Companhia Energética de Minas Gerais (NYSE:CIG) Q1 2023 Earnings Call Transcript

Companhia Energética de Minas Gerais (NYSE:CIG) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good afternoon and welcome to Cemig’s First Quarter 2023 Earnings Video Conference Call. We informed that this call is being recorded, and will be available at the company’s IR website, where you also find the Company’s presentation. Should you need simultaneous interpreting, the feature is available by clicking on the globe icon, where you find interpretation on the bottom of your screen. By choosing interpretation, you can then choose the language of your choice, Portuguese or English. Should you choose to follow the call in English, you can also select mute original audio. Now I would like to turn the floor over to Carolina Senna, Investor Relations Superintendent. Please Ms. Senna. You may proceed.

Carolina Senna: Good afternoon, everyone. I’m Carolina Senna, Cig’s Investor Relations Superintendent. We now start Cig’s first quarter 2023 earnings call and webcast with the following executives. Dimas Costa, Chief Commercial Officer; and Chief Legal and Regulatory Officer; Leonardo George de Magalhaes, CFO and IR Officer; Marco Da Camino Ancona Lopez Soligo, Chief Participation Officer; Marney Tadeu Antunes, Chief Distribution Officer; Thadeu Carneiro da Silva, Chief Generation and Transmission Officer. For the initial remarks, we would like to turn the floor over to our CFO and IR Officer, Leonardo George de Magalhaes.

Leonardo George de Magalhaes : Good afternoon everyone. Thank you very much for being here with us in this conference call for the results of the first quarter of 2023. These are great results. Very positive. Once again, another quarter with semi — sound results. And in this initial slide, we have some highlights for the first quarter. the EBITDA was very good, R$2.1 billion. This is a recurring EBITDA for the company 8% in the year-on-year comparison from last year, which was already a good quarter last year. And we were able to repeat in this first quarter this very good result. A balanced portfolio, we understand that in this quarter the company needs several businesses, whether distribution, generation, and trading, especially these three areas with greater potential to generate cash and results, and the results were indeed positive over R$1.3 billion and at profit 5.7% up when we compare to last year, also a good quarter for last year.

Therefore, this allows us to be very optimistic for the results in 2023. We’ll comment more on that on the next slides and the divestment of minority shareholders. An important event, and this first quarter, actually in the second quarter, we will draw your attention to that, the tariff review for our distributing company and May 28th. And then we would like to invite analysts and shareholders that are following up the company. As soon as we have the results for the tariff review, we will have a video conference to specifically comment on those results for a tariff review. You are all invited. This should happen by the end of May. And also, the reduction of post-retirement liability will comment more on that and that did have positive effects and the company’s results.

On this is slide, we’ll talk more about our divestments. These are divestments since 2019 up to 2023. We’ll go over the ones in the first quarter of 2023. Santo Antonio, we sold fully that asset. We had to diluted to 15.51% to 7.58% in 2022, but we did not follow the capital increase in Santo Antonio. And then in 2023, we concluded the complete sale of this asset to electro brass. So, we have cash of R$55 million incoming and also in our relationship with electro bras and other assets that we have jointly which is — which are Retiro Baixo and Baguari. And we also sold those assets and here are the numbers, R$393 million for Baguari and R$200 million for Retiro Baixo. And those two operations also depend on some approvals in our legislation, but we understand they should be concluded in the second or third quarters of this year.

And then the fax will be posted in our results. And these figures will be updated according to the CDI of 2023. And even more important than the sold, we had the R$2.1 billion cash inflow in the company. We also should highlight that thanks to these sales of assets. In order to maintain that original stake, we would have to have R$1.9 billion of cash injected in the company. So, this was also savings for the company, and more than R$2.1 billion of cash inflow. We are talking about R$5 billion in cash savings for the company. Thanks to these divestments that are fully aligned to our strategic guidance. And when we talk to the market and Eddie here, of course, the R$1.1 billion in tax credits and also positive the reduction of financial guarantees, PPAs release is also to purchase energy.

