Energy of Minas Gerais Co

BOVESPA:CMIG4

Earnings Call Transcript

[Carolina Senna, executive]

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'll also find the company's presentation. [Operator Instructions]

We are now starting Cemig's video conference with Reynaldo Passanezi Filho, CEO; Dimas Costa, Chief Commercial Officer; Leonardo George de Magalhães, 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 Filho, executive]

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 [ solvency ].

We do have some highlights that are very special. They have already been announced over this period of time, and we are very positive. We right now have the best rating in our history, AAA, we couldn't be better. This is the best rating in the company's history, and this is the best rating possible. We have over 6 [ matches ] of growth in the period, that is lower than 5 years. So this is really an acknowledgment by Fitch. Thanks to our consistent results, our cash generation and also EBITDA over net debt is one of the best in history.

Also in this quarter, we concluded the sale of Aliança Energia. This has been announced 45 days ago. We have received BRL 2.7 billion, and now we are recording in this quarter a capital gain of BRL 1.6 billion.

And also, we have very positive results of our transmission tariff revision, with a gain of BRL 1.5 billion in the IFRS and the adjustments of [ RTT ] for transmission. Therefore, we are reaching the best EBITDA in our history, BRL 5 billion in the third quarter.

These are wonderful results. In addition to the consistency of the results effectively with these events, we are reaching, again, the best EBITDA in our history as well as AAA, which is the best rating possible.

I would like to highlight these results to all of you that are here with us. And this is [indiscernible] the permanent commitment in certain results. And that, what I really like to focus on is, focus in growth and investments.

Once again, the quarter was almost 20% of growth compared to the same quarter of 2023. And when we look at this whole picture, we see that we are at 5x higher in terms of investments when compared to CEMIG in 2018. And in these 9 months, we have already invested over BRL 4 billion. Just last year was BRL 4.8 billion. This year, we will go over that number. So that proves our commitment to be working in the company's future, because a lot of these investments go to our base and also improve the company's future profitability.

These were the main highlights I wanted to go over. And obviously, I want to talk about the material fact. And also I have something to tell the market. Well, the first one I would like to tell you, has to do with our Investor Relations position and also our CFO position. Andrea Almeida is going to replace Leonardo.

And Leonardo, really, I would like to acknowledge and to thank you for your work at CEMIG and for the whole period where you worked as our CFO and IR Officer. You have over 30 years in the company. You are a leader, a great leader. I already have known you before I brought you over to be a CFO. You have always been praised by everyone, and I can only stress what I have heard about you before. And really, I wanted to publicly acknowledge you and to thank you. I am extremely thankful to you, and it's just [indiscernible] crowned with anything else different from a AAA rating. You provided us a crucial contribution and also to help us reach the regulatory OpEx to the minimum leverage in our history in the adjustments of postretirement, as well as I already said, with the AAA rating that we have just received.

And now we are appointing Leonardo, and this has been approved and the Executive Board. Also in the last week, he is going to be appointed for [indiscernible] to be the CEO there. Now we have to wait for the controlling parties there, but this is what we would like to see, that to have Leonardo taking over [indiscernible] as the CEO and also helping us in the challenges in the post-retirement at that entity.

And I would like to welcome Andrea Almeida. We are very happy to have you with us, Andrea. She has worked for Vale for 25 years. Also, she worked in Canada for Vale. She worked in the controlling area in the treasury department. She has been the CFO of Petrobras, and she was the CFO of Santander. This is a CV that requires no further comments.

Andrea, welcome to be in the company now. And to be part of the transformation, you see that we have been posting great and consistent results. So once again, Leonardo, thank you very much.

And also, I would talk about the material fact which we posted last Friday. We have received a communication from the controlling shareholder, announcing the submission of a bill. This is a bill for the legislative assembly, so that they can no longer be CEMIG's controlling party, therefore turning CEMIG into a corporation. There is going to be the whole process in our legislative assembly. So this is a very important announcement from our controlling shareholder and about his desire to turn Cemig into a corporation.

Carolina, these are my initial remarks, and we will be ready to take your questions after the company's presentation. And once again, I would like to stress that we did have consistent results. Our investment plan is in line with what was planned. And all of these historic numbers, AAA, the highest EBITDA ever, also higher investments and this material fact and communication we had to the market, and the desire of the controlling shareholder in turning CEMIG into a corporation. So we'll be available to take your questions at -- later on.

