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.

André Sampaio: André Sampaio from Santander. Márcio, I have a question for you. I would like to understand what is the difficulty? What are the challenges in dealing with a company that has a natural turnaround process a company, and you mentioned in the beginning of your speech and comparing that to the privatization process. So how do you bring together these two processes in a way that one does not get in the way of the other, and to make sure that both of them can work hand in hand?

Márcio Luiz Simões Utsch: Well, these are two simultaneous projects as you said, but one is really moving forward the turnaround projects and here are the results. We just work on them. We carry out and we are able to achieve some objectives. The strategic plan as Reynaldo said is a limit to say no. So the worst thing that we could have in a strategy is a good idea. So when you have a plan that is defined, you’ll say no to any other idea. So you have a wholesome plan because you can carry forward this turnaround project. You have a strategic plan that allows to say to define what’s in or out of the project, then you can say no to some good ideas, otherwise you are going to have a patchwork thing. On the other hand, the prioritization plan.

Nowadays, for Cemig is more of a preparation. I mean, we have to be ready so that when you are ready to do it, we are really ready for the process with all the questions already addressed with the most relevant issues taken care of, everything related to the corporate structure, because that has to do with the state. So this is more of a preparation for when the general assembly approves some type of prioritization. That could be a simple privatization, could be a corporation. There are a number of options. But so we do have a plan that is ongoing, that is varying results. And the other area is a preparatory area I would say, we are €“ we will be ready to execute the other one €“ the other plan when the time comes.

Reynaldo Passanezi Filho: Another question about the transmission CapEx, how much of that transmission CapEx is regarding new lines and how much of that is just to reinforce existing projects in the original contract? And most of them are just to back up improvements by far. We’ll have a Q&A with all the other officers. So please you can ask Márcio questions here and no problem. You can ask anything you want, but we will be here the whole afternoon and there’s going to be a Q&A by the end of the day.

Unidentified Analyst: My name is Juliana from Bank of Yes . So how much of your agenda today is focused in privatizing the company? That’s my first question. How much the agenda of the Board and the CEO is taken by the privatization possibility? And also on generation, all of €“ out of these R$13.4 billion, do you have a target here for mega, all of that is focused in Minas Gerais? And how much of that is from HVP and how much is renewable?

Márcio Luiz Simões Utsch: About the agenda, we had an agenda consumer in the agenda that was huge. And that was Light and Renova that really used up and consumed a lot of our agenda. It was really that would take up a lot of our time in hours, but also our intellectual agenda. So we cleaned up that agenda and now our mindset is focused in Minas Gerais. Once we left the low profitability or negative profitability assets and now we’re focusing on the good one. So that allowed us to concentrate on privatization. And here we are working on that. We are working closely with Minas Gerais administration so that we can show Minas Gerais administration and tell them that the reason why this is a good option for them and to be able to approve it.

In addition to that, we have a preparatory agenda. We €“ there’s nothing much that we can execute that we can actually do. And how this is going to be on the day after? We are just a preparation. So it’s done. What are we going to do on the next day? So we had advisory that we are working with and internal actions that we are doing to be ready. But there is something that is key. We need to have the government’s approval. So now we have a favorable environment. We from management are favorable to that, because of the objective reasons, because that’s going to improve the value of the company and also for subjective reasons as well. This is the single non-privatized company in the country. We are the only ones. Is that right? So I think it does make sense to take that into consideration.

We always communicate with the government and we always have meetings. So that’s also very active.

Reynaldo Passanezi Filho: First, I would like to tell you my personal opinion, just like Márcio. So also this is the opinion of the top management. And I believe that as an officer, I believe that it is great for Cemig to become corporation to go through this privatization process. So this process of acceleration and value creation is going to be even more accelerated in a movement that we might have of turning into a corporation or have the privatization of the company. So I’m thinking here as an executive, I think this is positive of the company. The company will no longer have some management eyes and that will allow this amazing company that we have to generate even more results to the investors and to the society. And also to €“ we believe this is very positive for the company itself.

