at the end of the presentation.

Thank you very much, Reynaldo. Good morning, everyone. I'm very happy to be here with you to discuss our issuance, which was highly successful. In the first quarter, we executed two significant parts: issuing BRL2.5 billion in Cemig D and BRL625 million in Cemig GT. At that time, we compared ourselves to our peers and managed to achieve an issuance lower than our peers and very close to the sovereign rate. This is a very relevant figure for us. We were thrilled because the demand was tremendous, over 2.5 times our booking. That’s why we were able to issue at the lower end of the spectrum. Due to the high demand, we had an opportunity for an additional issuance of BRL1.9 billion. It is not included in this quarter; we are just indicating it here as it occurred in April. Consequently, we were able to reduce the rate of the issuance slightly. The tenure benefited from this, as we extended our debt from 4.8 to 5.5 years. Regarding relevant landmarks, we've maintained our AAA credit rating assigned by Fitch Ratings. This latest debenture is considered green and sustainable, which we are very attentive to. Now, moving towards the results, and Reynaldo has already touched on this, we encountered a drop of 9% in our EBITDA. This was due to the price difference effect in the submarkets and the trading company, which had an impact of approximately BRL133 million. Additionally, we anticipate lower margins from the trading company. Hence, our EBITDA faced an additional decline due to the margins of the trading company, which we expect to see throughout the year. There was a nonrecurring effect from 2024, for instance, involving the SHBP sale in 2024, which was BRL43 million. This occurrence did not happen in 2025, and it’s quite significant when we consider the efficiency that Reynaldo highlighted. We have successfully migrated, offering our employees an opportunity to switch from the PSI health care plan, which guarantees that Cemig continues paying the health care plan until their retirement, to another health care plan. We successfully transferred over 1,000 employees who are now in the other plan, thus enabling a provision reversal of BRL28 million. Over 700 active employees migrated as well. Currently, around 24% of our employees are still in the old healthcare plan, PSI. When we discuss our non-profit impacts, we also had impacts from equities, such as Belo Monte or Alliance that were present last year; they are not included this year anymore. Additionally, Belo Monte affected submarket conditions, contributing to our debt increase, but we acquired funds at competitive rates. Consequently, we comprised an increase in financial expenses here. Examining the submarkets further, which we already discussed in the previous quarter; we observed that we initiated the year with minimal price differences, close to zero. February introduced a price difference of 35, and then in March, in response to a challenging hydrological situation with less rainfall, we observed a price mismatch that raised it to BRL272. This price difference represents the submarket price variations under this new model with greater volatility. April showcased a price difference that fell to around BRL120, indicating a reduction as hydrological conditions improved. Regarding our management expenses, the most significant factor, previously mentioned, is the post-retirement provisions reversal. Regarding our personnel costs, they are standard; we have the annual adjustments, but we have also witnessed a slight reduction in expenses which contributed to the reduction of manageable expenses in this first quarter. This offers a snapshot of our debt, which is now 100% Real-denominated, with an average tenure of 5.5 years and a leverage ratio of 1.4. Once again, we stress the success of our debenture issuances, and our Fitch rating is AAA. We hold corporate ratings by two other agencies at double A plus. Thus, we are in a very comfortable position to continue investing and pursuing this significant investment program for Cemig's growth. We expect our leverage to remain fine. Our consolidated cash flow concluded 2024 with approximately BRL2.3 billion. Our operating cash flow was BRL1.5 billion. We experienced a minor fluctuation from the variance account in payments for loans and debentures amounting to BRL3 billion in investment activity, showing strength at BRL1.2 billion. One of the debentures issued last year requires us to set aside funds, totaling BRL5 billion, in anticipation of those repayments, leaving us with cash at BRL4.7 billion. Analyzing the companies, as mentioned, we see that the distribution company experienced a significant tariff increase that proved beneficial. Additionally, the migration of the health care plan has yielded a favorable effect on net profit. We also encountered effects stemming from the debt, particularly regarding financial expenses when comparing the IPCA year on year. However, all indicators are consistent with the regulatory limits. At Cemig GT, the operational indicators remain in compliance with regulatory standards, with reductions in perception over the past twelve months, rolling to around three hours — a very relevant outcome. In the energy market, we have observed a 0.3% build market plus a transfer to customers. A decrease manifested in the rural sector due to increased rainfall. In commercial, we still see migration towards DD. Additionally, there’s migration towards the free market, witnessing growth in energy transfers. For regulatory losses, we remain compliant with the established limits. We're undertaking significant inspections. Outdated meters are being replaced with new smart meters as part of our essential investment. As I previously noted, Cemig GT experienced the nonrecurring effect in 2024, related to the SHBP sales of BRL43 million, which was the primary cause for the decline. Furthermore, last year, due to the dollar-denominated bonds, we experienced lower effects since those have already been paid down, resulting in diminished equity income. We also faced the impacts of Alliance and Belo Monte. For Gasmig, we saw a volume reduction sold, which affected both EBITDA and net profit, yet our investment program remains robust and well-executed, and we anticipate that this project will reach completion by the end of the year. This snapshot is crucial, illustrating that in the quarter, indeed, the greatest impact came from the trading company, showing a BRL12 billion effect on EBITDA. Additionally, there was the submarket impact and part of that due to the anticipated margin declines, which we have been vigilant about. The other segments yielded positive results, reaffirming the strength of our diversified portfolio that promotes resiliency, just as Reynaldo mentioned. That sums up what we wanted to share with you. Thank you very much for your attention, and we now move to the Q&A.

