Companhia Energética de Minas Gerais (NYSE:CIG) Q4 2022 Earnings Call Transcript

Companhia Energética de Minas Gerais (NYSE:CIG) Q4 2022 Earnings Call Transcript March 27, 2023

Márcio Luiz Simões Utsch: If we lose market, this will be a defeat for us. Just as all of our victories will show, when people say we want to stay with you, this is the work that our team has to do. So there is a note saying that says, if you only know who are your friends, if you eat a bag of salt with the other people. And so my dad used to say that it takes a long time to eat a bag of salt. So we have a long time to develop this relationship. And I think this relationship that we are going through of process improvement, to have at the end that yes from our consumers, our clients work with us. I think that is our job. And we are doing. We are working on it in addition to governance, team, technology and service. Another topic that is really important is Cemig’s privatization.

All of you know that Zema when he was elected and then reelected, he said that he wanted to privatize Cemig. This is no secret. It was openly said in his election campaign. And this is the task that has part of it to be executed by the administration and another part by the state administration because that has to be approved by the administration of the state. And so, we have to convince the congressman that this is good for the state, good for the population, and they have to say yes to this project. And once they say yes, we have to work for that. And if they say no, we’ll continue being a state company and improving all these. If you compare Cemig’s results in the last two or three years, you see that we are in the upward trend. We have €“ one another indicator of non-recurring events and sometimes are not that good, but you will see a history of improvements in our results in the past few years being a state-owned company.

So if it’s not approved by result, that’s okay, we’ll continue working and dedicating ourselves because we know that working on a state owned company is not dancing with my sister on the ball. It’s to dance with the most beautiful lady of the ball. But if, if we cannot be privatized, we will be a state owned company that it is a very strong one. But I do believe that we should convince them because we have arguments, we have data, not only objective data, but the subjective argument as well. Why is it better? So the objective data is that of course the company will have a greater value. So there are different mechanisms here. We have companies that have been sold. We have companies that we sold just a part of that stock. So the market value of Cemig for the state now it’s around 17%.

And if that becomes privatized or if that increase capital, it will be worth more. And if the €“ this amount is at €“ will be plus 30% or some more percent, so that this, what this part that the state has will be even more valuable because Cemig is going to be even more valuable. So we’re not removing value, we’re adding value to people and on the other hand people, the state is also part of this, people when I say it. And also we will have ability and management. They being a state owned companies. There are several at times that a perfect company doesn’t have because there is a lot of bureaucracy. There are a number of committees to manage state owned companies. So I’m not criticizing it and I’m appraising it either. These are things that are there, they exist, and sometimes that takes too long.

There are a lot of rules that end up taking to postponed actions, reactions that could be faster. So that’s a fact. It’s €“ this is not only a speech. You just have to look at it and you will see it. This is a subjective approach, but the objective one is that it’s going to value more. The subjective arguments are there is going to be improvement in management in agility and the administration. We have to take that into consideration because that is important. And finally, I would like to talk about results, Cemig’s results. They have been very good as we have seen it. Of course, you as investors have to approve that or not, and so far you have approved it because we are growing market value that in a very relevant, very well, when Cemig reached R$31 billion, R$32 billion not long ago.

And then it came down a little bit, but it came back €“ it came down because of the stock market because it was 110,000 points. It’s now 100,000 €“ 98,000. So that’s not an excuse. Yes, we could have stayed. It remained on the top, but we did suffer a little bit with the job of the stock exchange. So we took 50 steps forward to back, but that’s okay, part of us have to do with our work and also part of that has to do with the market. So there are consistent €“ our results are consistent. More than that, they are repeatable. These are not one-time off results. And because they are repeatable that shows that the company is on the right track. So the indexes that we have with our regulating agents are all met. What was supposed to come down came down, what was supposed to go up went up.

So we are meeting all the indicators defined by our regulating agents. And there are other indicators also such as management and the companies use it and we are also doing very well and these are other indicators. Any company in Brazil with a capital cost of 15%, 20%, and most of the companies are there in that range €“ the level of leverage the companies have a 15% to 20% to run a project. The project has to provide you 25% of return. How are you going to allocate 15% to 20% of capital to have a return of 21%? You should €“ you would be crazy to do that. So we need to understand that. We need in fact to have that capital allocation done right in a very specific way and especially and moments of high capital cost, such as now of 15% to 20% of capital cost.