So now moving on, I would like to turn the floor to our CFO and IR Officer, Leonardo Magalhães.

[Leonardo Magalhaes, executive]

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 in this period in which we worked together here, and the Board, and also thank him for his leadership in this transformation process in the company. The figures tell it all, but he created the base of the company in order to ensure that we would have the sustainable growth for this company in the next few years. Thank you very much, Reynaldo.

I would like to welcome Andrea, a great professional, a renowned professional. And she's going to have a relevant role in providing continuity to our strategy and the continuous generation of value to our shareholders.

And also, I would like to thank our investors for the relationship all of these years. This is -- the foundation is one of the important topics of the company. They have an important role with all their participants, and we will try to do the best work possible at [indiscernible]. So thank you very much for that appointment. And of course, now we will just depend on the regulating agents.

So we had a number of positive results. One of them was the sale of our company and Aliança Energia and also we had the tariff review. And we did have the effects of the tariff review now.

So it's important to mention that we almost doubled our remuneration base, and we forecast BRL 3.5 billion in investments for the next years for transmission lines in the state of Minas Gerais, important investments that we understand that they are important for the country and also for the company, and they would generate value to shareholders when we compare to returns in transmission auctions and these are investments that the company is doing right now, according to its transmission concession.

Now moving on. Reynaldo talked about investments. We had a bold investment planned for this year, BRL 6.2 billion, and we are confident that we will be able to invest over 90% of what was forecasted for this year. We have already been able to realize over 65% up to this third quarter. Of course, in the fourth quarter, we will accelerate that.

But here, we have the distribution of the breakdown. We have BRL 4.4 billion of realized investments. We are in line with what was forecasted. The company was investing close to BRL 800 million, BRL 900 million a few years ago in distribution. And now we are investing almost 4x the QRR. We believe these are profitable investments, and they proved the correct capital allocation for the company in the last few years.

Now moving on some highlights in the results. I'll turn the floor to Carolina. But before that, I would like to mention a few topics here. First, we were awarded [indiscernible], one of the most transparent companies in Brazil because of the quality of our -- and the transparency of our financial statements. So we provide quality and quick information to our investors, so that they can correctly assess our results and operations.

And in this result and the consolidated results, we have a cash generation once again, that is robust for businesses that generate a lot of results in the company's BRL 1.8 billion in EBITDA in the third quarter. And the trading results have been negatively impacted, because of the load restrictions between Northeast and Southeast that had effects in the grocery stores, comparing the prices of energy that we buy in the Northeast and use it in the Southeast. It was difficult. October was a difficult month. But because of rain in November and December, we have more favorable months for our trading business.

And Cemig D, we still have very good quality indicators within the regulatory limits, and the average tariff adjustments of this quarter of 7.32%, market growth of 4.5%, and we understand that the year-end results for Cemig distribution is to be very favorable. This is a company that has disciplined costs, and also is still focused on the clients to improve the service quality that we are providing to Minas Gerais society.

And Cemig GT, here in this third quarter, we posted BRL 1.6 billion in capital gain because of the sale of Aliança Energia. And also, we had core Cemig GT positive results stemming from the tariff review.

Now I'll turn the floor to Carolina, and she's going to go into the details of the results for this third quarter.

[Carolina Senna, executive]

Thank you very much, Leonardo. So now moving on. And this is the slide that we always show you with the results, the IR -- IFRS result and the recurring results here.

As Reynaldo mentioned, we had the best EBITDA in our history, thanks to the tariff review and Aliança sale. And this shows the success of our divestment plan. Net of the recurring effects, which are the tariff review in Aliança. I'll say, we had a drop of 10%, but most of that was affected by what Leonardo already told us, that has to do with commercialization or trading activity, that they had the difference because of the submarket price. And now with the rain effect, we will no longer have this price difference.

Now analyzing PMSO, we see that we have grown 2.9%, a highlight for outsourced services, also right of way clearing, tree pruning, when we compare quarters to quarters. Just to give you an idea of right of way clearing, we cleared 40,000 kilometers of right of way clearing, that is to mitigate interruptions of energy that is provoked by climatic events. We already see rains here and sometimes we are affected by these events. And that also -- so that we can keep on providing services at the best quality possible for clients, avoiding hours of interruption of energy because of some type of event.

