Earnings Call Transcript - CIG Q3 2024

Carolina Senna, Investor Relations Superintendent

Good morning, everyone. I am Carolina Senna, Cemig's Investor Relations Superintendent. Welcome to Cemig's Third Quarter 2024 Earnings Video Conference Call. We inform you that this video conference is being recorded and will be available on 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 located on the bottom of the screen. Upon choosing Interpretation, select the language of your choice, Portuguese or English. Should you choose to follow the call in English, you may also select Mute Original Audio. We are now starting Cemig's Video Conference with Reynaldo Passanezi Filho, CEO; Dimas Costa, Chief Commercial Officer; Leonardo George de Magalhaes, CFO and IR Officer; and Marney Tadeu Antunes, Chief Distribution Officer. For the initial remarks, I turn the floor to our CEO, Reynaldo Passanezi Filho.

Reynaldo Passanezi Filho, CEO

Good morning. Good morning, everyone. Welcome to the earnings video conference call for the third quarter of 2024. Once again, very consistent results, results that prove the significant turnaround of the company as well as its financial strength. We have some highlights that are very special. They have already been announced over this period of time and they are very positive. We currently have the best rating in our history, AAA. It couldn't be better. This is the best rating in the company's history and this is the best rating possible. We have over six notches of growth in a period that is lower in five years. So this is really an acknowledgment by Fitch. Thanks to our consistent results, our cash generation, and also EBITDA over net debt, which is among the best in history. Also in this quarter, we concluded the sale of Alianca Energia. This has been announced 45 days ago. We have received BRL2.7 billion and now we are recording in this quarter a capital gain of BRL1.6 billion. Additionally, we have very positive results from our transmission tariff revision with a gain of BRL1.5 billion in the IFRS and the adjustments of ARTT for transmission. Therefore, we're reaching the best EBITDA in our history, at BRL5 billion in this third quarter. These are wonderful results. Besides the consistency of the results, we are reaching, again, the best EBITDA in our history as well as AAA, the highest rating possible. I would like to highlight these results to all of you that are here with us. This reflects our permanent commitment to achieving certain results, focusing on growth in our investments. Once again, this quarter shows almost 20% growth compared to the same quarter of 2023. When we look at this whole picture, we see that we are five times higher in terms of investments compared to Cemig's in 2018. In these nine months, we have already invested over BRL4 billion. Last year, we invested BRL4.8 billion. This year, we will surpass that number. This proves our commitment to work toward the company's future, as much of these investments improve the company's future profitability. These were the main highlights I wanted to cover, and obviously, I want to talk about the material fact and also communicate something to the market. The first thing I’d like to mention is about our Investor Relations position and also our CFO position. Andrea Almeida will replace Leonardo. Leonardo, I want to acknowledge and thank you for your work at Cemig during your tenure as our CFO and IR Officer. You have over 30 years in the company and you are a great leader. I’ve known you for a long time and can only stress what everyone has said about you. I publicly acknowledge and thank you, and I am extremely grateful. You couldn’t have crowned this with anything less than a AAA rating. You made a crucial contribution and helped us achieve the minimum leverage in our history in the adjustments of post-retirement, leading to the AAA rating we just received. We are now appointing Leonardo to take over as the CEO at another entity pending the controlling parties. Finally, I want to welcome Andrea Almeida. We are very happy to have you with us, Andrea. She has worked for Vale for 25 years, including a position in Canada, and she has been the CFO of Petrobras and Santander. This is a CV that requires no further comments. Andrea, welcome to the company and to our transformation. We have achieved great and consistent results. So once again, Leonardo, thank you very much. Now, regarding the material fact we posted last Friday, we have received communication from the controlling shareholder announcing the submission of a bill to turn Cemig into a corporation. There will be a process in our legislative assembly. This is an important announcement from our controlling shareholder regarding turning Cemig into a corporation. Carolina, these are my initial remarks. We will be ready to take your questions after the company's presentation. Once again, I want to emphasize our consistent results and our investment plan aligns with our objectives, alongside these historic numbers, AAA ratings, the highest EBITDA ever, increased investments, and the communication to the market about the controlling shareholder's desire to turn Cemig into a corporation. We’ll now move on to our CFO and IR officer, Leonardo Magalhaes.

