Earnings Call Transcript - CIG Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for waiting. Welcome to the Conference Call for Cemig's Third Quarter 2020 Results.

Antônio Carlos Vélez Braga, Superintendent of Investor Relations

Good afternoon, everyone. I am Antônio Vélez, Superintendent of Investor Relations of Cemig. We now will start Cemig's third quarter 2020 earnings conference call and broadcast with the following executives; CEO, Reynaldo Passanezi Filho; our CFO and IR Officer, Leonardo George de Magalhães; and all the other officers in the company. You can also follow this transmission by the phones. In Brazil, (55) 11 3127 4971 or the number in the U.S. (1) 516 3001066 and also on the links available on our website, ri.cemig.com.br.

Reynaldo Passanezi Filho, CEO

Good afternoon, everyone. It is always a great pleasure to be here with you to bring the results of the company for this third quarter in the year and the year-to-date. Considering what we have been looking for and what the company has been able to deliver, we have results that are consistent and sound. They show the company's resilience in the pandemic and positive perspectives in terms of growth recovery. I would just comment on a few topics and then we'll go deeper. First, sound and consistent results in the financial area. Our adjusted EBITDA and consolidated EBITDA are much higher than 2019, at R$ 30.6 billion, and EBITDA is also much higher for this year. Our net income adjusted and consolidated is over 2019 by almost 12%, standing at R$ 1.7 billion. Our gross debt is controlled, and our net debt over EBITDA operation is at a much lower ratio of 1.55, which implies a better rating and allows us to have a very comfortable situation nowadays with over R$ 5 billion in cash. We can celebrate here our lower regulatory levels as we have mentioned already, Cemig D. We have been working hard in PMSO to reduce expenses, and even our EBITDA—regulatory EBITDA—had very good results. This is a market that very few times the company has been able to reach such numbers. Now we have a very good year with investment and execution, and I am sure we will be able to reach our goals. Regarding operating income, we also have sound results. The recovery of our load—I apologize for interrupting—we have seen in the national integrated system that the national load is recovering, and it's no different here. We are up 3% over September, fortunately, and we also see growth in the free market and a higher growth since March of 2020 due to the pandemic, which caused a different behavior. But now we see a gradual recovery of the load, which is very important to ensure that we have no contracting levels. This will allow us to roll as well. The recovery is also out of the leverage—sorry, of their levels—that's for an average that aligns with our target for 2020, which is much higher than what we had, mostly for the period, which were April and May. Finally, when we discuss DEC and FEC, the average outage duration is at 9.3 hours, which is also a very good result because the regulatory DEC is lower than 10. So we are below the regulatory levels. These are the main messages here.

Antônio Carlos Vélez Braga, Superintendent of Investor Relations

Thank you very much, CEO. So now let's turn to the presentation itself. I would like to ask you to turn to Slide 3. Our CEO already mentioned some of these highlights, but I would like to stress about operating efficiency. For the first time, Cemig distribution in the nine months of this year already has operating expenses lower than the regulatory limits, at R$ 127 million vis-à-vis our leverage, which was 1.55x over EBITDA, specifically our cash generation. In the third quarter, we saw a 24% increase, reaching R$ 1.3 billion. Due to our leverage, debt profile, and debt cost, the rating agencies also recognized our credit quality and improved our ratings in different ways, which I will detail on the next slide. We continue to identify actions to prevent our losses as well as delinquencies this year, which were specifically challenging due to the pandemic. We are still working hard to prevent our losses and delinquency.