And as we mentioned, like cash savings considering that we will no longer be injecting cash in these companies. So, the assets that pose the greater challenges with greater complexity, we now can understand that. In this first quarter, we have concluded the sale of these assets that had the greatest challenges, we could say. Now still in our investment program, this is a program of R$5.4 billion for 2023 last year, we invested R$3.6 billion. And as you can see in this slide is much higher than the company’s average in the past few years, and we start the year with an investment of almost R$800 million. And this is larger than what we were able to do in the first quarter of the past year. So, the company understands that, it has adapted already to this new volume of investments, so R$750 million is much higher than what we had in the first quarter of 2022.

And we are confident, we here have relevant investments, especially for Cemig Sim and generation and they should be happening, especially in the second half of 2023. But we believe that most of these investments should be concluded this year, and these are profitable investments and they will generate value for shareholders. This is our ESG commitment. The company sustainable in its operation 100% of its renewable matrix. We are in all relevant indexes in terms of sustainability, both nationally and internationally. And I draw your attention here to 1.3 million families that are enrolled in our social tariff program, that is a relevant figure, and it is growing over time. And here we have a relevant social effect, a positive impact also in the delinquency reduction in the company.

So, we were able to bring down the electric bill for companies that have lower income and that has a great social impact and also and financially default or delinquency is very relevant for us, and we get better results this way. Now moving on, I’ll go into the results here. The main facts are highlights. We have a new healthcare plan. Thanks to the restatement of that liability and some employees move towards this plan, where we do not provide that benefit to the enrolled employee for health care insurance, when this employee leaves the company and the initial effect was R$57 million and we are optimistic. We believe we will see positive effects in the company’s balance sheet, thanks to this strategy to create this new healthcare plan. And this is the initial effect, though and I understand it already shows the initial delivery that we have been promising to the market to reduce the post-retirement liabilities that the company has.

And thanks to this number of actions that the company is adopting. We are discussing this topic with the unions, with the employees of the company. This is an initial effect, as I said. It is relevant, that efficiency costs goes through the restatement of our healthcare plans and pension plans, and we understand we already had the first positive effect on the company’s balance sheet. We transferred third-party contracts to Cemig from Cemig D, Cemig GT to Cemig H and that is a positive impact on EBITDA of R$243 million in the first quarter from our trading company. In the holding, it has tax efficiency. And therefore, we can see clearly the results here. And these are really amazing results. And it was a great assertiveness for the company to read the market correctly.

And the strategy here really is to have the right analysis of pricing and of energy in the future. Now, for Cemig D we believe that we had a very significant growth 3.1%, when we compare the first quarter of ‘23 to the first quarter of ‘22, even with the migration to clients to distribute generation, that represents already 8.1% of total volume consuming there in distributed generation. This is going to be reviewed and adjusted in the market, but it was an important result in this first quarter in the year when we compare to the same quarter of last year. So probably one of the largest market growths in the distributed market in the country. In this first — in the first quarter of 2023. For Cemig GT we had the FX effect because of the market to market of Eurobond and a positive effect at what first Q of ‘23 of R$60 million.

And a positive effect in the first queue of ‘22, again of R$255 million. But it’s also under a radar, the liability management and the renegotiation of our debt because of the FX exposure. Now I will talk about the consolidated results of some of our main businesses, and I will turn the floor to Catalina.

Carolina Senna: Hello everyone, and thank you Leo so starting the initial results for the consolidated ones here we have a recurring result for the EBITDA of 8.1%, lower amounts non-recurring. This quarter, which was the sale of interest in Santo Antonio already talked about that. The restatement of the post-employment liabilities with the healthcare plan and now, so the bidding that we will hold for some PCHs that did affect the results and affect exposure every quarter that affects our not income and in 2022, the impact was positive and we also had a positive in effect on 2023, but a lower amount once because of the FX change. When we look at not profit, and I removed the Eurobond effect, we delivered a result of 5.7% positive.

