Prepared remarks
Good afternoon, everyone. I am Carolina Senna, Superintendent of Investor Relations at Cemig. Welcome to Cemig's Second Quarter 2025 earnings video conference call. This video conference is being recorded and will be available on the company's investor relations website, ri.cemig.com.br, where you will also find the full package related to this call. If you require simultaneous interpretation, the feature is available on the platform. Simply click on the globe icon at the bottom of the screen, select interpretation, and then choose your preferred language: Portuguese or English. We will now begin our call with Reynaldo Passanezi Filho, our CEO; Andrea Marques de Almeida, CFO and IR Officer; Luis Cláudio Correa Villani, Chief Information Officer; Marco Da Camino Ancona Soligo, Chief Generation and Transmission Officer; Marney Tadeu Antunes, Chief Distribution Officer; and Sergio Lopes Cabral, Chief Trading Officer. For the initial remarks, we would like to welcome our CEO, Reynaldo Passanezi Filho.
Good afternoon, everyone. It’s great to be here discussing the progress of our company. As shown in our initial video, we are currently undertaking our largest investment program to date. This quarter, we have achieved BRL 2.7 billion in investments for the first half of the year, along with strong consistency in resource generation, resulting in an adjusted EBITDA of BRL 2.2 billion, which is a solid outcome. This adjusted EBITDA reflects our ongoing investment plan in full execution, and we expect to see the opening of substations, enhanced grid capabilities, and the completion of projects in generation, particularly in gas. We are also very close to starting our Midwest gas pipeline, so we are fully committed to our investment strategy. With an adjusted EBITDA of BRL 2.2 billion this quarter, it demonstrates the strength and resilience of our operational performance. There are three key topics we should highlight for this quarter.
First, there is the RBSE, which pertains to the existing system basic grid and a review of the calculation methodology. For Cemig, there is a non-cash impact this quarter of BRL 199 million. It's important to note that the EBITDA we usually report is based on IFRS, and that this EBITDA result represents cash that will come over time. Additionally, we faced concerns in the first half of the year. Specifically, in the second quarter, we encountered negative differences among energy submarkets in our trading sector amounting to BRL 76 million. We expect that once ONS reviews the criteria and allows greater interchange, this amount should approach zero. We hope for this outcome. Moreover, we anticipate a tariff adjustment of 7.78%, which aligns with other distribution adjustments based on inflation and charges. Finally, regarding our GSF auction, we successfully participated and secured concession extensions for three power plants, one for seven years and another for three years, totaling BRL 200 million in disbursement.
This reflects our commitment to the sustainability of the company, as we extend concessions that were originally set to expire in 2037 to 2044. We are planning for the future. This decision was made with the favorable energy sales conditions and competitive pricing in mind, adding value to our participation in the GSF auction. Thus, we have secured an additional BRL 200 million in concessions, two of which are for seven years and one for three years. These represent the main highlights I wanted to share at the beginning of the call. Now, I will hand it over to Andrea, and we are available for any questions you may have shortly. Thank you.
Good afternoon, everyone. I apologize; I have a cold. But we, again, are following our investment plan, and it’s going very well. Out of these BRL 2.8 billion that we have for the year, we have concentrated investments in distribution to better serve our clients, and we have been doing that in a very structured fashion. Therefore, we have energized nine substations in these initial months. Also, we have been able to build over 2,600 kilometers in low and medium voltage networks. In generation, we had relevant investments in expansion, as well as maintenance in terms of safety, and in transmission, again, investments of BRL 200 million, especially in reinforcement and improvements for Cemig as well. As Reynaldo mentioned, we had the Central West project, over 100 kilometers of gas pipelines, and Cemig also added 21 megawatts following our investment plan. This is being very well executed.
Here are some pictures to show our substations in our Mais Energia program or more energy. Now, this is our photovoltaic plant in Advogado Eduardo Soares, we have a grand term of 35 years, CapEx of BRL 464 million, and the potential of CO2 reduction that is very relevant for us. Now turning to our results. Reynaldo already mentioned that when we compare now to the 2024 results, we will have some nonrecurring effects from that year. Analyzing IFRS, we will see that some of the effects might indicate a reduction. However, looking at recurring effects, we had a great quarter with an increase of 15% in our EBITDA. A major factor that helped was the reimbursement of the tariff subsidies we received via CDE, the energy development account. We know that in Minas Gerais, we had a large effect, with significant reimbursements coming from CDE subsidies. Additionally, we had a reduction of BRL 21 million and another migration of our employees to the premium plan.
That was also a reduction. Moreover, we had exposure to the submarket prices already mentioned by Reynaldo. Now, analyzing our IFRS EBITDA and considering the nonrecurring effects, there would be a reduction. However, last year we also had a reversal, and if you recall, those were tax provisions reversals regarding INSS in the profit-sharing program that were very relevant, amounting to BRL 584 million in net profit. We also had an effect of those provisions and reversals regarding amounts to be reimbursed from PIS and COFINS. There was a decision from the Supreme Court at the end of last week, and we are still awaiting the final ruling to understand the implications for Cemig. Moving forward, we present a brief snapshot of the effects concerning submarket exposures. Over time, we’ve shown our monthly exposure, with BRL 480 in April, BRL 533 in May, and BRL 619 in June. You can observe that the price difference is already decreasing.
