Earnings Call Transcript - CIG Q2 2023

Operator, Operator

Earnings Video Conference Call. We inform that this video conference is being recorded and will be available at the company's website, where you will 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 using interpretation and then the language of your choice, Portuguese or English. If 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.

Carolina Senna, Investor Relations Superintendent

Thank you. Good afternoon, everyone. I'm Carolina Senna. I'm Cemig's Investor Relations Superintendent. We now start Cemig's second quarter 2023 earnings call and webcast with the following executives: Reynaldo Passanezi Filho, CEO; 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 turn the floor over to our CEO, Reynaldo Filho.

Reynaldo Passanezi Filho, CEO

Good afternoon, everyone. Once again, it is a pleasure to be here, bringing to you the results of another quarter. These continue to be sound and consistent results, as you can see in this first slide; I can say that this is our main message. The company is effectively on a sound and consistent growth route. This is thanks to a very clear strategy that we called focusing on Minas Gerais and aiming for success. As you see in the last bullet, we have been very successful in executing the largest investment program in Cemig's history. This program focuses on the businesses that we understand well in our territories and the clients that we serve. We have BRL42 billion in investments planned for the next five years, focusing on distribution, transmission, and generation of energy in Minas Gerais, as well as trading across the country. Additionally, we are investing in distributed generation and natural gas, which are sectors we are very familiar with. This also includes divesting from minority shareholdings in areas outside Minas Gerais. This strategy has proven to be sound and consistent, allowing us to bring you once again robust cash generation and net profit. We are talking about an adjusted recurring EBITDA of BRL2 billion in the quarter, annualized at almost BRL8 billion, and a net profit growth of almost 7% compared to the prior quarter, amounting to BRL1.2 billion. These consistent results demonstrate the soundness of our company. Moving on to the first bullet, I would also like to highlight how strong our internal controls are. We obtained the Oxy certification of a balance sheet with no issues in its internal controls, receiving an unqualified approval after six years. We have sound internal controls and governance, celebrating 10 years of the Clean Company Law. Continuing with sound results and consistent cash generation, our net profit stands at BRL1.2 billion, with cash generation also very robust. Our aim remains to continue generating value for society, shareholders, and stakeholders through the largest investment program in history. We have another crucial topic, which is capital allocation, as mentioned, with BRL42 million planned in the company's largest investment program. You will see in the presentation that in one semester, we invested almost double what we invested in 2018. This investment will significantly enhance our operating efficiency. Consistent cash generation reflects our adherence to all regulatory OpEx and regulatory loss parameters. Our strategy aims for robust cash generation by being efficient in our operations and staying below regulatory loss limits. We are also divesting from assets where we hold minority shareholdings, and we have already divested a significant number of these assets. The presentation will cover our ongoing efforts in digitization, with almost BRL1 million dedicated to modernization and new systems operation. Our future perspectives regarding capital allocation look promising regarding both distribution and generation investments. After several years, we are now building almost 180 megawatts of photovoltaic plants, intending to maintain our market leadership. Additionally, we plan for 540 megawatts in land plants to ensure our leadership alongside our goal to renew generation concessions. I also want to mention our leadership in energy trading. We find ourselves in a comfortable situation for the next three years regarding our energy supply needs due to the opportunities presented by lower prices in the short term for electric energy. To sum up, we are in a consistent and sound position in terms of our results, with BRL1.7 billion in investments already allocated. Our comprehensive investment program is contracted and ready for execution, particularly in the regulated sectors with prospects to generate value. While acknowledging the current challenges in Brazil's electric sector, we remain committed to achieving consistent results, particularly in gaseous and super-generative sectors, continuing our record investments. These were my initial remarks, and we look forward to engaging with you and addressing your insights as we report another quarter of sound results.

Carolina Senna, Investor Relations Superintendent

Thank you very much, Dr. Reynaldo Filho. Now, I will turn the floor to our CFO, Leonardo George de Magalhaes. Leonardo?