And as on our dimension, these are important results knowing the performance of the company’s initiatives, bringing results to analysts and investors and shareholders. And as we mentioned, the commercialization, the trading activity, we started the migration to Cemig holding. So, R$243 million left Cemig GT are under Cemig H our controlling company, and the consolidated results because of consolidating issues now moving you forward, consolidating operating costs and expenses. This is the performance of our costs as we had a growth of 12.3% affected mainly by personnel. The wages adjustments for Cemig D database is in November. That’s when we adjust by the inflation. When we compare the first semester of two-way the first quarter of ‘23 to ‘22, that’s where we see the impact of the cost increase and also third parties outsourced services.

We did have an increase because the result here, it is because of more preventive maintenance that we already talked about that, and these costs tend to be higher now because we are increasing our assets base. When we look at investments that we have already made in 2022 that we’re growing when we compare them to prior years and — what we have forecasted for 2023, we are investing in our asset base for the distributing company and therefore we will have more preventive maintenance and also, we’ll have to maintain equipment to monitor clients and also increase the number of collection agents. Now our consolidated cash flow, a strong cash generation for the company, R$1.6 million and cash generation. We are still having the tax credits that be reimbursed to consumers in the next cycle with a tariff review.

And May 28 will still have a remaining amount they are to be returned to being reimbursed to consumers. Also, payments of loan financing and debentures of R$444 million. And the divestment activity, what we have already done in the quarter or investment activity is R$738 million and we ended with a significant cash of R$3.1 million and that supports our investment program. This is our debt profile. As Leonardo mentioned, we already worked — had to different movements of liability management related to Eurobond, but in 2024 we have a large amount of that in the maturity. And we are working on this high wall that we have for 2024. Our leverage is still below one, but we understand that this low leverage will guarantee the success of our program, our investment program, as we have shown in the second slide.

We believe that we’ll have more than R$5 billion investment for 2023. And we — in terms of ratings, you can see Fitch ratings and S&P AA+ and AA forest Cemig D results that are recurring growth in EBITDA that is very good for the distributing company. We still have clients that are migrating to GT and just in this quarter we had 8.1%. I will show you further on how the breakdown is for consumers. But even with this migration, with this loss of some clients from captive to GT, we have this increase in R$13.1 in our recurring EBITDA. That income — there was a drop there, because 2023 we had a lower financial revenue with the fines in the energy bills and also with monetary restatement for tariff. This is Cemig D energy market. We have grown 3.1%, you can see that transported or recurred energy has increased.

Also, we had an increase in the residential area. As I mentioned to, 8.1% of the total energy consumed four Cemig’s connection today has already migrated to distributed generation energy. And it’s important to say that these investments are allowing us to grow in the market weather by free clients with the increase of the transported energy or because of captive clients. As far as losses are concerned, we are within the tariff coverage related to regulatory losses. This is a commitment that we have with the market so that we continue meeting that number. We keep that number of inspections, just this first quarter we had 119,000 client inspections. We are replacing obsolete meters. We already replaced 97,000 and we believe we’ll be able to replace 6,000 of them in the year.

We are replacing conventional meters by smart ones, and we also had the disconnection of 1900 of illegal connections. And this will allow us to keep complying with the regulatory limit, and that is something that is a commitment for us. Very important. Now, for delinquency. And this is an important to show you how important the digital channels are for Cemig’s collections. Our instant payment method PIX is growing, and we have a number of collection possibilities here. They have lower costs for the economy and our collection rates are very close to 90% or 100%. It is 99.75%. This is a guarantee of our methods. And as I said, especially because we are using these digital means, delinquency when we look at it, there was a reduction. If we start in the comparison in 2020, the company developed some initiatives to bring down delinquency and we see here that 2023, compared to the first quarter of 2022, we had a significant reduction in delinquency, thanks to these collection activities, improvement, and also the improvement in accounting rules and evolution of the criteria collection using machine learning.