The company will gain sustainability and long-term survival. Now, as far as our relationship with the state assembly and with our officers, we have something that we need to discuss, which is the concession €“ which are the concessions and Alessandro here and he can tell you more about. By November of this year, we have to request the extension of our concessions within those 49%. And I don’t know the number of the decree, this decree nine to seven one, our concessions are doing 26, 27. But we have to send a letter saying that we are interested in the automatic extension. And this letter has to be sent by November of this year. And we also need a report from the state house, the state assembly by November of 2023. They have also to approve the extension of these concessions in here is more than 50% of our productive area.

So we have been discussing that with the executive power and the state assembly to avoid what happened in 2015 or 2017 when we lost some of the concessions. It was in 2015. So about our CapEx to R$13 billion obviously that is associated to a number of megawatts. How much is that Tadeu . 1.9 average and obviously is 100% renewable and that includes the renewal of the concession grant. So part of that is H50 because includes the renewal of the concession grant, but the investments will be in wind and the photo will take. I’m sorry, they are not using the microphone. So we can’t hear what is being said. Yes. So just €“ so that you can understand, we have two options. First, we can change our head office and that needs the state assembly. And that’s the option Paraná’s administration chose.

They will ensure 100% of the renewal of their concessions by changing the corporate structure of the holding company. And we have another option, which is to retain 49% of the SP, the concession grant that is due. And then I have another private entity will take over the 51, that’s on the regulation. And for the second option, we need an opinion from the state assembly. The state assembly needs to approve this model ensuring that we have the automatic approval of our 49% and that has to come by November of 2023. And I can also go for the auction. I think our time is up, but just one more question please.

João Pimentel: Well, this is João Pimentel from BTG. A lot has been you said about privatization and the obstacles, but we do need the approval of the state assembly and something very simple here. You said that you were not discussing with the state assembly. Yeah. When the government intends to discuss with the state assembly? What is the timing here involved? When do you €“ do you think it will be able to start and follow the process of our privatization process then? We know it’s a long one next year, we have municipal elections. We know that is a critical period of time. So we don’t know when that’s going to happen. That’s what we would like to understand. Are you going to submit this proposal to the state assembly right now? Is this a negotiation that takes time? Do you have a timeline involved here?

Márcio Luiz Simões Utsch: We want to right now don’t want to waste any time. We’ve had meetings with the government where we emphasize the need for the government to mobilize. Right now, that’s what we want. We want to get the approval. But obviously the government has its own interest. It’s not just about Cemig. There is a strategy to take those topics to the assembly to get approval. From our side, we believe in it. We’ve been working very hard on it. I believe that it will happen in this term. It didn’t happen in the Governor’s previous term, but it takes time as you said. So we need to work hard. We need to bring in potential bills and try to get immediate approval. But it’s not just in our hands, because shareholders own the capital and they should be doing that.

They have a power at the assembly. So we’ve been supporting that by information to get group, but it’s not in the hands of the company’s management. We’re just operating capital plan is done by the government really and we’re working hard to get. Thank you, Márcio. Thank you, Reynaldo for your time. As we heard we will have another Q&A session. But before now, we have Leonardo George about the last quarter and the year of 2022 result.

Leonardo George de Magalhães: Good morning. Thank you for joining us in person and thank you for joining us online. We have our foreign investors who are listening to the simultaneous translators. We also have our investors here, analysts, bank representatives who are here with us. Thank you so much for coming to the land of Cruzeiro Sports club. I’m sorry I apologize, but I do have the microphone. So I have the power of speech and I’m make use of it, so I must share 4Q and years results with you. But I wanted to talk about investments first. Reynaldo showed you the investments will be making the regulated market and competitive markets. We do have the balance to R$42 billion. Our leverage will be kept at levels €“ low levels.

So not to affect our rating, but in free markets, competitive markets, the future price of energy is one of the main variables for the company. So investing in the free market. Those R$13 billion we saw for generate, for instance, will be made considering future energy prices. In Brownfield or Greenfield and Márcio mentioned many times during his presentation that we need to have the right capital allocation and the right capital allocation plus financial discipline in allocating resources. That’s part of our everyday life and part decision making. So those investments when we disclose them to the market express which would that they will be adding value to our shareholders considering market variables with regards to raising funds and the future price of energy, which is a key variable, especially right now where €“ when energy prices are so low considering last few years of favorable ideology.