Leonardo George de Magalhaes, CFO and IR Officer

Thank you, Carol. As Reynaldo mentioned, we have made significant investments this year, with a bold investment program of a little over BRL5 billion. We are very optimistic about our investments in distribution and anticipate completing BRL3.2 billion this year, leading to various positive effects. Some key figures will be influential in the next tariff review, and they will help ensure that our company has a larger energy supply available, which is essential for societal growth. Regarding distributed generation, we acknowledge that our performance in the first half year was slightly shy of our goals, with most investments expected to occur in the second half. We are optimistic and believe we can approach BRL5.4 billion in investments for 2023. As Reynaldo mentioned in the next slide, we also face challenges in the trading area. However, we see this as a considerable opportunity for Cemig, similar to when the free market opened a few years ago. Cemig's trading company's EBITDA in the first half of this year exceeded BRL600 million, showcasing the trading area’s effectiveness in navigating the market. As we prepare for the retail market's opening in new sectors, Cemig is poised to meet consumer needs through our development of energialivre.cemig, aiming to create a user-friendly platform for consumers, not just in Minas Gerais, but also beyond, leveraging our strong brand reputation. This competitive advantage allows us to carve out substantial market share in this sector. We intend to harness this opportunity's potential as energy prices remain low in the free market, which is crucial for our growth and value generation. We are committed to ensuring these investments drive our strategic plan, emphasizing security, safety, and resilience to cyberattacks. Our digital platform development will improve productivity, leading to enhanced service quality for our teams. We believe these modernization investments will create long-term value. Our ESG actions remain a critical priority. Cemig has always positioned itself within sustainability indexes on national and international levels, actively participating in significant sustainability initiatives. In this quarter, we launched our diversity program for employees and completed the largest issuance of sustainable bonds in Brazil, totaling BRL2 billion. This successful market outcome reinforces market trust in us, underlining our commitment to significant investments in social programs that benefit our clients. We aim to continue disclosing our achievements in the TCFD report correlating with climate change and managed to remove significant CO2 emissions equivalent to 100,000 fuel tanks. We also hold certifications for renewable energy certificates, affirming our energy's renewable sources. Moving on, I would like to discuss our results analysis. We report another quarter with sound results, showing an EBITDA close to BRL1.9 billion in the first half close to BRL4 billion, and a net profit near BRL1.2 billion. Our net profit amounted to BRL2.5 billion for the half-year period. Our bylaws define a payout of 50% for dividend payments, a notably attractive payout, placing Cemig among the best dividend-paying companies. The results we present every quarter instill security and confidence to our investors, with over 40% growth compared to the previous year and nearly BRL600 million in EBITDA growth. We also distributed nearly BRL900 million in interest on equity, indicating the company’s dedication to engaging with its investors. We have experienced a favorable tariff review whose effects will become more noticeable in the second half of the year. This review, completed on May 28, positively influenced the company’s outcomes for the second quarter of 2023. Moreover, regulatory losses are maintained within acceptable limits, with Cemig demonstrating financial discipline and consistent performance through competitive proposals at transmission auctions. Although not awarded an annual transmission auction in January 2023, we have a commitment to our shareholders to invest in value-generating assets. The Baguari and Retiro Baixo HPP sales are also nearing conclusion, pending final approvals to facilitate cash inflow. Now, I will turn the floor back to Carolina, who will delve into the results details.