All of that is allowing us to bring down our delinquency, and get to a significant number. Now operating efficiency. This is something else that we have been able to achieve and it’s crucial for us. It’s to be within the regulatory limits for OpEx and EBITDA. So, what I have of covered in my tariff is R$1.05 million, and that’s 12.2% more efficient. So, my OpEx it has R$931 million. And on the EBITDA side, my performance is 8% of the regulatory EBITDA. These are achievements that the company is really focused, and achieving. Now, Cemig GT results. We look here and we see a reduction in the EBITDA and in the net profit, but since we started the migration of the trading activity to Cemig H part of that EBITDA was displaced. So, it is important to see that when if I move back with this displacement, if I analyze the first quarter of 2023 and we have R$243 million under Cemig H are controlling company.

Therefore, if I would bring that EBITDA back to Cemig GT, I would have reached an EBITDA in the quarter of R$1.032 billion. So, in an initial analysis, it looks like there was an operational inefficiencies Cemig GT. But that’s the other way around we are short for 2023. We did have opportunities in our trading activity and here we show efficiency with this activity and that profit in addition to this, displacement to this changed to Cemig H. We also have the effects — effect and in 2022, we had a positive effect that was higher than in 2023, which also helped to this reduction of 25% in the IFRS net profit and in the recurring numbers, recurring our profit, 6.6%. Now, on Cemig GT highlights. We are going to have an auction to sell 15 PCHs in a minimum value of R$48.2 million.

It makes a lot of sense for the company’s strategic planning. We will look for the optimization of our asset portfolio and also best capital allocation and we are still focused on Minas Gerais. This year, we’ll have an important transmission auction over 6,184 KM of transmission lines with an investment of up to R$15.8 billion, and six of the nine lots are going to be in Minas Gerais territory. The company will analyze the lots that makes more sense according to our strategic planning and will be participating in this auction with 100% Cemig GT. This is company’s results when it consolidated, we have already consolidated — results in our consolidated results and our EBITDA was up 41.2% and that is — thanks to a better price of the gas molecule.

We had a margin increase which has contributed to this growth and a net profit of 76.4%. And now I will turn the floor to Leonardo, and he will end with this final slide so that we can open with the Q&A stressing our commitments with the market and investors.

Leonardo George de Magalhaes : Well, this is something that we bring to you in all the quarters. This is something that we’ve brought in 2021, our strategic day in our last Cemig D. We stressed this strategic planning, our strategy, and we are being very much coherent. We are meeting everything that we promised. So operating efficiency, EBITDA over the regulatory EBITDA, our losses are under the regulatory limits. We have a good liability management. We reduce our debt for R$1.5 billion to R$155 million and we expected that we can reduce even more our FX exposure by the end of the year. And also, we are stressing our Cemig D investment program, it is a strengthening and we believe it has a great social impact, and for the economy also, we are offering more energy to the state and these are also investments that will provide the right return as we understand it.

Now in progress, divestment of non-strategic assets, we already mentioned the most complex ones have already been completed. It’s achieved, but we still have a few assets that in — because of our strategy, it would make sense for the company to divest them. We started seeing results of the restructuring of post-retirement benefit plans and we believe that in the next quarters, we’ll see better results. And we also are making a relevant investment this year in digital transformation. IT and renewable generation sources and for future challenges and opportunities thinking about our sustainability, we will have a growth in retail electricity sales. We are prepared and we continue preparing ourselves to be able to cater to this market and to have a relevant role as we have in the free market.

We are the largest trader for the end consumers in Brazil, when we expect to have this relevant stake for retail electricity sales. And also, we have renewals of concessions for value and also other plants that we will renew the concessions following the electric sector framework that allows us to renew these assets under given conditions. This is it in summary. This has been a great quarter and we are available to take questions that you might have on topics that should need a greater highlight or that if you have any other questions that you would like us to answer. We’ll now start the Q&A session.

