Central Puerto S.A. Q2 FY2022 Earnings Call

Good morning and welcome to the Central Puerto conference call, following the results announcement for the second quarter ended on June 30, 2022. All participants will be in a listen-only mode. Please note, this event is being recorded. If you do not have a copy of the press release, please refer to the Investor Support section on the company’s corporate website at www.centralpuerto.com. A replay of today’s call may be accessed by accessing the webcast in the Investor Support section of the Central Puerto corporate website. Before we proceed, please be aware that all financial figures were prepared in accordance with the IFRS and are stated in Argentinian pesos, unless otherwise noted. It is worth noting that the financial statements for the second quarter ended on June 30, 2022, include the effects of inflation adjustments. Accordingly, the financial figures mentioned during the call, including the data from previous periods and the growth comparisons, have been stated in terms of Argentine pesos at the end of the reporting period. Also, please note that certain statements made by the company during this conference call are forward-looking statements, and we refer to the forward-looking statements section of our earnings release and recent filings with the SEC. Central Puerto assumes no obligation to update forward-looking statements, except as required under applicable securities laws. To follow the discussion better, please download the webcast presentation available on the company’s website. Please be aware that some of the numbers mentioned during the call may be rounded to simplify the discussion. On the call today from Central Puerto is Fernando Bonnet, Chief Executive Officer; Enrique Terraneo, Chief Financial Officer; and Federico Bozhori, Financial Controller. Today’s presentation will be carried out by Federico as Fernando has a cold and has lost his voice. I will now turn the call over to Federico Bozhori. Mr. Bozhori, you may begin. One moment. We have a slight technical difficulty. Just give me 1 second.

