Companhia Energética de Minas Gerais

Ladies and gentlemen, thank you for waiting. Welcome to the conference call for CEMIG's third quarter 2020 results. Good afternoon, everyone. I am Antonio Velez, Superintendent of Industrial Relations of CEMIG. We now start CEMIG's third quarter 2020 earnings conference call and webcast with the following executives. CEO, Reynaldo Patanez de Filho, our CFO and IR officer, Leonardo Georges de Magalhães, and all the other officers in the company. You can follow the transmission by the phones in Brazil, 5511-312-74971, or a number in the U.S., 1-516-3001-066. And also, the links available on our website are i.tamig.com.br. For the initial remarks, I would like to turn the floor to our CEO, Reynaldo Passanesi-Figlion. Good afternoon, everyone. It is always a great pleasure to be here with you to bring the results of the company for this third quarter in the year and the year to date. Considering what we have been looking for and what the company has been able to deliver, we have results that are consistent and sound and they do show the company's resilience in the pandemic and obviously also They show very positive perspectives in terms of the growth recovery. So, I will just comment on a few topics and then we'll go deeper in them. But first, some inconsistent results in the financial area. We have our adjusted debited and consolidated debited much higher than 2019. 3.6 billion RALs with an EBITDA much higher for this year. Net income adjusted and consolidated also over 2019, almost 12%, 1.7 billion RALs. And gross debt is controlled Our net debt over EBITDA ratio is very little, a much lower ratio. It's 1.55 and that implies a better rating and also allows us to have a very comfortable situation nowadays in terms of over $5 billion in cash. So we are able to celebrate here. We lower the regulatory levels as we have mentioned already. We have been working hard in PMSO to reduce expenses in PMSO and even our EBITDA, a regulatory EBITDA. It has very good results. This is a mark that is very few times the company has been able to reach that number. But this is now we have a very bold year with investment and execution and I am sure that we'll be able to reach our goals. About operating income, we also have sound results, a recovery of our load. I'm sorry to interrupt. We have seen in the National Integrated System that recovery in the national load, but it's no different here. We are at 3% over September for SEME-D and also we have growth in the free market and a higher growth since March of 2020. In the year to date, because of the period of the pandemic, we had a different behavior, but now we see a gradual recovery of the load and that's very important in order to ensure that we have new contracting levels and that will allow us to grow as well. The recovery also of the levels and that's an average that is in line with the target of 2020 that is much higher. than what we had in the most difficult period, which were April and May. And finally, when we talk about the DEC and FEC, the average audit duration, we have 9.3 hours and this is also a very good result because the regulatory DEC is lower than 10. So, we are lower than the regulatory level. So, I believe these are the main messages here. We have sound results. And like I said, we do have a company that is very resilient, and we are ready to recover our growth. Our capex is in line to what was planned, and in spite of the crisis, we have made a few adjustments in the investment program. It's broad and is too ongoing. We have a positive effect. And our partnerships like Taeza just published their results. They do have positive results and therefore there was appreciation of their stocks and that also strengthened us. So we are also having positive results in generation with the GSF approval. We will have a gain. that is very significant in terms of extending the average term of the concessions. And something else that I would like to highlight that can be applied to CMEGT, but also for all the other subsidiaries or the companies as well where we have interest at that can be applied to North Energy, Taesa Light, we do have a very positive perspective of value gained and this is a subject that is very special for the electric sector. We did have also a tender notice and we do have a whole series of projects and went from generation over to give a lot that If we have 1.7 gigawatts, we have to think about expansion, and we have to work on the mix and grow our own energy and bring down outsourced energy, and we can then strengthen our commercialization area. So these are the main highlights. So just I would like to confirm what we have been saying. We do have an ongoing recovery process. The results just start to show. But we have a perfect rationale for decision-making, always aiming to generate value for our shareholders and provide consumers and the society a quality product. at an affordable price. These were my initial remarks and we are available to take your questions at the end of the presentations. But when we look at it, the consistency of the figures and the adjustment that we have been able to do are really bringing us good results. Thank you very much, CEO. So now let's turn to the presentation itself. I would like to ask you to turn to slide number three. Our