Q&A Session

Operator: So we will now start the Q&A session.

Unidentified Analyst: I have the first question and I will ask to Marcio Luiz to ask — to answer. The question is about the divestment in to ISA. How are the negotiations with ISA that, has the rights for purchasing it?

Márcio Luiz Simões Utsch : Hello, Carolina. Hello everyone. Good afternoon. We are talking not only with ISA but also with the market. Everyone knows that the company wants to divest and that participation that’s taken, we are working on it to finalize the process. So, we are having great conversations with ISA. We have a positive relationship with our partner and we have an open channel to talk everything we want about this topic. That’s what I can tell you right now.

Operator: Thank you very much, Marcio Luiz. So now let’s continue with the Q&A session. The next question is our Chief Generation and Transmission Officer, and it comes from Tiago an investor.

Unidentified Analyst : Good afternoon, everyone. What is Cemig’s perspectives for transmission options this year? Several lots are in state. Are you going to be aggressive there and or are you going to be more conservative there?

Thadeu Silva : Good afternoon, everyone. Can you hear me well?

Carolina Senna : Yes, we can hear you well.

Thadeu Silva : First, thank you for this question. Yes, we are going to participate and we are going to be very competitive in the transmission options this year, obviously to guarantee the — guaranteeing the minimum return that our shareholders require. But we are not going to go crazy. We are going to work with a lot of synergies so that we can be awarded with these lots. We have as an objective at least one lot to that in this auction that is going to happen in June 30th.

Carolina Senna : Thank you very much, Thadeu. And the next question is for our CFO, Leonardo. Can you comment if you are expecting new reversals in the post-retirement issue for Cemig regarding the healthcare plan? How was the migration of your current employees? And also, second question for you. We saw good results in EBITDA this quarter. Do you expect that to be recurring further on? And this question is from Julia, self side analyst from Santander.

Unidentified Company Representative: Hello, Julia. Thank you for your question. About the post-retirement benefits, we understand that in an initial migration that we allow the current employees to enroll that, they would accept this new healthcare plan, approximately one-third of the employees accepted this migration and this effect is posted in our balance sheet. We believe the company will adopt new actions, so that we can keep reducing this cost. We believe that this new plan makes a lot of sense to employees, and also it makes sense for the company, I think it is a win, win situation. So, we expect that in the future because of other actions that the company will take, we will be able to reduce these costs, both for current employees, but also actions that we are developing to invite the employees that were retired here from the company to join a sustainable plan.

And that makes sense, that reduces the post-retirement benefit for the company, but also provides good assistance for those that migrate to that plan. As I mentioned, the migration for now one-third of the current employees, but we expect that this is going to be even more relevant in the near future. Now, about EBITDA. Really it was a very positive one as a great result growth in the market close to 4%, but also growth in the 15% in the molecule price adjustment. Therefore, Cemig could have R$250 million in EBITDA in the first quarter of 2023. We are very optimistic about Cemig results. Of course, we cannot say that we will multiply that by four, but we understand it is relevant, and we expect, because Cemig to have relevant results to grow its operations this year.

And because also of these adjustments that we just mentioned.

Operator: We no longer have questions. So, I will turn the floor back to our CFO and IR Officer for the final remarks.

Leonardo George de Magalhaes: That’s great, Carolina. I would like to thank you again for being with us in this conference call. It is a very positive result. We are optimistic about 2023. We always tell you quarter-after-quarter that we are delivering sound results to the market and even our valuation — and appreciation of our share show the trust that the investors have in the company. Our IR area is available to talk to investors to take your questions in case they were not answered in this call. Good afternoon. Thank you very much, and have a nice weekend. Thank you.

Operator: Cemig’s first quarter 2023 video conference call has ended. Investor relation to super intendency is available to take further questions if you need so. Thank you all very much, and have a nice afternoon.