Energy of Minas Gerais Co (CIG) 2024 Q1 法說會逐字稿

Good morning, and welcome to Cemig's first quarter 2024 earnings video conference. We inform that this video conference is being recorded, and will be available at the company's IR website where you will also find the company's presentation. (Operator Instructions)

Now, I would like to turn the floor over to Carolina Senna Investor Relations Superintendent. Please, Ms. Caroline Senna, you may proceed.

Good morning, everyone. I am currently Carolina Senna Cemig's Investor Relations Superintendent. We now start Cemig's first quarter 2024 earnings video conference with the following executives: Reynaldo Passanezi Filho, CEO; Leonardo George de Magalhaes, CFO and IR Officer; Dimas Costa, Chief Commercial Officer; Marco da Camino Ancona Lopez Soligo, Chief Participation Officer and Generation Transmission Officer for now; Marney Tadeu Antunes, Chief Distribution Officer, and Cristiana Maria Fortini Pinto e Silva, Chief Legal Officer.

For the initial remarks, I will turn the floor over to our CEO, Reynaldo Passanezi Filho.

Good morning, everyone. It is a pleasure to be here with you. To talk about our results for the first quarter of 2024, I would say this is another quarter of consistent results according to our strategic plan.

So these are the main messages that I would like to bring to you. The first one, our capital allocation. We move on with the objective of concentrating Cemig's activities in its core businesses. So we are divesting from minority stake holdings and we are investing in businesses that are our core business, Cemig's core businesses.

So in this quarter, we once again show you these results. We have concluded the disposal of asset of Aliança Energia in April. That transaction was concluded that a large transaction it's BRL2.7 billion, adjusted by the CDI. There is another West HPP's auction to happen now in July. So we are moving forward with our divestment in minority stake holding and non-strategic assets. So that we can focus in our strategic assets, which are distribution, generation, and transmission and managerize.

And here once again, we have results that are very consistent of a record investments. We have investments in line with our budget of budget over BRL6 billion. Just to give you an idea, it's almost 6 times the investments in 2018. So it's 600% growth in investments. A very sound results. Now in June, we should be opening our 100 substation that was built under the more energy program.

When I started, we had 414 substations and our plan is to grow in 50% of that number by this over 200 substations. And we are delayering our substation number 100 now in June. These are very sound results that will improve the quality and the service that we provide. This is the first message. Our investment program is focused in Cemig's strategic business and managerize businesses that we have full control of and divestment in assets with minority shareholdings. So both programs are ongoing, whether and the assets that we'll still be divesting.

And of course, and the execution of our investment plan. And it's important to say that we have here BRL35 billion of investments up to 2028. Over 75% of that is already contracted. It's not only a promise. So part of that is already contracted or we already have bidding process ongoing for over 75% of that total that allows us to tell you that we'll be executing the investment plan.

Another significant guideline is efficiency. Efficiency -- expenses. We are within the regulatory OpEx efficiency because we are within the technical commercial regulatory losses, efficiency because we are within DEC and FEC and access and also a greater capacity for assets operation. So we are and compliance with the regulatory losses. This is very important for the Company, generates a lot of value.

We are also compliant with the regulatory DEC and FEC. And this is important too decreased financial compensations. And also here in this quarter, we moved away a little bit from the regulatory OpEx, but it is our commitment to comply with the regulatory OpEx, and we are working hard to comply with the regulatory holdbacks and at the same time, the directing expenses to improve the service, providing quality. There is a program that we are launching that's called Cemig agribusiness to improve the performance of our assets in the rural area. This is going to affect OpEx, but it will be offset by decreasing other expenses. So our commitment is to be in compliance with regulatory OpEx.

And another strategic guideline is sustainability. Obviously, you know that Cemig is already 100% renewable. But right now, we are delivering within our investment plans and also considering sustainability, our first solar plants centralized generation. So probably in July, we'll be delivering two large plants, 180 megawatts, photovoltaic generation solar plants. Therefore, this is something that we just had HPP.s. And now we are also in the generation market of -- intermittent and renewable energy, once again, our sustainability commitment and practice.

