Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Analysis

Robust Revenue and Profit Growth Amidst Expenses Increase

COPASA ended Q4 2023 on a strong note, with a surge in net revenue by nearly 27%, amounting to BRL 1.8 billion, compared to the previous year's quarter. Annually, the company saw an impressive revenue increase of 21.5%, hitting BRL 6.5 billion for the year, bolstered by measured growth across functions and a significant tariff adjustment of 15.7% implemented at the start of the year.

Adjusted EBITDA Highlights Operational Efficiency

COPASA's adjusted EBITDA saw a 34.3% rise in Q4, reaching BRL 712 million, and a substantial annual growth of 35% to BRL 2.7 billion, marking the highest margin since 2011 at 40%. Net income for the year followed suit, climbing by a stellar 64% to BRL 1.4 billion.

Costs and Expenses on the Upswing

Their watchful control of expenses has seen a moderate increase of 12.4% in 2023, totaling BRL 4.6 billion. Notably, personnel costs rose by 9%, which are a significant portion of their overall expenses. Increases in operating income and expenses also reflected higher costs from lawsuit settlements.

Investments and Dividends Signal Confidence

2023 marked a year of record investments for the company, with BRL 1.63 billion channeled towards numerous initiatives, highlighting their strong commitment to growth and development. This aligns with a secured BRL 1.8 billion in funding, earmarked for the future investment plan. On the dividends front, a robust payout policy distributed 50% of its adjusted net income, a clear nod to the shareholder value COPASA upholds.

Debt and Leverage: A Managed Approach

Managing their debt profile carefully, COPASA's gross debt reached BRL 4.8 billion by year-end, with a net debt increase to BRL 3.8 billion. Their leverage ratio, a critical measure of financial health for investors, stands at 1.5 times EBITDA – a sign of a balanced financial strategy.

Operational Excellence and Customer Delinquency Improvements

The company has made significant strides in operational efficiency, as evidenced by reduced delinquency rates at 2.97%, and a decrease in water loss index to 38.6%. These improvements are a testament to COPASA's commitment to reducing waste and optimizing operations.

Sustainable Practices and Social Responsibility

COPASA's focus on sustainability is unwavering, with investments in water protection and energy efficiency. This commitment not only impacts their operational efficiency but also contributes a significant positive impact to the environment and the communities they serve.

A Leader in Service Coverage and Inclusive Growth

With a strong position in the market, COPASA continues to exceed service coverage expectations, achieving over 99% for water services. The goal is to reach an impressive 90% coverage rate for sewage by 2033, as part of their adherence to the new sanitation framework. This forward-looking approach is coupled with commitments to gender equality and leadership diversity, with women holding approximately 36% of leadership positions and a target of 37% by 2025.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to COPASA's conference to discuss results regarding the fourth quarter and the full year of 2023. This conference is being recorded and the replay can be accessed on the company's IR website at ricopasa.com.br. Though the presentation is also available for download on the platform.

[Operator Instructions]

We would like to inform you that the presentation is being recorded and translated simultaneously. The translation is available by clicking on the interpretation button. Those listening to the conference call in English, there is an option to mute the original audio in Portuguese. Before proceeding, we would like to clarify that any forward-looking statements are based on the beliefs and assumptions of COPASA's management and current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists must understand that events related to the macroeconomic environment, the industry and other factors could cause results to differ materially from those expressed in their respective forward-looking statements. Now I would like to turn the call to Dr. Carlos Augusto Botrel Berto, who will start the presentation. Please, Dr. Carlos Berto, you may proceed.

