Energy Co Of Minas Gerais Q3 FY2025 Earnings Call

Good afternoon, everyone. I am Carolina Senna, Cemig's IR Superintendent. Welcome to Cemig's Third Quarter 2025 Earnings Video Conference Call. This video conference is being recorded, and it will be available on the company's IR website at ri.cemig.com.br, where you can also find the full package on our earnings call. We will now start Cemig's video conference call with Reynaldo Passanezi Filho, CEO; Andrea Marques de Almeida, CFO and IR Officer; Luis Cláudio Correa Villani, Chief Information Officer; Sergio Lopes Cabral, Chief Commercialization Officer; Sérgio Pessoa de Paula Castro, Chief Legal Officer; Carlos Camargo de Colón, Gasmig's CEO; Iuri Araújo de Mendonça, Cemig SIM's CEO. For their initial remarks, I turn the floor over to our CEO, Reynaldo Passanezi Filho.

Good afternoon, everyone. Welcome to our earnings call for the third quarter. It's always an opportunity and a pleasure to bring to you our results and our efforts in another quarter. This is a quarter in which we have more difficult news. Of course, I would like to highlight some important topics that show the strength and resilience of Cemig's earnings. About specific news on the quarter, we had distribution results that were affected by large clients that left the network. They migrated to the basic network about trading. We tried to decrease some positions. Also, that involves the submarket prices that have affected the results. What's important, and you know that when we look at our net position, it is very favorable in the scenario that we have for pricing today. The same thing happened with generation because of the difference in the GSF and the need to offset that with the spot price. This is what I would like to highlight. And despite these topics, we moved on with a recurring EBITDA, proving the company's resilience, and we have confirmed the AAA rating by Moody's. We have two agencies now guaranteeing us a AAA rating, showing our resilience capacity to any type of scenario. We also had an award by a magazine called Veja Negócios, as the best energy company in Brazil in the top 30 award. We also had the approval of our health care plan for retired employees. So we finalized a collective agreement with the union, and that allows us to look for a positive structural solution that will preserve a positive transition for all of us. Therefore, they can keep their health care plan, and we'll be able to guarantee the company's sustainability. And the final topic, and Andrea is going to go over the details, which is our investment program. We are, once again, making the largest investment program in the company. For this quarter, we have BRL 4.7 billion, a significant increase when compared to last year. I believe we have a very positive message here, and we are maintaining our investment plan. And that means very positive results for the tariff review situation when that comes. So here, we have BRL 3.6 billion in distribution by itself. If we multiply that by the WACC, we know that the results bring additional revenue of a little over BRL 500 million just for that 9 months. So these are very cautious investments in regulated areas that when they get mature and the agency recognizes that we are going to have very positive results for the company. This is what allows us to have resilience today, and this is what allows us to have very positive results in the future, whether by these investments or by a very favorable position in the trading business in the near future. These are my initial remarks. Obviously, we are here to take your questions after the company's presentation. I'll turn the floor to Andrea, but I would like to stress the strength of this company and that we are very confident that we are going to move on with this investment plan and maintain the company's debt levels and the covenants and therefore, to keep on investing, keep on generating value. And this is going to get more mature according to the regulations and tariff regulations as expected. Thank you very much.