Carolina Senna, Investor Relations Superintendent

Thank you, Leonardo. Now moving on. On this slide, we have Cemig's consolidated 2Q '23 results. Here, we had no non-recurring effects. In 2022, we encountered some effects that impacted the results. Briefly, we sold Renova, which was part of our plan for divesting non-performing assets, and we also had to write off certain financial assets. Other non-recurring revenue arose from tax credits, the reversal of the Santo Antônio provision, and FX exposure. When we exclude these effects, we reported another quarter with solid outcomes, achieving a 3.8% growth in our EBITDA and a 6.6% increase in our net profit, reflecting our commitment to adding value for shareholders. Regarding operating costs and expenses, we experienced a 9% increase in PMSO, influenced primarily by outsourced services due to management changes and preventive maintenance modifications we introduced since Q4 '22. We forecasted these changes to enhance service delivery to our clients. Additionally, increased expenses resulted from Resolution 1,000, which encompasses financial compensations for consumers. While we have mitigated expenses with a voluntary redundancy program, the primary concern remains the highest increase due to outsourced services. This expense is geared toward long-term reductions in future costs and enhances the service quality for our consumers. On the next slide, we highlight the company’s cash flow, showcasing a robust generation of operational cash in six months, amounting to BRL4 billion. Cash on hand in December was BRL3.3 billion. We have returned tax credits while paying dividends. We successfully raised BRL2 million in Cemig D through sustainable bonds, with a net effect of BRL1,388 million in debt payments. We are dedicated to our largest investment program, as Reynaldo stated, and at the end of six months, we finished with a cash position of BRL3.8 billion, which will be utilized in the second half of the year due to our robust investment program. Concerning our debt profile, we mentioned the Eurobond situation, noting that we have repurchased parcels, and it's due in 2024. We'll conduct another buyback in 2023 for December, eliminating premium costs associated with buybacks. Nonetheless, despite the funding for Cemig D of BRL2 billion still being low, naturally, due to our robust investment program, leverage will increase, expecting to reach 2 times consolidated results by 2027, although it remains currently low. Now regarding the results of Cemig D, we identified some non-recurring aspects, which include provisions for COFINS credits and utilization of distribution infrastructure. Excluding these factors, we achieved an EBITDA of 14.3% and net profit of 10.9%. We recently concluded the 5th tariff review resulting in a net average increase of 13.3%. This quarter, we only observed one month’s impact from this adjustment. Our regulatory remuneration base increased from BRL8.9 billion to BRL15.2 billion. For Cemig D, considering both consumer and transported energy, we recorded a modest 0.7% growth, which may seem minimal, but amidst the broader market, the DG sector affects the entire company and quarter-over-quarter showed a 56% increase. This energy migration to DG indicates growth opportunities in Minas Gerais, noticing developments in transported energy reflected in a 3.3% growth despite an overall decrease of 1.7%. Notably, our residential growth was 6.4%, indicating an increase in both the number of residential consumers and average consumption—an important sign showing our distribution investments are yield returns for the company while enhancing our service quality in our concession. Regarding regulatory limits, we remain committed to adhering to them, with losses ending the quarter at 10.78%, below the 11.16% threshold. Our year-end goal stands at 10.8% as we maintain compliance with prior initiatives we've been implementing over the last six months. Among the actions already taken, we've conducted 210,000 inspections, replaced 312,000 standard meters with smart meters, and running legal energy programs for low-income families. Cemig D signifies significant improvements in our digital channels, which have bolstered our collection efforts. The newly implemented instant payment system contributes significantly to our collections. In 2022 we approached 100%, and we exceeded that threshold in the first half of the year, managing to collect substantial debt. Another noteworthy metric showcases our ongoing commitment to regulatory OpEx while maintaining excellent efficiency. Our operation for six months registered BRL2 billion as regulatory OpEx, achieving performance standards above that at BRL1.9 billion. Consequently, our regulatory EBITDA exceeds projections, showcasing our dedication to compliance and operational efficiency, resulting in greater opportunities for enhancements via post-retirement measures. Now shifting to Cemig GT outcomes, the current slide reflects the unique circumstance featuring non-recurring effects that have already been covered. Additionally, our trading activity's transition from Cemig GT to the holding company is ongoing. In observing the EBITDA which had been moved to Cemig-H, although we recorded a slight contraction of 2.2% due to inflation and the effects on rights bonus transfers, we did see an increase of 14.3% when we consider the profit involving trading activities, which was influenced by the dollar. Key highlights of the Cemig GT that we had previously shared, include that our permitted transmission revenue did not have an influence this quarter. However, we expect a 23.5% jump in this revenue for the next cycle, driven by inflation's impact and enhancing network capability. We've been actively investing BRL360 million within ongoing projects, with all suppliers contracted and developments on schedule. We are pursuing concessions renewal requests for relevant plants moving forward. Our consolidated performance significantly contributes to quarterly results, showcasing a 55.4% EBITDA increase driven by tariff reviews and consumption from industrial and thermal clients—growing a remarkable 36.5%. GASMIG presents considerable growth opportunities and has launched a centralized project with a BRL780 million gas pipeline planned to Divinopolis, with substantial investments slated for the upcoming year. As of June, we invested about BRL73 million and project finishing across all operations shortly. Overall, we are also enhancing distributed generation, with measures currently active and in construction. Our installed capacity continues to grow, presently standing at 52 megawatts operational; we currently have 168 megawatts in construction and 174 under development. A significant expansion in distributed generation is set to impact our future EBITDA positively, with contracts forthcoming for 23 solar plants expected to operationalize by 2024. To conclude, I will turn the floor to Leonardo to discuss our commitments, challenges, and future opportunities.