[Carlos Augusto Berto, executive]

Thank you, [indiscernible]. Good morning, everyone. Thank you for attending this conference call. Also with me is our CEO, Guilherme Duarte, our Director of Technological Development Environment and projects, Pablo Andreão. In relation to the performance of the company of the fourth quarter of 2023 and the full year of 2023. We will start on Slide 2, discussing the results of the fourth quarter of 2023. In the following slides, we will also discuss in more detail the explanations for the behavior of the main lines of the income statement. These are the financial highlights of COPASA's fourth quarter of 2023. Our net revenue amounted to BRL 1.8 billion, a growth of almost 27% compared to the last quarter of 2022. As regards cost and expenses, the amount recorded in the fourth quarter of 2023 was BRL 1.2 billion, an increase of 11.5% when compared to the BRL 1.1 billion of Q4 '22. In relation to other net operating income in the fourth quarter of 2023, the value was negative at BRL 97.2 million, while in the fourth quarter of 2022, we had a positive result of BRL 19.2 million. Speaking now of EBITDA adjusted by nonrecurring items, the value reached BRL 712 million in Q4 '23, a growth of 34.3% in relation to the same period last year. As for financial results, the amount was negative at BRL 22 million, whereas Q4 '22, the value had been negative at BRL 77.4 million. As a result of the effects presented, net income reached BRL 355.2 million in the quarter. On Slide 3, we will provide details of the main variations in the accounts that make up the income statement, starting with revenue from water, sewage and solid waste, the fourth quarter of 2023 showed a growth of 26.7% compared to the same period of the previous year.

Our revenue in the fourth quarter was impacted by the increase of more than 8% in the measured volume of water and sewage when compared to the figures recorded in the previous year. This strong volume presented was due to higher temperatures. We also had the effect of the 15.7% tariff adjustment implemented in January 2023. On Slide 4, we saw the evolution of manageable costs, which were BRL 810 million in the fourth quarter of 2023 corresponding to an increase of 12.5% in relation to the same period of last year. Below we will provide the details of the variations recorded in the main items that make up those costs. Personnel costs had an increase of 10.6%, reaching BRL 436.3 million, mainly due to the effect resulting from the collective bargaining whose base date was November with INPC being applied, which was 4.14% reflecting the value of salaries, vacations and the 13th salary and benefits. We also had an extraordinary expense that paid all at once in November 2023 in the amount of BRL 8 million according to the Collective Bargaining Agreement. Personnel were also affected by the increase in net income. The basis for calculating the amount to be paid as profit sharing and in the EBITDA margin, which is the basis for the variable remuneration and position commission. Regarding the PDVI, the Voluntary Separation Program, around 95% of the employees who joined the program have already been terminated. So almost the entire savings have already been accounted for.