CEO already mentioned some of these highlights, but I would like to stress that about operating efficiency, that for the first time, semi-distribution in the nine months of this year Already, it has on trading expenses lower than the regulatory limit and 127 million aroused vis-a-vis are leveraged 1.65 times over EBITDA, specifically of cash generation. The 24% are reaching $1.3 billion in the third quarter. And because of our leverage and our debt profile and also thanks to our debt cost, The rating agencies also recognized our credit quality and have improved our ratings in different ways, and I will go into the details in the next slide. We continue identifying and intensifying actions to prevent power losses as well as delinquency. This year specifically was, because of the pandemic, a very challenging year, but we are still working hard to prevent power losses. A very good piece of news is that thanks to all our sustainability initiatives that we care so much about, San Miguel was, for the 21st consecutive year, chosen to be part of the Dow Jones Sustainability Index, which is one of the most you know, one of the oldest recognitions of the financial industry about sustainability practices in the world. So, we are very proud to say that we are in the 21st year, again, part of the Dow Jones Sustainability Index. Now, turning to slide number four, we have here the ratings of the main rating agencies, Fitch, Standard & Poor's, and Mojib's. Pitch and Mode just recently elevated our investment grade and you can see that on the screen both in the domestic scale as well as in the global one. And the Standard & Poor's has revised our perspective for positive and that means that maybe next year we also can have an upgrade in our credit quality and our credit ratings. Now turning to slide number five, we have some collection indicators. We see how the collection over the year was affected, specifically in the months of the second quarter, April, May, and June. But starting in July, specifically in August, we had a strong recovery of our collection, and also we improved our delinquency rates. We have to remember that during the pandemic, we had restrictions. we were not able to perform disconnections. And in August, the disconnections started happening again. And from August through October, we had over 235,000 disconnections. And as you know, this is the main initiative to fight delinquency. We also should highlight that in the third quarter of this year, we had a reversal of 231 million rounds of the... ADA provision thanks to negotiation with the managerialized state government. Therefore, the ADA of 2020 in the year to date for 2020 is in $46 million up to September. And now turning to slide number six, we have here the execution of our investment program. So far, we have already invested $1.2 billion or else. that is consolidated out of those 80% were directed to distribution, to make distribution. 6% were allocated to transmission. I'm sorry, 6% were allocated to generation, 10% to transmission and 5% were capital contributions and acquisitions, the small acquisitions that we had throughout the year. So that's the breakdown. We had 76 million investments in generations and transmission 121 in the strengthening and upgrading, and that is translated in the APR annual permitted revenue and distribution up to September 960 million and about the capital contributions and acquisitions. We had $20 million of capital contribution for Semicazine, and we acquired part of San Francisco, $43 million. Now, turning to slide number seven, we have our quality indicators for Semic distribution, DECI, FECI, which have been improving year after year. Specifically, in the last few years, we are lower than the regulatory limit, and we have a higher margin between the realized and the regulatory limit. In September of 2020, the accumulated DEC for the last 12 months was 9.32 hours vis-a-vis 1044 for the regulatory limit, and that shows that in 2020, probably, we are going to be lower than... 10 hours, that is the first time that our DEC, our average audit duration per customer in hours is lower. Our FEC has always been very comfortable, but we are still working to improve it anyway. And in September of 2020, in the last 12 months, the indicator was at 4.63%. Turning to slide number eight, CMEGA distribution, we have here the load. for semi-distribution and the load does not necessarily translate into build a market in the financial figures. But that is an indicator of what is to come in terms of revenue. And here we can clearly show the significant recovery that semi-distribution market had after the pandemic. And we can see that in April, when we compared to April of last year, we had a drop. in a load of over 10% and in September we already had an increase vis-a-vis September of last year of 3% and October even more so. This is a strong recovery specifically because of the recovery of free clients in the concession area for CIMIC distribution. Now turning to the next slide, number nine, we have here once again CIMIC GT load. And that's what we are comparing here with the consumption over the year because of the seasonalization and also changes in the market year on year. The comparison sometimes is compromised, but we can also see this recovery coming in very strong, similar