Right now it’s not easy to have a project that will pay off if you take a debt to pay at this rate and to have a return that is lower than that, it wouldn’t make any sense. But we have to be careful, unless it’s something needed or the ceiling is falling and we have to fix the ceiling. So we will need to do that. But if it’s not that really we have to choose very well where we are going to allocate the capital to make sure that the company does well. And a wrong capital allocation is just like cancer. If you have that, I’m not a physician, but anyway, well, we don’t need to be a doctor to know that. But if you have a cancer, it will eat you up. And when you find that out and you were dying because you would not find that out because of the symptoms.

And this is capital allocation. If you allocate it now and the return term of the project, if it is four years from now, the mid €“ in the mid-term, you’re ready, no if you have done something wrong or not. So if you are not doing well, you know that you’re not doing well and you can prepare yourself. So capital allocation is a relevant art. And that’s part of this final €“ part of this presentation of mine. And to conclude me here, my remarks, I think that that are many challenges today and this is really something comes to me, a huge challenge is to reinstall people. But when you take a people away from a position where they are for a long time in a very comfortable way, and when you do that, the person has to be reinstalled in a better place, that’s an art because you want to take people away from that place, people have to leave the place where they are comfortably installed, so that they can be transferred and reinstall themselves somewhere else.

But can you make someone to do that? Of course, not. But we can provide a plate full of food, but we cannot make the person eat. So this is the food plate, but if you provide and then we have to do everything that we need, so that people €“ that the company really can move to where we want it to be, a competitive company, a company that does a great job and the competitive market is over, but people . Well, thank you all very much. Have a nice day and a nice event. Yes, I’m done a few minutes before the time I had allocated. That’s it from myself. Thank you.

Carolina Senna: Thank you very much Márcio for your participation. Now moving on I would like to invite our President, our CEO right now, Reynaldo Passanezi Filho, and he’s going to talk about our strategic plan from 2023 to 2027. Mr. Passanezi Filho, please go ahead.

Reynaldo Passanezi Filho: I could talk with no presentation, but I think it will make things easier. This is something that we are used to doing. Well first, welcome. Thank you very much for being here with us. This is the first thing that we would like to say. We would like to thank you very much. I am going to thank the investors and to congratulate the team and I think the results that we are delivering here is good. We can bring results to this amazing team that we have. And in fact, we have prepared here for you the best of Minas and €“ the best of Minas, so we understand that Cemig is also part of the best Minas, congratulations Carol and Leo for this event’s organization, but we brought to you a great breakfast. We have cornmeal cake, so that we can have a nice conversation.

And we are bringing to you some of Cemig that is a symbol of Minas Gerais. And I would like to start by saying that Minas Gerais is changing itself, is transforming itself. This is something that is important for me and for you. Cemig, not Cemig, but Minas Gerais in 2022 had the largest relative share of Brazil’s GDP. In the last year, Minas reached the largest relative share of 9.2% of the GDP. Four years ago, it was 8.7. So it’s almost a half percent more of the GDP in Minas share in Brazil. So that for us means more market and it shows how much we €“ how important it is our function to develop the state’s administration. Minas is doing well. And of course, if Minas is doing well, we can bring even more results, so we can move forward. So what do we want to show you?

We have this because if we accelerate value creation and Cemig’s transformation, we can have results. Márcio said it very well. We have a strategy that is very clear and the strategy is the same. It’s a strategy to focus in Minas and win. This is our strategy. And what we are doing now is we are accelerating this strategy. You see our new investment plan that doubles our investment value in the next five years. We are €“ we accelerating a transformation process for Cemig and also for value creation. Our dream, what makes our eyes a sparkle really is to keep on generating value, creating value. We have seen it how much the stocks are appreciating with a known strategy and the company providing more agility, bringing more results, and making more people happy, supporting Minas Gerais development and at the same time being a machine to create value.

So we are having happy clients, we are providing results, and we can drive Minas Gerais development and at the same time we are accelerating value creation. And that’s what I am going to show you today. And then I want to talk about something that Márcio touched. That’s a macro scenario, our overview. How do I see the company’s management? This is how we see it. First, what is the company’s strategy? And when I got here, in fact, we reviewed the strategic planning and this review is still valid. As I said, we are accelerating. This planning was defined in 2021. The first one is to understand the strategy. Then after understanding the strategy, we wanted to have efficient capital allocation because it was very inefficient in the past. We were destroying value with minority shareholding outside of Minas Gerais that would just divide the attention of the administration and we’re destroying value for the company.

We’re aiming for operating efficiency in the company and we are renewing, revitalizing our people, our people area. And that’s what we are going to see here. We are going to see a little bit of the strategy, a little bit of capital allocation, the efficiency and to do all of that, people. That’s it. That’s what’s management is about to know what you want is the strategy, to know how to use your money well, generate value, create value, capital allocation to look for efficiency in your operation and for €“ to do all that you need people. So that’s what we’ll be seeing here. First, we start with a strategy and a strategy. And I like strategy because it allows us to say no because the number of things that come up to us and that’s good because if I have a strategy, I can say no because that’s not in our strategy.