Moving on, we will now start our Q&A session. Our first question is from sell-side analyst Victor Cunha from Itau BBA. Please, Victor, feel free to ask your question.

Good morning, everyone. Good morning, Carol, and thank you for this opportunity. Now my question is looking at the energy balance that the company posted; we see an increase in the short position, especially for the next years. Can you share with us what was the rationale behind this decision, especially during a period of pressure on energy prices considering also the recent adoption of the hybrid new wave and the new parameters for risk aversion? Can we consider a marginal cost of expansion that might be higher than what we have today? I just would like to have your understanding regarding this decision. What was the rationale behind it and the perspective that we have looking ahead?

Thank you, Victor. Now, who is going to answer the question is our trading officer, Sergio Cabral. Please, Sergio?

Good morning. Good morning, everyone. Good morning, Victor, and thank you for your question. Actually, we have not increased. We still have a short exposure this year because of the deliveries that have not been carried out. For 2026 and 2027, we will maintain a short position. We should bring it over to the future a little bit more when we analyze prices, and we are already looking at a price stabilization. And as Andrea said, the end of this submarket effect, but we do not intend to increase exposure; we are trying to work with the lowest exposure possible and also observing these changes and fluctuations in price.

Thank you, Sergio.

Thank you, Sergio.

Hello, everyone. Good morning, and thank you for the call and for this opportunity. I have two questions. The first, on the details that you mentioned regarding efficiency. In this quarter, we have seen, as you said, the initial impact of the health care plan migration. In fact, can you tell us what we could expect for the next quarters? And Andrea, you said that you have a new window for enrollment. I would like to understand how this is going to move forward over the year. Also, my second question on the trading company, I would like to understand if in 2025, you have been able or if you're looking for a way of mitigating the impact of the submarket. We see that there is a mismatch of prices or a detachment of prices, not with the same strength as March, but still strong. But I would like to understand if the company is trying to mitigate these impacts for the next quarters in terms of the prices for the submarket. Thank you. To ask the question about the health care plan, Andrea Almeida, our CFO. Thanks, Andrea.