Leonardo George de Magalhaes, CFO and IR Officer

Good morning, everyone. Thank you very much for being here in this video conference. For these results, I would like to start by thanking you as well. I’d like to thank Reynaldo for his trust during our time working together on the Board and thank him for his leadership in this transformation process in the company. The figures tell it all, but he laid the groundwork for sustainable growth for this company in the next few years. Thank you, Reynaldo. I would like to welcome Andrea, a great professional and a renowned expert who will play a significant role in providing continuity to our strategy and the ongoing generation of value for our shareholders. I also want to express my gratitude to our investors for the support over the years. The foundation is one of the essential topics of our company, and we will strive to do our best for Luiz. Now moving on, we had several positive results, one being the sale of Alianca, alongside our tariff review impacts. It is important to note that we almost doubled our remuneration base, and we forecast BRL3.5 billion in investments for the coming years for transmission lines in Minas Gerais. These are important investments for the country, which will generate value for shareholders compared to returns in transmission auctions. This year we had an ambitious investment plan of BRL6.2 billion, and we are confident that we can invest over 90% of this plan. Up to this third quarter, we have already realized over 65%. We will certainly accelerate in the fourth quarter. Here is the breakdown: we have BRL4.4 billion in realized investments. We are on track with our plans. The company was investing close to BRL800 million to BRL900 million a few years ago in distribution, and now we are investing almost four times that amount. These are profitable investments and reflect correct capital allocation over the last few years. A few highlights from our results: I’d like to mention that we were awarded the Transparency award, being recognized as one of the most transparent companies in Brazil due to the quality of our financial statements. We provide quality and timely information to our investors for accurate assessments of our results and operations. Our consolidated results show robust cash generation with BRL1.8 billion in EBITDA this quarter, although trading results were negatively impacted due to load restrictions between the Northeast and Southeast. October was challenging, but favorable conditions arose in November and December because of rainfall. For Cemig Distribution, we maintain good quality indicators within regulatory limits, with average tariff adjustments in this quarter of 7.32% and market growth of 4.5%, leading us to expect a favorable year-end outcome for Cemig Distribution as we are focused on maintaining disciplined costs and improving service quality for the Minas Gerais community. In Cemig GT, we posted BRL1.6 billion in capital gains due to the sale of Alianca Energia, along with positive results from our tariff revision. Now I'll hand the floor back to Carolina, who’ll dive into the results detail for this third quarter.

Carolina Senna, Investor Relations Superintendent

Thank you very much, Leonardo. Now moving on, this is the slide we always share with you, featuring the IFRS result and the recurring results here. As Reynaldo mentioned, we had the best EBITDA in our history, thanks to the tariff review and the Alianca sale, demonstrating the success of our divestment plan. Net of the recurring effects from these two factors, we observed a drop of 10%, largely influenced by the commercialization or trading activity, which has been impacted by price differences. However, with the arrival of rain, we should not see the price discrepancies anymore. Analyzing PMSO, we note a growth of 2.9%, particularly in outsourced services. For instance, in right-of-way clearing, we pruned trees across 40,000 kilometers to mitigate energy interruptions caused by climatic events. We are seeing some rains, which can affect these services. Additionally, under other expenses, when comparing quarters '23 and '24, the asset deactivation due to the largest divestment program in the distribution sector is a key point. From a cash flow perspective, as Leonardo stated, the company shows a solid cash generation. For year-to-date, we have BRL5 billion in operational cash. We secured two successful funding for Cemig Distribution in 2024 to support our investment program. Cemig D will invest over BRL4 billion in its distribution concession this year. We have interest in dividends paid, structured in two payments at year-end and June, among other cash flows. We completed Alianca's divestment, ending the quarter with BRL6.7 billion, to be allocated in the coming quarters for dividends and investments. Let's remember that we have our last share of Eurobonds valued at $380 million to be settled in December. Now I'll hand the floor back to Leonardo, who will discuss our successful 11th issuance of debentures.