Otherwise everything is an opportunity, would be crazy. So the strategy is to focus on Minas Gerais and win. This was the first great result, and I clearly remember a chart that a consultant brought to us. And one of the alternatives was to try again. And I said, no, we are not going to try again because to try again means any risk to see it happening again, which was a wrong movement to have the minority shareholders, they’re holding the companies outside of Minas Gerais. So there is a very clear message to focus in Minas Gerais, and there is an indirect message here, which is not focusing outside of Minas Gerais and not focusing on anything that is not the company’s core business. That’s why we are a leading action in other minority shareholding areas.

So we are not going to focus in everything that’s outside of Minas Gerais. So it’s easier to say no. It is not interesting for us to invest in anything in Para and to win and to win means to generate value with this capital allocation win. When we say to focus in Minas Gerais and to win is not only to focus in Minas Gerais, but also we want to add value to the company and to add value to our investors. So by a process of results maximization and sustainable management, that’s how we are going to do it. That’s clearly the way that we are going to concentrate our investments in Minas Gerais and to be concentrated is to be in assets that generate value. That’s why we say to focus in Minas and to win. So whenever I invest on something that will provide me greater profitability than the regulatory one, I’m generating value.

If I invest and I have a better efficiency than the regulatory one, I’m generating value. So we are focusing in Minas Gerais, we are having cautious investments and we are generating value. So I think this slide is very clear if you consider from 2009 to 2018 Cemig invested outside of Minas Gerais and this amount is adjusted by IPCA plus 6%. So we invested outside of Minas Gerais R$34.1 billion. So we invested three Cemigs and investments outside of Minas Gerais. That’s right, yes, so we got considering Belo Monte, Santo Antonio, Light and Renova ties. If we add all that up, we invested in minority shareholding stakes with no control, R$34 billion. That’s cash that was flowing out of the company and it was not coming back to being invested here in our market, in our captive market that will end and we need to make sure that when it ends they will continue choosing Cemig.

And we did not invest in the main market. We only invested R$1 billion in this main market. Unfortunately, this R$ 34 billion did not generate value, they destroyed value. That’s why our strategy is the focus in Minas Gerais and win because this was not only taking up our time of management but also it was destroying value. This is what we have done. We clearly changed the strategy. The strategy €“ I believe it’s a common sense strategy what is the main characteristic of CEMIG what we are reprieved of to invest in our core business distribution, transmission and generation and we mesurized with a trading company, a huge trading company we will talk more about that. So we have already divested and recovered over R$ 6.5 billion of cash over two thirds of our investment plan is already carried out.

So if we add up right, Renova, San Antonio, Axxiom, Ativas, are these the ones Marco? But we also have a slide later on and if you add up that and here we have to add not only the amount that we have sold but also what did not have in terms of capital injection, all the risks that we’ll no longer have and also the tax credit. So when we left a given investment for instance like when we left light, we not only showed that but we no longer needed to have capital injections that we would have to add R$1.5 billion to bring keep my share, but we also recovered the tax credit. So I have the gain of tax credit. I also gained because I did not have the capital injection and obviously we sold the stocks, so only that cash represented a cash that we are bringing in to invest here in Minas Gerais.

And we will see how much investments here have increased. So we invested R$2.8 billion a year on average since 2000 €“ in the last four years, 2019 2020, 2021 and 2022 that’s seven times our historical average. We also lost half of our generation complex. So I say R$1 billion but actually when we consider the power plant losses, it’s much more. So we have invested seven times more than our historical average in Minas. Obviously, of course, all this investment was outside Minas. So we generated more cash and we are investing a hundred percent in Minas. Marney will be talking about that. But a very enlightening figure is the number of substations stations. From 2019 to €“ 2009 to 2018, we opened about five substations a year on average last year we opened 45 substations.

So, that’s a huge example of what that means to use cash, not to invest in Rondônia or Paraná. And we’re going to talk about our five-year investment plan. On average that’s five substations a year. That is 2022 our market valuation was posted at 28.2 times to energy industry index and almost six times the Ibovespa index. So clear value creation. And that’s what we want to do. We want to speed up that process and speeding up that process means following the strategy, prudent capital allocation, efficiency, which we’re going to talk about in the next slide and doing all that to generate value to shareholders and society. This is a value generation machine and that’s what we want to do. So the second comparison. First we have prudent capital allocation.