Thank you very much. Good morning and welcome. We are joining you today with our management team from our site, Argentina, to report results for the second quarter of 2022. After the presentation, we will answer any questions you may have. I would like to begin today's call by analyzing the recent events, the industry in general, and finally, the operating figures of the second quarter of 2022. First, I would like to comment on the latest regulatory news in the industry. On April 21, the Secretariat of Energy issued Resolution number 238/22, which updated remuneration prices for energy and capacity of units under spot energy framework. Remuneration values increased by 30% retroactively to February '22 and an additional 10% increase in June 2022. This resolution also eliminated the use factor adjustment that reduced the capacity payment calculation for the units with lower dispatch, paying all generation units regardless of dispatch. In our steam turbines with low dispatch, this change implies an improvement of 30% in their capacity payments. Secondly, I would like to mention the following updates regarding Central Puerto. Central Puerto successfully bid in CAMMESA's auction for 10 megawatts of dispatch priority for our Parque Solar San Carlos Project under MATER framework located in San Carlos, Salta province. Now I would like to comment on the main metrics of the industry, as you can see on Pages 2 and 3. In terms of its total capacity, the system reached 42,882 megawatts in the second quarter of 2022, resulting in a 1% increase compared to the second quarter of 2021, mainly based on new renewable projects developed. As of June 30, 2022, the installed capacity continues to be 59% thermal, 25% hydro, 12% renewable, and 4% nuclear. In the second quarter of 2022, energy generation increased 1.8% to 34,486 gigawatts compared to 33,872 gigawatts in the second quarter of 2021, mainly due to an increase of 41% in hydro, a 12% increase in renewable, partially offset by an 8% decrease in thermal and a 15% decrease in nuclear. Renewable rise was due to the new installed capacity and hydro is related to the increase in water inflows that softened the drop that the region had experienced last year. For thermal units, there was low dispatch due to the increase in hydro and an overall lower availability of 77% for the second quarter of 2022 as compared to 83% in the second quarter of 2021. As per nuclear's source, the decrease was related to the shutdown maintenance of Atucha II nuclear plant. During the second quarter of 2022, the main sources of energy generation continued to be thermal and hydro, with a share of 60% and 32%, respectively, while renewables were up 13% and nuclear were 6%. In the first half of 2022, energy generation increased 1.4% to 70,205 gigawatts compared to 69,204 gigawatts in the first half of 2021, mainly due to an 80% increase in renewable and 8% increase in nuclear and 4% in hydro, partially offset by a decrease of 3% in thermal. Finally, as you can see on Page 4, energy demand increased 6%, up to 34,948 gigawatts compared to 32,858 gigawatts in the second quarter of 2022 where commercial users grew 7%, residential grew 7%, rate demand grew 4%. As of the second quarter of 2022, demand structure was 46% represented by residential users, 27% by commercial activity, and the remaining 27% was related to great demand industrial/commercial. In the first half of 2022, the composition remained stable, with 46% residential, 28% for commercial, and 27% linked to great demand industrial/commercial. Going now to our key performance indicators for the quarter. As you can see on Page 5, energy generation in the second quarter of 2022 was 4,280 gigawatts of electricity, 14% higher than the same period of 2021. The increase was mainly caused by a 39% increase in energy generation from thermal units, mainly from Terminal 6 due to high dispatch related to the combined cycle full operation and higher dispatch of Puerto’s steam turbines. A 45% decrease in energy generation from the hydro plant Piedra del Aguila due to the lower water inflows of Limay River compared with the second quarter of 2021. A 4% decrease in energy generation from renewable units due to lesser wind results. Regarding the viability of our thermal units during the first quarter of 2022, it reached 83%, in line with the strong availability history of Central Puerto's equipment. As a reference, the market average availability for thermal units for the second quarter of 2022 was 77% according to data from CAMMESA. Steam production increased 104%, totaling 585,645 tons produced during the second quarter of 2022 compared to 287,484 tons during the second quarter of 2021 due to the commissioning of the Terminal 6 cogeneration plant. Going now to our key performance indicators for the first semester in the first half of 2022. Energy generation increased 23% to 8,865 gigawatts compared to the 7,218 gigawatts for the same period in 2021. As a reference, domestic energy generation increased 1% during the first half of 2022 compared to the first half of 2021 according to data from CAMMESA. The increase in the energy generated by Central Puerto was due to an increase of 37% in electricity generation for thermal units, mainly due to Terminal 6 generation, the recovery to the average production of the Siemens branded combined cycle of the Luján de Cuyo plant, and a 5% increase in the energy generation from renewable units. This was partially offset by a 16% decrease in energy generation from the hydro plant Piedra del Águila due to lower inflows of Limay River. During the first half of 2022, machine availability for thermal units reached 83% compared to 89% in the same period of 2021 due to the above-mentioned extraordinary maintenance in Luján de Cuyo Cogeneration and one steam turbine from Puerto site, certain small failures and unavailability in some steam turbines. As a reference, the market average availability for thermal units for the same period was 76% according to data from CAMMESA. Steam production increased 90%, totaling 1,046,380 tons produced during the first half of 2022 compared to 549,515 tons during the first half of 2021 due to the commissioning of Terminal 6 cogeneration. And now I will comment on the financial highlights. First, I would like to comment on certain key financial information related to the Brigadier Lopez Financial Trust. On April 5, 2022, the existing financial debt under the Brigadier Lopez Financial Trust was concerned. The scale and majority of this indebtedness was due in August 2022 and was canceled in April as a liability management policy with the aim to reduce financial costs. I will now comment on the results of the second quarter of 2022. Going now to the results for this quarter. As you can see on Page 9, our revenues were ARS 19.1 billion as compared to ARS 20.1 billion during the second quarter of 2021. This 5% decrease was mainly due to, first, a 37% decrease in Spot/Energía sales, which totaled ARS 6.4 billion in the second quarter of 2022 as compared to ARS 10.2 billion in the second quarter of 2021. This was due to higher inflation and price adjustments and lower generation from the hydro plant Piedra del Aguila, scheduled maintenance of certain steam turbines from Puerto site, and the commitment of Terminal 6 plant and the beginning of that contract, partially offset by, first, a 79% increase in the steel sales, which totaled ARS 1.1 billion in the second quarter of 2022 compared to ARS 0.6 billion in the second quarter of the previous year due to a 104% production increase; and second, a 26% increase in sales under contracts, which amounted to ARS 11.1 billion during the second quarter of 2022 as compared to ARS 8.8 billion in the second quarter of 2021 due to a higher generation of terminal sales and their performance of wind plant by higher inflation adjustment over the peso depreciation in the period. Going to Page 10, we can see the changes in our EBITDA, excluding impairment and fluctuating FX differences and interest, which was ARS 12 billion in the second quarter of 2022 compared to ARS 11.3 billion in the second quarter of 2021. This 6% increase was driven by the following changes: first, a 5% decrease in revenues explained before; second, a 5% decrease in the cost of sales that totaled ARS 10.5 billion compared to ARS 11 billion in the second quarter of 2021, primarily driven by lower operational costs; and third, an 8% increase in administrative and selling expenses that totaled ARS 1.3 billion during the second quarter of 2022 compared to ARS 1.2 billion in the second quarter of 2021. Continuing with Page 10, we can see that the consolidated net income was ARS 2.4 billion in the second quarter of 2022 compared to a consolidated net loss of ARS 7.2 billion in the same period of the 2021. In addition to the above-mentioned factors, net income was negatively impacted by: first, an increase in financial expenses, which amounted to ARS 6.9 billion during the second quarter of 2022 compared to ARS 4.7 billion in the second quarter of 2021, mainly due to an increase in foreign exchange differences and a higher depreciation of Argentine peso during the quarter; second, an increase of net monetary position loss, which amounted to ARS 4.8 billion during the second quarter of 2022 due to a higher inflation during the second quarter of 2022 and higher balance of monetary assets and was positively impacted by: first, the decrease in impairment charge of property plant and equipment that totaled ARS 6.4 billion during the second quarter of 2021; second, a 155% increase in foreign exchange defense on operating assets, mainly related to FONI trade receivables that generated ARS 4.6 billion gain during the second quarter of 2022 compared to ARS 1.8 billion gain during the second quarter of 2021 due to a higher depreciation of the Argentine peso during the quarter; third, an increase in financial income that amounted to ARS 2.2 billion in the second quarter of 2022 compared to minus ARS 0.3 billion in the second quarter of 2021, mainly due to higher financial asset results in the second quarter of 2022; and fourth, lower income tax expenses that amounted to ARS 1.1 billion in the second quarter of 2022 compared to ARS 5.5 billion in the second quarter of 2021. Additionally, the share of profit of associates was ARS 0.3 billion gain during the second quarter of 2022 compared to a loss of ARS 0.7 billion in the second quarter of the previous year. FONI collections related to the trade receivables for Vuelta de Obligado Plant totaled ARS 2.1 billion in the second quarter of 2022 as compared to ARS 3.9 billion in the second quarter of 2021. The amounts are being collected on time and according to the signed contract. Going to Page 11, you can see our cash flow for the second quarter of 2022. Net cash provided by operating activities was ARS 16.9 billion. This includes ARS 2.1 billion in collection from Vuelta de Obligado's installment. Thank you. And now we invite you to ask any questions you may have.