Outsourced services grew by 14.9% in the fourth quarter of 2023. The growth explained in particular by the increase of BRL 7.2 million, in maintenance services for systems assets, driven mainly by the new maintenance contract in operational water and sewage units as well as contractual readjustments. Another factor that impacted outsourced services was the expenses incurred in the fourth quarter of 2023 with outsourcing build reading and delivery services and the amount of BRL 4 million. In turn, the value of impairment of receivables dropped presenting a value of 12.4% lower than the previous period due to the reduction in delinquency rates, which reached a value below 3%, the lowest rate observed in the last 7 years. As a result, above all of the intensification of collection initiatives as well as the debt negotiation campaign. We also had the result of changing the way in which amounts recovered from written-off accounts are recorded, which as of the first quarter of 2023 began to be recorded as credit under this line. Finally, tariff transfer to municipalities increased by 55% due to the increase in net water and sewage revenues. And in the number of municipalities authorized by the regulatory agency to receive resources related to municipal sanitation funds. On Slide 5, we show the performance of non-manageable costs, which showed an increase of 29.2%, in which BRL 192.9 million in the fourth quarter of 2023. Now let's go into a little more detail about the main accounts that make up this group. Electricity costs increased by 36.4% due to the 4.3% increase in the company's electricity consumption following the increase in the distributed volume of water. The 13.3% adjustment applied by CEMIG to energy tariffs applicable in the captive market and the 3% reduction in the subsidy as well as changes in the way taxes are calculated. However, the increase in the value of electricity costs were partially offset by the 17% reduction in expenses related to electricity and the units that migrated to the free market throughout 2023. It's worth mentioning that these units represent about 47% of the company's total energy consumption. In turn, spending on treatment materials showed a drop of 10.5% due to the reduction in costs with the purchase of chemical products used in the water treatment process. With this, total costs and expenses of COPASA in the period in question reached BRL 1.18 billion, corresponding to an increase of 11.5%. On Slide 6, we present the other revenues, other expenses, equity pickup and financial results. In relation to other operating revenues, the account reached BRL 11.6 million with a drop in the value of the account, mainly due to the change in the form of accounting for the values under recovery of written-off accounts line, as mentioned previously. In turn, the other operating expenses, whose value recorded in Q4 '22 was negative BRL 13.9 million went to a negative value of BRL 108.8 million in the fourth quarter of 2023. An important point to mention is the comparative basis since in Q4 '22, we had reversals of provisions related to civil and tax lawsuits, which had an impact on that quarter. And in Q4 '23, we had the extraordinary and nonrecurring expenses due to the legal agreement normalized and settled in December 2023 aimed at the closing of the 2021 compensation claim whose impact was in the order of BRL 34 million. The financial result finally showed the reduction in deficit reaching a negative level of BRL 22 million in Q4 2023 compared to a negative value of BRL 77.4 million in Q4 '22. Financial revenue increased by BRL 20.7 million due to the increase in actual gains in financial investment due to greater cash availability in Q4 '23 compared to the previous year. Financial expenses fell by BRL 34.6 million, mainly due to the interest rates and monetary restatement during the reclassification of lawsuits in Q4 2022, which increased the amounts recorded in that quarter. Moving on to Slide 7. We present the quarterly data for EBITDA, EBITDA margin and income. Adjusted EBITDA for extraordinary and nonrecurring factors showed a growth of 34.3% in relation to the comparative period due to the increase in revenue at levels higher than costs, as shown in previous slides. This value corresponds to a margin of almost 40% against 36.9% in Q4 2022. Net income in the fourth quarter was in 2023 was BRL 355.3 million as a result of the fact also mentioned in the previous slides. On Slide 8, we present the financial highlights of the company. When observing the annual net revenue rate in 2023, there was a growth of 21.5% in relation to 2022, reaching the level of BRL 6.5 billion, mainly due to the growth in savings and the volume measured per item in addition to the tariff adjustment of 15.7% implemented in January 2023. Costs and expenses showed an increase of 12.4% in 2023, totaling BRL 4.6 billion. When disregarding the PDVI, which we implemented in 2023, the increase in costs and expenses was 9.6% in the year-on-year comparison. The main item in our cost structure, personnel, which represents around 36% of our cost and expenses increased by 9%, and the factors behind this increase are practically the same as those that justify the quarterly variations that we have already discussed. Other net operating income and expenses in the year 2023 showed an increase resulting from payments related to lawsuits in 2023, especially due to the judicial settlement aimed at closing the case for compensation under the claim of economic, financial imbalance in the construction contracts signed with COPASA whose impact on the result was BRL 34 million as well as a change in the way accounts written off were recorded. Due to known recurring items, COPASA's adjusted EBITDA reached BRL 2.7 billion, representing an increase of 35% compared to 2022. EBITDA margin was 40%, the highest EBITDA margin observed since 2011. Thus, the net come off in 2023 reached the level of BRL 1.4 billion, an increase of 64% compared to the previous year.

Now on Slide 9, we present the data from the investment program of the company. In 2023, we had a record performance as to investment program, which reached BRL 1.63 billion, of which BRL 680 million were allocated to water and BRL 671 million for sewage. BRL 79 million for business development and BRL 199 million related to capitalizable expenses. On this slide, we also present the values of investments planned for the next 5 years for which average investments are planned at BRL 1.95 billion per year. As for funding, today, we have BRL 1.8 billion amount already contracted to be used in the investment plan. As for Copanor, the investments made amounted to BRL 31.5 million in 2023. On Slide 10, we will discuss the evolution of the company's debt, covering data on gross debt, net debt and leverage. Gross debt reached in December 2023, the amount of BRL 4.8 billion, of which 15% in the short term. Net debt went from BRL 3.1 billion in December 2022 to BRL 3.8 billion in December 2023. As for leverage, measured by net debt over EBITDA, the indicator stood at 1.5x. On Slide 11, we discuss the representativeness of indexors, average coupon, level of indebtness and the rating. CDI corresponded to 34% of COPASA's debt, a drop of 15 percentage points in relation to the comparative period, and this reduction CDI share was due to amortizations recorded throughout the year.