Whenever we invest and the return on investment is higher than the regulatory average, they you are generating value and we can do that better than the regulatory work. And the other thing that generates value is when we’re able to cost less than in regulatory terms. If you look at distribution, everyone knows you have a value for PMSO, operating expenses and another one for losses that is added to the tariff paid by consumers. So you have the basic tariffs plus capital, the return on capital, then PMSO and then we paid for losses. In the past we were never able to keep to what was in the tariffs. We were more expensive than the regulatory PMSO or regulatory expenses and we had more losses than the loss that is included in the tariffs. In 10 years’ time we’ve managed to consume R$7 billion out of the tariffs that was cashed.

I was leaving the company because we were outside the regulatory limits and outside €“ regulatory, technical and commercial losses. But now we are within those parameters. This is a huge adjustment. It’s over R$700,000 a year, seven billion divided by ten. That’s about 50% of our PMSO plus, pluses. So we made an adjustment that was more than 15%. And we had two buildings, we left one of them that was the Aureliano Chaves Building. That cost about R$40 million to R$50 million a year. We had two airplanes plus the hangar. The hangar alone cost a few million reais a year. That’s not counting the actual aircraft. We also had post-retirement benefits, perpetual retirement payments which is right to inheritance after retirement. But life insurance added to that.

We were also able to negotiate as no longer available. So if you add those things up, it had a huge effect on bringing operating expenses plus losses to within regulatory parameters. That makes a huge difference to cash that stays in the company that used to go somewhere else and that cash is reinvested into those R$2.7 billion or in opening as we did 45 substations. And that’s what allowed us. And my hat goes off to Leo, five times net debt over EBITDA to less than one time net debt over EBITDA. That’s five to six notches that we’ve gained. And our rating now is AA+. So in four years’ time to get six notches given by rating agencies, that’s quite a lot because it takes a long time. People reviewing ratings, it’s not something easy to do. And obviously right now it makes a huge difference having competitive cost of capital because of our rating.

So, these are the key points for me, strategy, focusing on Minas and investing, winning capital allocation, always prudent capital allocation within Minas and consistent efficiency to generate cash so that we can carry out our investment plan. That is what generates value and for the first time in history we are within regulatory loss limits. And these are the results our share price has gone up. Total shareholder return was 235% from October, 2018 to 2022. In terms of dividends paid out, we’re talking about R$5 billion in market valuation, $R28 million total shareholder return used to be minus 25% from 2015 to 2018 and October, 2018 to 2022 it’s 235% up. So that’s the kind of value creation we want to have and continue to have. Is this Gasmig?

Right now we are executing company’s largest investment plan in Minas and we will show you that. Last year we invested R$3.5 billion, in 2017 R$1 billion, 2018, R$900 million, it’s 3.3 times more. And we’ll be talking about the future in a minute and we want to increase that R$2.9 billion in distribution, R$137 million in generation, R$ 340 million in transmission plus CEMIG SIM plus Gasmig, we will break these down in a minute but this is the overall message. We have broken the distribution record, we will capitalize on R$7 billion in this tariff review coming up in May. Concrete example being the 45 substations with an annual average of five in generation, Thadeu is here, our Chief Generation Officer. I love it, the best of Minas for you and that symbol, it was his idea and our communications department used that.

He is not an expert but he has great communications idea. Generation, it, had been a long time since we had invested in new plants. Sorry, what? This year it’s R$1 billion. But we are executing on Ruzanti . That’s another 180 megawatt. But that years later since we built any new plant. We also won a transmission auction, have been year since we had won an auction. We won one last year and we hope to win another one this year. Gasmig, POSCO same thing is here, we are investing heavily again, we’re building a gas pipe. The building process has been successfully concluded for Divinópolis. Again, it had been years since we had made considerable investments in gas pipelines And distributed generation we are market leaders. We are very proud to say that we are leaders.

And actually still on strategy, all of this is a hundred percent CEMIG no partnerships. That’s another change in our strategy. We no longer have any new partnerships. We want to do this with the CEMIG know-how. This plant is a 100% CEMIG, our model at CEMIG is also organic. If we’re going to acquire anything, we want to buy 100% of the asset. So, this is a change to our previous model which included lots of partnerships. So the process is we’re not going to grow, generate and are likely through Renova, Santo Antônio or Belo Monte, we’re going to grow generation through CEMIG engineering, CEMIG teams, €“ hundred percent CEMIG capital even CEMIG SIM, given the new reality, now that we can use the reservoirs doing floating solar power. So distributed generation with CEMIG know-how, CEMIG engineering and CEMIG teams.