And now talking about sustainability, I should mention something that is important when we talk about climate change and what we are seeing now in the south of Brazil. And we understand that this is not something that happens only with the people from the south, but we need to understand that this is our challenge and everything that we can do to help we'll be doing it.

And so all of you that can you hear me now you know, I would encourage everyone to support whether cooperatively or personally. So I can tell you that we have sent a helicopter just help them and rebuilding substations and also to help rescuing people. We are also sending generating trucks and also ATVs. We are doing what we can to contribute. And I think it is important for companies to support some needed solution for today. So this is my message for everyone that are following us here today.

So I think it is more important to work in your companies and also personally to help people's. And again, I repeat that this is not something that is happening in the South offices. This is something that affects all of us.

So once again, we have very consistent results and we are executing our strategic plan; divestment and non-strategic assets, investment in the core areas of the company, operating efficiency, better performance for our assets and sustainability.

So here now we turn the floor to Leonardo to move on with the presentation.

Thank you very much, Reynaldo. We're opening our video conference. Thank you all very much for being with us today.

As Reynaldo mentioned, another quarter of consistent results. We are very proud to say and to stress once again about our capacity of execution of our strategic plan, which we brought to you in 2021. We believe that the company has been executing the strategy that was disclosed to the market at the time and we reinforce it every year. And among the actions related to strategic planning, we have the divestment of assets where the company has no control of these assets or non-core assets. We had a number of divestments in the last years.

And once again, as our CEO already mentioned, we had a divestment now of Aliança Energia that was approved in the shareholders' meeting that we had in April. And we expect the closing of the operation after all the approvals of competent agencies. But that should be concluded in the second half of this year of 2024.

And we would like to draw your attention to the most important topics of this operation year. Here, you have BRL2.7 billion for 45% stake of Aliança. This amount has been adjusted by the CDI rate since June 30., 2023. After the closing, that should happen in the second half of 2024, probably between October and November this is what we expect. To the period of time to cancel the operation, although we are trying to bring that date forward. And also we are waiting for the needed approvals and this operation was done and that falls gate mode. So we will have the effective conclusion in terms of rights and liabilities regarding the disposal of the asset.

And there is a possibility of receiving an additional amount of BRL223 million for compensations, and that would be related to Candonga plant. That's a period of time when this plant did not have any operation. So this would be net of taxes.

Now moving forward in our next slide. Also following our strategic plan, execution we were successful in the disposal of 15 small SHVPs. So we understand that we add value to shareholders when we dispose of these assets. They have great value in the market. In the other disposal, we had an unimportant goodwill, and we believe that this disposal of assets that is going to happen in July 3, 2024, in B3.

We have four plants here, not as relevant in terms of value but once again, we are being very faithful to our strategic plan. So here, we are talking about 19 SHVPs and with some of them were sold last year and for more of this year, once again executing our strategic plan by disposing these appliance of lower results and they are complex in their operations and we consider that the size of the company and its operations. As we said, I think this is going to add value to our shareholders when we sell these assets.

Once again, here, we have our divestments plan here -- investments here. In this first quarter, we invested BRL1 billion in execution. As Reynaldo mentioned, we feel very confident about this investment cycle. There is a curve here. We remember that last year we had BRL3.2 billion of investments in our distributing company and we were able to invest 100% of what WAS forecasted. So we are confident that the BRL4.4 billion investment forecasted for 2024 will also be fully realized.

The other investments in the first quarter of -- in the other businesses that we had a lower investments and transmission generation and gas. As I mentioned, there was a ramp of growth over the year, we have seasonal effects in the first quarter. It was already expected and execution of these investments at lower levels when compared to the next quarter. So we are confident that this investment of [BRL6.2 billion], which is the largest in the company in the last years.

