Companhia Energética de Minas Gerais - CEMIG - Q3 2024

Transcript

Speaker 0

Good morning, everyone. I am Carolina Sena, 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.

Vamos en ese momento.

We are now starting CEMIG's video conference with Reinaldo Passanese Filho, CEO; Dimas Costa, Chief Commercial Officer; Leonardo George de Magalhães, CFO and IR Officer; and Renata Del Antunes, Chief Distribution Officer. For the initial remarks, I turn the floor to our CEO, Reinaldo Passanese Filho.

Muito bom dia a todos e a todas.

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 soundness. We do have some highlights that are very special. They have already been announced over this period of time, and they 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 six notches of growth in a period that is lower than five years. This is really an acknowledgment by Fitch, thanks to our consistent results, our cash generation, and also EBITDA overnight. That 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 R$2.7 billion, and now we are recording in this quarter a capital gain of R$1.6 billion. Also, we have very positive results of our transmission tariff revision, with a gain of R$1.5 billion in the IFRS and the adjustments of ERTT for transmission. Therefore, we're reaching the best EBITDA in our history, R$5 billion in this 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.

Reflecting the permanent commitment in certain results. What I really like to focus on is the focus and growth and investments. Once again, a quarter with almost 20% of growth compared to the same quarter of 2023. When we look at this whole picture, we see that we are at five times higher in terms of investments when compared to CEMIG's in 2018. In these nine months, we have already invested over R$4 billion. Just last year was R$4.8 billion. This year, we will go over that number. 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.

Obviously, I want to talk about the material facts, and also I have something to tell the market. The first, what 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.

We 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. Really, I wanted to publicly acknowledge you and to thank you. I'm extremely thankful to you, and it just couldn't be 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 post-retirement, as well as, as I already said, with the AAA rating that we have just received. Now we are appointing Leonardo, and this has been approved in the executive board also in the last week.

He's going to be appointed for Luz to be the CEO there. Now we have to wait for the controlling parties there, but this is what we would like to see, to have Leonardo taking over for Luz as the CEO and also helping us in the challenges in the post-retirement at that entity. 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.

Once again, Leonardo, thank you very much. I would also like to 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 to 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. This is a very important announcement from our controlling shareholder 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. 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 the communication we had to the market, and the desire of the controlling shareholder in turning CEMIG into a corporation. We'll be available to take your questions later on. Now moving on, I would like to turn the floor to our CFO and IR Officer, Leonardo Magalhães. 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 Reinaldo for his trust in this period in which we worked together here in 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, Reinaldo. 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. I would like to thank our investors for the relationship all of these years. 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 for Luz. Thank you very much for that appointment. Of course, now we will just depend on the regulating agents. We had a number of positive results.

One of them was the sale of our company and Allianz, 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 $3.5 billion 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. They would generate value to shareholders when we compare two returns in transmission auctions. These are investments that the company is doing right now according to its transmission concession. Moving on, Reinaldo talked about investments. We had a bold investment planned for this year, $6.2 billion reals, 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'll accelerate that. Here we have the distribution of that, the breakdown. We have $4.4 billion of realized investments. We are in line with what was forecasted. The company was investing close to $800, $900 million a few years ago in distribution, and now we are investing almost four times the QRR. We believe these are profitable investments, and they prove 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. Before that, I would like to mention a few topics here. First, we were awarded the Transparência, one of the most transparent companies in Brazil, because of the quality of our and the transparency of our financial statements.

We provide quality and quick information to our investors so that they can correctly assess our results and operations. In this result and the consolidated result, we have a cash generation, once again, that is robust for businesses that generate a lot of results in the company, $1.8 billion in EBITDA in this third quarter. 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. CEMIG, 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%.

We understand that the year-end result for CEMIG distribution is to be very favorable. It's 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. CEMIG GT, here in this third quarter, we posted $1.6 billion in capital gain because of the sale of Allianz Energy. Also we had for 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. Thank you very much, Leonardo. Moving on, this is the slide that we always show you with the results, the IR, IFRS result, and the recurring result here.