In June, we noted a price difference of BRL 4.88; thus, the effect on this quarter has been much lower than the one we had in the previous quarter and a gross effect of BRL 76 million regarding the price difference in the submarkets. Another positive outcome is that, when analyzing managerial expenses, we have seen increases below inflation, partly due to the PDVP or the voluntary redundancy program, which resulted in lower costs regarding outsourced services. We are still actively working on tree pruning and disconnecting some meters, making significant investments in distribution. This leads to increased deactivation and disposal of assets. Analyzing our debt profile, it is very solid. We have achieved a leverage indicator of net debt over adjusted EBITDA of 1.59, already including the debentures issuance of BRL 5 billion that we mentioned last quarter, and this accounts for the amortization of a prior debenture, thus helping us reach an average tenure of 6 years.
We are also evolving in this average term. Additionally, we have a very comfortable leverage position moving forward with our ongoing investment plan. Analyzing our cash flow at the quarter's end, we concluded with BRL 3 billion, well-supported by our operating cash generation of BRL 2.3 billion, the BRL 5 billion in debentures we discussed, payments on other amortized debentures around 2.3%, interest payments on capital and dividends, and our investment activities. Looking at Cemig's D results, we will revisit what we have communicated regarding the holding. For Cemig's D results, when we compare the adjusted EBITDA effect, not considering nonrecurring effects, we had growth of 39%, mainly driven by the reimbursement of tariff subsidies, as we mentioned. Analyzing these results and adding the nonrecurring items, obviously, the effect was lower when compared to the previous quarter. Regarding the energy market for Cemig distribution, there was a drop of 3.3% this quarter.
We continue to observe client migration trends, particularly among large industrial clients moving to the free market and significant clients migrating to the transmission network, thereby affecting the transported energy to our right, while we also note the continued growth of distributed generation. The progress comparison from 2Q '24 to 2Q '25 reflects a significant growth of around 20%. For operating efficiency for Cemig D, we are focused on optimizing collection. We are aiming to collect payments digitally; of course, instantaneous payments via Pix are one of the most efficient methods of getting paid in Brazil. Currently, approximately 67.5% of collections occur via digital channels, not just through Pix. Additionally, our ARFA receivables collection index is around 99%, demonstrating our excellent position regarding collection, billing, and access. Our OpEx is, of course, compliant with regulatory requirements for OpEx and EBITDA.
Very positive results here. With regard to regulatory losses, a change in the calculation from the built market to the measured market has positively reduced distortions affecting losses at distribution companies. While we have seen an increase, we remain within regulatory limits. We also continue to install smart meters, engaging with over 4,000 families in efforts to reduce losses at Cemig. Moving on to Cemig GT, we experienced effects from contracts and trading, which accounted for the primary impact of the reductions we forecasted. We have consistently communicated to the market about the variations in commercial margins regarding 2024 to 2025, where margins have lowered; thus, on the side of net profit, we have achieved a positive impact from the repayment of bonds that previously negatively affected our net profit for Cemig GT due to FX exposure. We already talked about the GSF auction's success; here are more details regarding the BRL 200 million and the three plants we were awarded - Irapé and Queimado.
For these two plants, we maintained sales contracts with prices above BRL 350 per megawatt, extending beyond the concession period. This extension has been very advantageous for us. We went into the auction with a controlled premium and were awarded these plants. We are very pleased to add 3 more years for Irapé and 7 more years for Queimado. A significant update for us is that ANEEL has recommended the approval of our concession extension request for Sá Carvalho. This is pivotal news for renewing our concessions per quotas. It is also noteworthy that, in Pai Joaquim, we benefited from a discount in TUSD. We also experienced very positive outcomes for Gasmig where EBITDA aligns, and net profit is considerably higher, primarily due to effective cost management. Furthermore, debentures issuance has facilitated funding, leading to positive results for net profit, and we plan to continue investing.
We believe the opening of our Central West project will occur shortly. Lastly, I would like to invite you all to our Cemig day happening on September 10, 2025, where we will elaborate on our strategy and vision for Cemig, discussing the challenges and opportunities we face as a remarkable company in the energy sector. Thank you all very much. We now conclude the presentation and open the floor for the Q&A session and your questions.
Questions and answers
Our first question is from Carolina Carneiro, an analyst from Banco Safra.
Hello. Thank you very much for the call. I would like to take this opportunity and ask you to comment on capital allocation. You went into the GSF auction. Of course, you have a robust investment plan, but the cash situation of the company is very much under control. If you could provide more visibility on your focus for the next transmission auction. Are you looking at any other segments? Also regarding the concession renewals, you had that opportunity via the GSF auction, but we have some important concessions due in the next few years. Do you have any updates on regulatory changes or discussions that could provide greater visibility on plans for these plants? That would be very interesting. Thank you.