Leonardo George de Magalhães, CFO and IR Officer

Good afternoon, everyone. Thank you very much for participating in another video conference of Cemig, where we have the opportunity to explain our results. As Dr. Reynaldo mentioned, these were sound and good results that show the resilience of the company during the pandemic. Vélez has already commented on the main results for the quarter, and we will concentrate on operating costs and expenses. We see that the company has maintained efforts for operational efficiency. We were able to reduce our manageable costs or PMSO costs basically for materials, outsourced services, and headcount by 4.7% compared to the prior year without any inflation adjustment. Adjusted for inflation, we see the efficiency of almost 7% in cost reduction compared to the prior year. These are relevant results for the company, and we continue working to bring down costs. It is important to highlight that there was an increase in the profit-sharing program for the quarter, but in the year-to-date, there was a reduction from 160 million to 109 million in the quarter. Another highlight has to do with the provisions for ADA; we were able to sign an agreement with the state, ensuring that overdue payments from the state will be offset and discounted from the ICMS credits. Last year, there was a large provision, over R$ 1 billion based on our profit-sharing program and tax contingency provisions that affected our results. On the next slide, we have our OpEx—our realized OpEx and the OpEx with regulatory targets. This was a landmark for us because all our OpEx was covered by our tariffs. This is the first time this has happened. This is the company’s commitment. We committed ourselves in the Cemig D that by the end of the year, we would be able to have our OpEx within the regulatory limits, and we are pleased to announce that we are R$ 127 million lower than the regulatory target even if we consider costs that we knew would be difficult to cover with tariffs, such as post-retirement costs. Even then, the company has managed to maintain this for 2020. Regarding the EBITDA, we are lower than the regulatory target by 73 million, but here we have the company’s relevant efforts related to non-technical losses. These caused us losses of almost R$ 200 million up to the third quarter as the company is taking several actions that are already being implemented to reduce these non-technical losses to close to zero by the end of 2021. We believe this is an important effort and landmark for Cemig distribution. On the next Slide, we have our consolidated debt profile. We see here our indebtedness profile. This gap for the next year can be managed. With the cash generation that we have, plus the cash of the company that we have so far, we’re able to navigate through financial challenges. We have hedged our interest rates, and up to $5, this bond is hedged. Therefore, this gap of 9 billion would be at a lower amount. The important management message is that we are paying attention to this issue. We understand that in the first quarter of next year, under a more stable scenario with vaccines and reduced uncertainties, interest rates will normalize or improve, and the company will begin a process of liability management over the coming months. We are in a very comfortable position, translating into the company's leverage, which today is at 1.55 of our total net debt over EBITDA—a very comfortable level that has positively affected our ratings, as Vélez mentioned. We expect this to remain an improvement trend for the future and ongoing enhancements in our liquidity as well as a reduction in investments. On the next Slide, we have our liquidity and our cash flow generation, which is impressive for the quarter. In the first nine months of the year, we generated around R$ 4 billion in cash. This is significant, alongside other factors that maintain our liquidity level, ensuring cash close to R$ 5 billion by the end of the third quarter of 2020. This is crucial to allow the company to tackle challenges by year-end without a vaccine, especially as the market is still reeling from economic deceleration. However, this ensures the company a comfortable situation for the next few months. Moving on to our next slide, we discuss the company's positive expectations. We start with solutions for GSF. The regulations are ongoing with the regulating agency, and we have a favorable outlook to extend for two or three years our planned concessions, not only for Cemig plants but also for our investees, Aliança and others where we have a stake. Thanks to the GSF agreement, we likely will expand these concessions, translating to more value for our company. We have an important digital transformation project, aiming for a modern relationship with clients by updating our platforms, utilizing virtual assistants, and robotic processes to transform our interactions with customers. Concerning new investments, especially in generation with wind projects and photovoltaic plants, we have a more than 2-gigawatt portfolio to assess. The same applies to solar plants, with a portfolio close to 2 gigawatts. Both are profitable projects that will generate value for the company in a conservative fashion while always seeking to add value responsibly. We will analyze these projects in the short, medium, and long term. We are also revising our strategic planning to address opportunities and challenges for Cemig concerning renewable energy in Brazil and globally over the next few years, preparing the company for this competitive environment. The project called New Energies aims to enhance our organizational culture, as this is a company with over 60 years and has strengths that should be valued while also needing improvements in processes and behaviors that can foster a results-driven culture. This is indeed vital and aligns with this administration's targets to transform the company into a more efficient one. Lastly, regarding divestments, we remain committed to appropriating our capital wisely, with the company still interested in maintaining its remaining stake in Light, which is a priority in our divestment portfolio. These were the slides we wanted to present, showing resilient results for the company, and we are optimistic about the future and the projects in development to create value for our shareholders. We will now begin the Q&A session.

Operator, Operator

There is a question from an unidentified analyst regarding the timing of dividend payments and the dividends policy.

Unidentified Analyst, Analyst

The question is when are you going to be paying dividends, and what about the dividend policy?

Reynaldo Passanezi Filho, CEO

Thank you very much for your question. The company, in the last meeting with investors, stated that our current purpose is to maintain our policy of 50% dividend payments. We believe this is balanced and allows our shareholders to receive proper remuneration while also maintaining the company's liquidity, which is crucial at this time, especially with upcoming plant maturities, Nova Ponte and Emborcação, and grant payments needed to maintain those concessions. For now, we find this policy appropriate. However, we are continuously reviewing and seeking to create shareholder value. If our liquidity and leverage improve, we might consider additional dividend payments. But at present, we want to maintain our policy of 50% dividend payment.

Operator, Operator

If there are no further questions, we’ll turn the floor back to management for their final remarks.

Antônio Carlos Vélez Braga, Superintendent of Investor Relations

Very well. Ladies and gentlemen, thank you very much for this teleconference and video conference. Teleconference is something from the past already. These are indeed consistent and sound results, showing that the path we have chosen is the right one with favorable perspectives. I should highlight two last subjects that Reynaldo mentioned. It’s important that we are working on our strategic planning, aiming for a future scenario associate with organizational culture, understanding the rationale behind results as part of the decision-making process, which will help prepare the company for future challenges. Thank you very much, and have a nice afternoon.

Operator, Operator

Cemig's conference call has ended. Thank you very much for your participation, and have a good afternoon.