to what we see to the total distributed energy for semi-distribution in the year, the consumption and the load that we have in April. You see the recovery up to October, it's over 22%. It's 375 average megawatts. So this is a strong recovery, and we see that, and most of that recovery is thanks to our incentive-bearing clients that have increased to 28%. But the free conventional client also has operated significantly, and it has grown at 19% in the quarter. Now, attorney... to the analysis of the results of the third quarter themselves. Here on the page 11, we have the main effects on the results of this quarter, and we should highlight them to better understand the results that we'll then bring to you. For scenic holding and consolidated results, we had the restatement at market value of light. Remember that light is an asset that is available for sale in our books. So, every quarter we have to mark the market the value for light and the reference of the stock price in the stock exchange market. So, on the stock market, sorry. So, the stock price in September was 14.50 reals and we had to bring down the amount posted for that light is posted for in our balance. sheet and so the net income would be $90 million and there was a reduction of $136 million in our balance sheet. But in September, the stock price was at $22.75 and if that holds, it will have a positive impact in the fourth quarter. About systemic distribution, we had a growth market to the total. Energy distributed is growing vis-a-vis last year. It has increased 1.4%. The captive market had a drop vis-a-vis the third quarter of 19, of 3.6%. But transmission or transport for free clients in the concession area grew 7.8%. And as I said before, we had... a reversal for ADA of 231 million, but in the last 12 months, it was a reversal of 178 million rounds. About Tameka TT, we had a quarter that was much better. It was very good, but operation-wise, And that was very good. But in terms of our finance, we had the market-to-market of Eurobonds and the hedged instruments in a way that we had a negative effect of 244 million euros in our financial results compared to a negative effect that was very low in the third quarter of 2019, which was only 12 million euros. Now, turning to page 12 of the presentation, we have here... The impact itself of the euro bond, this is a breakdown. And in our opinion, this was a temporary effect because of the effects of pressure and the volatility both in the domestic as well as international scenario. Here we see on the chart that our hedge instruments have not varied in this third quarter. And because of the real depreciation, The bond had an increase of 247 million riles and at the end we had a negative financial effect of 244 million riles. Turning to slide 13, we have here our EBITDA and net profit for the nine months. Our CEO mentioned the adjusted EBITDA had a growth of 2.7%. in the nine months of the year, reaching $3,688 million in the last nine months. And the nonprofit had a growth even more significant of 12% reaching over $1.7 billion. On the bottom part of the slide, we have the adjustments made in 2019. Maybe the most relevant ones were... the phase positive fees in the second quarter of last year over ICMS, and also we had the provision for receivables that were now about R688 million. We also last year had the provision, we have to remember that, of that profit-sharing program that we held. And this year also we had light restatement, a positive effect, of the tariff review of the transmission company and the reversal of the provision I mentioned before. So just to, you know, have that, bear that in mind when you consider the recurring results of our company. Now turning to slide 14, we have the breakdown for distribution market or GT market. We had a growth of 1.4%. And as I said, the captive market, was down 3.6% and transports and transmission for free clients increased 7.8%. If we break that down by the type of consumers, we should highlight our residential customers and that is still growing 3.7% year-on-year. Industrial also grew 5.6% and the quarter And still our commercial clients had a reduction of 16.8% because, you know, the stores were basically closed also in the third quarter. On the next slide, 15, we have our adjusted EBITDA, adjusted net profit consolidated just for the third quarter of 2020, which improved. Our adjusted EBITDA grew over 24%, reaching $1,329,000,000, a level that is very sound for recurring EBITDA, as we already mentioned. And just the net profit also had a growth of 77% stronger growth, and with a quarterly net profit of $644,000,000, a very strong result. On the bottom, we see the adjustment I already mentioned on slide 16, we have adjusted the net profit for the MADGP, which also have increased. It was up 61% on top of the third quarter of 2019, with adjusted the net profit of $539 million. And adjusted the net profit also, we had a strong growth of over 200%. for CEMIG GT reaching 164 million RALs. On slide 17, we have adjusted EBITDA and adjusted net profits for CEMIG distribution. CEMIG distribution had a slight reduction of 7.6% in the adjusted EBITDA, reaching 572 million RALs. And adjusted net profit was up 22.4%, reaching 306 million RALs. Now, turning to the slide 18, in terms of constant operating