And you can see in this slide, the company went from investments of BRL1 billion in 2018 to almost BRL5 billion in 2023. And now we are confident that we'll be investing the full amount of BRL6.2 billion in 2024. This is the message the company -- this is a growth curve for investments. We are very optimistic.

Once again, I highlight distribution, so forecasted investment for the next five years from '23 to '28 of BRL23 billion. As we disclosed to the market, these are significant investment in the distributing company with an important effect on the quality of service for clients. But also these investments will be integrated in the regulatory base in the next tariff cycle. So these are very important and the company is faithfully executing this investment strategy in this business. We have 100% of control over the next few years.

Now moving forward, we are going to analyze our results the highlights. For the first quarter, once again, resilient results. We have the company's condition of having relevant stake in a number of business. This allow us to have resilient results whether in generation trading with a larger trader in Brazil was catering to free clients -- and also our distributing company, the shipping company EBITDA close to BRL2 billion and also interest on equity posted this quarter,BRL386 million. We have been posting interest on equity on the quarterly basis.

Last year we had a very relevant yield with very attractive remuneration to our investors. And this is the expectation for the next year. Company with a low leverage with regulated investments and with the ability to be attractive in terms of dividends. The company today is one of the and main dividend payer in the electric sector, and we intend to keep on being on that position to providing good dividends to our shareholders.

Once again, our trading company worth at EBITDA generation of BRL280 million in the first quarter, allowing Cemig our trading to be -- the trader in Brazil with the highest results, whether in absolute amount or in margin of profitability when compared to its peers.

For Cemig D here, once again, we are meeting the quality indicators. The DEC outage duration indicator as compliant with -- indicated parameters by [Unaoil] as acceptable in terms of the quality of the energy we provide our clients and energy losses also lower than the regulatory limit. Thanks to a number of actions that the company took allowing us to reach that result.

For Cemig D, we did have resilient results during this first quarter. And we have already mentioned the dispose of assets of the four SHVPs that will join the other 15 ones we have sold last year. And now I will talk to Carolina our IR and she will talk about some of the results, and I'll be back.

Good morning, everyone, once again. So moving on with the results. With the consolidated results for the first quarter of 2024, we are ready mentioned as we had a reduction of 4% of our recurring EBITDA, and we have some topics that are should be mentioned here. In this quarter, we no longer have [to buy some time ready], so when we see the gain on sale of that is lower in 2024 than when compared in 2023. Because of our strategy of divestments that our CEO and our CFO mentioned.

We also have a greater OpEx pressure and our CEO mentioned, and I will show you more up ahead when we compare realized OpEx at distributing company to the regulatory OpEx, but over the year, we have a number of initiatives so that we can end the year in compliance with our OpEx. This is a commitment that we make with the market.

On the other hand, the net profit had a drop because of the FX exchange, we have issued a debt in Eurobonds in the past and over time, we have already done some tranches of liability management of partial buyback of that debt and foreign currency. And in 2024, we have the final a share of $380 million. And just like in 2023, the FX had a positive effect in our profit in 2024 it had a negative event -- effect. And so because of that, net profit had a greater reduction when we compare that to the EBITDA.

Also affecting on our net profit increase in Cemig distribution depreciation because of our robust investment program where we have BRL23 billion to invest in the distribution concession up to 2028. Considering this investment program in our asset base has been increasing. It is natural that we have a depreciation that is higher. So the main effects on the net profits were the FX exchange in Cemig GT because of issuance of bonds in foreign currency and depreciation of Cemig D, it has increased because we have increased the base of assets considering our investment program.

Now, moving forward, talking about our consolidated operational costs and expenses -- that have some important effects that are highlighted, and I will go over them. And I will remind you of some important topics here. One of them is the post-employment, which had a nonrecurring effect in 2023. We launched a new health care plan for the company's employees. And in 2023, we had an enrolment of 1,500 employees with a positive effect in our 2023 results. Once we had the restatement of the liabilities related to the healthcare plan.

