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Edited Transcript of CMIG4.SA earnings conference call or presentation 18-Nov-19 5:00pm GMT

Q3 2019 Companhia Energetica de Minas Gerais CEMIG Earnings Call

Belo Horizonte Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Companhia Energetica de Minas Gerais CEMIG earnings conference call or presentation Monday, November 18, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Antônio Carlos Vélez Braga

Companhia Energética de Minas Gerais - General Manager of IR

* Daniel Faria Costa

Companhia Energética de Minas Gerais - Chief Officer for Managements & Member of Executive Board

* Paulo Eduardo Pereira Guimarães

Companhia Energética de Minas Gerais - Head of Corporate Finance

* Ronalde Xavier Moreira

Companhia Energética de Minas Gerais - Tariffs Manager

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Conference Call Participants

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* Andre Sampaio

Santander Investment Securities Inc., Research Division - Research Analyst

* Marcelo Sá

Itaú Corretora de Valores S.A., Research Division - Research Analyst

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Presentation

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Antônio Carlos Vélez Braga, Companhia Energética de Minas Gerais - General Manager of IR [1]

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Good afternoon, everyone. My name is Antônio Vélez, Cemig's Investor Relations Superintendent. We are now starting Cemig's Third Quarter 2019 Earnings Conference Call and Webcast with the following executives. Cemig's ambassador and CFO and IRO, Daniel Faria Costa; Corporate Finance, Management, Superintendent, Paulo Eduardo Pereira Guimarães; Corporate Control and Planning Superintendent, Ronalde Xavier Moreira Júnior; Head of the Business Accounting Manager, Leonardo Felipe Mesquita. This broadcast can be followed by the following phone numbers, 55-11-2188-0155 or 55-11-2188-0188 and also through our website, http://ri.cemig.com.br.

I'll now turn the floor to Cemig's officer, Daniel Faria Costa.

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Daniel Faria Costa, Companhia Energética de Minas Gerais - Chief Officer for Managements & Member of Executive Board [2]

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Good afternoon, everyone. First of all, I would like to thank all of you for participating in this conference call. And I would like to say that we are focusing on improving our efficiency, doing responsible work and the process is unfolding now.

This quarter, we had an extraordinary effect because of the provision for social security contribution from profit shares after the current position. So we wanted to be responsible and I have taken decisions for that. So let's go to the presentation.

On Slide 4 of this presentation. We have the provision for this tax claim on social security contributions on profit share. You probably read about this on our release because we did not collect INSS there or social security on profit sharing payments in the period from 1999 to 2016. And the authority, the higher Brazilian IRS they cannot comply with 10101 for a long time. This was not considered during the period of operations and then this changed. And we were -- we had the authority argue that they cannot comply with this law logically not previously establishing clear roles and objectives for distribution of these amounts. So the chances of loss in this dispute has been reassessed from possible to probable. And you can see on the table, all of the numbers.

(inaudible) we participated in an auction, we've been having these auctions since last year. And we've been very successful. We have purchased a lot of energy in a total of 798 average megawatts in the auction of the 14th. We bought a little less because of our price limit. So our goal is to purchase a little bit of energy. So it is possible, then we will participate in more auctions in the coming months.

Our clients are demanding this energy. So in our view, we should continue to participate in these auctions to acquire renewable supply.

On the next slide, Slide 6, I would like to comment on this recalculation of debt, which had an important effect because we have this dispute with Aneel and the recalculation. Cemig was fined by Aneel, they felt that we were not calculating that correctly. But we understood that our methodology was right. So Cemig recalculated these numbers for the years 2016, 2017. We resubmitted 2018 numbers already with the adjustments required by the regulatory agency. The purpose is just to show that the indicators, they are indicators, were just the average outage duration per consumer, in hours, under the required enrollment for 2019. So this fine was removed.

On the next slide, we talk about a topic that is very well-known to all of you, but I think it's worthwhile reminding you, this is our divestment program. So can we maintain this commitment to this divestment program. So we sold our 33 million shares in Light at approximately BRL 18.75 per share in total of BRL 625 million. And this operation gained -- generated a couple of gains in accounting gains.

We had, on our balance sheet, close to [BRL 15]. So we had a capital gain of BRL 73 million. And the result -- we had a result of remeasurement of BRL 151 million. We continue to have a shareholding of 22.6% for an interest stake as part of Light.

And moving on to Slide 8. We have a summary of the electricity market in the third quarter of '19 for Cemig D and Cemig GT. As you know, we have had a kind of flat performance. Energy and Commercial area sales remained more or less at the same level. So we can see the numbers, final consumers and energy transported.

In some segments of customers there was a little bit of reduction but nothing too much. In Cemig GT -- the market of Cemig GT was down 2.2%. So we are talking about sales in the free market, traders and generators.