As Reinaldo mentioned, we had the best EBITDA in our history thanks to the tariff review and Allianz sale, and this shows the success of our divestment plan. With net of the recurring effects, which are the tariff review and Allianz sale, 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 had the difference because of the submarket's price. 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 and tree pruning. When we compare quarters to quarters, just to give you an idea of right-of-way clearing, we cleaned 40,000 kilometers of right-of-way clearing. That is to mitigate interruptions of energy that are provoked by climatic events.

We already see rains here, and sometimes we are affected by these events. 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. Also under other expenses, when we compare the same quarters, 23 and 24, because of the asset deactivation, 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 nine months, just for operating cash, we have R$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 $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. We had Allianz divestments, and we ended the quarter with $6.7 billion reais that will be used in the next quarters also by dividends payment because of investments. 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 the ventures.

Yes, once again, a successful issuance of the ventures. This is already a triple-A company, but in the last issuance, we knew clearly that we were already being considered a triple-A 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 issuance of $2.5 billion, all of them placed in the market. The banks had a huge demand. It was higher than our offer. We issued a CDI of $1 billion and a second series of $1.5 billion with IPCA. We have a natural hedge, 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.

After December next year, so it's going to be 5.4 years, our debt profile. We adjusted our debt profile. We extended the debt profile. Right now, we have very high rates, but considering our market situation, we have been able to pay off our investments and finance that in the market so that they can be feasible using third-party or capital. Now turning the floor to Carol, she will go back to the debt profile and additional information. Continuando, então, as Leonardo mentioned, we had a recent issuance for CEMIG 2 of R$2.5 billion with an extension of our debt profile. We still have low leverage, especially thanks to Allianz's funds incoming, 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 will no longer have debts in dollars 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, in CEMIG D, we had no non-recurring event. In this quarter, we have significant results over each quarter in EBITDA. There was a drop when compared to 2023, 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. We were also 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 the Minas Gerais state is growing in terms of energy demand, new clients that are coming to the state, and also demand the CEMIG's concession services. 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. If we were not to have that adverse event of distributed 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 three days in May and CEMIG's distribution anniversary is May 28.

There were differences in just three 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 smart ones, to increase the shielding, 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 in the tariff, and remember in the second quarter, we had a non-recurring positive effect, which was the reversal of tax provisions of INSS on the voluntary dismissal program.

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 OPEX. For CEMIG GT, the sale of Allianz 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%. That is affected by the trading activity. We are starting to bring all the trading contracts to CEMIG Holding, but this process is not 100% concluded yet. Therefore, part of that activity is under CEMIG GT, therefore affecting the recurring results. Now, to show you the breakdown per business, per area of the company, we have this slide.

For distribution, we already know we have an increase in expenses with outsourced services, and that is to bring best quality of service for the people. Generation is more or less in line. 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. I will show you ahead, and we already talked about this, the industrial activity ahead, a reduction in cubic meters for gas. In addition to 2023, there was a compensatory parcel that was improving the results for 2023.

When I compared that to 2024, there is a difference in the results, and the transmission improved by 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 a recurring robust result. For GASMIG, then, as I mentioned, there was this cubic meter reduction in gas volume from industrial clients of 6.6%, affecting our EBITDA by 1.7%. Remember that GASMIG has an investment program. They are building a gas pipeline up to the Midwest. After seven years without investing in the state, we are now investing again. This is the largest investment program in the group, as we are saying. Now I'll turn the floor to our CFO and IR Officer, Leonardo, so that he can talk about our commitments.

This is a slide that we always like to bring you every quarter because this is the commitment from the company to be transparent. These commitments are in line with our strategy. 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 talked about, our strategic planning and what we had 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 in the CEMIG, in the regulatory OPEX, quality index, also in the regulatory limits, also we divested from more complex holdings, also CEMIG's distribution investment program. So it's $23 million from 2023 up to 2028.

