Companhia Energética de Minas Gerais (NYSE:CIG) Q2 2023 Earnings Call Transcript

Companhia Energética de Minas Gerais (NYSE:CIG) Q2 2023 Earnings Call Transcript August 4, 2023

Operator: [Starts Abruptly] Earnings Video Conference Call. We inform that this video conference is being recorded and will be available at the company’s [indiscernible] website, where you will 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 using interpretation and then the language of your choice, Portuguese or English. If you choose to follow the call in English, you can also select mute original audio. Now, I would like to turn the floor over to Carolina Senna, Investor Relations, Superintendent. Please, Ms. Senna, you may proceed.

Carolina Senna: Thank you. Good afternoon, everyone. I’m Carolina Senna. I’m Cemig’s Investor Relations Superintendent. We now start Cemig’s second quarter 2023 earnings call and webcast with the following executives: Reynaldo Passanezi Filho, CEO; Leonardo George de Magalhaes, CFO and IR Officer; Marco da Camino Ancona Lopez Soligo, Chief Participation Officer; Marney Tadeu Antunes, Chief Distribution Officer; and Thadeu Carneiro da Silva, Chief Generation and Transmission officer. For the initial remarks, I turn the floor over to our CEO, Reynaldo Filho.

Reynaldo Passanezi Filho: Good afternoon, everyone. Once again, it is a pleasure to be here, bringing to you the results of another quarter. And these keep being sound and consistent results, as you can see in this first slide, I can say that this is our main message. The company is effectively in a sound and consistent growth route. This is thanks to a very clear strategy that here we called to focus in Minas Gerais and to win. As you see in the last bullet, we have been very successful in executing the largest investment program in Cemig’s history. And this program is focused on the businesses that we know in the territories and the areas and the clients that we know. You have BRL42 billion investments for the next five years, focused in distribution, transmission and generation of energy in Minas Gerais, and also in the trading area all over the country.

In addition to investments in distributed generation and natural gas, but these are territories that we know well and also in a situation which we fully control the decisions, that also means the divestment of the assets that are a minority shareholding in areas that are outside the state of Minas Gerais. This strategy has proven to be sound and consistent that is what allows us to be bringing to you once again a robust cash generation and also robust net profit. We are talking about an adjusted EBITDA already recurring one of BRL2 billion (ph) in the quarter, annualized almost BRL8 billion. And at profit, once again, growth of almost 7% vis-a-vis the prior quarter, already adjusted. This is a net profit of BRL1.2 billion. These are the consistent results, the recurrent results that prove the soundness of this company.

And now I go to the first bullet, bringing to you also how sound our internal controls are. We did have the surveyance Oxy certification of a balance sheet with no problems in its internal controls, an unqualified approval after six years. So this — we are very sound in terms of our internal controls and governance and that comes in a great moment because we are celebrating 10 years of the law clean company. Also sound results consistent cash generation, net profit consistent as well, BRL1.2 billion, the cash generation also very robust. And also, we aim to continue generating value to society, to shareholders and stakeholders by the means of the largest investment program in history. And in order to complete this strategy, we have another topic, which is capital allocation, just like I mentioned, the BRL42 million, the largest investment plan in the company’s history.

And you will see in the presentation that in one semester, we have invested in distribution almost double of what we invested in 2018. Just to give you an idea, in the first half, we invested in the double amount that we invested in 2018. And this is the topic that we are talking about in terms of capital allocation. And another dear topic for the company in the company’s strategy is our operating efficiency. So we move forward and these consistent results of cash generation are there because we are meeting all the regulatory OpEx, regulatory losses. So we are within the parameters there. This is our strategies for — is to have a robust cash generation because we are efficient in this operation. And we are under the regulatory OpEx. We are lower than the regulatory losses allowed and we have a strategy to allocate capital, which is a record in the businesses that we know.

And we are divesting from assets which — in which we have a minority shareholding. And as you know, we have already divested in a large number of these assets. The presentation will also go over another great effort of this company in the digitization area, almost BRL1 million in digitization, automation, modernization, new systems to operate and control our businesses record investments and modernization. And we also have future perspectives in this capital allocation. In terms of investments and return, not only return on distribution investments, but also the company’s investments in generation after a number of years, we are now building almost 180 megawatts of photovoltaic plants. We have a bold plan and distributed generation, whether solar photovoltaic generation whether it is flowing.

We’re talking about 540 megawatts already growing in land plants to ensure the market leadership in addition to our objective to renewal our generation concessions. So this is the broader overview. And I also would like to talk about our leadership in energy trading. We have a very comfortable situation for the next three years, as far as the needs that we have are concerned because we have a situation where we can see this opportunity of lower prices in the short term for electric energy. So I would say that here, once again, we are in a very consistent and sound position in terms of our results. And all these are my initial remarks. The slide is up. I can comment also on that. We have BRL1.7 billion in investments here. And here, we have a capital allocation, right, that I was talking about.