But we’ll have an afternoon presentation by the most about this topic. And during Tadeu’s presentation about generation, we’ll also be hearing more details about how ready the company is for this future. How the company is organized to make the most of market opportunities to present themselves. So I’m going to have to continue talking about my football team. No, maybe I shouldn’t. As I said, these investments will respect the discipline will have an allocating our funds over the next few years. We’ve been doing presentations for a few years and when we did this presentation a few years ago about talking about the companies focused on planning, we were dealing very difficult question. Some investments that did work out our debt profile wasn’t great in the short-term.

There was a lot of pressure on our cash management divestment program at the time. It had to do with how the company was dealing with cash pressure. Sometimes it had R$10 billion maturing in two years’ time. It was a very tough time for the company. But the last two years. We have been able to change history in the past. We were also discussions with the federal government about renewing concessions, losses that led to the loss of half of our generation complex. These were tough questions that led to a drop in our rate change, the cost of we issue on at the end of 2017, IPCA €“ no not IPCA it was the dollar value plus 9.5%, which isn’t that scary right now, but at the time it was very high. So since then, over the last few years, we have reorganized our leverage ratios very low.

We have the balance we need to make investments Reynaldo told us we have invested in operating efficiency and we are on a whole different . So our drivers now are our operation and our everyday life.

Unidentified Analyst : We’ll have issue with our files, so we’re going to switch you if you don’t mind Leo, and then we’ll come back with would you be so kind?

Márcio Luiz Simões Utsch: Do you think I know my presentation is very hard?

Marney Tadeu Antunes: As Leonardo said, Márcio left one minute, Reynaldo left eight and you left 29. There’s no way I’m going to beat that record. Okay. First slide please. Good morning, everyone. Welcome analyst, investors. It’s a huge pleasure to have you here with us. I also want to thank Reynaldo for believing and supporting our wonderful project. Leo, all the directors, all the superintendents who are here today. And I also want to thank everyone who’s working here and our clients, the hotel. Am I changing my own slides? Okay. Great. And I want to thank hotel, one of our R$9 billion and I want to say that we are going at 106 kilometers an hour, 106 an hour. We connect 106 new customer distribution. And those customers need investments.

So if we want to speed up our connections. We need to increase investments. And if you do it, well, like sigma did, as Leonardo those amazing customers we connected this year. We’ll need more investment. And make it easier for them to join our trading company. It all starts with distribution. We need to meet each so that we consolidate our relationship with our clients. As I said, our solution by expansion and focusing in our clients. This is a highlight. We used to waste a lot of time, establishing relationship no channels with our partnership with IBM, brought them on Board with us, our customer care which has made our life much easier and it has allowed us and improving operating results. We will know that and I think it’s important to say, I always say this to my team, losses and default go hand in hand and distribution.

The company has to be doing well. Both in terms of losses and in terms of it, because if we stop, just we’ll go up losses will happen anyway so distribution we’ll have a consistent and that’s what we work and that’s what I’d like to show you right now. Just to highlight our investment was record R$7.2 billion CapEx in 2018, 64 substations as Reynaldo said, last year alone on average as Reynaldo said number of stations that is what will allow us to connect our clients. So it’s our heavy clients, clients that use that energy R$2.5 billion for substations 1,500 transmission lines, because we highlight. And we have a lot of burn downs, there’s lot of burn down and we suffer a lot. We really have the right maturity replacing 2.5 is worth of transmission lines.

We’re also connected distributed generation points a 118,000 works, clients are now they complaining have to keep our debt lines. What about revenue? This is very important. We have 235,000 meters. They are smart meters. In total 260,000 smart meters close to 9 million clients in parallel but 64 substations is protected in our billing. We monitor that consumption and our revenue is good because we also monitor all of that connect to 9 million clients. And our revenue is because we also monitor all of those. Also 860,000 obsolete meters are being replaced. So more than one million of share alone considering a 9 million customer base. So more than 1 million then we want to replace all of the obsolete meters and that will losses on our customer base and we will also not loss any energy that’s the main thing, when meters get old everybody knows they favor customers and we are also focusing on the MSO that Reynaldo said, how do we reduce cost?