Please go to Slide 9. Here, we have a net revenue -- consolidated net revenue in Q3 '19. We can see a lot of stability, first, in Cemig Distribution and Cemig GT. We had a net revenue of BRL 6.071 billion, down 2.9%. For Cemig D, BRL 3.909 billion, down 40% (sic0 [0.2%]. And in the case of Cemig GT, a net revenue of BRL 1.766 billion, down 4.3%.

I will ask superintendent Ronalde to speak a little about our operating costs and expenses.

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Ronalde Xavier Moreira, Companhia Energética de Minas Gerais - Tariffs Manager [3]

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Good afternoon. When we compare operating expenses in the 9 months or in the third Q '19 compared to the third Q '18, this increased 17.5%. So if we compare the PMSO -- the ordinary PMSO of the company, it was practically flat comparing Q3 '19 with Q3 '18. So we had a reduction in our personnel, we shared our performance annual program. So we had someone share the performance meeting, and we hired someone to (inaudible) and materials was a reduction and onshore services had an increase. This is basically associated with expenses related to the grid, monetization of the grid and preventive maintenance. This is a what we're thinking about improving the quality of the system and maintenance of construction cost to make a way for (inaudible) so it is crucial. And we improved the quality of our grid.

And now (inaudible), we had the provisions [following the call with PLR]. This is a profit-sharing case so it has increased our provisions. And also post-retirement and the manageable -- some unmanageable costs such as provisions and we have the tax contingency.

For social security contributions on the profit sharing case. We do had an energy supplier [choose to do a] reduction. And we can see the abundance for gas purchase and construction cost, depreciation, amortization, et cetera.

Please go to Slide 11. Here, we have our PMSO and gain. We confirm a dilution in our personnel costs. PMSO remained practically flat in the yearly comparison. We had an increment of almost 200,000 consumers, but still we maintained a stable PMSO level. So on PMSO, we -- comparing with the regulatory requirements we compared along 2009. We have Cemig D setting the regulatory requirements. In regards to the region tariffs, we got the regulatory OpEx, BRL 2.133 billion in the first column. We had an actual OpEx of BRL 2.927 billion. But along the way, again, unfortunately, we had this provision of BRL 824 million for the profit share case. Actually BRL 764 million if we looked only at normal operations of the company. We would be practically -- would be BRL 2.163 billion compared to BRL 2.133 billion, which is the regulatory OpEx.

Looking at the regulatory EBITDA now, BRL 1.691 billion. Including the profit share provisions, nontechnical loss in all those instances. We have reached BRL 1.598 billion. So fairly close to the regulatory EBITDA. Now we are working a lot to reach this nontechnical office, which is the main manageable item that we can tackle to reach the regulatory EBITDA. Very well.

Moving to Slide 13 to speak about our EBITDA. It has become very clear. When we make adjustments for nonrecurring events the provisions for Social Contribution form half the profit sharing. In the nonrecurring gains activities for the Light shares, we can see that our consolidated EBITDA was BRL 984 million, more than 9% increase compared to third quarter '18. Cemig D show the result which is 35% higher than Q3 last year, an EBITDA of BRL 618 million in the quarter, reaching levels as Ronalde mentioned very close to the regulatory EBITDA. And we have been announcing and communicating (inaudible). We see growth of 21.5%. And we have BRL 334 million adjusted.

Moving to Slide 14, we talk about our net income. The consolidated result for Cemig was 45.3% up, adjusted BRL 356 million and Cemig D more than 49% increase in the yearly comparison to BRL 151 million of Cemig GT. We can see a BRL 45 million net income adjusted.

Last year, we had a problem with the lower exchange rate, putting EBITDA impacting our results because of our foreign currency net debt. Now the dollar is at a higher level. So it gave us a net income of BRL 45 million of Cemig GT.

Now I'm going to turn forward to Eduardo to speak about the evolution of our debt. Eduardo?

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Paulo Eduardo Pereira Guimarães, Companhia Energética de Minas Gerais - Head of Corporate Finance [4]

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Thank you, and good afternoon. On Slide 16, I would like -- on Slide 15, we have Cemig's consolidated debt profile. Again, we start -- we continue with the movement to deleverage the company. We have total net debt of BRL 13.6 billion. And we have a reduction in operation of BRL 1 billion.

I'd like to highlight the reduction of cost of debt because of -- also because of Cemig's interest rate. And we showed our commitment to reduce the leverage of the company. And this reduction in leverage reflects the improvement of the company.

In the past, we had an upgrade in our ratings and this collaborates this process of improving the quality of credit. The company is very much devoted to this.

Please go to Slide 16. Cemig GT on 16 and Cemig D on Slide 17. Well, we have a reduction of Cemig D debt. This started in December of 2017, this year we were able to improve even from the profile of our debt not only extending the average tenure of the debt, but reducing the cost of debt. The exchange is at [146%] of CDI to a better one. So we can see a reduction in the cost of debt in our leverage, in nominal terms and in real terms.