The increase in debt share in IPCA rose to 30% in December 2023 and can be attributed mainly to the raising of funds through the 18th debenture issue, which took place in September in the amount of BRL 900 million with BRL 786 million linked to the IPCA. We had an increase in debt in foreign currency, which rose to 14% due to the release in 2023 of around EUR 80 million related to the contract with the BEI. Regarding average coupon, the percentage reduced to 8.7% due to the reduction in interest rates. In turn, the level of indebtedness measured by net debt over shareholders' equity went from 43% in December 2022 to 50% in December 2023. As for our dividend policy, with regard to regular dividends, the percentage of net income distributed varies from 25% to 50% and payments are made within 60 days of approval with the exception of the amount from last quarter, whose payment is defined by the Board meeting. As for extraordinary dividends, the policy provides that there may be distributions of extraordinary dividends as resolved by the Board of Directors and in compliance with established guidelines. In 2023, the payout was 50% of adjusted net income with the announcement of dividends that took place on the 20th. The total amount reaching BRL 637.8 million of which BRL 387.5 million have already been paid, and the remainder will have the payment date defined in the annual meeting. Still in 2023 in December, extraordinary dividends were approved and paid in the amount of BRL 372.5 million is in the part of the balance of the earnings retention reserve account existing at the end of the previous year. The payout will be maintained at 50% of the adjusted net income. And on March 20, the shareholder compensation was approved in the amount of BRL 172.4 million. On the next slide, having finished presenting the financial data. We will now discuss the concession contracts referring to December 2023. Copasa and Copanor jointly own 638 water concessions, of which 633 are in operations. As for sewage, there are 309 concessions, 273 of which are operated. As a result, Copasa serves 11.8 million inhabitants with water and 8.6 million with sewage services. In the table on the right are Copasa's 10 main concessions, which together account for almost 50% of total revenue. In December 2023, the company had 31 expired concessions and 2 concessions whose contracts are considered legally void. These concessions together represent 4.3% of revenues. On Slide 15, some of our operational data. The delinquency rates corresponding to the relationship between the balance of accounts receivable overdue between 90 and 359 days and the total amount invoiced in the last 12 months continued its downward trend in relation to the comparative period, reaching a percentage of 2.97%, lower level observed in the last 7 years. In turn, the loss index measured by the difference between the volume distributed and the volume measured also showed the drop going from 39.7% in 2022 to 38.6% in 2023. Finally, due to the voluntary separation program implemented, the ratio between the number of employees per thousand water and sewage connections also decreased and now corresponds to a multiple of 1.23. On Slide 16, we will briefly discuss how we are approaching the ESG topic in the company. As part of its water protection commitment, COPASA has maintained since 2017, the prominent sewage program whose objective is to protect and recover the micro river basins used as a source of abstraction. The program has already invested BRL 116 million in the social and environmental actions since its beginning, covering to 191 municipalities until December 2023 and favoring more than 9.7 million people considering the population supplied. On Slide 17, the company has invested in energy efficiency initiatives such as the purchasing energy on the free market and the installing of photovoltaic solar plants and the reservoirs reflecting pools. We are also taking actions to reduce the level of water losses, which fell by 0.8 percentage points in 2023. Among the most relevant actions, we can mention the continuity of the policy of replacing water meters, which this year around 20% of our water meter network. We also saw to reduce losses through a performance contract. On Slide 18, in relation to gender equality, Copasa is committed to increasing female share in senior leadership positions, setting the target of 37% of women in leadership position by 2025. In 2023, women occupied approximately 36% of leadership positions. Copasa also promotes the female mentoring program, which is in its third edition and includes 33 mentees in 2023. On Slide 19, we see the coverage rate for COPASA's water services that continue to be above 99% higher than that recommended by the new sanitation sector framework. As for the coverage rate of collected and treated sewage, it's currently at 75% and the goal is to reach 90% of the new -- under the new sanitation framework by 2033.