Like this. We have 400,000 kilometers €“ 300,000 and we want €“ 30,000 kilometers single phase and these reconnectors are completely automated. They’re the best. They reconnect automatically. They bring the number down to zero without happening anything and after two years any temporary outage needed a team outside we had to send and you know what manager is like distances of. So wherever we’ve installed, we use the interruption by 2023, that is and its system reliability. Now back to those CapEx. In 2023 to 2027, 30,000 kilometers of single phase will be converted to teams, this will turn family agricultures into agribusiness owners. This is all about development as Reynaldo said. And this is the contribution we want to help the rural farmers.

We’ll also be building 3,5000 kilometers of distribution lines and we have the largest number 1,250,000 smart meters of the program. We have the largest number of smart meters which is zero or 240,000 companies have connections. It’s because of our problem either they are illegal barrier or it’s not allowed to have power, they are going to meet with the government that all that we can make various legal that we can provide this neighborhood 6,000 families and 4,000 families have connections thanks to the flow of the distribution group. 135,000 there’s a lot of people with illegal connections. And we will deal with this if we were other agencies to find solution and we have the MORE POWER program, we will be building another 136 substations are coming, this is a government program that full energy coming in hopefully this number will only increase from now on.

These are our substations. We had plan to investment R$3 billion worth of investments and as Reynaldo said we can’t do that. We have to go to court. We have to stop those losses, and we’ve changed that. The other one was safeguarding the network, the BT zero network. What does that mean? Zero frauds. There’s no secondary way of getting the energy. Clients can steal it. And BT zero is precisely where most frauds can happen. And right now there is no fraud. And that helps to reduce losses. And obviously, we have 400 technicians out in the field conducting inspections. That was one of our main gains. 40 an hour, do you know what 40 an hour is, 40 frauds detected every hour. That’s a lot. So we have to do something. We have to find the right innovation, the right technology, the best inspections possible to have the best systems, so that losses can remain below regulatory limits.

And I was talking to my kids the other day, we went to see a Coldplay shows, and there was a huge sign there. I think most of you from Sao Paulo probably have seen it, return the bracelets because this is a sustainable show. Each band that comes in brings something new. And they had €“ no, they had the number of places, the number of €“ no, the countries that were returning the bracelets the most or the least. And guys who was the worst was Argentina with 80%. And then I thought, what is going to be what €“ how Brazil is going to rank? And my daughter said it’s going to be 100%, but the results were out who are 79%. So even lower than Argentina. So yes, even that leaflet from masses people take it away. Can you imagine the energy, power 24-hour available?

So this has to do with the inspection program. But we have a balance point here. If what if I have an electrician in each home, we won’t have fraud, great. But we have losses coming down, delinquency coming down, and our PMSO also coming down, then we can invest more in losses and bring this back to us. Well, I think we are fine here. In terms of losses, I covered everything. The ARFA index, the receivables collection index. That is how much we were able, well, the billings that are due on the month over what we collect on that month. So here we have the €“ accumulated from other periods, but that has to do with the efficiency we’re looking for. Right now, we are at 99.68% of that, the amount of billing over the amount of collection over the amount of billing.

So that our ARFA indicator collection over billing. We also have the last 12 months results. So in our delinquency, we are also with good results. Now talking about operating efficiency, we have another example here, which is collection. Collection is expensive. But here, using digital channels, we are at 56.5%, a significant development. We are bringing down the lottery houses that also collect money. And that has a reason to be expensive because people don’t have that €“ don’t have a bank account. They use the lottery places to pay the bills. But here we are looking at our average tariff for a collection at 0.79 per client billed. And I have a number of examples here and likes this one because it involves money. And whenever it involves money, he likes it.

