Comp En De Mn Cemig ADS American Depositary Shares

Good morning, everyone. I am Carolina Sena, CEMIG's Investor Relations Superintendent. Welcome to CEMIG's third quarter 2024 earnings video conference call. We inform you that this video conference is being recorded and will be available on the company's RR website, where you also find the company's presentation. Should you need simultaneous interpreting, the feature is available by clicking on the globe icon located on the bottom of the screen. Upon choosing interpretation, select the language of your choice, Portuguese or English. Should you choose to follow the call in English, you may also select mute original audio. We are now starting CEMIG's video conference with Reinaldo Passanese Filho, CEO, Dimas Costa, Chief Commercial Officer, Leonardo Jorge de Morgalhães, CFO and IR Officer, and Mornay Tadeu Antunes, Chief Distribution Officer. For initial remarks, I turn the floor to our CEO, Reinaldo Passanese Filho.

Good morning.

Good morning, everyone. Welcome to the earnings video conference call for the third quarter of 2024. Once again, very consistent results. Results that prove the significant turnaround of the company, as well as its financial solidness.

We do have some highlights.

That are very special. They have already been announced over this period of time and they are very positive. We right now have the best rating in our history. Triple A. We couldn't be better. This is the best rating in the company's history and this is the best rating possible. We have over six notches of growth in a period that is lower than five years. So this is really an acknowledgement by Fitch. thanks to our consistent results, our cash generation, and also EBITDA overnight data is one of the best in history. Also in this quarter, we concluded the sale of Alianza Energia. This has been announced 45 days ago. We have received 2.7 billion reais, and now we are recording in this quarter a capital gain of 1.6 billion reais. And also, we have very positive results of our transmission tariff revision. with a gain of 1.5 billion in the IFRS and the adjustments of ERTT for transmission. Therefore, we're reaching the best EBITDA in our history, 5 billion rails in this third quarter. these are wonderful results in addition to the consistency of the results effectively with these events we are reaching again the best ebida in our history as well as triple a which is the best rating possible i would like to highlight these results to all of you that are here with us reflecting the permanent commitment in certain results. And that, what I really like to focus on is the focus and growth and investments. Once again, a quarter with almost 20% of growth compared to the same quarter of 2023. And when we look at this whole picture, we see that we are at five times higher in terms of investments when compared to semis in 2018. And in these nine months, we have already invested over 4 billion reals. Just last year was 4.8 billion. This year, we will go over that number. So that proves our commitment. to be working in the company's future because a lot of these investments go to our base and also improve the company's future profitability. These were the main highlights I wanted to go over. And obviously, I want to talk about the material fact and also I have something to tell the market. Well, the first what I would like to tell you our investor relations position and also our cfo position andrea almeida is going to replace leonardo and leonardo really i would like to acknowledge and to thank you for your work at Semig and for the whole period where you worked as our CFO and IR officer. You have over 30 years in the company. You're a leader, a great leader. I already have known you before I brought you over to be a CFO. You have always been praised by everyone. And I can only stress what I have heard about you before. And really, I wanted to publicly acknowledge you and to thank you. I'm extremely grateful. Thanks to you. And this just couldn't be crowned with anything else different from a AAA rating. You provided us a crucial contribution and also to help us reach the regulatory optics to the minimum leverage in our history in the adjustments of post-retirement, as well as, as I already said, with the AAA rating that we have just And now we are appointing Leonardo, and this has been approved, and the executive board, also in the last week, he's going to be appointed for Luz to be the CEO there. Now we have to wait for the controlling parties there, but this is what we would like to see, to have Leonardo taking over for Luz as the CEO. and also helping us in the challenges in the post-retirement at that entity. And I would like to welcome Andrea Almeida. We are very happy to have you with us, Andrea. She has worked for Vale for 25 years. Also, she worked in Canada for Vale. She worked in the controlling area in the Treasury Department. She has been the CFO of Petrobras, and she was the CFO of Santander. This is a CV that requires no further comments. Andrea, welcome to be here. in the company now and to be part of the transformation, you see that we have been posting great and consistent results. So once again, Leonardo, thank you very much. And also, I would talk about the material fact, which we posted last Friday. We have received a communication from the controlling shareholder announcing the submission of a bill This is a bill for the Legislative Assembly so that they can no longer be a CEMIG controlling party, therefore turning CEMIG