So, this was our previous strategic plan, R$22.5 billion. We’ve contracted R$18 billion already. This is the new one. We announced this on Friday, was it Márcio or Saturday? Our strategic plan. Oh the material fact was disclosed today. Our strategic plan was R$22.5 billion, is now R$23 billion, R$27 billion adding up to R$42 billion. So we want to speed up a strategy that is working, that we are familiar with, we will accelerate that transformation by investing in every single area. Regulated market, R$18 billion in distribution, R$3.5 billion in transmission, R$2.3 billion in natural gas; and in the free markets, this is probably the biggest change, R$30 billion in generation, R$1 billion in innovation and IT plus another R$3 million in distributed generation.

So we’re clearly betting on the trust we have in this country. We have state support. The state is growing more than the average. So that means we’ll have a market for all this investment. And right now a large part of this, especially in the regulated market has been contracted. So we just need to execute on our investment plan, which is highly ambitious but it fits with the rest. This will generate value, create value, and help transform CEMIG and support the development of Minas states. That’s what brings a twinkle to our eyes. We can generate value, create value, and to drive growth, because every time we can do this with a cost of capital that is below regulatory limits, and generating value because we’re doing it by being efficient, keeping operating expenses and losses within parameters.

And if the cost of capital is below regulatory average, as a consequence, we are creating value to the company. And at the same time we are meeting market needs, keeping customers happy, creating employment and helping to drive growth in the state of Minas. So, focusing on Minas, generation, distribution, transmission, excellent service, with maximum efficiency, safety, focusing on results and making the largest investments in the company history. This is a snapshot of our divestment. Every time I say focus on Minas, that means moving away from focusing on other places. And if you take a look, we used to have 191 companies. When you add up all of our SPCs, we now have 55 Axxiom, Ativas, Renova Santo Antônio. This is what we saw previously, including, all the cash resources, but also the cash injection that was avoided as well as tax credits and a lot more.

We used to have, for instance, I mean, this uses up huge management resources. When I first arrived our board meetings, our executive board meetings, this is about these shares, about these takes. Thankfully these assets are no longer part of our everyday life. So there is some risk that are no longer part of our everyday life that are worth a lot. We have relived some we had to buy them because buy power for these companies above market prices because market prices have dropped and if we had any trouble with creditors, we had to renew the PPAs. Based on those very high prices we are free from that now. Reducing guarantees in the Renova case, we had the depersonalization risk, I’m sorry, he is the lawyer knows what I’m talking about. This considering legal entity so that Renova that could be a hundred percent transferred to CEMIG and that’s no longer the case.

So all of this, obviously, we are free from all these risks. Not only do we not have to make investments in these projects and inject capital, but we’re also free of the risks. And obviously we were only able to that do that because we were bold in our management accepting that our company you have a stake in goes into judicial reorganization you have to be brave to do that. You have to have good lawyers and you have to have the courage to say we will face that risk in the name of the company and we will create value. And that’s what we’re doing. We are creating value because we left Renova, we left Light, we left Santo Antonio and others that seemed smaller like Ativas and Axxiom. In these cases, our operation control system used to be through a company we had a stake in.

How can you have the best system in the market like that? What if there are any delays? We weren’t able to. So Márcio mentioned IT, we are making huge IT changes, we’re going to have a whole new ADMS because we were able to let go of risks associated to companies who had a stake in. So we talk about divestment. It’s not just about the financial value that came in. It’s also about being free from all this risk. Gasmig, I’ve already touched on this. What’s great about this is that we are making considerable investments again in the state of Minas. The first point is we have renewed the concession for another 30 years. That’s the key point. Gasmig’s concessions are maturing, but we have been able to extend the concession for another 30 years, which ensures huge potential.

This is one of our main value creation drivers. We have a concession for 30 years with the state of Minas Gerais and we have another 900 kilometers of network and we have contracted a gas pipe to Divinópolis supporting the development of the state of Minas whilst creating value because the regulatory work is higher than our cost of capital as I said previously. Cemig Sim, again, same thing. Everybody knows that Minas needs distributed generation, especially remote distributed generation. Minas is always 10% of Brazil. Generally speaking, 9% to 10% of Brazil in term €“ on any terms, the GDP population, we always revolve around 9% to 10% of Brazil. And in distributed generation, we account for 25% of Brazil’s remote distributed generation.