I'd like to remind you that for Cemig D in 2018, we can face the level of our net total debt of BRL 5.3 billion. And for Cemig GT, we have on the maturities timetable, we made a very comfortable level in terms of cash generation of the company. We'll have to pay more in 2024 because of the Eurobonds that will mature in that year. But in 2023, our debt will be down to BRL 0. We'll have to pay BRL 0 so we'll be in the right condition to pay the debt -- maturities and debt and amortizes.

I'd like to remind you that 77% of our dollar-denominated debt is totally hedged, which gives us comfort in terms of foreign exchange exposure in (inaudible) indicator. Net debt or adjusted EBITDA, 3.58%.

So -- well, this is what we had prepared for you regarding our quarterly results. And we have the whole team here available to answer your questions.

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Questions and Answers

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Operator [1]

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[Operators Instructions) First question is from Andre Sampaio with Santander.

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Andre Sampaio, Santander Investment Securities Inc., Research Division - Research Analyst [2]

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And I would like to ask 2 questions. First regarding debt, in fact, as you mentioned, these 2 indicators, when will ANEEL give you a decision on this recalculation that you submitted? My second question is regarding losses. It seems to be one of the main points regarding the regulatory index. What is the strategy regarding to try to reduce the regulatory nontechnical losses?

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Unidentified Company Representative, [3]

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Hello. Well, actually, since we recalculated debt according to the rule, I understand that now ANEEL should give us the regular -- well, normally next year. But since we recalculated according to their requirements and adjustments that a regulatory agency asks from us, we believe that ANEEL will not cause us any problem. Can I give you a predetermined deadline to get placed? Well, we submitted numbers, and we are now waiting for the regular assessment. And regarding your question on loss. We have a number of initiatives. We have a whole program to find nontechnical losses, which is basically fraud, right? Most of them -- most of these initiatives have been started to now found to be implemented. We're missing some of them, but we increased significantly. The number of inspections that we do in our grid and our metric, we had a very low level in the past 2 years ago and even before had a lot of difficulties. Our networks needed to be improved by our field crews, our inspection crews. And this initiative has been resumed. And I think it is now at an ideal level.

We used to have BRL 200 million worth of losses. We also had a consulting firm that is working on establishing the parameters for the system to change our growth to where they need it so that they can start cost. And this is ongoing also. We need to have a budget -- a supplementary budget available so that all of these initiatives can come to fruition. These are the main ones. But there are other initiatives that are more strategic and specific to different segments of consumers that will allow us to reduce the losses, to pursue inspection of a public lighting, for example. And we can do this kind of work with the local government. And we have the same types of consumers. In other words, we have a number of initiatives. Whatever we can work on to reduce the losses, the company is sparing no efforts to improve so that we can reduce our nontechnical losses.

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Andre Sampaio, Santander Investment Securities Inc., Research Division - Research Analyst [4]

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Perfect. If I make one additional question regarding losses. Do you have any expectations of the end line to achieve the regulatory level?

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Unidentified Company Representative, [5]

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Yes. We do. Our expectation is that we'll reach the regulatory targets by 2020, next year. By 2020, we have to have the system running at full speed. We are now at a phase of approving our budget, and we are trying to approve all of the necessary resources so that money will not be deterrent. And so that we can achieve our target by 2020. We don't know exactly in what month but along 2020, that's our target.

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Operator [6]

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Our next question comes from Marcelo Sá with Itaú.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [7]

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I have 2 questions. First, trying to understand the tax provision. Not only Cemig but other companies have similarities. We can look at the banks and the banks don't provision for this as probable. So I'm just trying to understand what would you do to provision for this now in the third quarter results. I just wanted to understand how do you see in Page 909 or 915, if there is a delay, will this reduce risk of the past? Or will it just keep the growth tax problems for the future? I just want to understand that, please.

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Unidentified Company Representative, [8]

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Well, good afternoon, everyone. Regarding the provision for the profit-sharing case. We had a ruling by TRF, the Appellate court. The first decision in which Cemig was involved is at the level of the Appellate court. So the court set some parameters. It was more reasonable to adopt the same parameters for the provisioning for profit -- for the profit-sharing case. We decided to follow the same parameters. It is inevitably, all of the other rulings will consider that. Of course, we are appealing on this decision. We have been conservative because we lost in the first instance of the quarter. So we decided to take into account case for the current and provision for that.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [9]

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And how do you see provisional measure 905. Currently, does it solve the problem or would it impact all the future cases?