So it’s BRL1.7 billion in the first half of the year. If you all remember, how it was in 2018. For the whole year, it was BRL950 million. So almost all that amount in a single semester. So in fact, now we have a large part of our investment program already contracted. So we have everything that we need to be able to execute our investment plan, especially in the regulated sectors, where we have greater perspective to generate value. We do have a challenge. The Brazilian electric sector has a challenge in centralized generation because of a large amount of supply, and you’re still picking up in terms of demand for energy consumption. And the country also consistent results in gas and the super generation, once again, record in terms of investments.

We are building a pipeline here from the metro region of Belo Horizonte up to the and also in the distributor generation area, our objective is to maintain our leadership and the state of Minas Gerais. These were my initial remarks, and we are available who once again show you and hear your contributions — about another quarter of sound results in this company.

Carolina Senna: Thank you very much, Dr. Reynaldo Filho. Now, I will turn the floor to our CFO, Leonardo George de Magalhaes. Leonardo?

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Leonardo George de Magalhaes: Thank you, Carol. As Reynaldo mentioned, we did have important investments already. This year, we have a bold investment program, a little bit over BRL5 billion. We are very optimistic about our investments in distribution. We understand that we’ll be able to complete these BRL3.2 billion in the year and we believe that it has a number of positive consequences. We have some precious numbers that will be considered in the next tariff review. And also these figures help the company to have more energy available in the market, which is important for society in order to ensure the society’s growth and the society that is carried by this company. Some investments in distributor generation — and here, the performance, the execution in this first half of the year was shy on considering the total that we have forecasted for the year because we believe that most of these investments will happen in the second half of the year.

So in the second half of the year, we expect more investments in the other businesses in the company other than distribution as well. So we are very optimistic. We believe we are going to get close to this BRL5.4 billion that we have forecasted for 2023. And as Reynaldo mentioned in the next slide, we have some of the challenges of the trading area. And we understand this is a great opportunity for Cemig as it was when we had the free market becoming open a few years ago and Cemig saw a new opportunity then, and now it generates a lot of results, great results. And Cemig’s EBITDA of our trading company in the first half of the year was higher than BRL600 million of very relevant result. And that is a material fact — material proof that the trading area of Cemig is correctly reading the market.

And this is a relationship that adds value, both for the clients as well as for the company in its operations. And now with the opening of the retail market in new markets, Cemig is already prepared to cater to this client by our website, energialivre.cemig and this is constantly being developed so that every day, we can have a friendlier platform so that we can read consumers, not only in the state of Minas Gerais because we understand that — thanks to the company’s reputation, the top of mind of our brand here in Minas Gerais. This allows us some competitive advantage, and we have to see this competitive advantage to have a large share of this market. But also for to allow us cater to this retail consumer and client out of Minas Gerais. So we understand that we can have — and we do have that ambition in terms of a stake in this retailers marketplace.

This is a new market or the company adds value, considering especially this moment where energy has low prices in the free market. And that’s an important market for us. We want to cater to this market in a way that we can create value to the company and our shareholders. Moving on Reynaldo talked about these important investments that we’ll be doing in the next few years. It’s within our strategic plan. There are some special topics here. So investment in security and safety. We see cyberattacks happening frequently, Cemig has resilience and its security information, we are prepared to face effects in this environment. And also platform development in terms of quality of service to clients, and that reflects in a better productivity in our teams, avoiding frustrated teams being displaced because they do not have the best algorithm or the best optimized intelligence to be used in their daily operations.

So we understand that this platform modernization allows us to have greater security and sustainability. In our operations, digital channels and also operating efficiency. These are important investments and we understand that the company cannot like all updating itself in this digital environment. These are important investments we’ll be making in the next few years and I think this is going to generate value. Now moving on our ESG actions. This is a very dear topic to us. This is in our DNA. Cemig has always been within the sustainability indexes, the national ones and international ones. Cemig has part of these indexes. And we play a significant role there. And in this quarter, we launched our program, but — diversity program for our employees.

So we have also training and diversity. This is important for us. In the second quarter, we had the largest issuance of sustainable bonds in Brazil BRL2 billion and mission our bonds were placed in the market and that shows how much the market trusts on us, and they are attached to important investments that we are making in social areas, 3-Phase Minas, Mais Energia and Efficiency programs that bring more energy and have energy available to clients. So we change lives of people that are serviced by us. And we also generate value to our shareholders because these investments are also recognized in the remuneration base. And also we have disclosures in our TCFD report. And these are events related to climate change. And here, we were able to remove a large amount of CO2, 10,156 tons of CO2.

This is a relevant figure. It is equivalent to 100,000 fuel tanks. And also, we have a certification of renewable energy certificates. This is the energy that we deliver to our clients, and it has the seal of proving that the energy comes from renewable sources, that’s another value that we create for our clients when we have this special seal. Now we are going to dive into the results analysis. I will comment on overview and then Carol will continue the presentation. As Reynaldo mentioned, another result — another quarter of consistent results and EBITDA close to BRL1.9 billion and the half of the year, close to BRL4 billion and net profit close to BRL1.2 billion. And in the half of the year took almost BRL2.5 billion. So we can get very optimistic in terms of our results for the end of the year.

