Earnings Call Transcript - CIG Q2 2025

Carolina Senna, Investor Relations Superintendent

Good afternoon, everyone. I am Carolina Senna, Superintendent of Investor Relations at Cemig. Welcome to Cemig's Second Quarter 2025 earnings video conference call. This video conference is being recorded and will be available on the company's IR website, ri.cemig.com.br, where you can also find the full package on this call. If you need simultaneous interpretation, the feature is available on the platform. Just click on the globe icon located at the bottom of the screen, choose interpretation, and then select your preferred language, either Portuguese or English. We will now start our call with Reynaldo Passanezi Filho, our CEO; Andrea Marques de Almeida, CFO and IR Officer; Luis Cláudio Correa Villani, Chief Information Officer; Marco Da Camino Ancona Soligo, Chief Generation and Transmission Officer; Marney Tadeu Antunes, Chief Distribution Officer; and Sergio Lopes Cabral, Chief Trading Officer. For the initial remarks, we would like to turn the floor to our CEO, Reynaldo Passanezi Filho.

Reynaldo Passanezi Filho, CEO

Good afternoon, everyone. It’s a pleasure to be here with you to discuss our company’s progress. As mentioned in our initial video, we are currently executing our largest investment program to date. In this quarter, we have increased our investments to BRL 2.7 billion in the first half of the year, alongside strong resource generation, achieving an adjusted EBITDA of BRL 2.2 billion, which reflects a solid performance. This adjusted EBITDA highlights our investment plan, which is in full execution, including the opening of substations, expansion of the grid, and completion of generation and gas projects. We are nearing the start of our Midwest gas pipeline, so we are advancing rapidly with our investment strategy. With an adjusted EBITDA of BRL 2.2 billion this quarter, it underscores the strength and resilience of our operational performance. There are three key topics to highlight this quarter. First is the review of the calculation methodology for the RBSE, which has resulted in a noncash impact of BRL 199 million for Cemig this quarter. Our typical EBITDA disclosure is based on IFRS; however, cash impacts will materialize over time. Secondly, we encountered a concern in our trading sector with a negative impact of BRL 76 million due to discrepancies among energy submarkets. We believe that with the upcoming review of criteria by the ONS and improved interchange, this figure will likely approach zero. Lastly, we have a tariff adjustment of 7.78%, aligning with other distribution adjustments, largely driven by inflation and additional charges. We also participated in the GSF auction, successfully securing concession extensions for three power plants: two for 7 years and one for 3 years, resulting in a total funding disbursement of BRL 200 million. This reflects our commitment to sustainability as we look to extend concessions due in the future, understanding the energy sold for the companies and the competitive pricing. This strategic move adds value in the long term. These points represent the main highlights I wanted to share to start our call. Now, I’ll hand it over to Andrea. We are also available to handle any questions you may have shortly. Thank you.