So when I compare 2024 to 2023, I see that the costs and expenses related to post-employment are worse. But that is because in 2023, there was a reversal because of what I already mentioned, there was an increase in outsourced services over 2023 we shared with you. We told you that we are increasing our investment program in distribution. We have a challenge of being in compliance with quality indicators. Therefore, we need to have higher expenses with maintenance. We are ready to share that with you over 2023, and it's still happening in 2024. We have a greater asset base that requires greater maintenance expenses in addition to the quality indicators so that we can provide the best service to initialize population.

And also on the other expenses, we have an important highlight, which is the shutdown of assets -- thanks to our divestment program in Cemig Distribution. When I remove the recurring effect of the post-employment, the increase in costs will represent 5.6%.

Now, in our consolidated cash flow, this is a very important slide, and we like to share that with you to show the strong operating cash generation of the company. As our CEO mentioned in the first slide, when he talked about the highlights. Cemig has a strong cash generation. Every quarter it goes around BRL2 billion. And in this quarter, we also had funding -- the successful funding, which was issuing -- issuance of debentures up to billions in March, so that we could increase our robust investment program. And we ended with a cash of BRL4.5 billion. And this cash naturally will be used.

As we have already mentioned, because of with our robust investment program for 2024 of BRL6 billion. And in addition to that, we will also be paying dividends in two different instalments a year. So will be paying the first instalment in the middle of the year end December of '24, the second instalment. So this cash will be used naturally. And as we have shared with you will be going to the capital market at a higher frequency, so that we can foster our robust investment program.

Now for the debt profile, I already mentioned that we had funding in the first quarter. For Cemig D, was very important not only for the investment program, but also a second series issuance of -- with a 10 year term. So we have elongated the debt profile of the company and now in May 7, Moody's published a report increasing our rating to AA+.

So today, our company is AA+ for the three main rating agencies, and we are still working to improve the recognition from these agencies because when we look at our funding rate, we see that we already have -- we are in the same position of AAA companies. Our leverage is low, but just as my cash will be used to pay dividends and to direct for investment programs. I believe the leverage will also go up because of the same variables that will be affecting our cash consumption.

Now for results and Cemig D moving on. For Cemig Distribution results, and I have already mentioned the OpEx pressure. There is a greater OpEx pressure that was already mentioned, especially outsourced services and also shutdown of assets. And there was a growth of 0.7% of the recurring EBITDA because of the market growth. And I will show that in the next slide.

And also in 2024, we already have the effect of the tariff review that happened in May of 2023. The net profit as I mentioned in the consolidated slide, we are increasing the asset base with this investment program. So now there is greater depreciation. So our profit is affected because of this depreciation that the more I invest will have a higher value.

And as our CEO mentioned, so that we can provide better services. We are launching what we call Cemig Agro for the agribusiness. The idea is to have no installations, no reclosures to improve the business for the agribusiness and [miniaturized concession].

As mentioned, the recurring EBITDA for Cemig D was 0.7 higher in 2024, partially explained by the tariff review with the adjustment in the '24 result when compared 2023 and majorly explained by the markets growth. There was a growth considering the transported energy and captive market growth of 4.4% and I should highlight here the growth of the residential area. This is a very significant increase when compared to other companies -- concession companies, they had greater growth but our distribution is the one that has a very hard time with distributed generation and we always bring that information to you. And so we only show the growth of injected energy when compared to distribute generation.

And also in terms of the requests approved in the quarter after 14,300 a law that changed the distributor generation regulation and starting in January '23, the new connections and no requests for new connections for the distributing company, we will start receiving part of that via CDE because of transported energy. And so we see that there was a significant reduction, especially in Mini DG but what we have already lost in our market, we will recover part of that in the investment program, but we have not recovered everything.