Good afternoon, everyone. It's a pleasure to be here with all of you today to discuss our third quarter earnings. Moving on to our investments, as Reynaldo mentioned, we invested BRL 4.7 billion in the first nine months of 2025. This includes BRL 3.6 billion in distribution, primarily focused on substations, which is a significant milestone. We have photos of the substations we completed this quarter, plus 5,349 kilometers of low and medium voltage networks, essential for providing quality service in Minas Gerais. In terms of generation, we participated in the GSF credit auction with BRL 199 million, ensuring the extension of our concessions in several plants, along with BRL 149 million in expansion and maintenance investments. Our Verona project in transmission accounts for about BRL 30 million, and we continue to invest in improvements and reinforcements. For Gasmig, the main project is centralized, with an investment of around BRL 180 million. Cemig SIM has recently delivered new photovoltaic plants with an installed capacity of 31 megawatts. We have images of five new substations completed this quarter: Andrelândia, Coronel Xavier Chaves, João Pinheiro, São Tiago, and Fronteira. In transmission, we’ve seen operational improvements at Taquaril, Três Marias, São Simão, Itajubá, Volta Grande, and Lafaiete, allowing us to add BRL 32 million of allowed annual revenue in our transmission business. Now, regarding figures, we recorded BRL 1.5 billion of EBITDA, reflecting a decrease of approximately 16.3% when examining recurring EBITDA. This reflects impacts from various nonrecurring events last year, which were significant. In generation, we faced the effects of a lower GSF, necessitating energy purchases to compensate, leading to an impact of BRL 54 million. There was also a reduction in trading margins compared to 2024 and operational adjustments due to energy price fluctuations that impacted distribution by BRL 136 million. In 2024, a change in methodology reversed our ADA provisioning, which was absent in 2025, resulting in a negative delta effect in distribution. Some clients switched to the basic network, further affecting distribution results. Regarding our net profit, significant investments resulted in increased depreciation, and the rising interest rates and leveraged debt also impacted our recurring net profit, leading to a drop of approximately 30.2%. For nonrecurring effects last year, it's worth noting we had BRL 1.6 billion from the disposal of Aliança and a BRL 1.5 billion tariff review for transmission, which did not recur in 2025, leading to a relevant delta. Now, zooming in on GSF, comparison of 2024 shows GSF fluctuating from 0.8 to 0.7 from July to September, requiring us to purchase energy to manage hydrological risks, reflecting higher energy prices this year compared to last year. In terms of operating costs and expenses, we are growing below the inflation rate. Notably, costs are rising in areas requiring greater investment in distribution to enhance services, including maintenance and technology, emphasizing our work on smart meters. We've also seen an increase in personnel as we bring in more employees to improve efficiency in serving clients across various regions in Minas Gerais. While we require debt for funding our investments, our leverage remains at safe levels, with a net debt over recurring EBITDA ratio of 1.76. This has resulted in our highest historical ratings: two AAAs and one AA+. We have structured our debt to increase average tenure, reaching 5.7 years. However, the high cost of interest rates is affecting us and the market as a whole. Now regarding cash flow, for the first nine months of 2024, we started with BRL 2.3 billion in cash. Our cash flow from operations was BRL 3.4 billion, along with BRL 5.1 billion from debentures issued in May. Debt payments accounted for BRL 2.4 billion, and our dividends and IOC totaled BRL 1.7 billion. Our investment activities amounted to BRL 4.5 billion, with earmarked funds totaling BRL 187 million, culminating in a closing cash balance of BRL 2.3 billion. For Cemig D, we have already explained the notifications. However, we reported a decline in EBITDA of 4.7%, largely due to reductions in the market primarily attributed to economic activity and a mild temperature affecting demand. Additionally, the migration of clients to the basic network has fully impacted the third quarter results. The reversal of ADA constitution has also played a role in our net profit, along with the effects of funding and interest rates. In the energy market, we observed a drop of 4.4%, with various sectors experiencing declines, influenced by clients migrating to the basic network. Our operating indicators show that our collection remains strong, emphasizing our focus on digital channels. We aim to introduce auto Pix as a payment method, which will contribute to lowering costs. Our receivables collection index maintains stable levels, aligning with regulatory operational expenditures and EBITDA standards. We are actively working to integrate the effects of micro-generations and install necessary meeting panels and smart meters to remain within regulatory limits. For Cemig GT, the significant impact of GSF has necessitated energy purchases relative to hydrological risks, resulting in recurring net profit outcomes visible in our results. Cemig GT experienced considerable nonrecurring effects in 2024 that will not repeat in 2025, affecting its EBITDA. Gasmig also faced EBITDA reductions due to a 6% market decline and clients moving to the free market. Lastly, regarding recognition, we are proud to have been named the best energy company in Brazil by Veja Negócios. Additionally, we've earned accolades for having the best financial team in the infrastructure and energy sector by FILASA, as well as a transparency award from ANEFAC for the 19th time. We recently received the ESG award from ANEFAC in the Transformative Internship category, reflecting our ongoing commitment to sustainability. With that, I conclude my presentation and will now turn the floor back to Carol to open the Q&A session and take your questions.

Our first question is from Victor Sousa, Genial Investimentos.

Hello, can you hear us?

Yes, we can hear you, Victor. Go ahead.

My question is about Technical Note 53 that changes how you post losses in the distribution sector. I would like to understand if there is a possibility of republishing the level of losses that Cemig had. Now looking backwards here, I would like to understand if this change can end up generating any accounting retroactive effect regarding the application of this technical note if your concerned amount receivables, provisions and other adjustments, or is this just a prospective impact, just an accounting impact? And another question still on this note. How would have been the level of losses for distribution if this technical note did not exist? So in the same comparison base, what would have been the performance of Cemig losses? Would they have increased, decreased, or they would have been the same? I think this is important to understand for the process of assessing the distributing companies.

Thank you, Vitor, for your question. Denis Mollica, our Strategy, Innovation and Sustainability Officer. Please, Dennis.

Thank you for your question, Vitor. About the method used for calculation of losses. The method, even having it being reviewed, it does not apply to past calculations. Even if we were to simulate that in the prior losses and the older losses, we would still be within the limits. So for practical accounting effects, adjustments have done from now on. And as it was said already, we are still within the regulatory losses, both before and after this technical note. So we have major actions to manage and to fight our losses, and they are within the limits with no effects that might affect accounting at all. And of course, yes, we also have here a positive effect on the tariff once we have the recognition of the impacts of the DG in the method of calculating losses.

Our next question is from Luiza Candiota from Banco Itaú.

It is about your trading strategy. Analyzing the changes in the energy balance in this quarter compared to the prior one. I would like to go over the details of the rationale regarding the short exposure when we look at '25, '26 and '28. What could be explaining this change that we see?

Thank you, Luiza. I'll turn the floor to our Chief Trading Officer, Sergio Lopes.

First, thank you for your question. We have been doing a great effort to close our positions. Of course, we have some marginal sales that we are executing with clients that are strategic, but our position is not to open more positions. We want to close, as Andrea has mentioned. For this quarter, we could close positions in these past months. And also, we have the impact of gold that ended up making us go to the market to buy energy, but we are not opening positions. We are rather than that closing them.

There are no further questions. We appreciate your participation. The superintendents of IR are available to answer any additional questions you may have. Therefore, we conclude Cemig's third video conference call. Have a nice afternoon, and thank you very much.