Closing our presentation, we show our water resource used in the metropolitan region of Belo Horizonte. The levels of the reservoirs that make up the Paraopeba system that is [indiscernible], which are responsible for supply 51% of MBH or at more than 80% of their capacity. In the Rio das Velhas system responsible for 43% of their regional supply and whose information is highlighted on the right side. The average flow of the last 15 days prior to March 10, 2024, was 34 cubic meters per second, showing a very significant surplus in relation to the volume captured, which is approximately 7 cubic meters per second. Therefore, due to the company's efforts to align with sustainable practices and themes, COPASA was selected to join the B3 corporate Sustainability Index, ISE portfolio, which came into effect on January 2, 2024. The company's inclusion in the new easy portfolio proves the robustness of COPASA sustainable practice and reinforces its ESG strategy. With this, we end the presentation of the results of the fourth quarter of 2023. And I turn the call to our CEO, Guilherme Duarte. You may proceed, sir.

[Guilherme Augusto Duarte Faria, executive]

Good morning, everyone. I hope you can hear me well. First of all, I would like to thank you for attending our results -- earnings call to discuss the results of 2023. Maybe a coincidence that today, we are celebrating the water day. And this result shows the permanent effort that COPASA has made a big part of this international effort and this is in the agenda of our water resources so that it can always be present in the agenda of public managers. And I would like to reinforce our commitment as a supply company to take care of our springs and take care of their qualities, providing the quality to our users and as a company in concessionaire of water and sewage treatment to return water into the environment in good quality, and this is something that needs to be reinforced, especially on water stake.

I would like to mention that the company has recently published the update of its hallmark. It's a hallmark that had a history of nearly 60 years. It is almost the same age as the company. And this marketing strategy is not summarized in a strategy for announcement and disclosure but rather complement to the proposal to change the culture, which is underway at our company. It's a company that seeks to be more efficient, leaner, and with a focus on providing better services to clients and delivering value to the shareholders. So a more dynamic in the near company is a result of the efforts that are made within the company. As to the results we presented today, as we understand, the results are very favorable especially when we compare to the same period of the previous year. So I would like to reinforce our intention of the management of the company to maintain the cost discipline focused especially cost on personnel, electricity, purchase of chemicals, outsourced services. And for each of those lines, we have always action plans underway for each of them. And we do a daily monitoring by the management. I would also like to highlight the focus of this management team on the performance of CapEx. And CapEx performance brings to us 2 positive dimensions. First is the reach of our levels of universalization. We have observed that the universalization index in the supply network has maintained and the progress to 75% on the coverage of sewage services with the collection and treatment of sewage, which is in line with the atypical planning of the company.

And the second folk is related to expansion of the regulatory asset basis for the next tariff cycle. And this is the asset base, which is remunerated and generates returns to shareholders. Generally speaking, we had a typical year with climate changes that had not observed in previous years, and that was reflected in positive volumes to the company. But on the other hand, it's always important to mention the challenges that the company has to face considering the history. So we can also observe intermittent scenarios in our supply activities, they generated a very effective response by the company that reinforcing our commitment to provide better services to our clients. So as to water, we want to have the coverage network, universalized not only in relation to the water supply with the proper quality but in the right amount so that clients will not suffer with intermittent problems. The company has, in fact, been developing action plans in order to mitigate those supply problems focused on the metropolitan region of Belo Horizonte. And we have already observed it last week, new heat wave and the company had to -- had a number of complaints and the number of intermittence reduced when we compare to the history of last year. So we can see the volumes that have been delivered to our clients, and we have also seen the level of satisfaction by our clients. And as to 2024, the management sees the year with good prospects, focused on maintaining a growing CapEx at the company, focused on providing better services to our investors and also meeting the targets of universalization and delivering results -- financial results, growth of EBITDA to users. So we will open the Q&A session, I'll now go back to you.