Now moving forward about losses also, our CEO and our CFO talked about. This is a commitment that the company has made to be in compliance. We were able to be in compliance in 2021 and to maintain losses and compliance, we need actions and initiatives and we are still investing a lot in these initiatives. With a significant number of it inspections, we are switching conventional meters to smart meters, we are switching obsolete meters. And also we are here converting illegal connections in legal ones. This is part of our distributing company routine and they are very important to allow us to be in compliance with regulatory losses.

Now for operating -- operational efficiency, I'll turn the floor to our CFO, so that he can talk about the non-compliance of the regulatory OpEx.

Thank you, Carol. As already mentioned in this quarter, we had some non-recurring events related to the level of provisions that were much higher than we had in the prior quarters, and that has affected the company's compliance in terms of regulatory limits here.

Since 2020, Cemig's has an OpEx that is lower than the regulatory limit that is fully in compliance with the regulatory levels, as -- stated, and also EBITDA that is over the regulatory limits established by the official agency. So we intend that this non-compliance in this first quarter's regarding to a situation, just that happened in this first quarter, as we mentioned that we have BRL140 million more of an impact in our EBITDA that are related to contingencies, provisions for losses, and also the shutdown of assets that is more related to the divestment program. So when you invest some more you also need to shut down the assets that have been replaced and switched. So that explains this temporary non-compliance. And this first quarter regarding -- to what we expect to see in the year, which is to be in compliance with our OpEx and EBITDA. Carol please, you may takeover.

Okay. Now moving on for Cemig GT results here in the first quarter at the end of the year. Well, in March of this year, when we talked about the results of 2023, we said that 2023 had an amazing result for the trading company and that in 2024, we would have also an important result with one of the best margins in the industry but that -- it would not be the same result of 2022 because that was a window of opportunity that we had when we sold energy at prices over 200 rows. So when we look at the recurring EBITDA of Cemig GT, it was down 1%. And that is because of this lower margin I mentioned it has had already been shared with the market.

So in the non-recurring for Cemig GT and which was also a highlight during this presentation is the conclusion of the disposal of 15 SHVPs and we will have the disposal for more assets in July.

About our net profit, we had a greater reduction because of FX. Our rate in 2023, the FX exchange of the Eurobond and the remaining instalment that will be due in 2024. In 2023, it was a higher instalment and it did have a positive effect in 2024. In addition to having a debt in a foreign currency that is lower than 2023. Now I have a negative effect. So this drop is explained because of the FX exposure we have already mentioned.

And on the bottom, we show you the trading activity once again. We started a transfer of contracts of trading to Cemig's H and this is not 100% concluded. So we still have part of trading under Cemig GT. But if we add both EBITDAs to show the EBITDA of the trading company, we had a drop of 3.5% because of the same reason, I already mentioned a lower margin in 2024, when compared to 2023.

Now moving on Cemig. As you already know, is consolidating that mix results. And we had a reduction in the EBITDA explained about two reasons. First, because in 2024, we did not have a compensatory parcel. This compensatory parcel works as a CVA, a variable compensation account for distribution, but different because it is in a gas regulation. It is added to the quarters in 2023, we did have an additional compensatory parcel. And in 2024, we did not have any balance for this compensatory parcel. And the other explanation is the volume there was a volume reduction of around 10%, which has affected the EBITDA drop and therefore the net profit as well. But gas making has a very significant EBITDA in the group. We always say that and it represents around BRL850 million to BRL900 million miles a year.

This is our last slide. I would like to bring our CFO once again to close the presentation today. Thank you very much for your participation. And after his remarks, we will open for the Q&A.

This great, Carol. And we'd like to conclude with this slide because it represents a summary of the commitments the company has taken with shareholders.

