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

Carolina Senna: Thank you, Marney. We have time Marney for two questions, so if you can stay there and we can take two questions now, otherwise, we’ll move on. No. We don’t have questions now. Thank you very much Marney for your presentation. Leonardo, please can you come back to the floor, so that we can resume your presentation.

Leonardo George de Magalhães: I think now it’s going to work, right? But you saw Marney’s presentation and sometimes we see our collection index that better than before the pandemic, lower delinquency, the losses behind the regulatory. But behind that, we have a number of actions that allowed us to reach those results. That is thanks to a lot of work from our distribution team, from our operations so that we could reach those results today or a collection when compared to other distributing companies. We always compare ourselves to the best ones in the market. We do not consider the fact that we are a state-owned company, but we are always among the best ones in the quarter. And we see that our collection rates are the €“ among the best ones in the electric distribution sector.

There are not managers shifting companies that are in the regulatory €“ that are meeting the regulatory indexes. And we are and we are proud of that. Well, some athletical Bruder sent me a message because I talked about Cruzeiro and then the presentation didn’t work. Bruder is from a competitor jinx to me. Well, yes, I am being bullied by the competition here by the competitors, the soccer team. I think it’s going to work now very well. This is our presentation about the fourth quarter of 2022. We published on Saturday that these results were filed on CVM, the Brazilian SEC. And now we turning in the slides. I don’t think this is working. The clicker doesn’t seem to be working. This is a quick disclaimer. I don’t think I have control of it.

And with this clicker, this is not working. Okay, now it’s working. These are the main factors and results we always draw your attention to the transferring of our trading contracts from Cemig GT to Cemig Holding. This is something that we have been doing little by little, but that adds that little to our shareholders. We were able to transfer 30% of contracts. And when we talk about amounts, they are substantially higher. And this is an interesting piece of data holding per Cemig H here totally transferred in terms of contract and then EBITDA in 2022 of R$721 million. So just in the fourth quarter it was almost R$300 million with the total of 2022 is €“ in total in 2022 of R$721 million extraordinary results. And we understand that in addition to the tax efficiency of transferring these contracts to the holding company, we can better visualize how much Cemig commercial trading company adds to Cemig.

Sometimes the results are under Cemig GT and that is combined with the results of energy generation. And we were not able to have that understanding of how this trading company really is special in the market. Not only in size as the largest energy trading for final clients. But also how much value we are generating by this trading area. The figures are really amazing. This is Cemig D. Here we have operating efficiency and investments in 2022 are within the regulatory limits. We are the €“ one of the largest redistributing companies in Brazil. We have 9 million consumers. I believe we are the largest. And with the quality indicators also in the regulatory limit that are established to buy an hour our regulating agency. So we are delivering sound financial results and distribution company meeting the regulatory indexes and also reaching the quality indicators.

So we believe that we are in the virtual cycle of the Cemig Distribution and with investments that we have for next year. And we are already doing that we believe Cemig Distribution will jump to another level. And for Cemig GT, we have significant results of very good results of for Cemig Generation and Transmission. Hydrology also helped here and the results were very significant and we will see more of that in details. And we reduced our FX exposure in around $244 million that was done in 2022. And we talked more about that. Cemig GT had 1.5 billion of FX exposure in 2018 €“ by the end of 2018, we published a plan to reduce this FX exposure. And we are moving towards that strategy. And I’ll talk more about that in a minute. We have our consolidated results and we see that in a pure results we had a reduction of 14% from 8 billion in 2021 to 6.9 in 2022.

But when we adjust that by the non-recurring areas, in 2021, we had that huge agreement of GSF and we had to post extra 1 million in the result because of that agreement. So in 2022, we had a huge provision needed to what involved the tax credits on ICMS that the tax gain that we had. And because of an approval of line in 2022, we had make a provision for that and that has affected our results in R$1 billion. But even with this provision, we see the results were very robust, EBITDA closed R$7 billion, and when adjusted, it’s close to 7% higher vis-à-vis the priority year. And same thing for net profit, adjusted it was 30% higher than the prior year, and we do believe this is an extraordinary result, very consistent for the company. At every quarter we can have a non-recurring effect higher or lower but in general our quarterly results in the past few years have been consistent.

And when we look at the fourth quarter alone, we also understand that these were very consistent results. Adjusted EBITDA close to R$1.7 billion and our profit 21% higher than what we had in 2021. Even if we do not consider inflation, the company is adding value to its shareholders with the special results. So talking now about PMSO, I think we should talk more about that. Our adjusted costs for the results of 2021, 2022 had an increase of 17% for PMSO cost. But we should explain that if we look our personnel expenses and profit sharing, these were very controlled costs. Post retirement it’s something separate. We’ll be able to discuss that and this event we’ll be able to talk more about post-retirement. But this has to do with actuarial issues and the higher costs this year has to do €“ have to do with outsource services, R$255 million vis-à-vis 2021.

But as I mentioned, we should break that down and explain that. We have SG&A costs at every budget discussion. We want these costs to increase less than inflation. So we want them to be very efficient, not only with lower adjustments when compared to inflation, but here in 2022 the company had some expenses that we understand that are more towards investments such as inspection target that makes us lose loss to decrease losses or increase the disconnections that reduce delinquency because there is a huge relation between disconnection and delinquency. And when we increase this cost, it might look like a loss of efficiency or higher expenses, but if you look at that ratio of revenue increase and expenses increase because of the higher number of disconnections, for instance you see that this effect at the end of the day is good for the company.