The state of Minas accounts for that. Obviously that means a huge effort by the distribution company in terms of connection. We have to connect all of this and it happens at huge speed. So it requires heavy investments and we are doing that and it’s an opportunity. It’s an opportunity because there’s a lot more investment going into remote generation, distributor generation here. Then the rest of Brazil, our target is R$3.2 billion. We have updated our strategy, which means these investments will be made in generation. There are 100% Cemig will be using our own engineering. We have a huge potential for innovation, which is floating distributed generation because of our reservoirs. So a large part of these 540 megawatts we have here, will be in floating solar our plants in our reservoir.

So this is innovation and making the most of opportunity. And we have all the connections. We won’t need to invest in connections as much. The bottleneck was the connections, we will invest in the reservoir and we will de-bottleneck that. So that was capital allocation, investing in distribution generation, transmission, gas distributed generation. This is that same chart I mentioned earlier to achieve operating efficiency. So we were above the regulatory limits and now we’re below 318 to 199, that’s 94.8% and again EBITDA minus R$900 million to plus R$600 million. All you need is look at both ends. R$1 billion adjustment, we were more expensive than what was in the tariff and now we are cheaper than what’s in the tariff and we can’t go back on this right, Leo?

Now that we have achieved this, we cannot go back on it. This has to be within technical and non-technical losses as well as the regulatory PMSO. It’s quite an achievement. We can never lose that. It’s almost like you can’t put on another grain of fat. We have to preserve this efficiency. And now we’re going to €“ so I’ve given you an overview, which includes a clear strategy, prudent capital allocation, and operating efficiency. Those are the three key points. Our strategy is very clear now, we know when to say yes. We know when to say no. In fact, we have been saying a lot of no’s because they don’t fit with our strategy, very prudent capital allocation. Substations still have a 50% load. One new substation that we open has a load that is close to 50% of its capacity.

So what is the risk of that kind of invest? It’s very low because we’re starting off with 50% load. How can anyone say that’s not prudent? We have a study and the planning department has played a key role in our making prudent investments. When we invest in generation, we already have DPT associated to that. In Jusante, we’re doing that, but we have already signed a PPA. So this is a free market. We are making an investment that is attached to a PPA that will ensure certain profits. Not only do we have a PPA, but we also have a turnkey project in our CapEx. So just like financial investors do in generation business and distributed generation. It’s the same thing. It’s a large market based on a discount applied to the main tariff, the distribution tariff.

So again, efficient allocation and efficiency, as for ESG, environment is key to us obviously, I’ll go back to this in a minute. I went back. Yes, I’ll go back and open it. So I’ll skip this one. So we’re starting with G rather than E. We’ll talk about G, but then we’ll talk about E and to everything Márcio has been saying. So I’ll start with this one. This is a major topic. We have to thank the board for the opportunity to our team. The board has approved up to 40% of leaders made up of professionals that who don’t have to sit an exam. Right now, it’s 14%. It’s a mix of internal and external talents and professional management. And it will make all the difference because we need people to do everything I’ve just told you about, to implement that strategy, to have prudent capital allocation, to have more efficiency.

To do all that, we require good people and also to bring oxygen and to combine talent and to have more diversity at Cemig. And that means not necessarily having people who sat a public examination, there has never been any political influence on what we do. We have no connection with the governor or any government representative. Our management is 100%, and all directors, all chief officers were hunted €“ were hired by head hunters and internal employees go through a formal assessment, formal assessment conducted by an independent company or professionals hired by headhunter. I was hired by a headhunter, Thadeu was, Leonardo was no exceptions. And our own talent go through an assessment. And right now, we’re able to do that not only for directors, but for all leaders.

So 14% of our talents did sit public exams. That brings in new oxygen, more diversity, new ideas, which also creates value for the company. And we can see that in our climate survey. We went from 64% to 75%, overall satisfaction 86%, diversity 82%, opportunity for growth 64%. So, and this €“ and the way we think what we want to work so that we can have a client-centric culture, our family is Minas Gerais because I have in mind catering, serving the Minas Gerais’ clients that are here. This is a gradual change. And that’s what we have been doing. We are leaving a procedure culture, and we are going to a culture where we have the customer at the core. We have to consider the clients at the end, but we have also to follow the procedures. But the rationale is, first, I need to think about customer satisfaction and to reach customer satisfaction, I have to follow all the rules and procedures.

But when we think about the customer’s pain, I have to go that extra mile at differently when I just look at procedures. So I have to work with both. So people as a process and I’m going to repeat what Márcio said, people as a permanent process in a number of things. We have grown, we have evolved, here you see this new talent. And we have a lot to be done, to evolve. And that has to do with creating a customer-centric culture. And that’s what’s going to make all the difference when the market opens. If I’m thinking about the client, that’s what’s going to make all the difference. I don’t know how much time I have, but I would like to congratulate the team from the commercializing company. Thank you very much and congratulations to the trading team Dimas and Márcio, that once again, I have to share a secret publicly, but it’s not a secret of course, because I’m saying it out loud, you hear.