We believe it's an opportunity that we have to show you what we have been doing, what we have done, and will be doing. You -- we see here a number of actions that have been completed, the compliance with our regulatory levels, the strengthening of Cemig's D investment program, the liability management of our bonds, and we already had permitted ourselves to gradually reduce our FX exposure, and we have done that. Now we have BRL380 million, less than 25% of total bonds issued abroad in 2017, 2018, which was BRL1.5 billion. So it's of a final parcel to be settled in at the end of the year. And also the divestment and holdings with complexities.

Now in progress, as we already mentioned, we expect it to be in compliance with the regulatory OpEx and also wrap the reference EBITDA for the company's concession in this year 2024. We are still in the process of digital transformation, divestment in minority holdings. Aliança is a great example of stake where we have no participation and we are divesting.

And also investment in renewables and focus on leadership in energy, retail trading and Cemig has the greatest largest trader in Brazil. Aims to be leader in also in this retail trading and for the next year the renewals of co-generation concessions and also to be in compliance with the DEC outage duration indicator. And that has to do with our strategy so that we can focus and providing the best service quality to our clients. So thank you very much for being with us for this presentation. And now we'll turn the floor to a Q&A session.

(Event Instructions) [Victor Chiu, Sell Side analyst from ABBA] I'm going to ask Leonardo to take his question. Thank you.

It looks like Victor did not open his microphone, so we'll move on Leonardo.

Andre Sampaio, sell-side analyst, Santander.

I have a quick question about the regulatory OpEx. And now is voting on the final rules for the regulatory OpEx for distributing companies. I would like to know if you have an initial opinion about that and still on that topic, one of the important changes in the rule has to do with the DEC of meeting, not only the total global DEC but also the subsets and you still have work to do there. What is your plan to recover and improve the whole set DEC.

Andre thank you very much for your question and your participation in our call.

I will start talking about the regulatory cost, and I will talk about DEC. And I mean, if Marney may want to add his or distribution offer, he can also comment. About costs, the regulatory costs that now is defining for the distributing companies, we are following that up and closely in spite of the fact that the company has -- well does this review will affect the company in the next tariff review. But what I can tell you is that we have a commitment with operating efficiency and all the measures that the company is taking in terms of post-employment costs have been within the commercial losses, reducing its cost in other areas. So that we can privilege.

Whatever can be -- it can be focused in its PMSO and the quality of service to our clients, but also providing positive effects in the revenues, reducing financial losses and fines. And we understand that this is -- there is a positive effect when you invest more in the network. And also because of that, we had higher operating costs in these last quarters related to outsourced services in terms of recovery and maintenance of the network. And it has to do with the concern of a quality service to our clients. But in summary, we are following up the process, but we need to say that we are committed to meeting this new regulatory benchmark marketing established by the regulating agency.

About the DEC, yes, we understand that business needs to be met for distributing companies also Cemig, but also we understand the compliance with DEC and FEC has to do with the strategy of the company providing the best service to its clients. This DEC reduction also has positive effects with a reduction in the financial offsets paid of the company. And now so it has both positive effects in our PMSO.

This year we have a percentage for the full site DEC. This is the trajectory of the company. We believe we will be able to meet the DEC, the whole site DEC, according to announced definition. But I would like invite Marney to comment, if he wishes.

Good morning, everyone. Well, just adding to that, we have 58% of the sets met by the end of the year. We have 54% of those within our target in line with ANEEL as well. The two programs that were mentioned by our CEO in the beginning, Mais Energia, which is the construction of 200 substations, that will help the whole set DEC because the decrease the size of the sites and Cemig Agro that aims to fare better service to the rural areas.

So these are two large projects and also our maintenance plan and OpEx that we already discussed. We have specific plans to clean areas of 42,000 kilometers. It's just like going around the earth, just cleaning the land. That's it.

Daniel Travitzky sell-side analysts, Banco Safra.

Daniel, you have two questions. One about pension funds and healthcare plan. I will ask our CFO, Leonardo and also the next steps for divestments of plan and I will ask Marco Soligo to answer.