into a corporation. There is going to be the whole process in our legislative assembly, so this is a very important announcement from our controlling shareholder about his desire to turn Semegi into a corporation. Carolina, these are my initial remarks, and we will be ready to take your questions. after the company's presentation. And once again, I would like to stress that we did have consistent results. Our investment plan is in line with what was planned. And all of these historic numbers, AAA, the highest EBITDA ever, also higher investments, and this material fact and communication we had to the market. the desire of the controlling shareholder in turning CEMEGA into a corporation. So we'll be available to take your questions later on. So now moving on, I would like to turn the floor to our CFO and IR officer, Leonardo Magalhães. Good morning, everyone. Thank you very much for being here and this video conference. For these results, I would like to start by thanking you as well. I'd like to thank Reinaldo for his trust in this period in which we worked together here and the board. And also thank him for his leadership in this transformation process in the company. The figures tell it all. But he created the base of the company in order to ensure that we would have the sustainable growth for this company in the next few years. Thank you very much, Reinaldo. I would like to welcome Andre, a great professional, a renowned professional, which is going to have a relevant role in providing continuity to our strategy and the continuous generation of value to our shareholders. And also, I would like to thank our investors for the relationship all of these years. The foundation is one of the important topics of the company. They have an important role with all their participants, and we will try to do the best work possible for Luz. So thank you very much for that appointment. And of course, now we will just depend on the regulating agents. So we had a number of positive results. One of them was the sale of our company and also we had the tariff review and we did have the effects of the tariff review now. So it's important to mention that we almost doubled our remuneration base And we forecast 3.5 billion investments for the next years for transmission lines in the state of Minas Gerais, important investments that we understand that they are important for the country and also for the company, and they will generate value to shareholders when we compare to returns in transmission auctions. And these are investments that the company is doing right now, according to its concession, transmission concession. Now, moving on, Reynaldo talked about investments. We had a bold investment planned for this year, 6.2 billion reais, and we are confident that we'll be able to invest over 90% of what was forecasted for this year. We have already been able to realize over 65% up to this third quarter. Of course, in the fourth quarter, we'll accelerate that. But here we have the distribution of that, the breakdown. We have 4.4 billion of realized investments. We are in line with what was forecasted. The company was investing close to 800, 900 million a few years ago in distribution, and now we are investing almost four times the QRR. We believe these are profitable investments, and they prove the correct capital allocation for the company in the last few years. Now, moving on. some highlights in the results. I'll turn the floor to Catalina. But before that, I would like to mention a few topics here. First, we were awarded the Transparência, one of the most transparent companies in Brazil because of the quality of our and the transparency of our financial statements. So we provide quality and quick information to our investors so that they can correctly assess our results and operations. And in this result in the consolidated result we have a cash generation once again that is robust for businesses that generate a lot of results in the company 1.8 billion in EBITDA in this third quarter and the trading results have been negatively impacted because of the load restrictions between Northeast and Southeast that had effects in the grocery stores, comparing the prices of energy that we buy in the Northeast and use it in the Southeast. It was difficult, October was a difficult month, but because of rain in November and December, we have more favorable months for our trading business and SEMIG-D, We still have very good quality indicators within the regulatory limits, and the average tariff adjustments of this quarter of 732%, market growth of 4.5%, and we understand that the year-end result for SEMIC Distribution is to be very favorable. It's a company that has disciplined costs and also is still focused on the clients to improve the service quality that we are providing to Minas Gerais Society and SEMIC GT here in this third quarter. posted 1.6 billion in capital gain because of the sale of Alianza Energia. And also we had, for SEMIG-GT, positive results stemming from the tariff review. Now I'll turn the floor to Catalina, and she's going to go into the details of the results for this third quarter. Thank you very much, Leonardo. So now moving on. And this is the slide that we always show you with the results, the IFRS results and the recurring results here. As Reynaldo mentioned, we had the best EBITDA in our history thanks to the tariff review and Allianza sale. And this shows the success of our divestment plan. The net of the recurring effects, which are the tariff review and alianza, say