Leonardo George de Magalhaes, CFO and IR Officer

Thank you, Carol. We like to finish with this slide because these illustrate our commitment to investors, derived from our strategic planning. Most of these commitments are already mapped out by the company. Some achievements have already materialized, such as OpEx staying below regulatory limits, with our EBITDA exceeding standards, losses under the allowed limits, and significant advancement in Cemig's D investment program, dramatically escalating from the past BRL800 million to BRL900 million range to a valuation standing at BRL3.2 billion for this year. We feel assured having contracted materials and services, demonstrating we're prepared to invest. The divestment of non-strategic assets also progresses, with several sold, including Light, Renova, and other assets such as Axxiom and Santo Antônio. Our digital transformation plans towards investing BRL1 billion up to 2027 continue, alongside our renewables investments running at full speed as discussed. We aim for increased retail electricity sales and are focused on liability management to gradually mitigate FX exposure. Looking toward the future, we pledge to continue investing in renewable generation sources and renewing concessions, readying ourselves to ensure we secure these essential concessions within our portfolio for energy generation. Thank you very much, and I'll turn the floor back to Carol. Now we can start our Q&A session.

Carolina Senna, Investor Relations Superintendent

Thank you all very much. We'll now start the Q&A session. The first question is from Andre Sampaio, sell-side analyst from Santander. Please go ahead, Andre.

Andre Sampaio, Sell-side Analyst

Good afternoon, everyone. I have a question about GASMIG. Can you comment on the results? Why were the results so much higher than the regulatory limit? Is there anything that is non-cash or a non-recurring effect making sense to anticipate that significant gap vis-a-vis the regulatory limits?

Carolina Senna, Investor Relations Superintendent

I will turn the floor to Leonardo.

Leonardo George de Magalhaes, CFO and IR Officer

Hello, Andre. Thank you for your question. Yes, GASMIG is part of our group that has consistently produced highly relevant and impressive results. It has low leverage. Recently, GASMIG underwent a tariff review resulting in a strong 15% increase, which integrates the off-balance regulatory assets, positively affecting our results this quarter. Despite previously good results, the current outcomes reflect more significantly due to this review. The company maintains low delinquency levels, hence we merely see this variance as temporary rather than being a long-term issue. In essence, GASMIG’s results reflect solid consistent performance relative to regulatory compliance. We're optimistic about GASMIG’s results in the upcoming period, evidenced by another promising quarter.

Carolina Senna, Investor Relations Superintendent

Thank you, Leonardo. Our next question is from Marcelo Sa, sell-side analyst from Itau. Our officer for generation and transmission will answer that. I will open the microphone.