[Carlos Augusto Berto, executive]

Thank you President. We are now going to open the Q&A session. [indiscernible] over to you.

[Operator]

[Operator Instructions] Our next question comes from Joao Fagundes with Bradesco BBI. You may proceed, sir.

[Joao Fagundes Moreira da Silva, analyst]

First, I would like to congratulate you all on the results of the company in 2023. My question is related to the personnel line. And despite of the Voluntary Separation Program, there was an increase year-on-year. Could you explain the dynamic of this cost? And -- would this level be a reference for 2024. Thank you.

[Guilherme Augusto Duarte Faria, executive]

Thank you, Joao. This is Guilherme Duarte speaking. In spite of the fact of the PDVI at the end of the first half of 2023. And this Voluntary Separation Program had the dismissals made along the second half of the year and about 30%, 35% of employees were disconnected from the company in the past 2 months of 2023. We see that the line is under control. Those 2023 had about 700 of head count below the level observed in the beginning of 2023. And in relation to higher expenses, we have to mention that we have the maintenance of net profit sharing of the company -- profit-sharing program of the company. It's important to mention that this profit sharing initiative is closely connected to corporate targets. Internal targets, which are connected to the departments of the company, especially those targets that we have in the regulatory ex-factor. In other words, we replicate those indicators for each employee of the company so that the employee can feel engaged and their various performance along the year that would reflect positively to the company. In the adjustment of 2024, we had an ex-factor, which was positive in the order of BRL 110 million. So we understand the profit share initiative must be maintained and this is also related to this profit sharing distribution that goes in line with the financial results of the company. Other than that, this is driven by the collective bargaining program or agreement that was agreed with the union that was implemented as of December. So your question also involves the comparisons of December, January and February and onwards. Our prospect is that there will be another reduction in the payroll. In spite of the collective bargaining that has already been applied considering that the company has been implementing actions to reduce the cost of extra hours. And we have already seen the effect, especially after February and the company is closely monitoring on how the workforce is going to be working, focused on optimizing and reducing extra hours so that we can have positive effects in the future results.

[Operator]

[Operator Instructions] We will now read the questions that were sent in text. I'm going to read the question. The first question is by Guilherme Lima with Santander. Could you discuss how the BH contract could be renewed considering federalization and if there is no renewal prospect, how do you see the strategy of continue using the CapEx for the concession? Our CEO will answer this question.

[Guilherme Augusto Duarte Faria, executive]

Good morning, Guilherme. Thank you for the question. Guilherme, as to the legal aspect and speaking only about the legal and regulatory aspects and the possibility of privatization. So there may be an extension of the contract if the controllers of the company change to the private initiative. If there is any federalization possibility, there is no interpretation of the sanitation framework that would allow us to consider this possibility. So the extension of the contract is not provided for in the framework. So this is only applicable in the privatization considering that all those scenarios are in hypothetical aspects. So we continue with the mature date of up to 32.

As to the concession of Belo Horizonte, I would like to mention 2 important points. First, we have commitments to the municipality to maintain the quality of investment. So it's always reasonable to understand that we are going to continue investing focused on the improvement of the supply as well as the treatment and collection of sewage. And the second point is that in the metropolitan region of Belo Horizonte, the production structure and the sewage collection and treatment system such as [indiscernible] station and dam of Paraopeba as well as the treatment of sewage [indiscernible]. So these are assets that are owned by COPASA.

These are not assets that can be reversible to the municipalities. Because they are assets of the company, there is no direct correlation with the term of the concessions. And if COPASA is no longer a concessionaire in Belo Horizonte and using your example, the municipality would be a purchaser of treated water from the company since there's no other abstraction source in the municipality and also will be hired by the company for the sewage treatment. And these are in the PPE and they are not considered in the reversible asset.

Another point in relation to our regulation, every investment that can be considered responsible inside the concession and then can be included in the asset may receive indemnation if it's not amortized up to the end of the concession. So we have to consider those 3 factors. And we are very comfortable in continuing making those investments.