So we do have those related to inspections and also related to disconnections and some costs related to maintenance of our electro grid. So Cemig spending a lot with a corrective maintenance instead of spending with preventive maintenance that is much cheaper. Of course now Cemig is changing that. We are increasing our costs in preventive maintenance in a way that we reduce our corrective maintenance costs in the mid-term. But we still have those two types of expenses mixed, here the corrective and preventive maintenances, so they are a little bit higher because of that combination. In a period of time, the corrective maintenance will be reduced, just so that is what explains the increase of these costs. And we are also investing more in IT.

That investment was approved in the strategic planning. We did not invest in IT for a long time, and our IT Officer can talk more about that in the afternoon. But IT is a cost that my nature and the past and an investment present. We have stored a large hardware investments and so when you turn it to the cloud, it might seem that you have more expenses with IT, but actually it will move from CapEx to OpEx because of the tech innovations. And now you be more of €“ maybe paying more of a lease, and before we had large hardware structures where we were capitalizing all these costs. So basically that is what explained most of these costs that we mentioned here, and that explained that increase above the inflation when compared to our prior year.

But as Reynaldo mentioned, all the budget discussions of the company, we will not maintain our costs above inflation. This is crucial for us. These costs will be always disciplined, but as I mentioned, we have some costs that can be considered more of investment and they will be always under the regulatory index. So these will be covered by our tariffs. This is the cash generation of the company. Really amazing R$7 billion of cash generated in 2022, part of the amount, and we are already returning the tax credits to consumers and the distribution company, R$1.5 million that’s relevant, that is to be reimbursed in 2023. We had amortization of loans and when we look at that payment we decreased our indebtedness level and that helped our leverage, and we ended the year €“ with a cash close to R$3 billion.

We have a large investment for the next few years. This cash generation for Cemig is very significant and combined with funds from the market, and I think that is part of a company €“ a utilities company with a significant investment plan. We think this is a sustainable combination. It will maintain our leverage at low levels and it’s not going to affect our credit quality. Here we have our debt profile. See that our debt in 2024, we have a larger amount due basically the bonds of 4.5 billing, most of that are the bonds, but if we were to remove 600 to 700, which is the hatch or protection here, this is a debt that is under 4 billion for 2024. And also when you talk about our strategy here in the Cemig day of 2021, we told the market that we had a strategy to reduce our dollar denominated debt, that we would do it in stages.

We would be reducing that debt in the second semester of 2021. We reduced R$500 million of that 1.5 dollar-denominated debt. And by the end of 2022 in December, we reduced 244 million more that was the market demand. So today basically open, we have $750 million that are part of this 4.5 billion here; that most of that come from the bonds. And of course these bonds will not be due by the end of 2024 for a single payment. We believe that we have to keep on reducing our dollar denominated debt and we expect that if the market has more favorable conditions, that in the second half of 2023 we are able to do a new payment in December of 2023 can already by the bonds in the market without any premium paid. And we expect that by the end of 2023, we can buy back more dollars in order to reduce our exposure here and to have a more flat debt profile.

Removing that pressure from 2024 compared to what we had in the prior years, which was on R$1.5 billion, it is already reduced 50%. So we have a much lower risk now and that has been reflected in our ratings. They have been up even more than five notches in the past few years. That reflects the credit quality and everything that the company has been doing in the next few years €“ in the past few years. And we see that in a scenario where the companies are going through downgrades, several companies are going through downgrade. This is public information available in the market and that is because of the risk perception in some of the factors. And we believe Cemig is, and the other way we are already AA, but we are not happy about that. We think we deserve to become AAA very soon because the company is keeping leverage at a low level, our capital allocation discipline.

We reduce financial guarantees in Santo Antonio. All of that has a positive impact in the credit quality of the company. So we believe that our credit quality of the company are a trend. When we think about the current management, it is upward trend in terms of credit quality here. And moving forward, here we have the cost, it has increased, but because of macroeconomic issues and that involve with interest rates and that’s not something that the company has control of. But still we have a low leverage. So we do not have any problems with the sustainability of our operation is neither the execution of our investment plan. And now moving forward, Cemig had an adjusted result of R$597 million, close to R$600 million, 12% lower than what we had last year.

Here we have two issues affecting it. As we already mentioned, one of them is related to the market and we’ll see more of it as soon. And this was €“ this market was resilient in 2022, even increasing an increase of distributed generation. It grew a little bit, but because of that cost that I mentioned that we’re concentrated in the fourth quarter related to maintenance of installation, some IT costs all of them happen in the fourth quarter and they affected Cemig’s D results. But we did have some favorable non-recurring events that happened in the fourth quarter that also we’re good for the results, and that was because of energy. So mechanism that’s a distribution was had a surplus contracted and it was able to sell part of that energy and post a significant gain of R$200 million considering the rules of the regulation.

And in the year, well in the net profit of R$318 million, very close to the EBITDA variation because of the problems of the issues I already mentioned. This is Cemig D market in 2022 compared €“ to 2021 compared to 2022. If we consider here transmission and build the market, we have a growth of 1.4% where we can see here the classes in which we have higher consumptions. We had some reclassification here, but rural came down because of a favorable hydrology, last irrigation, and of course the rural class would have a reduction and it’s a volume of build market. And here as Marney mentioned, the 6.4% that mentioned €“ that Marney mentioned that’s over a total market of Cemig we had a €“ we’ll have a tariff review now in 2023. And the market will have an adjustment to this new reality of the company because of the distribution generation affecting our market.

This is one of the main effect that we consider to be positive for the company; does a tariff review on this market adjustment that we’ll have in 2023. That said what I had, if they have any questions, will be available to take them.