And also under other expenses, when we compare the same quarters, '23 and '24 because of the asset activation, and we have the largest program of divestment in the company in the distribution sector. So it is natural that we have a higher deactivation of assets over this program over these years where we are executing the program.

In our cash flow, as Leonardo mentioned, the company has a robust cash generation. When we look at the year-to-date, in these 9 months, just for operating cash, we have BRL 5 billion. We had two fundings for Cemig D that were very successful so that we could foster our investment program.

Just this year, Cemig D will be investing over BRL 4 billion in its concession distribution.

Also, we had interest on equities or dividends paid, the payment of these dividends, that is done in two installments, at the end of the year and in June. So we had investment activity, which also meant a cash outflow. And we had Aliança divestments. And we ended the quarter with BRL 6.7 billion that will be used in the next quarters also by dividend payment because of investments. And also let's remember that we have our last share of the euro bonds of $380 million, which will also be paid now in December.

Now I'll turn the floor to Leonardo to talk about our successful 11th issuance of debentures.

[Leonardo Magalhaes, executive]

Yes, once again, a successful issuance debentures. This is already a AAA company. But in the last issuance, we know clearly that we're already being considered a AAA company.

These issuances, when compared to our basis to the market, the market really trusted the company, thanks to our low leverage, our good financial structure. So we had the issuance of BRL 2.5 billion, all of them placed in the market. Banks had a huge demand. It was higher than our offer.

We issued a CDI of BRL 1 billion and a second series of BRL 1.5 billion with IPCA. We have a natural edge, and our revenue from distribution also is attached to IPCA. And we have good terms here, 7 years and 12 years. Cemig has an average maturity up to last quarter of 2.7 years. And so after December next year, so it's going to be 5.4 years our debt profile. So we adjusted our debt profile. We extended the debt profile. And right now, we have very high rates. But considering our market situation, we have been able to pay off our investments and to finance that in the market so that they can be feasible using third-party capital.

Now turning the floor to Carol. She will go back to the debt profile and additional information.

[Carolina Senna, executive]

Now moving on. As Leonardo mentioned, we had a recent issuance for Cemig [ T ] of BRL 2.5 billion, with an extension of our debt profile. We still have low leverage, especially thanks to Aliança's funds in coming, but this leverage is going to be used, because of our investment program, which is the best in history.

As well as in December, as I mentioned, we will be paying euro bonds. We no longer have that [ and dollar ] after 2025, and also we'll be paying dividends. So this leverage will naturally increase, because of the events that I just mentioned.

Moving on. On Cemig D, we had no nonrecurring event in this quarter. We have significant results over each quarter in EBITDA. There was a drop compared to '23, and that was because of a higher increase in outsourced services expenses, as I mentioned, over 40,000 kilometers that we had to clear the right of way to mitigate possible adverse events stemming from climate events. And also we were affected by market losses from captive market to DG.

Now talking about the market, we had a significant increase of 4.5%, mainly affected by transported energy, showing how Minas Gerais' state is growing in terms of energy demand, new clients that are coming to the state and also demand Cemig D's mix concession services and the capital market is kind of sideways.

We had a significant improvement in the residential clients because of high temperatures, but distributed generation is still affecting our captive client, which is migrating from that segment. And if we were not to have that adverse event of distribute generation, we would have grown 6.6%.

Now for regulatory losses. We always say that in 2021, we committed ourselves to be within the regulatory limits. So we had a slight mismatch here because of those 3 days in May and Cemig's distribution anniversary is May 28, so there were differences in just 3 days that affected that significant indicator of regulatory losses.

We have already had a reduction, and we are optimistic about our commitment to end the year within the regulatory losses. We need to keep on investing in the inspection of consuming units to continue our program to replace the conventional meters by [indiscernible] , wants to increase the fielding, the protection for the meters, and also to convert illegal connections into legal ones so that we can provide the best service to our consumers and also to maintain, to keep ourselves within the regulatory limits.