expenses, we also had a very positive performance, but I'm going to ask to our CFO and IR officer, Leonardo Giorgi de Magalhães, to talk about it. Good afternoon, everyone. Thank you very much for participating in another video conference of TAMIG, where we have the opportunity to explain our results. As Dr. Rinaldo mentioned, these were sound and good results that show the resilience of the company during the pandemic. And Valis has already commented on the main results on the quarters. And here we are going to concentrate on operating costs and expenses. We see that the company is is maintaining the efforts to have operating efficiency. We're able to reduce our manageable costs, our PMSO costs, basically for materials, all sorts of services, and headcount, and 4.7% vis-a-vis the prior year without any inflation adjustment here. So if we adjust it by the inflation, we are able to see the company's efficiency of almost 7% in cost reduction when compared to the prior year, and we think that these are relevant results of the company, and we continue working to bring down costs. Therefore... It's important to highlight that there was an increase in the profit sharing program in the quarter, to be specific, but in the year to date, there was a reduction from $160 million to $109 million just in the quarter. And also, another highlight here, it has to do with the provisions for ADAs, and we were able to sign an agreement with the state, and therefore, we ensured that that overdue payments from the state will be paid by the settlement, and we are willing to offset those in discounts from the ICMS credit. And also, last year, we remembered that there was a large provision, over one billion reals, based on our also profit-sharing program, and these were tax contingency provisions. And that affected our results. Now, on the next slide, we have our OPEX, our realized OPEX, and the OPEX with regulatory targets. This was a landmark for us because all our OPEX was covered by our tariffs. This is the first time this happened, and this is the company's commitment. We committed ourselves on the same day that by the end of the year we would be able to have our profits within the regulatory limits and we anticipated the profits so in this third quarter we are ready bring to you this good news we are 127 million lower than the regulatory target even if we consider the cost that we knew that would be difficult to cover for with the tariffs such as post-retirement but even then the company was allowed We were able to have that still for 2020. About the EBITDA, we are lower than the regulatory target, $73 million. And here we have the company's additional and relevant effort related to non-technical losses that caused us to have losses in almost $200 million up to the third quarter. The company is taking several actions. These actions are already being implemented so that by the end of 2021, we are able to reduce these non-technical losses to close to zero. So, once again, we were able to reach our coverage of 100% of what the regulation guarantees. Remember that There is a small chart here on the bottom. In 2018, we only had 78% of our OPEX covered by our tariffs in 2018. And in 2020, because of our efforts in the past two years, specifically efforts in 2020, we were able to reach the regulatory coverage. So we believe this is an important effort, an important landmark for SEMIC distribution. On the next slide, number 20, We have our consolidated debt profile. We see here our indebtedness profile. This is a debt for the next year that can be managed with the cash generation that we have plus the cash of the company that we have so far. We were able to go through 20 candidates. um let you know that we have a hedge for the interest rates and up to five rails so this bond is hatched therefore this debt of 99 billion would be uh at a lower amount and the important management messages that we are paying attention to the topic. We understand that in the first quarter of next year under a more stable scenario and we expect it to be a scenario with vaccines and the market will have less uncertainties and the interest rate will be at a normal rate or with less uncertainties and with a better risk level and the company will start a process of liability management for these bonds. So, we are at a very comfortable position and that translates into the company's leverage, which today is at 1.55 of our total net debt over EBITDA. Very comfortable and that also has affected our ratings as well as mentioned. The ratings are continuously improving and we understand this is the trend for the future. and we expect it to continue on that improvement scenario, improvement of our liquidity as well as reduction of our indexes. On the next slide, number 21, we have our liquidity, our cash flow generation that is amazing for the quarter. In the nine first months of the year, we were able to generate around $4 billion in cash. This is significant in addition to other factors that have helped us to maintain the liquidity level and the cash flows to $5 billion by the end of the third quarter of 2020. We understand that this is Very important, and that balance allows the company to tackle the challenges. It's still at this year-end with no vaccine, and the market is still suffering because of the economic