Thank you very much for your question. What we can expect in the next quarter in terms of this migration, we have 700 employees migrating, so we will have an amount to be reduced because of this provision reversal. However, this is not as significant as we observed earlier; we had a migration of 1,000 which yielded 28 million in reversal. This provision, as a whole, we are negotiating with our Unions to reach an agreement. As this agreement is finalized, we might have this additional provision but we don't have a final date for that, nor can we define an amount at this moment since it is a process still in negotiation. Now, addressing the other question on trading, yes, of course, we are looking for mitigation tools for the current year. The current instruments, considering the price differences, are quite expensive. However, if we have any opportunities with clients purchasing in regions where we have that production, we will work on that. So, yes, we are continuously looking at it, but we need to arrive at a price that is reasonable. We are also evaluating developments and considering whether the energy agency could become less conservative, which would afford a more feasible transference from the Northeast to the Southeast, aiding in reducing the differences between the submarkets. This is part of an in-house study we are currently conducting about this issue. Thank you very much.

Thank you, Andrea, for your answers. If there are no further questions, we will now end. Oh, there is another one. I'm sorry. Victor, sell-side analyst from Genial Investimentos. Please, you can open your microphone and ask your question.

Good morning, everyone, and thank you very much for taking my question. If someone else wants to ask another question, please feel free. Now, back to the media discussions regarding Cemig and Propag, and it connects to the decision of Governor Romeu Zema from Minas Gerais. Do you have any updates on this topic in comparison to what has already been discussed? The Minas Gerais legislative assembly has anything new on this? It feels like things keep shifting, and we’re somewhat lost regarding the ongoing discussions. What can we expect from this topic now?

I will turn the floor over to Reynaldo, our CEO, to answer this question.

Well, Victor, I think the context remains unchanged. The government has only sent a project regarding Propag. This project includes specific assets, among which Cemig is mentioned, as well as COPASA. This is a significant matter for the Minas Gerais legislative assembly, and it will have to be debated there. What's new is that this subject is now prioritized for discussion in the legislative assembly.

The next question comes from the analyst Xin Lai from Trigono. Yes, we can hear you.

I would like to know if you will have any changes in the dividends policy of the company regarding the payout. What are you considering for 2025?

Thank you, Xin. Who will answer your question is Andrea Almeida, our CFO.

Thank you, Xin, for your question. We do not expect any changes in our dividends policy. We’ll continue to pay 50% of our profits. As you have seen in prior years, even when we had non-recurring effects, we were able to pay dividends, even when they were not cash-generating. This year, the practice will remain consistent. If similar circumstances arise, it will also be the case this year. Our policy is unchanged; 50% of net profit remains our commitment, as stated in our bylaws.

Thank you, Andrea. Our next question comes from sell-side analyst from HSBC, Liliana Yang. Please, Liliana, you may ask your question.

Hello, and thank you for this opportunity. I would like to hear about the capital structure. This relates to what Andrea discussed concerning dividends. But how do you perceive your indebtedness structure and capital? Some companies in the sector have indicated they should be more conservative given the price volatility in the energy market. Thank you.

Thank you. I turn the floor to our CFO, Andrea Almeida.

Thank you very much for your question. Cemig has been relatively conservative. We have a low leverage figure. We acknowledge that leverage during the investment period will peak around 2.5 times net over EBITDA by 2027. In 2028, we will conduct the tariff review at Cemig D, which will elevate us to another level. Therefore, we expect leverage to decrease thereafter. We believe we have room to navigate this additional volatility currently observed. When compared to other firms, we already operate within a more conservative framework. I'm sorry; Reynaldo wants to add something.

Our results show strong resiliency. We report resilient results this quarter despite volatility. As mentioned, we aim to diminish risk exposure. We plan to maintain both our dividend distribution policy and investment plan unchanged. We will follow our established timings and commits as we have in the past. Thank you very much.

Thank you, Reynaldo. If there are further questions, please feel free to ask. Please provide your name in the Q&A icon. Since there are no additional questions, we conclude the Q&A session. Thank you very much for participating in the first quarter 2025 videoconference call. There seems to be another inquiry; we missed one, Antonio Alex. The IR Superintendent is available for any other questions you might have. Thank you all very much, and have a nice day. If you have additional queries, Amelia and our website are available to address your concerns, and we will respond accordingly. Thank you very much, and have a nice day.