While the best guideline is our strategic planning, our BRL 59 billion investment plan from 2019 to 2029 includes mainly distribution investments. In the past, we faced issues with insufficient investments leading to around 15% of unmet load. There’s also a substantial connection of distributed generation to consider. This initial growth phase in distribution addresses expansion needs and the demands of distributed energy generation. We now have nearly 5 gigawatts of distributed generation requiring significant investment. These known projects include Mais Energia, Minas 3-phase, and more energy. After accomplishing this initial phase to meet expansion needs, the next focus will be increasing resilience and automation, as requested by ANEEL and the Ministry of Energy. Initially, expansion was our priority, but now our investments center around enhancing resilience and quality of service.
We also consider gas investments in another regulated sector. Concerning the concessions, the regulatory environment is essential. We appreciate ANEEL's recommendation for the renewal per quotas of Sá Carvalho, which is being reviewed for our other two plants. They will be recommended to the Ministry of Mines and Energy. We would secure renewal without requiring any disbursement, transitioning from the free market to the regulated market. Decisions on the free market depend on capital structure changes, which are outside the company’s management. Overall, our strategy is to follow our plan meticulously. Importantly, we are focused on Minas Gerais; 100% of our investments will be directed towards this area, where we achieve our competitive advantages and where most of our assets and plants are located. We take this guideline very seriously, and any M&A opportunities must occur within Minas Gerais.
Thank you very much, Reynaldo. If I may pose another question. Last week, the Supreme Court ruled on PIS/COFINS and ICMS. I understand it might be premature to ask, but do you have any comments? Other companies in the sector have a significant balance for potential credit to be transferred to tariffs or even to the company. Do you have any insights regarding last week’s ruling? That would be great to know. Thank you.
Well, the ruling allows for the deduction of taxes and honoraries previously paid, which is indeed positive. As you mentioned, Cemig has reimbursed clients for over 10 years. The next step involves waiting to see how the final ruling unfolds to understand its impacts on us. However, the ability to discount taxes and honoraries is a positive outcome, but we cannot quantify that until the final ruling is confirmed.
Our next question is from analyst Victor Cunha.
Good afternoon, everyone. Thank you for this opportunity. Regarding the energy balance presented, we noted a reduction in the short position for 2025 and 2026, but an increase for 2027 and 2028. Could you share the rationale behind this decision to increase the short position for these years, particularly during a time of pressure on energy prices, considering new parameters, risk aversion, and presumably higher costs and expansion marginal costs, especially given the challenges facing renewable plants? I would appreciate your insights on this.
Victor, thank you for your question. We have been actively working to close this position. We have been observing market trends and have been closing positions by increasing our exposure. The short exposure for the two years you mentioned reflects a residual effect. The counterpart we contracted was for energy we had not delivered, necessitating energy purchases and increasing our exposure slightly. However, we are looking ahead and working to close our positions. This has always been our objective; we do not wish to create further exposure.
Our next question is from Lilyanna Yang, analyst from HSBC. I can also read your question. Okay. Well, there was a problem here with transmission, but she has two questions. First, in distribution, your next tariff review is scheduled for 2028. Can you comment on how the current changes in the regulatory environment might affect the profitability of the company? Secondly, when can we expect an expense reduction in the pension plan fund?
Good afternoon, Lilyanna. I can comment on those inquiries. Once again, it's premature to discuss an efficient frontier of costs. We must be prepared to address efficiency as one of our guiding principles. Improving service quality while pursuing efficiency is essential and a core mantra for us. If achieving that efficiency occasionally necessitates tariff adjustments, we welcome it since it benefits consumers requiring fair tariffs. We must focus on efficiency and remain aware that tariff models evolve every five years. We hope the upcoming discussions will address not only distribution parcel tariff models but also CDE subsidies and charges, which we understand currently constitute the rising costs impacting tariffs. The development of automation and technology is crucial, and we are working on expanding our smart meters. All these initiatives aim for better service delivery and cost savings.
Regarding pension funds, Carol mentioned healthcare plans, which significantly affect our results. We are actively negotiating these topics, whether health care plans or pension funds, particularly concerning benefits from Cemig. We will be better positioned to discuss this once we reach agreements, and until then, it is premature to provide specific details. I can tell you that we are all focused on securing agreements with beneficiaries to ensure guaranteed contributions for both healthcare and pension plans while enhancing Cemig's overall efficiency.
If there are no further questions, we conclude our Q&A session. I would like to turn the floor to our CFO and IR Officer, Andrea Marques de Almeida, for her final remarks.
I would like to thank you very much for your questions and your participation. We are here available to take any questions in the IR area and our leaders to help you at any time. Thank you very much, and have a nice afternoon.
Our media conference call for the second quarter 2025 Cemig's results has concluded. Thank you very much.