Here we have our default provision, our allowance for doubtful accounts. Obviously, here we have an improvement in the accounting rules, always aiming in the best practices in the market, how other companies are doing it. But there was a change here. But here, what we really have to consider is the assertiveness of disconnections. So that delinquency doesn’t move up. And we are reaching 2.5 million of disconnections. That’s why it’s a cultural thing. That’s why clients pay the energy bill. Otherwise they know it’s going to be disconnected. We cannot lose sight of that. So disconnections are crucial, but disconnections are expensive. So what we have to do, we have to have other types of technology. So that we can collect quicker or send WhatsApp, send SMS, and also make our clients’ life easier so that they can bill €“ pay the bill.

Those that don’t have a bank account only have €“ only can pay with money. We can have another option for them closer to their home so that they can pay their bill. So that will improve us, our results in our ADA. And here we have some other still in this area, we have campaigns for picks that instant payment system. Also here we had 2 million temporary disconnections. So we do have to be aggressive in that action and fighting delinquency. We have here 80,000 remote disconnections. And it’s important to say that our client a group, all of that is protected. Second category were the clients of average voltage. All of them protected. Then indirect low voltage clients, the ones that consume the most, all of them protected and they will perform the 280,000 clients I mentioned.

And now when we are a low voltage, we are not going to add them to the ones that consume the most. No, we are going to add that on the clients where we have delinquency problems, fraud problems, which is the BT zero or low-voltage zero and network and also safety because in some of the neighborhoods you just cannot go in to make any disconnection. So it has to be a remote meter or a smart meter. So that shows that we are on the right track. And this is also good because many times clients are delinquent and not because they don’t want to pay, it’s just because they can’t. And a lot of those tell us, I’ll get my payment tomorrow or I’ll be paid on Monday. And then we reconnect because we trust them, because it’s easy to do it and it’s easy to disconnect again on Monday if they don’t pay.

So it’s a good relationship that we have with our clients. So for low income delinquency, for instance, why did we have a low delinquencies in the pandemic period? Because disconnections were suspended for a long period of time. And when does connections restarted, again, we brought solutions, energy efficiency and also installment payments just as we have done with the stores when they were closed for a long period in the pandemic, we created special conditions for merchants to pay. So this is a very humanized relationship because a lot of clients are not in that situation because they are fraudsters, it’s just because they are unemployed. So we respected that a lot and that has helped us to bring facilities to easy €“ to offer easy solutions.

So for instance, when we go for a disconnection, we bring in a credit card machine or allow them some time to pay using the PIX, the instant payment system. And also we have the regulation of the debt of public authority and hospitals because of prior strategies, they removed the relationship with public authorities of the public power. We did not have direct service to city administrations. Now we created a project that’s called approximation. And our goal is zero problems with the city €“ halls with city administrations. And we have 774 of them and we have been able to control delinquency. There is one of them that there is a problem, but everything else is solved. Credit cards option I already mentioned. And we have that low income tariff that already was mentioned here when we increased the number of clients enrolled and that really helped them.

Thank you very much for your attention. And in the afternoon I’ll be here available to take your questions.

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.

Carolina Senna: Thank you very much Leonardo. If you have any questions, you have a few minutes for a Q&A regarding the results.

Unidentified Analyst: Hello, Leonardo.

Leonardo George de Magalhães: Hello.

Unidentified Analyst: Quick question about Gasmig. There was a significant drop in volume, but at the same time the EBITDA had a significant growth year-on-year. Can you explain what happened at Gasmig please?

Leonardo George de Magalhães: Well, our Gasmig CEO is here. Would you have any comments on that? This is for a question from Juan from BTG Pactual. Last year was the other way around. We had an increase on distributed volume, but the thermal was down because of hydraulic favorable conditions for another type of energy, not the TTP dispatches. I think he’s talking about the volume of the market where they have lower margins. Right? And we also had a tariff review last year that although it decreased our margin a little bit, it increased because of inflation. So we went down 40% in effective margin, but because of inflation we ended up increasing in 5%. So there was a higher number. The collection was higher because of that.