For operating efficiency, when I compare the realized OpEx and regulatory OpEx, the ones that I have the coverage and the tariff. And remember, in the second quarter, we had a nonrecurring positive effect, which was the reversal of tax provisions of INSS on the voluntary business program. And even with that, we are within OpEx with a performance of 6.8%.

Within EBITDA, we are at 5.6% lower than the regulatory EBITDA. But we are very optimistic. We are still working so that we can end over the year, within the regulatory EBITDA, just like the [indiscernible].

For Cemig GT, the sale of Aliança and the periodic tariff review are under Cemig GT. We had an EBITDA for IFRS, higher and 380%. Removing those effects, we are down 19%. So that is affected by the trading activity. And we are starting to bring all the trading contracts to Cemig holding. But this process is not 100% included yet. Therefore, part of that activity is under Cemig GT, therefore, affecting the recurring results.

Now, to show you the breakdown per business or area of the company, we have the slides for distribution. We are ready now. We have increase in expenses with outsourced services, and that is to bring best quality of service for people. So generation is more or less in line [ for ] trading.

We already mentioned that the margin for 2024 would be lower than 2023, but also we had the effect of the submarket difference, the reduction in the gas consumption, and I will show you ahead. And we already talked about this, the industrial activity we had, a reduction in cubic meters for gas in addition to 2023. There was a compensatory parcel that was improving the results for 2023. So when I compare that to '24, there is a difference in the results. And the transmission improved in 11%, showing that one of the strengths of the company is to have a footprint in different segments in a way that, as a whole, we are able to deliver recurring robust result.

For Gasmig, again, as I mentioned, there was this cubic meter reduction in gas volume from industrial clients of 6.6%, affecting our EBITDA in 1.7%. Remember that Gasmig has an investment program. They are building a gas pipeline after the Midwest. So after 7 years, without investing in the state, we are now investing again. So this is the largest investment program in the group, as we are seeing.

And now I'll turn the floor to our CFO and IR Officer, Leonardo, so that he can talk about our commitment.

[Leonardo Magalhaes, executive]

This is a slide that we always like to bring you every quarter, because this is the commitment from the company to be transparent. And these commitments are in line with our strategy. And we usually say that if we go back, and what we said that we were going to do in 2021, 2020, during the pandemic, and look at what we had talk about our strategic planning and what we have for the future, we can clearly see that the company is delivering exactly its strategic plan.

Here, we have some of the objectives that have already been met, such as the bonds and the Cemig's in the regulatory OpEx, quality index also and the regulatory limits, also we divested from more complex holdings. Also Cemig's distribution, investment program. So it's 23 million from '23 up to '28.

So the ongoing projects in progress, a number of them are at full speed, and we are already market leaders in energy here in Brazil, we are meeting already that commitment of this leadership that we already have and market and now also in retail trading, showing Cemig's competence and Cemig's team competence in generating value.

Also digital transformation. We are investing a lot in technology to prepare Cemig for the future. And also, we are implementing initiatives to comply with nontechnical losses within regulatory levels. So here, we are talking about assets where we would like to reallocate capital. And thinking about the future -- other projects also, we have renewals of generation concessions. We are just paying attention to the topic and also technologies for energy transition, that something else that the company is very much aware of, so that we can have a relevant position in the future, so that we can have a good position on how to deal with energy transition topics.

Now I'll turn the floor to Carolina, we will have a Q&A session, and I would like to thank you all very much.

[Carolina Senna, executive]

Thank you, Leonardo. So now we will start the Q&A session. [Operator Instructions]

Our first question is from Marcelo Sa, sell-side analyst from [indiscernible].

[Marcelo Sá, analyst]

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 the prior project approval?

Second, I would like to know if there is anything new in terms of Taesa's stakeholding?

[Carolina Senna, executive]

Thank you, Marcelo. I will ask Mr. Reynaldo to answer your question.

[Reynaldo Filho, executive]

Good morning, Marcelo. It is obvious that the best entity to answer this question would be Minas Gerais administration, the controlling shareholder. It is a strategy that is coming from the controlling shareholder.

Yes. We know that there are a few things there. We have the bill of law now, and now we have the constitution amendment proposal. If just the bill of law is approved, our understanding, and it's just an initial understanding, is that we will need a referendum. So if this bill of law is approved, regardless, this constitution amendment proposal, according to the constitution, we would have to have a referendum.