Marcelo Sa, Sell-side Analyst

Hello, everyone. Thank you very much for the call. I have two questions. The first one is to try to understand the company's position regarding Argentina exports. Currently, it's a role to facilitate exportation. But can you also agree to inject further investment in the future? My question is concerning convincing the government to act positively on these plans. Secondly, regarding the plans, you will need to request renewal for quotas; is that not going to require control sale through government oversights?

Thadeu Carneiro da Silva, Chief Generation and Transmission Officer

Okay. About the first question, yes, trading makes sense for that energy, whether it’s being converted or transformed, or anticipated for future agreements. Currently, reservoirs are at high levels, likely maintaining this through the approaching dry period; hence, we anticipate further transformations in the near future. We are collaborating with groups striving to improve that possibility. Regarding concessions, Cemig is examining all renewal possibilities, which include requesting renewals by quotas and exploring options for plant sales or transferring control of the parent company. We’re currently exploring every potential avenue as this will depend significantly on the granting authority’s decisions, so we don’t intend to disregard any potential options.

Carolina Senna, Investor Relations Superintendent

Thank you, Thadeu, and Marcelo. Now moving on, I will open the microphone. The next question is for Leonardo George. The question is from Daniel Travitzky, sell-side analyst from Safra Bank. Daniel?

Daniel Travitzky, Sell-side Analyst

Hello, everyone. Thank you very much for taking my question. I actually have two questions. The first pertains to the BRL1 billion in automation and technology investment—does it enter the remuneration base of the distributing company, or only a part, and if so, how much? The second question involves the strategy for managing Eurobond rollover debt. How do you plan to address this? Will you continue to maintain it as dollar-denominated debt due to existing high-interest rates? I'd greatly appreciate clarification on this.

Leonardo George de Magalhaes, CFO and IR Officer

Thank you, Daniel, for your questions. Initially touching on our Eurobond debt, back in 2021, we declared our strategic approach focused on different stages of liability management. We successfully reduced our FX exposure via significant repurchases. An imminent buyback take place by December 2023 without any premiums—around BRL350 million to BRL370 million should be repurchased. This approach is gradual; by the end of 2024, we aim to further mitigate our FX exposure through the Eurobond. Current comparisons show that it is now more attractive to manage local emissions with 100% hedging when generating local currency revenue. Therefore, our strategy surrounds transitioning this Eurobond debt into local currency, addressed in the subsequent franchising stages. As for your first inquiry on IT investment, most of these expenditures are treated as OpEx, contributed to our announced tariff review coverage. Considering various robust investments, we remain committed to ensuring our OpEx stays within the regulatory limits established during tariff reviews, adhering strictly without exceeding even BRL0.01.

Carolina Senna, Investor Relations Superintendent

Excellent. Thank you very much, Leonardo. Next, I will read a question concerning Marco Soligo. Please provide an update on GASMIG, regarding the potential IPO and on Thadeu's divestiture process in Taesa.

Marco Da Camino Ancona Lopez Soligo, Chief Participation Officer

Great. To begin with Taesa, internal evaluations alongside banks assisting us for potential divestitures are ongoing. We are prepping for opportunities that may arise concerning Taesa and also Allianz and others. Numerous studies continue developing. Regarding GASMIG, we have finished internal preparations for a potential IPO. However, the decision to proceed with it depends on the Cemig privatization process, potentially leading Cemig to emerge as an independent corporation in the future—this remains to be seen.

Carolina Senna, Investor Relations Superintendent

Thank you for your answer. Now returning to Reynaldo, our CEO, for the final remarks to conclude our earnings call. I would like to thank everyone for their participation.

Reynaldo Passanezi Filho, CEO

Thank you very much for your participation. We appreciate your questions and hope to reconvene next quarter, right, Carol, with more sound and consistent results. We are a company committed to fostering development in Minas Gerais while generating value for our stakeholders, investors, and shareholders. Thank you all.

Carolina Senna, Investor Relations Superintendent

Cemig's second quarter 2023 conference call has concluded. IR Superintendents are available for further questions. Thank you very much and have a nice afternoon.