Our bylaws defines a payout of 50% of dividend payment. So it is a very attractive payout. And I would say one of the best dividend paying companies, I would say that Cemig is. And the results that we bring to it every quarter allows investors to view secure in terms and confident regarding their trust that they have on us. So as I mentioned, over 40% growth vis-a-vis the prior year in the six months over BRL600 million in EBITDA. And dividends, we have had interest on equity already almost BRL900 million of interest on equity, showing that the company is really interested to work with investors as well. We did have a positive tariff review. We understand that the results of this review will be better seen in the second half of the year. And this was in May 28, this tariff review.

So just one month after this tariff review that has affected the company’s results for the second quarter of 2023 for the — now by the end of the year, we will have the whole semester with the results of the tariff review, which were positive. It was fair regarding our operations. And also regulatory loss at PMS, so within the regulatory limits. And Cemig’s GT with financial discipline, consistent results, we bid at annual transmission auction in January of 2023. You understand that we were competitive because we are in Minas Gerais, we understand that our proposals were competitive. We were not awarded that the auction, but we also understand that we have a commitment with our shareholders investing on assets that will generate positive present value.

So we were not awarded this big but we have a number of other investments for the next few years that will generate value for our shareholders. So that’s fine. It’s part of the game. We bid. We were not aware of the concession, but that shows also that we have a financial discipline in our capital allocation. And also here, we have the sale of Baguari and Retiro Baixo HPPs that — these are almost concluded. We are just waiting for the final approvals to conclude the operations and then to have the funds coming into our cash. So now I will turn the floor to Carolina, and she’s going to go into the details on the results.

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Q&A Session

Carolina Senna: Thank you, Leonardo. Now moving on. On this slide, we have Cemig’s consolidated 2Q ’23 results. Here, we have had no non-recurring effects. In 2022, we had a number of effects that affected the results. I will go over them very briefly. We sold Renova. As we said, that is within our plan of sale of assets of non-performing assets, and we also had the write-off of financial assets. These are assets that we have, but we had other assets that we need to be reimbursed. So those were written off. We also have the provision for credits — for tax credits and that was provisioned in 2022. Also, the use of the distribution infrastructure. This was a non-occurring revenue also in 2022. Reversal of Santo Antônio provision and the FX exposure and this affects the quarter.

And remember that we still have an Eurobond share or part of that is due in 2024. When we remove all these effects, we report another quarter with sound results, we grew 3.8% in our EBITDA, 6.6% in our net profit, showing our commitment and the company’s commitments in adding value to its shareholders. About operating costs and expenses. There was an increase of 9% in the PMSO affected by outsourced services. That increase is because of a company’s management change by — because of preventive maintenance. Since the 4Q ’22, we mentioned that we were going to change that in our management because this is going to bring a better services provided to our clients. Also Resolution 1,000. And here, we have financial compensations for consumers. On the other hand, on the positive note, we did have our — a voluntary redundancy program, and that was the cost of 9%, but the highest increase here is the outsourced services.

This is an expense that is going to bring us in the long-term reduction in future costs and better services provided to our consumers. On the next slide, we see the company’s cash flow, the strong generation of operating cash in six months, we generated BRL4 billion. So the cash in December was BRL3.3 billion. We are returning the tax credits and the tariffs we paid dividends. We raised BRL2 million in Cemig D, as we mentioned with sustainable bonds. We paid debt with a net effect here of BRL1,388 million. We paid Santo Antonio, we are investing the largest investment program, as Reynaldo said, and we ended with a cash of BRL3.8 billion in six months and it tends to be used over the second half of the year because of our robust investment program, which we already discussed.

About the debt profile and the consolidated but that profile. I already talked about the Eurobond, we already bought back parcels of this Eurobond and it is due in 2024. And 2023, we’ll do another buyback. So — for December, we do not have a premium anymore for the buyback. So we are going to improve our structure. But the cost of that is down because of the IPCA and the dollar and our leverage. Although, we had the funding for Cemig D of BRL2 billion is still low. But like I said, naturally, because of the robust investment program, this leverage is going to increase and it should reach 2027 2 times in the consolidated results. So despite of being a low leverage, it will naturally increase because of the investment program. Now going into Cemig D results, we have the nonrecurring here.

The provision for these COFINS credits and also the use of distribution infrastructure. If we remove those, we have an EBITDA of 14.3% and net profit of 10.9%. And again, we have just concluded the 5th — the tariff review for the company. Then we have now a net average increase of 13.3%. So here in this quarter, we had just one month of effect of this adjustment for this tariff review. And our regulatory remuneration base here increased from BRL8.9 billion to BRL15.2 billion. And the electricity market for Cemig D here, if we add consumer and transported energy, we have a 0.7% growth. It might seem small, but if we look at the whole market, the DG market is affecting the whole company compared to — quarter-to-quarter, we had a 56% increase.