[Operator]

Another question from [indiscernible]. He is in individual investor. What is the policy for dividend payment?

[Guilherme Augusto Duarte Faria, executive]

I will answer according to the approvals, Board approval. The payout will be 50% of net income.

[Operator]

Next question comes from Antonio [indiscernible]. Individual investor as well. The losses that were in spite of improving, they still have a high level, about 40%. What are the actions of the company to reduce this loss. Our CEO will answer this question.

[Guilherme Augusto Duarte Faria, executive]

Good morning, Antonio. Thank you for asking the question. As discussed by Dr. Carlos Berto in his presentation, the company has been posting reduction in the loss index. But we, of course, understand that the level is above of a comfortable position. I can mention that in addition to the measures already presented by Mr. Alberto, the company has been maintaining a focus on the commercial and physical losses. And therefore, we have separate actions as for parent or commercial losses, the company keeps on replacing more than 900,000 hydro meters per year. The hydrometer network that we currently have is approximately 3.7 years on average, that's the age. It's a recent network and the replacement will bring in a very positive effect on those commercial losses. And we also comply with our performance contract that includes the connection of new clients, especially in areas which are [indiscernible] in order to reduce this apparent loss. In relation to physical losses to 2024 is already hiring about 300 kilometers of network replacements in the metropolitan region of Belo Horizonte. And 100 kilometers in the country focused on the areas where leakages are reported the most and since last year, we have had an effort to maintain and replace pressure reducer valves and also the installation of micrometers in the sectors of our area focused on loss reduction. So we understand that these are measures that would not have the effect in the short term, but they are compliant with our policy to reduce losses, commercial or fiscal losses.

[Operator]

Our next question comes from [indiscernible] what's the percentage of net income that would account for the concession in Belo Horizonte?

[Carlos Augusto Berto, executive]

It accounts for 27% of net income Belo Horizonte, net revenue Belo Horizonte.

[Operator]

Another question by Leandro Batista. With the inflation of photovoltaic complexes in the reservoirs, can the company estimate the reduction of expenses with energy in the next years electricity.

[Guilherme Augusto Duarte Faria, executive]

I'm going to recap all the effort that the company has made in the control of its expenses related to electricity costs. The company has already migrated nearly fully of its consumption, high voltage that can be migrated to the free market, as we have already observed more than 50 average megawatts of consumption in this sector. The company probably has 100 and 150 average megawatts for the sector per the moment.

As mentioned by Carlos Berto, about 50 average megawatts are located in low voltage and they are migrating to distributed generation, especially related to the construction of the plant and reflecting all of Rio Manso reservoir. But according to CEMIG agreement, before the farm is being constructed because it's still in the phase of environment permitting. We are already migrating the low-voltage units that started in January this year to the distributed generation using CEMIG plants until our own plants are completed. So those 20 average mega up to May this year, 18 will be migrating. We will have migrated to distribute generation with an expectation that in this range of consumption, we will have a reduction of 15% as agreed with the distributing company. So this is an effect that is already going to be observed in the first half of 2024. The remaining 30 average megawatt that are not associated with the market or the distributed market belongs to the retail market. And today, they are for medium voltage below 500 kV, but they are not adequate for the migration to the free market or to the distributed generation. So we are evaluating with the supplier as well as with CEMIG how we are going to migrate this retail market for high production of energy. And we have initial expectation to reduce at least 20% in the cost of this segment. So the company is very focused on providing a definite solution in 2024 to all its range of energies, not only migrating to renewable sources, which will contribute to our ESG agenda, but also ensuring better costs to the company.

[Operator]

[Operator Instructions] Since there are no further questions. I would like to turn the call over to Mr. Carlos Berto for his final remarks. You may proceed, sir.

[Carlos Augusto Berto, executive]

Once again, I would like to thank you for attending our conference call to discuss our results of 2023. We remain at your disposal with our IR area and have a good day, everyone. And see you next time. COPASA conference call is now closed. We would like to thank you for participating and have a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]