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Unidentified Company Representative, [10]

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This is actually the point that we are studying in depth right now. This measurement stated last week. So we started a study group exactly to work on this, to discuss whether this measurement will have a retroactive effect or not. I think we are quite comfortable to say that from this moment onward we are not going to have this problem anymore because while we are -- the negotiation of the profit-sharing case has doing on the before the year of measurement. In the case of the provisional measure, it seems to me that looking forward, this is no longer going to be an issue. It seems to me that this requirement will no longer apply. But again, we are looking at the prior year to see what should happen.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [11]

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Excellent. It's clear. And if you'll allow me, I'd like to change gears and speak a little about Renova. Cemig made a decision of not investing, in fact, tag along, which is what lagged. I would like to understand what is the rationale of this position, because when we look at everything that Cemig has spend with Renova. I think you lost more than BRL 1 billion that you invested in Renova with no results. This seems to me, say, little risky to adopt this strategy to continue to have a stake at Renova. I get a little nervous about this. And I think the market is too, if you need to inject more capital into Renova. So to give the investors more comfort regarding this to have any expectation of injecting more capital into Renova? It is in the case of Renova, the (inaudible), the manufacturer does not want to give you a warranty to guarantee. So will you be able to sell that pipe. What is the guarantee that investors can have a (inaudible) in investing more in Renova.

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Unidentified Company Representative, [12]

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Thank you. I'll ask Daniel to answer your questions.

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Daniel Faria Costa, Companhia Energética de Minas Gerais - Chief Officer for Managements & Member of Executive Board [13]

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Thank you for the question. Regarding the rationale for Cemig to keep its equity interest in Renova. In fact, we are assessing the case. We are looking at the case in depth. We will exercise our rights on Renova. We'll have to go for the revaluation of Renova as well. More containable Renova certainly started now offer in-quarter reorganization. Renova will resort to local bankruptcy protection or incurred reorganization. So considering the company and the creditors, we now want to have an in-quarter reorganization plan that will allow Renova to recover. So the Board of Directors together with our partners approved that we should support Renova in this process. Regarding your question about injecting more capital. Obviously, it will be very hard for the company to recover the amount invested, right? We have to maintain our corporate activities, and this is a commitment that all of the partners had to take on to support Renova in the bankruptcy protection interval. But this will not necessarily mean direct cash inflows from Cemig into Renova, in collaboration with other Renova creditors. Because of the bankruptcy protection, we are interested in providing the necessary support and we have to consider Renova's assets and liabilities so that we can approach the bankruptcy protection plan. And this has to be done in the most adequate fashion. So we haven't got any decision in terms of injecting more capital into Renova. But we have to help Renova sort its problems in reasonable market conditions. And hopefully, with a bankruptcy protection plan. This is the rationale that we are working with, with the support of Renova creditors. And we're doing this adequately and professionally with our shareholders.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [14]

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Okay. Excellent. And I would like to understand the issue about the manufacturer. I think it was problem regarding the warranty. So what will you do regarding the cash flow of the parts paying the future net debt of the company or do you intend to sell? And can the manufacture provide any kind of guarantee? Is this a possibility right now?

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Unidentified Company Representative, [15]

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The manufacturer is not providing a guarantee. The main objective is to complete the parts as quickly as possible. And this will have a major activity to connect the pipes. And then we'll make a decision of fine or not and having a guarantee or not. It will all depend on the design of the bankruptcy protection requirements, this is not a guarantee. But when the price starts generating, we'll identify additional contingencies. And this is what we are focusing on. We're vigilantly working on that so to complete, to support with the approval of the credit risk and under the umbrella of the bankruptcy protection plan.

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Operator [16]

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[Operators Instructions) We are now closing the question-and-answer session. I'd like to turn the floor to Cemig's Chief Officer, Daniel Faria Costa, for his final statements. Mr. Costa, you may proceed.

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Daniel Faria Costa, Companhia Energética de Minas Gerais - Chief Officer for Managements & Member of Executive Board [17]

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Again, thank you very much for participating for joining us. We had almost a record amount for the third quarter. And to note, the interest of Cemig is attractive. If I can sum it up, Cemig continues to improve operating efficiency.

We are aiming to improve our quality, reduce costs and have local investments in our core business investments. Cover those infrastructure deficits that the company had over the years. Our focus is, of course, to reduce costs, and to extend the maturity of our debt.

So as to have our debt comparable with our cash generation. And we mean to divest whenever possible, to relieve the balance sheet of the company as good bringing returns to the company. Assets could -- are now bringing returns to the company. And that can represent a capital gain for Cemig. This is our quest. And we will be recognized because this improves our credit ratings.

So again, thank you very much. We continue to work diligently to deliver the results and to even exceed the results that our investors and shareholders expect.

I hope to see you on board on the next conference call. Our IR team remains available to all of you. Thank you very much.

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Operator [18]

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Cemig's third quarter earnings conference call webcast has now ended. We would like to thank all of you for participating, and have a good day.