we had a drop of 10%, but most of that was affected by what Leonardo already told us, that has to do with commercialization or trading activity that... It had the difference because of the sub-market price, and now with the rain effect, we will no longer have this price difference. Now, analyzing PMSO, we see that we have grown 2.9%. a highlight for outsourced services, also right-of-way clearing, tree pruning. When we compare quarters to quarters, just to give you an idea of right-of-way clearing, we cleaned 40,000 kilometers of right-of-way clearing. That is to mitigate interruptions of energy that are provoked by climatic events. We already see rains here, and sometimes we are affected by these events. Also, so that we can keep on providing services at the best quality possible for clients, avoiding hours of interruption of energy because of some type of event. And also, under other expenses, when we compare the same quarters, 23 and 24, because of the asset activation and we have the largest program of divestment in the company in the distribution sector so it is natural that we have a higher deactivation of assets over this program over these years where we are executing the program in our cash flow as leonardo mentioned the company had a has a robust cash generation When we look at the year to date, in these nine months, just for operating cash, we have $5 billion. We had two fundings for CEMIG-D that were very successful so that we could foster our investment program. Just this year, CEMIG-D will be investing over $4 billion in its concession distribution. Also, we had interest on equities or dividends paid the payment of these dividends, that is done in two installments, at the end of the year and in June. So we had an investment activity, which also meant a cash outflow, and we had Alianza divestments, and we ended the quarter with 6.7 billion reals that will be used in the next quarter, also by dividends payment, because of investments, and also let's... Remember that we have our last share of the Euro bonds of $380 million, which will also be paid now in December. Now I'll turn the floor to Leonardo to talk about our successful 11th issuance of the Benchers. Yes, once again, a successful issuance of the Benchers. This is already a AAA company, but in the last issuance, we knew clearly that we were already being considered a AAA company. These issuances, when compared to our basis, to the market, the market really trusted the company, thanks to our low leverage, our good financial structure. So, we had issuance of 2.5 billion, all of them placed in the market. It had a huge demand. It was higher than our offer. We issued a CDI of $1 billion and a second series of $1.5 billion with IPCA. We have a natural hedge, and our revenue from distribution also is attached to IPCA, and we have good terms here, 7 years and 12 years. Semiga has an average... maturity up to the last quarter of 2.7 years. And so after December next year, so it's going to be 5.4 years, our debt profile. So we adjusted our debt profile. We extended the debt profile. And right now we have very high rates, but considering our market situation, we have been able to pay off our investments and to finance that in the market so that they can be feasible. using third-party or capital. Now turning the floor to Carol, she will go back to the profile and additional information. Now moving on. As Leonardo mentioned, we had a recent issuance for CEMIC II of 2.5 billion RALs with an extension of our debt profile. We still have low leverage, especially thanks to Alianza's funds incoming. But this leverage is going to be used because of our investment program, which is the best in history, as well as in December, as I mentioned. we will be paying Euro bonds, we will no longer have debts and dollar after 2025, and also we'll be paying dividends. So this leverage will naturally increase because of the events that I just mentioned. Moving on to MIG-D, we had no non-recurring event in this quarter. We have significant results over each quarter, in EBITDA, there was a drop when compared to 23. And that was because of a higher increase in outsourced services, expenses. As I mentioned, over 40,000 kilometers that we had to clear the right of way to mitigate possible adverse events stemming from climate events. And also, we were affected by market losses from captive market to DG. Now, talking about the market, we had a significant increase of 4.5%, mainly affected by transported energy, showing how the Minas Gerais state is growing in terms of energy demand, new clients that are coming to the state and also demand the That makes these concession services and the captive market is kind of sideways. We had a significant improvement in the residential clients because of high temperatures, but distributed generation is still affecting our captive client, which is migrating from that segment. And if we were not to have that adverse event of distributed generation, we would have grown 6.6%. Now, for regulatory losses, we always say that in 2021, we committed ourselves to be within the regulatory limits. So we had a slight mismatch here because of those three days in May and CEMIX distribution anniversary is May 28th. So there were differences in just three days that affected that significant indicator of regulatory losses. We have already had a reduction and we are optimistic about our commitment to end the year within the regulatory losses. We need to keep on investing in inspection of consuming units to continue