Thank you for taking my question. Actually I just would like to have an update on the negotiations of liabilities related to health care plan and pension funds. Just to understand where we are at in these negotiations. If we can see any progress on those fronts still in this year?

And second question, I would like to understand, how the divestment plan will follow after this disposal of Aliança and now the other sales of PCA SHVPs. So what are the steps to be implemented?

Daniel, thank you very much, and thank you for your questions. Well, the company for a while now is disclosing the need of managing its post-employment benefits. These have no regulatory coverage and they are significant amounts is around BRL6 billion have obligations that are in the balance sheet of the company and is strategically you understand it is important to have to take actions that can mitigate our position related to these costs.

I understand that the company already has a successful history on those topics. We had benefits related to life insurance where we were paying part of that to retired employees and no other listed companies were paying that benefit. And by a collective agreement, we were able to remove that benefit from our financial statements and our obligations.

And now we have issues that may involve the pension fund and health care plan. As we have already disclosed to the market, these are very complex issues that involve a number of discussions and -- a lot of study and we would like to have got convergence still this year, allowing us to have social justice in terms of health care plan to our retirees that have a lower income and at the same time that we can reduce the company's exposure related to that topic because these are very relevant costs. And once again, they are not covered by the company's tariff.

So it's important for the company to address this as well. So once again for this year, we believe that we will have positive news on those topics. These are complex and difficult topics, but we are working hard to find a solution. And again, we want to be a socially acceptable and responsible and also we want to reduce financials exposure of the company. So this is very relevant. We are still optimistic about solving this issue and we expect that we can have good news this year on those fronts.

Now I will turn to Marco Soligo, our Generation, Transmission, and Participation Officer for the comments on your other question.

Hello. thank you very much for your question. As our CEO mentioned, we are following strictly our divestment program of minorities companies where we have no control. We have to Taesa, we have some SHVPs or you have some stake and we are working to solve to address that, to dispose of these assets.

I cannot go into the details about specific negotiations, but they are moving on and we want to do something that is smart and that makes sense to the company. So Taesa for instance, is a more complex the way we do it, how to do it? Are there -- are very difficult such as Belo Monte. It's not something that is easy to dispose of. But we are discussing, we are talking to the market and we do believe we'll be able to address that. This is what I can bring to you, Daniel, thank you very much.

[Eduardo Lazarette, direct buy-side analysts, GTI]. I will ask Leonardo to take our question.

I would like to know if you have savings expectations on expenses with these migrations. If you have anything along those lines and also an update on leverage. I would like to understand your mindset for the next years, where would you feel comfortable to be at in terms of your net debt. If there is an expansion, in case you have an opportunity for inorganic expansion?

Good morning, Eduardo. Thank you for your question about post-employment that we just talked about it and about leverage, are that policies establish a target that is close to 2.5 times. We feel that this is comfortable that we'll maintain the company's credit quality and also we will allow the company eventually if there are business opportunities and M&A and investment, we still have room in our balance sheet so that we can take part on possible M&A in a competitive fashion without reducing our credit quality.

As Carol mentioned, our leverage is a curve. We have a lot of investments to be made in the next few years. And this in 2027, we should be close to 2.5 times our EBITDA. This is our target leverage ratio. We feel it's comfortable. It's more efficient financially. So this is our target leverage, of course, that we have opportunities for new investments or robust investments program. And we believe this is a weaning strategy. This is a company that has low leverage right now.

But with this low leverage now, the company can make new robust development investments that will be increasing our revenue, whether and transmission and also mainly in the BRR for Distributing Company considering 2023, 2027 investments will be integrated to the next tariff review. So these will be relevant amounts that will double the base asset remuneration of the company, the max tariff review.

And at the same time, it allows the company to keep on being one of the main dividends payment companies. With this strategy, we believe that we'll continue with this leverage and the investment program that are regulated and integrated to the regulatory remuneration base.