Andrea Marques de Almeida, CFO and IR Officer

Good afternoon, everyone. I apologize for my cold. We are continuing with our investment plan, and it's progressing well. Of the BRL 2.8 billion allocated for this year, we have focused our investments on distribution to enhance service for our clients, and we have approached this methodically. In these early months, we have energized nine substations and constructed over 2,600 kilometers of low and medium voltage networks. In generation, we have made significant investments in expansion and maintenance for safety. Additionally, we have invested BRL 200 million in transmission, particularly for reinforcements and improvements for Cemig, including the Central West project, which involved over 100 kilometers of gas pipelines and added 21 megawatts in line with our investment plan. This execution is going very well. I’d like to share some images of our substations from our Mais Energia program and our photovoltaic plant in Advogado Eduardo Soares, which has a 35-year term and CapEx of BRL 464 million, significantly contributing to CO2 reduction. Now, regarding our results, Reynaldo mentioned that when comparing to 2024, we expect some nonrecurring effects. Analyzing IFRS shows that while some effects may reflect a reduction, we achieved a substantial quarter, with a 15% increase in EBITDA. A key contributor was the reimbursement of tariff subsidies via the energy development account, particularly impactful in Minas Gerais. We also noted a BRL 21 million reduction related to employee migration to the premium plan, along with exposure to submarket prices mentioned by Reynaldo. Looking into our IFRS EBITDA, while some nonrecurring effects might lead to a reduction, we also had reversals from prior tax provisions, particularly regarding INSS in the profit sharing program, which significantly influenced our BRL 584 million net profit. There were also adjustments for amounts to be reimbursed from PIS and COFINS. We are awaiting the final ruling from the Supreme Court, which will clarify the implications for Cemig. We have documented our exposure to submarket prices over time, showing decreasing differences—BRL 480 in April, BRL 533 in May, BRL 619 in June, with June reflecting a price difference of BRL 4.88. The impact in this quarter was less severe than in the prior quarter, resulting in a gross effect of BRL 76 million from the price differences. In terms of managerial expenses, we managed to keep those below inflation. The voluntary redundancy program had a minimal effect on outsourced services. We are also focused on tree pruning and meter disconnections, alongside significant investments in distribution, leading to greater asset disposals. Our debt profile remains strong, with a net debt to adjusted EBITDA leverage ratio of 1.59, factoring in the BRL 5 billion debenture issued last quarter and the amortization of a previous debenture, achieving an average tenure of six years. This positions us comfortably for our ongoing investment plan. By the end of the quarter, our cash flow stood at BRL 3 billion, supported by an operating cash generation of BRL 2.3 billion, the BRL 5 billion in debentures, and amortization of around 2.3% on other debentures, alongside payments on interest and dividends related to our investment activities. For Cemig's D results, our adjusted EBITDA without nonrecurring items grew 39% largely due to the reimbursement of tariff subsidies. However, factoring in nonrecurring items shows a lesser increase compared to the previous quarter. In the energy market for Cemig distribution, there was a 3.3% drop this quarter, largely due to clients migrating to the free market, particularly large industrial clients, and the rise of distributed generation, which has seen around 20% growth year-over-year. We are prioritizing operational efficiency at Cemig D, particularly in collections. Currently, about 67.5% of collections occur through digital channels, and our receivables collection index stands at around 99%, demonstrating effective billing and collection practices. Our operational expenses are also aligned with regulatory requirements. Recently, we adjusted the calculation of regulatory losses, shifting from built to measured markets, leading to improvements, although we still remain within regulatory limits. We continue to install smart meters and support over 4,000 families in reducing legal energy losses. For Cemig GT, we anticipated reductions due to trading contracts, as the margins for 2024 and 2025 are expected to decline. However, we are experiencing a positive impact on adjusted net profit due to repayment of bonds that had negatively affected prior profits because of currency exchange exposure. Regarding our success in the GSF auction, we achieved BRL 200 million from three plants: Irapé, Queimado, and Joaquim, with favorable pricing extending beyond original concession periods. Additionally, ANEEL has recommended approving the concession extension request for Sá Carvalho, reinforcing our commitment to renewing our concessions. Gasmig also showed promising results, with EBITDA and net profit markedly improved by efficient cost management and successful debenture issuance. We remain committed to ongoing investments and look forward to the opening of our Central West project. Finally, we invite you to our Cemig Day on September 10, 2025, where we will delve deeper into our strategies and future opportunities, as we are proud to be a leading company in the energy sector. Thank you all, and we now open the floor for your questions.

Operator, Operator

Our first question is from Carolina Carneiro, an analyst from Banco Safra.

Carolina Carneiro, Analyst

Hello. Thank you very much for the call. I would like to take this opportunity and ask you to comment about capital allocation. You went into the GSF auction. Of course, you have a robust investment plan, but the cash situation of the company is very much under control. If you can give us a little bit more visibility, what's going to be your focus for the next transmission auction. If you were looking at any other segment? And also about the concession renewals, you had that opportunity via GSF auction, but we have some important concessions that are due in the next few years. Do you have any updates in terms of regulatory changes or discussions that are on the table that would allow us to have greater visibility about the plans for these plants? That would be very interesting. Thank you.

Reynaldo Passanezi Filho, CEO

Our strategic planning serves as our best guideline, which includes a BRL 59 billion investment plan from 2019 to 2029. A significant portion of this investment will be directed toward the distribution sector, which is regulated. In the past, we faced challenges due to insufficient investments, leading to an unmet load of nearly 15%. We also experienced substantial growth in distributed generation. This initial focus on growth in distribution aims to meet the expansion needs for both the unmet load and distributed generation, which currently requires substantial investment, given that we have nearly 5 gigawatts of distributed generation. Projects like Mais Energia and Minas 3-phase are already in place. After we address these initial expansion needs, we will shift our focus to enhancing resilience and automation as requested by ANEEL and the Ministry of Energy. Our investments will primarily be concentrated on resilience and service quality improvements. Additionally, we have plans for gas investments in another regulated sector. Regarding concession renewals, we appreciate ANEEL's recommendations for the renewal of Sá Carvalho per quotas, and this matter is under consideration for our other two plants as well. ANEEL will then relay its recommendations to the Ministry of Mines and Energy. If we proceed with the renewal for quotas, we will transition from the free market to the regulated market without needing significant disbursements. Decisions regarding our presence in the free market rely on changes in capital structure, which are beyond our management's control and depend on executive and statehouse decisions in Minas Gerais. In terms of capital allocation, our primary focus remains on our strategic plan, which centers on Minas Gerais. All our investments will be directed there, leveraging our competitive advantages and the synergies we have in our region with the majority of our assets and plants. We take this commitment seriously, and any potential M&A opportunities must occur within Minas Gerais.