The ongoing projects in progress, a number of them are at full speed. We are already market leaders in energy here in Brazil. We are meeting already that commitment of this leadership that we already have in the free 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. We are implementing initiatives to comply with non-technical losses within regulatory levels. Here we are talking about assets where we would like to reallocate capital and thinking about the future, other projects. We have renewals of generation concessions. We are just paying attention to the topic and also technologies for energy transition.

That's 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. Thank you, Leonardo. Now we will start the Q&A session. Please ask all your questions at once and wait for the company's answer. To ask the question, we would like to ask you to send them via the Q&A icon in the bottom of your screen. Then your name will be announced so that you can ask questions live. Then a request to activate your microphone will pop up in your screen. If you do not want to ask your question live, please send your question by writing.

Our first question is for Marcelo Sá, CELSIDE analyst from Banco Itaú. Olá, pessoal. 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. Aquela aprovação da PEC. 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? Exato, and I would like to know if there is anything new in terms of Taesa's stakeholding. Obrigado, Marcelo. Thank you, Marcelo. I will ask Mr. Arnaldo to answer your question. Bom dia. Good morning, Marcelo. É óbvio que a melhor forma de você fazer essa pergunta. 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. E o PL? Yeah, we know that there are two things there. E podemos avançar no seguinte. This 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. If anything comes up, we will then publish a notice, and you will know about it. Thank you, Reinaldo. Next question from Daniel Traviski, CELSIDE analyst from Safra Bank. Please, Daniel. Oi, pessoal. Obrigado pela oportunidade. 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 in this quarter. There was an increase in that line. I would like to understand how was the quarter on that topic. The second question has to do with 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 mindset for additional dividends distribution up to the end of the year? Thank you. Daniel, para a primeira pergunta relacionada à corporação. 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. 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 no positions. 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 one-fourth of that energy coming from the northeast. Usually, that energy in September, October is stressed because there is a restriction in transmission. There is a price difference in the markets. Because of the lower prices, it's around R$2, R$3, R$6. That is usually more or less the amount. But this year, the price detached, it went to R$300 and R$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.

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 sell in the northeast. This is the regular dynamics of those that have energy in the submarket and have to sell it in another. We had some trading companies that, and some large trading companies did not deliver what they had promised in September and October. We had to cancel contracts with no losses for CEMIG and for two other small ones. It's just for 2025. They will be reused in a larger one, which was the largest impact. We were able to negotiate with it. It did not post energy to us, and that amount of millions of reals was converted in a price reduction in the contract for 2025.

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 a judicialization, especially when we have a large amount of money involved, and that was then transferred to 2025. Thank you, Dimas. Now, moving on, on the question of leverage, I'll turn the floor to Leonardo. Hello, Daniel. Thank you for your question. This topic regarding dividends and leverage reflects the CEMIG 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.

What we are usually telling the market is that because of this large investment program, we also have large investments for next years, our leverage is going to grow, considering dividends of 50% of the IFRS results. We would reach 2027 with a leverage between 2 and 2.5, considering the level of investments that we have now. This leverage will go down in 2028 with CEMIG's distribution tariff review. We understand that even without talking about extraordinary dividends and 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 the highest dividends in the electricity sector.

Also, in this year, for the results that we already have, we can say that these will be very good dividends. I believe that this is a sustainable strategy because we can pay great dividends, considering the company's profits. We are also investing; we are increasing leverage slowly without hindering the credit quality of the company. 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. In 2028, we will have a 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. Obrigada, Leonardo. 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 Reinaldo Passanesi, our CEO, for his final remarks. Please, Mr. Reinaldo. Well, 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 on our investment program and meeting our targets. Have a nice day and a great week. Thank you. Our video 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 week.