Leonardo George de Magalhaes, CFO and IR Officer

Yes, once again, a successful issuance of debentures. This is already a AAA company. In our last issuance, we were clearly recognized as a AAA company. The demand in the market substantiated our status. We issued BRL2.5 billion, all of it placed among the banks, with demand exceeding our offer. We executed BRL1 billion in CDI and a second series of BRL1.5 billion linked to IPCA, aligning with our revenue expectations, as distribution income is tied to IPCA. Our terms reflect a seven-year and a twelve-year maturation. Cemig's average maturity stood at 2.7 years last quarter, meaning that starting December next year, it'll extend to 5.4 years. Hence, we have adjusted our debt profile; despite high rates, we have managed to pay off our investments and finance future ones using third-party or capital funding. Now back to Carolina for additional information.

Carolina Senna, Investor Relations Superintendent

As Leonardo mentioned, we had a recent BRL2.5 billion issuance, successfully extending our debt profile. Still, we maintain low leverage, primarily due to incoming funds from Alianca. However, this leverage will increase due to our investment program, which is the best in history. In December, as mentioned, we will pay off Eurobonds, alleviating our debt load in dollars post-2025, besides paying dividends. Notably, this leverage will naturally rise due to these events. Regarding Cemig D, there were no non-recurring events this quarter. Each quarter showed significant outcomes — the EBITDA observed a drop compared to '23, impacted mainly by outsourced service costs incurred due to our extensive right-of-way clearing to mitigate climate-related disruptions. We also had market losses attributed to the shift from captive markets to DG. Energy demand in Minas Gerais state has significantly increased, especially in the residential segment due to higher temperatures, even though distributed generation still impacts our captive client base. Without the adverse impact from distributed generation, growth would have reached 6.6%. Regulatory losses also illustrate a slight mismatch due to occurrences over a small period, drastically affecting our regulatory indicators. We are committed to staying within our regulatory limits and continue investing in inspections and smart meter replacements to improve service quality. We are optimistic about ending the year under regulatory limits. Comparing regulated OpEx and EBITDA, we can affirm that we are working towards the regulatory EBITDA balance. For Cemig GT, impactful events from Alianca’s sale and the tariff review are significant contributors, marking an EBITDA increase of up to 380%. However, removing those specifics, we saw a drop of 19% affected by trading activity, which remains a transitional process to Cemig Holding, not yet fully concluded, hence impacting recurring results. I'll now turn the floor over to Leonardo for commitments and final considerations.

Leonardo George de Magalhaes, CFO and IR Officer

This slide highlights our commitment, aligning with our strategy while offering transparency each quarter. Reflecting on our 2021 strategic planning and goals for the future, it is evident that Cemig is diligently executing its strategic plan. Some objectives have been met, such as bonds, maintaining regulatory OpEx within limits, and quality indexes, and we are divesting from complexities whilst pushing forward with the Cemig Distribution investment plan of BRL23 million projected from '23 to '28. We are actively working on numerous fully launched projects, establishing ourselves as market leaders in energy in Brazil. Our commitments encompass digital transformation, technology advancements geared towards energy transition, and extending beyond regulatory constraints as we replace conventional meters with smart ones. I now turn the floor back to Carolina to commence the Q&A session, and I appreciate your attention.

Carolina Senna, Investor Relations Superintendent

Thank you, Leonardo. We will now begin the Q&A session. Please feel free to ask all your questions at once and wait for the company's response. Our first question is from Marcelo Sa, an analyst from Banco Itau. Please go ahead, Marcelo.

Marcelo Sa, Analyst

Hello, everyone. Thank you very much for your call. I have two questions. The first one is that I would like to understand this bill of law authorizing Cemig to become a corporation. But I believe it would have to have the approval of another bill that was sent a while ago. So why sending this bill now before that prior project approval? And second I would like to know if there is anything new in terms of Taesa's stakeholding.