We had the TTP and we also sold more energy, more gas. I don’t know if I address your question. Well, we’ll have a special session in the afternoon where we can go into the details right? Can you go back to page nine I think on the cash flow? I just would like to check something there. Yes, that page, what we can see here is done. If you roll out the data will be generating cash of R$3 billion, R$3.5 billion, considering a CapEx of R$3.4 billion. The projection now is to have the R$40 billion of CapEx over the five years. So it’s more than double your CapEx here, right? I would like to understand how your leverage is going to behave in the process and if that that is interfering in the dividends pay out. And also not only the capacity of getting loans, but also the operating capacity to execute this CapEx first for distribution, for Cemig distribution.

And I’m starting by the end of your question. Our ability to execute the program, we have an investments close to R$1 billion and to go from R$1 billion to R$3 billion, R$3.5 billion, which is no reality for Cemig distribution, that’s not simple. You have to have a restructuring process in your operations. And our logistics today is totally different. We have centers all over the state. We have control in the process and the investment process in our hand. And that is in a more systematized way. And we have already invested R$2 billion to R$3 billion. So Cemig organized itself to be at a higher sales level than what we had before. And with no disallowance, we have an internal process to follow up these costs to see if they are meeting the regulatory compliance.

We are very disciplined. This is multidisciplinary and we are ready for these investments about the other investments we see that investments in solar energy, you can do it quickly and you start generating EBITDA. So in our results, when we consider our leverage in the long-term considering this program and the type of investments that we are doing, and of course here there is a caveat. We will only we’ll be making non-regulated investments if they provide returns to shareholders. And if we say that there are no opportunities in the market to invest, we will see that investments in the free market are not attractive to the company, then we will have a discipline in capital allocation. We cannot lose that from our side. But considering that we’ll be able to make these investments and we’ll have opportunities in greenfield or brownfield for those investments are leveraged.

And we’ll be following the 50% of dividends payment and that’s in our loss , that’s what it’s in our strategic planning. So our strategy, our leverage would not reach to times out, our EBITDA. So we know we could reach 2.5 at the most but thinking about our results how much Cemig D, our next revision can generate our operating efficiency in the house. We believe this is a sustainable program. We understand that the cash generation. In summary, cash generation and the new funding and other investments that we are making and maintaining that 50% policy leverage is lower than two times our future cash generation. I just want to make clear that this is part of our strategic plan. The sustainability of that investment plan is extremely important to us.

As we said, this program is sustainable. We have the balance that we required to execute on it.

Unidentified Analyst: Question about the same topic. There’s a wall in 2024, when you’ll be paying for the bond and the credit market right now is quite tight. So there are other instruments that are being used that are not so conventional. What is Cemig’s access to capital market considering that significant CapEx increase, there are other options?

Leonardo George de Magalhães: Well, with our normal operations at Cemig and our businesses at Cemig GT, there is no cash pressure in 2023 or to pay for any debt. Cemig distribution has a relevant program, but we need to understand that there is a credit restriction in the market and Cemig D has great credit quality and in our industry. In our industry there’s a predictability in terms of generating resources. It’s one of the very few industries that are still attractive in terms of predictable results. It’s very reliable for our investors. So during this fundraising period, the deadline would be shorter and the cost would be higher than it would be last year. Obviously we understand that, but we don’t see any problems in going to market to raise funds in these conditions to keep our distribution programs up and running.

That wouldn’t be a problem. Now obviously fundraising had longer terms, but in the short to the midterm, things are a bit less favorable than they used to be a few months ago. But that’s not just Cemig, it’s everyone, but we’ll be able to deal with that. I mean it’s part of the game. Market conditions are not that favorable, but we have no problem to conduct a well-structured fundraising considering our investments and also our credit. But for Cemig GT, as I said, we’re not going to leave it to the end of 2024. Maybe we will raise funds in the shorter period, so that we can amortize more than 50% of that bond, which will be close to $300 million. So we can go to market and raise funds, because Cemig GT’s leverage right now it’s practically the bond.