our program to replace the conventional meters by smart ones to increase the shielding the protection for the meters and also to convert illegal connections into legal ones so that we can provide the best service to our consumers and also to maintain, to keep ourselves within the regulatory limits. For operating efficiency, when I compare the realized OPEX and regulatory OPEX, the ones that I have the coverage in the tariff and remember in the second we had a non-recurring positive effect, which was the reversal of tax provisions of INSS on the voluntary And even with that, we are within OPEX with a performance of 6.8%. Within EBITDA, we are at 5.6% lower than the regulatory EBITDA, but we are very optimistic. We are still working so that we can end over the year within OPEX. the regulatory EBITDA, just like the ALPAC. For CEMIG-GT, the sale of Allianz and the periodic tariff review are under CEMIG-GT. We had an EBITDA for IFRS higher and 380%. Removing those effects, we are down 19%. That is affected by the trading And we are starting, you know, to bring all the trading contracts to CEMIG holding. But this process is not 100% concluded yet. Therefore, part of that activity is under CEMIG GT, therefore affecting the recurring results. Now, to... you know, the breakdown per business, per area of the company, we have this slide. For distribution, we already know, we have increase in expenses with outsourced services, and that is to bring best quality of service for people, so generation is more or less in line, so trading, we already mentioned that the margin for 2024 would be lower than 2023, but also we had the effect of the sub-market difference, the reduction in the gas consumption, and I will show you ahead. And we already talked about this, the industrial activity had a reduction in cubic meters for gas in addition to 2023. there was a compensatory parcel that was improving the results for 2023. So when I compared that to 2024, there is a difference in the results. And the transmission improved in 11%, showing that one of the strengths of the company is to have a footprint in different segments in a way that, as a whole, we are able to deliver a recurring robust result. For GASMIG, then, as I mentioned, There was this cubic meter reduction in gas volume from industrial clients of 6.6%, affecting our epidemic in 1.7%. Remember that GASMIGI has an investment program. building a gas pipeline up to the Midwest. So after seven years without investing in the state, we are now investing again. So this is the largest investment program in the group, as we are saying. And now I'll turn the floor to... our CFO and IR officer, Leonardo, so that he can talk about our commitments. Well, this is a slide that we always like to bring you every quarter because this is the commitment from the company to be transparent. And these commitments are in line with our strategy. And we usually say that if we go back and what we said that we were going to do in 2021, 2020 during the pandemic and look at what we had talked about our strategic planning and what we had for the future, we can clearly see that the company is delivering exactly its strategic plan. Here we have some of the objectives that have already been met, such as the bonds and the semi in the regulatory impacts, quality index also in the regulatory limits, also we divested from more complex holdings, also CEMEX distribution investment program. So it's 23 million from 23 up to 28. So the ongoing projects, the in progress, a number of them are at full speed and we are already market leaders. In energy here in Brazil, we are meeting already that commitment of this leadership that we already have in the free market and now also in retail trading, showing CEMIG's competence and CEMIG's team competence in generating value. Also, digital transformation. We are investing a lot in technology to prepare CEMIG for the future. And also we are implementing initiatives to comply with non-technical losses within regulatory levels. So here we are talking about assets where we would like to reallocate capital and thinking about the future of other projects. Also, we have renewals of generation concessions. We are just paying attention to the topic and also technologies for energy transition. That's something else that the company is very much aware of so that we can have a relevant position in the future so that we can have a good position on how to deal with energy transition topics. Now I'll turn the floor to Carolina. We will have a Q&A session and I would like to thank you all very much. Thank you, Leonardo. So now we will start the Q&A session. Please ask all your questions at once and wait for the company's answer. To ask a question, we would like to ask you to send them via the Q&A icon in the bottom of your screen. Then your name will be announced so that you can ask questions live. Then a request to activate your microphone will pop up in your screen. If you do not want to ask your question live, please send your question by writing. Our first question is for Marcelo Sá, sell-side analyst from Banco Itaí. Hello, everyone. Thank you very much for your call. I have two questions. The first one is that I would like to understand this bill of law authorizing CEMIG to become a corporation. But I believe it would have to have the approval of another bill that was sent a while ago. So why sending this bill now before that prior project approval. And second, I would like to know if there is anything new in terms of Taís' stakeholding.