Reynaldo Passanezi Filho, CEO

Good morning, Marcelo. It is obvious that the best entity to answer this question would be the Minas Gerais administration, the controlling shareholder. It is a strategy originating from the controlling shareholder. We understand there are two relevant points: this bill of law and the constitutional amendment proposal. If just the bill of law is approved, our initial understanding is that we would need a referendum. Thus, if this bill is approved regardless of the constitutional amendment proposal, constitutionally, we would mandate a referendum. Regarding Taesa, we do not have any updates, but if anything materializes, we will address it in a notice.

Carolina Senna, Investor Relations Superintendent

Thank you, Reynaldo. Next question from Daniel Travitzky, sell-side analyst from Safra Bank. Please, Daniel.

Daniel Travitzky, Analyst

Hello, everyone. Thank you for this opportunity. I have two questions. They are related to the results. I would like to better understand the purchase and sale of energy this quarter. There was an increase in that line. I would like to understand how this quarter was for that topic. My second question is about leverage. You mentioned that you were expecting leverage to increase after payments of dividends and the Eurobonds. So where do you project this leverage at, and what is your view regarding additional dividend distribution until the year-end?

Dimas Costa, Chief Commercial Officer

Good morning, everyone. Thank you for your question, Daniel. Regarding the signals about this quarter's energy purchase, Cemig generally maintains an open position during the year. However, during this period, we did not find ourselves in that situation, thus avoiding the necessity to purchase energy externally. However, we did encounter a price difference this quarter. Specifically, one-fourth of our energy, we acquired from the Northeast, reflects the heightened stress during September and October due to transmission restrictions and price variations across markets. That month, energy prices ran higher—from BRL200 to BRL600 amidst these stresses, while this year, it surged to BRL300 to BRL400 in September and October. Out of the total 1,100 megawatts from the Northeast, we successfully hedged around 300 but remained exposed for the remaining 800, warranting risk management. Additionally, we had to purchase energy in the Southeast and settle it in the Northeast, which is the regular dynamic we experience in submarket trading. We also faced situations where certain large trading companies failed to meet their contractual energy deliverables in September and October, leading to contract cancellations without incurring losses on our side, deferring that amount to 2025, which we strategically managed to avoid judicial complications.

Carolina Senna, Investor Relations Superintendent

Thank you, Dimas. Now moving forward, regarding the leverage question, I'll hand the floor to Leonardo.

Leonardo George de Magalhaes, CFO and IR Officer

Hello, Daniel. Thank you for your question. The topic of dividends and leverage reflects Cemig’s current state—characterized by very low leverage amidst a substantial investment program with secured access to capital markets for future financing. Our comments have consistently indicated that with a prominent investment program ahead, we project leverage to increase, assuming dividends equate to 50% of IFRS results. Should this projection hold, we envision reaching a leverage ratio between 2 and 2.5 by 2027, factoring in our investment levels, although we expect it to decline by 2028 with a distribution tariff review. Nonetheless, we deem dividends at this payout rate of 50% to remain appealing, given our historical records of generating substantial dividends in the electricity sector. Based on current results, we anticipate solid dividends moving forward. We maintain a sustainable strategy that allows for attractive dividends intrinsic to the profits while gradually escalating leverage without undermining the company’s credit quality. This approach is rare in the market but is set to yield notable shareholder value in the coming years. By 2028, we forecast greater cash generation linked to tariff reviews for the distribution and transmission companies, underpinned by our extensive investment execution.

Carolina Senna, Investor Relations Superintendent

Thank you, Leonardo. If there are no further questions, we now end the Q&A session. I would like to turn the floor to Reynaldo Passanezi, our CEO, for his final remarks. Please, Mr. Reynaldo.

Reynaldo Passanezi Filho, CEO

I would like to thank you all very much for being with us in this video conference. Have a great week and we will continue working on consistent results aligned with our investment program and meeting our targets. Have a nice day and a great week.

Carolina Senna, Investor Relations Superintendent

Thank you. Our video conference for the earnings call of the third quarter of 2024 has ended. The IR Superintendents are available to address any further questions you might have. Thank you very much to all of you, and have a great day.