We believe that this allows our investors to feel safe. They will generate revenue and they will guarantee that will continue to be a company in the industry that most pays dividends, considering that we have established in our bylaws, a 50% payout of dividends annually. And considering our consistent and sound results, we understand that this winning strategy of a company that we mentioned that we'll have leverage at great levels with regulated sectors and also being one of the main dividends payment in there electric industry. This is our strategy and considering leverage regulated investment and our attractive policy of dividends distribution.

We have a few questions for -- from investors that are concerned about the dividend payment asking if in 2024, because of the investment program and the natural cash consumption, if there is going to be any second is regarding the quarterly results and what they can expect in terms of payments of dividends.

As we mentioned in our last question -- that I just answered, we are very optimistic about the company's results. We see that our individual investors are very interested in the company. They see that our dividend policy is very attractive. We aim to just move on as we are doing right now.

So this our plans create stability for the company -- the minimum payout for the company is 50%. And that allows us to feel safe and optimistic. We are confident because we can provide an attractive dividends payment to our investors. And we understand that interest on equity posting every quarter is efficient and it creates value for shareholders. And we intend to maintain that practice.

Giuliano Ajeje, sell-side analyst, UBS,

I have a question. Can you give me an update on the federalization process of the company. And also I would like to know if there is a possibility of privatization of the company.

And another third -- another question, in two years from now, the governor will change. I would like to understand what is being done to maintain this legacy and this good management that you have had in the past few years.

Thank you, Giuliano, for your questions. I will start with a brief comment and then if our CEO wishes, he will also comment about

your questions. What we are telling the market about federalization and privatization is that this is not a company's agenda. This is our controlling shareholder agenda, the State of Minas Gerais. But we have been the strategic plan that has been approved. And regardless on how these issues will be conducted, we have a strategic plan to be executed. We are executing it not allowing external issues that are not in the company's agenda to handle the execution of the program.

So we believe we are being successful and I'm being repetitive here, but it just to stress the importance of this topic for us. We are being very successful in the execution of this investment program, and this is the company's strategy and also our liability management, the dividend policy. So that we are not affected by the controlling shareholders agenda.

We are very optimistic about the company's future. We understand that the investments that we are making, especially in the regulated sectors and transmission and especially in distribution, this is a strategy that we have and it's a winning strategy. And as -- regardless of any changes in state administration, you know, we are providing it's good for our shareholders and it's good for our clients. So there is a convergence of interest. Therefore, these are perennial strategies regardless external -- issues.

Dr. Reynaldo, would you like to add anything on this topic?

I don't think so. I think you said it very well.

Federalization is a matter that is on the hands of the controlling shareholders. We are managing the company with the strategic plan, focusing Minas Gerais.. We are divesting from minority stakes or disposing of assets that do not fit the company and it's important to say that 75% of this strategic plan is already contracted.

So we are working on improving the quality of service when you deliver 100 substations. This has an effect when you add them in the prephase, when we develop Cemig Agro, the new program there is a lot coming in that will be really changing. We have DMS that is coming in is going to have a huge impact. All of these topics are contracted. So this is a new managing system for distribution and operation. It will be new from scratch with the best technology. And we also will work on distributed generation and this intermittent aspect of distributed generation.

This is the first one in Latin America. This is a huge investment in digitization, [BRL1.5 million] of smart reclosers and smart meters. We are working on a number of things that are structural, and they are already ongoing. We end up talking a lot about the best, but everything is already contracted. And I am sure that this will provide great quality and great improvement in service for Minas Gerais population.

Thank you, Leonardo. Thank you, Reynaldo, and we'll will be closing our call now. And for the other questions that we did not have time to answer, we'll be answering them via e-mail from the IR area.

Now I would like to thank you once again for your participation in this video conference. I wish you all a great day.

This concluded Cemig's first quarter of 2024 earning video conference call. Superintendent of IR is available to take further questions. Thank you all for your participation and have a great day.