Thank you, Marcelo.

I will ask Mr. Arnaldo to answer your question.

Good morning, Marcelo.

It is obvious that the best entity to answer this question would be Minas Gerais administration, the controlling shareholder. It is a strategy that is coming from the controlling shareholder. We know that there are two things there.

We have...

this Bill of Law now, and now we have the Constitution Amendment Proposal. If just the Bill of Law is approved, our understanding, and it's just an initial understanding, is that we will need a referendum. So if this Bill of Law is approved regardless this Constitution Amendment Proposal, according to the Constitution, we would have to have a referendum. about Taesa. We do not have anything new about it. And if anything comes up, we will then publish a notice and you will know about it. Thank you, Reinaldo. Next question from Daniel Traviski, sell-side analyst from Safra Bank. Please, Daniel.

Hello, everyone.

Thank you for this opportunity. I have two questions. They're related to the results. I would like to better understand the purchase and sale of energy in this quarter. There was an increase in that line. I would like to understand how was the quarter on that topic. And second question has to do with leverage. you mentioned that you were expecting leverage to increase after payments of dividends and Eurobonds. So, where do you project this leverage at and what is your mindset for additional dividends distribution up to the end of the year? Thank you.

For the first question,

about energy trading. I will ask the support of Dimas Costa. And about leverage, I'll turn the floor to Leonardo. Good morning, everyone. Thank you for your question, Daniel. Let me understand it. You were asking us about the quarter's purchase of energy, this year. Sometimes we have an open position. We were not in that situation, so we did not need to buy, to purchase energy. But we did have a price difference. Today we have an energy that we purchased. We have one-fourth of that energy coming from the northeast. And usually that energy in September, October is stressed because there is a restriction in transmission. And there is a price difference in the markets. And because of the lower prices, it's around 2, 3, 6 reals. That is usually more or less the amount. But this year, the price detached. It went to 300 and 400 reals in September and October. So, out of the 1,100 megawatts that we acquired from the Northeast, we were able to hedge around 300, and the other 800 is at a risk, and we have to manage that risk. But in addition to the impact, therefore, we were not... But we did have that difference. We had to buy energy in the southeast and settle in the northeast. And this is the regular dynamics of those that have energy in the supermarket and have to sell it in another. And also we had some trading companies that... and some large trading companies did not deliver what they had promised in September and October, so we had to cancel contracts with no losses for CEMIG, and for two other small ones, just for 2025, they will be reused, and a larger one, which was the largest impact, then we were able to negotiate with it, It did not post energy to us, and that amount in millions of rounds was converted in a price reduction in the contract for 2025. So, actually, there was a deferral when you check the results. A lot of the impact, in addition to the price difference, was this deferral that we had to a trading company. not only to help the trading company, but also to help ourselves, because no one wants judicialization, especially when we have a large amount of money involved, and that was then transferred to 2025. Thank you, Dimas. Now, moving on, on the question of leverage, I'll turn the floor to Leonardo. Hello, Daniel. Thank you for your question. Well, This topic regarding dividends and leverage reflects CEMIG's situation. This is a company with a very low leverage, with a large investment program, with access to the capital market to be able to finance future investments. are usually telling the market is that because of this large investment program, we also have large investments for next years, is that our leverage is going to grow considering dividends of 50% of the IFRS results, we would reach 2027 with a leverage of between 2 and 2.5. considering the level of investments that we have now. And this leverage will go down in 2028 with CEMEX distribution tariff review. But we understand that even without talking about extraordinary dividends higher than the payout today that we have today, which is the 50% of the IFRS, we believe that these are very attractive dividends. company just you know last year and the prior years we have already paid higher the highest evidence in the elect factor also in this year for the results that we already have we can say that these will be very good evidence and then i believe that this is a sustainable strategy because we can pay great dividends considering the companies And we are also investing, we are increasing leverage slowly without hindering the credit quality of the company. So this is a strategy that we see in the market that's very successful. Very few companies have it, and that's going to generate value for shareholders in the next few years. And in 2028, we will have a greater cash generation with the tariff review. for the distribution company and also transmission thanks to all the investments that are forecasted and we are executing these years thank you leonardo if there are no further questions we now end the q a session now i would like to turn the floor to reinaldo pasanesi our ceo for his final remarks please mr reinaldo I would like to thank you all very much for being with us in this video conference. Have a great week. And we will continue working on consistent results on our investment program and meeting our targets. Have a nice day and a great week. Thank you. Our video conference for the earnings call of the third quarter of 2024 has ended. Our superintendents are available to take any further questions you might have. Thank you very much to all of you, and have a great day.