Carolina Carneiro, Analyst

Thank you very much, Reynaldo. If I can ask another question. Last week, the Supreme Court ruled about PIS/COFINS and ICMS. I know that it might be too early to ask you, but if you already have any comments and other companies in the sector have a significant balance in a possible credit to be transferred to tariffs or even to the company, do you have any ruling or do you have any reading about what was decided last week? That would be great to know. Thank you.

Andrea Marques de Almeida, CFO and IR Officer

Well, this allows the deduction of the taxes and honor areas that have been paid. And yes, this is positive. And as you said, Cemig has already reimbursed clients for over 10 years. So now we have to see how this final ruling will be to check the impacts for us, but two positive things are to be able to discount taxes and also honoraries. This is positive, yes, but we cannot calculate that without knowing the final ruling. Let's wait for that.

Carolina Senna, Investor Relations Superintendent

Our next question is from analyst Victor Cunha.

Victor Cunha, Analyst

Good afternoon, everyone. Thank you for this opportunity. Now looking at the energy balance that you presented, we saw a reduction in the short position for the short term, '25, '26, but an increase in the short position for '27, '28. Can you share with us what was the rationale and this decision to increase the short position for '27, '28, especially during a pressure for energy prices, considering the new parameters and risk aversion, but also probable higher cost and the marginal cost of expansion, considering all challenges that renewable plants are facing. If you can tell us what you have in mind for that, I would appreciate.

Sergio Lopes Cabral, Chief Trading Officer

Victor. Thank you for your question. Actually, we have been working to close this position. We have been looking at the market and we have been closing positions and increasing our exposure. The short exposure in these 2 years you mentioned, still a gold effect. The counterpart that we had contracted and because we do not have delivered energy, we had to buy energy and to expose ourselves a little bit more. But we are looking ahead and closing our positions. This is our guide, we do not wish to open more positions.

Carolina Senna, Investor Relations Superintendent

Our next question is from Lilyanna Yang, analyst from HSBC. I can also read your question. Okay. Well, there was a problem here with transmission, but she has two questions. First, in distribution, your next tariff review will happen just in 2028. Can you comment on how the current changes in the regulatory environment might affect the profitability of the company? And second question, when can we expect an expense reduction in the pension plan fund?

Reynaldo Passanezi Filho, CEO

Good afternoon, Lilyanna. I can address those questions. It's still early to discuss an efficient frontier of costs. We need to focus on efficiency, which is one of our core principles. We aim to enhance the quality of our services while also pursuing greater efficiency. These goals are interconnected, and we are always striving for more efficiency. If this includes changes in tariff models, we view it positively since it's beneficial for consumers who require these models. We need to pursue efficiency, and we recognize that discussions about tariff models and efficiency occur every five years. We hope the conversations extend beyond distribution tariffs to include CDEs, subsidies, and charges, as these are the areas significantly impacting tariffs, rather than just the parcels for generation and transmission. Distribution has lagged in progress, so we are actively working to improve efficiency. We know that changes happen every five years, and of course, more automation and technology will help. We are currently focusing on expanding our smart meters, which contribute to better service and savings. Our IT department is looking into this. Regarding pension funds, there was another point made by Carol concerning health care plans, particularly related to post-employment benefits, which is significant in our financial results. We are in negotiations concerning these matters, whether related to health plans or pension funds, especially the benefits linked to Cemig. We will have more information once we reach conclusions on these topics, and until then, it's premature to comment further. I can assure you that we are keen on reaching agreements with all beneficiaries to ensure that both the health care plan and pension funds are secured while also focusing on Cemig’s efficiency.

Carolina Senna, Investor Relations Superintendent

If there are no further questions, we end now our Q&A session. I would like to turn the floor to our CFO and IR Officer, Andrea Marques de Almeida for her final remarks.

Andrea Marques de Almeida, CFO and IR Officer

I would like to thank you very much for your questions and for your participation. We are here available to take any questions in the IR area and our leaders to help you at any time. Thank you very much, and have a nice afternoon.

Operator, Operator

Our media conference call for the second quarter 2025 Cemig's results has ended. Thank you very much.