But wherever I go, I hear companies say, and they tell me, well, I have contracted your energy. Large companies contract our energy, and they say, you put a hardball in negotiation? And that’s what we want to do. We want to play a hardball at negotiation, but we want them to close with us to sign the deal with us. So we have the largest market share in energy trading in Brazil. We are leaders here in Minas Gerais, and we are very strict because we also want to ensure profitability in this leadership. So really I congratulate you because I was at an opening, Sigma’s opening. It was Friday, if I’m not mistaken. This is a lithium company here at Jequitinhonha Valley. This is a huge transformation in Minas Gerais. This is a company that now is worth $3 billion.

They are producing green lithium in Jequitinhonha Valley, where that they buy their energy from us. They could buy from anyone, but they buy power from us. And that shows our capacity of delivering. And obviously it shows the potential that the state has, the state is seen in terms of growth opportunities and because new investments are coming into Minas Gerais. So this is the culture that we have, this is the culture for the next moment when we have a market that is here, but this is what we already have been able to reach with our trading company. I already talked about this other slide here. We have some other important topics I will talk about gas. We talked about governance, about the professional management, all the talent, the internal and external talent that come in via assessment or had counter risk.

That’s a very professional management with no political interference. This is a culture that aims at clients and customers especially at the core. And here in terms of other programs, considering our social responsibility, now we have 1.2 families benefited from our low income tariff. And that’s also thanks to simpler procedures. We were able to more than double the number of families enrolled in the low income tariff program. We are thinking about the clients, the customers before we had so many procedures they were not able to enroll. Now we simplified it. We doubled that number. So here we were able to include more than the total population of Belo is not in terms of number of families that now are under this low income tariff program. And that means that they were able to save around R$56 a month in their energy bills.

And that’s money that they have to spend on food, for instance. And that is just because we were able to change a special procedure. And we were able to benefit that huge number of people by the means of this low income tariff program. There is another program that is called Energia Legal, here we have public lighting using LED 100% of the municipality is a huge program. 490 towns, over 120,000 public lighting fixtures and also it was important for us because it decreased losses. Energia Legal was also important for us to decrease losses. And we also are able to take electricity to all those people that have a hard time receiving it. So this has a huge defect socially. And now also in terms of carbonization, because when we go into our zero target.

That’s it here. That’s our ambition. Our is €“ our ambition is to reach carbon neutral up to 2040, up to 2030, we want to be 75%. That’s right. So most of companies is 2050. We want to be carbon neutral in 2040, in 2030, we want to be 75% clean. And our challenge is the losses. So whenever we are able to improve losses via Minas LED and also via program Energia Legal, we are also aiming to be neutral carbon. And this is what we are proud of. We are in the Dow Jones Sustainability Index for over 20 years. We are the single company, electrical company that is in the Dow Jones Sustainability Index for the last 20 years. And also we got here the Carbon Clean200. This is the certification. We are ranking the 37th in the world and in Brazil we are number one.

And our objective, which is very clear is to have zero target €“ target zero for 2040 in or 2030, we want to be at 75%. I already talked about our program Energia Legal. I think that’s it. So I am finishing within my time here. I was able €“ well, I still have eight minutes left for a wrap up. I would say that €“ I need to say that I’m very happy to be participating in this journey. That makes a lot of difference for us. We have to keep that sparkle in our eyes. And I do wake up every day with that sparkle in my eyes to continue carry on this transformation project. And when we see the results, we only get even more encouraged. And so we would like to count on the support of all of you to move forward in this transformation project. And I am sure that it’s already generating value and we continue generating value.

And at the same time, we will allow for a company’s transformation. And this company will be the driver of Minas Gerais development, improving the quality of service providing also providing a better life for our consumers. And that’s why we are here. And we are always paying attention to that. We obviously have our own biases, and it’s always important to hear from you, to hear your opinion so that if there are an improvements to be made, we are willing to do so. All the executive Board will be available and by the end of the day here in our afternoon so that we can have a Q&A session. And we just want to be a machine to create value, to transform, to change, to generate value to shareholders, to drive Minas Gerais development and to better serve the people from the state.

Carolina Senna: Thank you, Reynaldo very much for the presentation of the new strategic planning. Please I would like to have you a few more minutes on this stage. We’ll have 10 minutes of a Q&A before turning to the results of the fourth quarter of 2022 with Leonardo George. So now we’ll go for a Q&A.