So, we’d raise funds just to improve our debt profile and Cemig GT does have the credit it takes to go to market until the end of the year, but we are monitoring the market and there’s a chance to divest as well. We’re not counting on that. But if there are any divestments, we could use those funds. But even in this challenging scenario this year, it’s not going to affect our investment plan for the year. There will be a partial amortization of bonds. Towards the end of the year. I mean conditions would be favorable to that, but as of December, 2023, we can buy the bond, could be December, January, February. We’ll monitor the market and see when things are looking more favorable.

Unidentified Analyst: Gustavo from Bank of America. About results costs were higher than inflation, especially in third party materials at the distribution company. Does that have to do with your corrective rather than preventive measures? Might that decrease over the next few months? Talk about that will there be a reduction in the next two months, because of the preventive and predictive maintenance and have any OpEx predictability for the rest of 2023? Or have you done most of it last year?

Reynaldo Passanezi Filho: Well, to give you some more color, we think that investing in innovation is extremely important. We spent a few years not making any investments and investing in technology is very important to our business, in the short term that means reducing costs, but we will be making more investments in IT over the next few years. That’s part of our strategic plan and we think that, investing in IT is important to us and it will help us have a more sustainable and efficient operation. We also talked about maintenance and we believe that cost increase, which we believe to be short term. You have corrective and preventive maintenance still at higher levels. But on the same level, we believe we should be investing more in preventive maintenance than corrective, because it’s cheaper.

But that’s a short-term issue. It happened in 2022. We believe that cost will be lower now, it will grow close to inflation rates and those are the rules of the game. But those costs should reduce looking forward. But the message is, we have to reduce costs in other areas so that we can keep costs below the regulatory limits. We’re not going to straight from that. We’re not going to say, oh, this happened, that happened, therefore our costs will be above regulatory limits. That’s not going to happen. That’s our strategy. We need to have expenses that make sense, that help to reduce costs in the mid to the long run. But even though those costs have to do partly with investments, they will not go over that which has been established for the tariffs.

Unidentified Analyst: Lisa from Itaú. I have a very quick question. You talked a lot about migrating some GT contracts to the holding company that about 30% of that spinoff has already taken place. How is that going to progress over the rest of the year? How will you conclude this spinoff?

Reynaldo Passanezi Filho: I have the trading, our trading officer is here. I think he can probably help me with that answer. Do you want to answer that now or will you be talking about that later?

Leonardo George de Magalhães: Hi, good morning actually. Good afternoon. Yes. Right now we’re migrating those contracts because we have to agree on the prices for which we bought that energy. We believe that by the end of the year, we should have migrated all the energy that we purchased from third parties because we haven’t traded Cemig, we have traded Cemig’s Energy plus third party energy. So by the end of the year, we believe we will have concluded our negotiations with the sellers and by the end of the year, close to a 100% of those contracts will have been transferred and the holding, trading company will be managing all the energy that we have purchased from third parties.

Unidentified Analyst: Good afternoon, Myra from HSBC. You just recognized the voluntary retirement program worth R$4 million. So how much will you be saving and personnel, because of that voluntary retirement program?

Leonardo George de Magalhães: Well, that program is excellent for the company because we are bringing in new people, new talent, which is extremely important. These people have been in the company for a long time. I was practically born in the company. You have 25,000 employees right now. It’s not as much as it should be. When I joined the company, there were 18,000 companies, so employees joining us are usually at the beginning of their career. The company didn’t, doesn’t have benefits that it used to have benefits that were usually Cemig state owned companies. We no longer have those; we’re much closer to private company policies. But what we’re saying is that new employees cost practically half of what employees who are retiring used to cost us and it pays off in about eight months.

That’s important for the company and it’s important for our operating efficiency as well. It make that for us to continue to implement those programs in the future. Obviously when that will happen, depends on the company’s strategy. When those programs have been implemented, they’ve had very positive effects on our operating efficiency.

Carolina Senna: I think that’s it. Yes, thank you Leo. So with that, the morning session, you are all invited for lunch, which will be served at the Bela Hall room to my left. Analysts, investors and company officers will be to interact. We have serve tables for you and Cemig’s team will also be available to answer your questions. And we back at 2:30. Thank you and enjoy lunch.