About Taesa, we do not have anything new about it. And if anything comes up, we will then publish a notice and you will know about it.

[Carolina Senna, executive]

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

[Daniel Travitzky, analyst]

I have two questions. They are related to the results. I would like to better understand the purchase and sale of Energia in this quarter. There was an increase in that line. I would like to understand how was the quarter on that topic.

And second question has to do with leverage. You mentioned that you are expecting leverage to increase after payments of dividends and the eurobonds. So where do you project this leverage at? And what is your mindset for additional dividend distribution up to the end of the year?

[Carolina Senna, executive]

For the first question about energy trading, I will ask the support of Dimas Costa. And about leverage. I'll turn the floor to Leonardo.

[Dimas Costa, executive]

Good morning, everyone. Thank you for your question, Daniel. Let me understand it. You were asking us about the quarter's purchase of energy. Cemig, this year, sometimes, we have an open position. We were not in that situation so we did not need to buy, to purchase energy. But we did have a price difference.

Today, we have an energy that we purchased. We have 1/4 of that energy coming from the Northeast. And usually, that energy in September, October is stressed, because there is a restriction in transmission. And there is a price difference in the market. And because of the lower prices, it's about BRL [ 2, 3, 6 ], that is more usually more or less the amount. But this year, the price attached, it went to BRL 300 and BRL 400 in September and October. So out of the 1,100 megawatts that we acquired from the Northeast, we were able to hedge around 300. And the other 800 is at a risk, and we have to manage that risk.

But in addition to the impact -- therefore, we were not open, but we did have that difference. We had to buy energy in the Southeast and [indiscernible] in the Northeast. And this is the regular dynamics of those that have energy in the submarket and have to sell it in another.

And also, we had some trading companies that -- and some large trading companies did not deliver what they had promised in September and October. So we had to cancel contracts with no losses for Cemig. And for other -- two other small ones, it's just for 2025, they will be reused and a large one, which was the largest impact, then we're able to negotiate with it. It did not post energy to us and that amount of millions was converted in a price reduction in the contract for 2025.

So actually, there was a deferral. When you check the results, a lot of the impact, in addition to the price difference, was this deferral that we had to a trading company. Not only to help the trading company, but also to help ourselves, because no one wants judicialization, especially when we have a large amount of money involved and that was then transferred to 2025.

[Carolina Senna, executive]

Thank you, Dimas. Now moving on the question on leverage, I'll turn the floor to Leonardo.

[Leonardo Magalhaes, executive]

Daniel, thank you for your question. Well, this topic regarding dividends and leverage reflects Cemig's situation. This is a company with a very low leverage, with a large investment program, with access to the capital market to be able to finance future investments. And what we are usually telling the market is that, because of this large investment program, we also have large investments for next year is that our leverage is going to grow considering dividends of 50% of the IFRS results, we would reach 2027 with a leverage of between 2% and 2.5%, considering the level of investments that we have now, and this leverage will go down in 2028 with Cemig's distribution tariff review.

But we understand that even without talking about extraordinary dividends higher than the payout today that we have today, which is the 50% of the IFRS, we believe that these are very attractive dividends. The company just last year and the prior years, we have already paid higher -- the highest dividends in the [indiscernible] factor.

Also in this year, for the results that we already have, we can say that these will be very good evidence. And then I believe that this is a sustainable strategy, because we can pay great dividends considering the company's profits. And we are also investing. We are increasing leverage slowly without hindering the credit quality of the company.

So this is a strategy that we see in the market that's very successful. Very few companies have it, and that's going to generate value for shareholders in the next few years. And in 2028, we will have greater cash generation with the tariff review for the distribution company and also transmission, thanks to all the investments that are forecasted, and we are executing these years.

[Carolina Senna, executive]

Thank you, Leonardo. If there are no further questions, we now end the Q&A session.

Now I would like to turn the floor to Reynaldo Passanezi, our CEO, for his final remarks. Please, Mr. Reynaldo?

[Reynaldo Filho, executive]

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

[Carolina Senna, executive]

Thank you. Our media conference for the Earnings Call of the third quarter of 2024 has ended. IR superintendents are available to take any further questions you might have. Thank you very much to all of you, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]