A – Márcio Luiz Simões Utsch: So should I tell a joke? So we’ll have a microphone here for questions.

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Q&A Session

Unidentified Analyst: Good morning. This is Pedro from J.P. Morgan. Thank you and congratulations to the whole team. About expansion in generation there are R$13 billion invested in the next years, and we have not seen good returns, especially in greenfield. How do you intend to work with the capital cost also in GD, this R$2.5 billion are in the new €“ under the new rule or the old rule for the GD.

Reynaldo Passanezi Filho: Let me start by the first question. The R$3.2 billion is the old rule. Of course, the number of incentives that we have in the old rule is much greater than in the new rule, but we do have enough projects. So the answer is that these R$3.2 billion, we already have assigned projects that we will allow us to reach those R$3.2 billion of investment. The second question, I think your comment is good. We know what is €“ how low is the energy price right now. And we do have a challenge to turn projects feasible. But we can always have brownfields. If you don’t have the greenfields, you can have brownfields. We prefer to have the greenfields. And my team is €“ my soccer team’s collar is green. So not many times in life will €“ you will be winning as much.

And I had to make that joke. So obviously what we have done with Boa Esperança and Jusante is greenfield, but in general, I would say that it doesn’t make sense to have the largest trading company, the country and to buy outsourced energy if you also generate energy. So we changed our strategy. We have the largest trading company in the country. We have a single understanding from our clients. We see the results of our trading company, and we were doing that buying energy from third-party. So we have a technical capacity to produce projects to manage projects. And we have our trading company that has a single understanding of our clients. And we are going to put these two things together. If I can put these two things together with a greenfield battery, if there is no feasibility for a greenfield, we do have M&A projects that are feasible.

And then what is important is to have the discipline that we are going to look for these M&A projects within my strategy that is Minas Gerais very close to Minas Gerais eventually, but it has to be Minas Gerais, I’m not going to go for an investment project outside of the state.

Daniel Travitzky: Good morning. Daniel Travitzky from Safra Bank. I have a question about the return rates. Large part of your investment in the strategic plan goes towards distribution and you have a return rate of 11% to 14%. So I would like you to compare this return rates for the distributing company, how much you see that above the regulatory level. And if you can talk about how that compares €“ how the return rates compare? And the second question, if you allow me, how do you see the risks involving the distribution contract extension analyzing this amount of investments in this segment? Thank you.

Reynaldo Passanezi Filho: Well, I think you cannot compare invest R$18 billion and invest in distributed generation or invest in the regulated marketing and the competitive market. Obviously, the profitability in the distributing company is lower than the distribution €“ the profitability in GD. But there is the capital and the capital considers the existing risk. So the distributed generation has a high potential of return, and the figures are very positive. And we see that there is a rush also from Banco Safra €“ Safra Bank to invest in distributed generation, a huge rush of investment in distributed generation that tends to turn to a more normal return. But that will depend on the discount that you are going to give. So here we have an embedded risk, the risk that €“ the discount that you are going to have in the final tariff in the current situation, this remains to be a profitable investment.

And that’s why we have a fluctuating solar generation. It costs a little bit higher than internal GD, but because the connection is easy for me, I can be agile, I can be quick. And that’s what explains this investment in distributed generation. And when we look at the distributing company, that’s a whole set of things. It’s not that I’m going to have A, B, or C a specific profitability by asset, but I will have that profitability according to a CapEx. So for the situation number one, it’s for a total CapEx that I have invested. And then we have two objects. So first, I would say that if I have R$10 billion of investments, I want to have zero disallowance because if I have disallowance that is going to affect less my basis. Second, that the capital cost or capital cost is lower than the regulatory walk.

So if I am able to finance lower than the debt cost that is on the regulatory walk, and also I understand that is lower, then it’s lower than the regulatory walk. I can’t generate value. So we have to ensure that obviously that is attractive. In terms of leverage, and I have to leverage lower than the €“ that cost that we have at now the regular rating agents and ensure that the disallowance is as minimal as possible. Let’s hope so. I can’t do it in the middle of the tariff review, but in the last tariff review, it was a zero disallowance. Everything that we are doing requires a huge planning in order to ensure that this is a needed investment. And here, we €“ there’s an advantage here because we didn’t invest much. So now we need a lot of investment and I can do it.

So here, when we open a new substation in average we have 55 €“ 50% to 55% that’s a lot.

Márcio Luiz Simões Utsch: So conscious, right? And also there is a qualitative consequence, right? Because with the line that we have a huge line for the connection request, so if distribution is not prepared, this line won’t move. We won’t have the connection ability. So you connect and you connected nothing. So it’s also important to meet this growing demand.