deceleration, but that will ensure the company a comfortable situation for the next few months. And our next slide, before we turn to our Q&A session, these are the company's expectations, which are very positive, starting by solutions for GSF. The regulations are still ongoing with the regulating agency, and we have a favorable expectation to extend for two or three years our plan concessions, not only SMEs plans, but also our Allianza and other ones where we have a stake. And thanks to this major GSF agreement, we probably will have the extension of these concessions translating into more value to our company. We have an important digital transformation project. We plan to change our relationship to turn it to a more modern approach, updating our platforms, virtual systems. and also having robotic processes to change the level of our relationship with our customers. In terms of our new investments, specifically in generation and wind projects and also photovoltaic plants, we have a portfolio to be analyzed of over 2 gigawatts, and also for solar plants, we have also a portfolio close to Two gigawatts. Both are profitable projects that will generate value for the company, and in a very safe, conservative fashion, always thinking in terms of adding value in a responsible fashion, the company will analyze these projects in the short and in the medium-long term. Also, we have a revision process for our strategic planning in order to analyze opportunities and challenges for CEMEX considering renewable energies in an environment of the electric sector in Brazil and in the world for the next two years and how the company has to prepare itself for this competitive environment. There is a project called New Energies and the aim here is to boost our organizational culture. This is a company with over 60 years of age. It has a lot of strengths that need to be valued, but also we need to improve processes and behaviors that can contribute to a culture that is directed to results. And we believe this is important and it has everything to do with this administration's target to turn this company into a more efficient one. And finally, divestments. We maintain the commitment to rightly allocate our capital and the company is still interested in maintaining its remaining stake in light. This is one of our priorities when we talk about our divestment portfolio. These were the slides that we had to bring to you. These are very good results showing resilience in the company. very optimistic about the future and all the projects that are being developed in the company in order to develop value to our shareholders. We will now start the Q&A session. To ask a question, please press star 1. To remove your question from the queue, please press star 2. Once again, I would like to remind you that to ask a question, please press star 1.

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to ask a question, please press star 1. Please wait while we collect the questions. Please wait while we collect the questions. To ask a question, please press Start 1. Please wait while we collect the questions. There is a question from Rosalie. The question is, when are you going to be paying dividends and what about the dividends policy? Thank you very much for your question. The company, in the last meeting with investors, the company stated that our purpose right now is to maintain our policy of 50% of dividends payment. We believe this is balanced, and this allows our shareholders to have the right remuneration, and also it allows the company to have the liquidity position, which is important for it right now, considering that in the midterm, we will have the maturity of Plants, Nova Ponte, and Borgeson, and we are going to have a grant payment to maintain those concessions and also we have a large investment program in the distributing companies. So right now, we believe that this policy is adequate but of course, we are always reviewing and trying to create value to shareholders and if we have a better liquidity situation and we have a comfortable average situation, we might think about paying additional dividends, but right now we want to maintain our policy of 50% dividends payment. Please wait while we collect the questions. To ask a question, please press star 1.

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If there are no further questions, we'll turn the floor back to the management for their final remarks. Very well. Ladies and gentlemen, thank you very much for this teleconference and video conference actually, right? Teleconference is something from the past already. Really, these are consistent and sound results showing that The path that we have chosen is the right one and we do have favorable perspectives. And I should highlight the two last subjects that Leonardo mentioned. It's important that we are working on our strategic planning. We wanted to have a future view for CEMIG, a future scenario and along with planning always associated to an organizational culture. understanding a rationale of results of decision, private decision making process which will help us and will prepare the company for future challenges. Thank you very much and have a nice afternoon. The conference call has ended. Thank you very much for your participation and have a good afternoon.