Your first question is coming from Frank McGann of Bank of America.

I have a couple of questions. First, what are the current plans for any stoppages or maintenance in the second half of the year? Also, do you expect any changes in demand in the second half compared to the overall trends you've observed in the first half? Additionally, regarding the hydro situation for Piedra del Águila, you mentioned in the release that conditions started improving in June. How significant is that improvement, and how do you view the overall conditions as you look into the third quarter? Lastly, I understand that the contract for that plant expires next year. Are there any discussions with the government or plans for renewing the contract?

Thank you for your questions, Frank. To address your first question, we are not anticipating significant maintenance for the remainder of the year. We will have some routine maintenance, but nothing major is expected for our thermal or hydro equipment. The first substantial maintenance we will undertake is next September, when we perform an intervention on our combined cycle in Buenos Aires. Regarding demand, we are witnessing some recovery. Industrial demand is back to levels similar to 2019, having fully recovered from COVID. However, we don't project significant increases in demand at this time, despite signs of industry growth. For residential demand, we need more clarity on how the new subsidy restrictions will work, which the government recently announced. This will affect demand forecasting, particularly with the projected 400 megawatts per month over two months. Currently, we do not see a substantial increase in residential demand in the near future. As for Piedra del Águila, we are observing improved inflows this winter, with higher snow levels than anticipated in the river. While we are recovering the level of the ramp, it's too early to determine if we are on track to reach medium production levels, especially without consistent rain during the summer. We are seeing improvement, but we cannot yet confirm if it will continue. Regarding the concession talks, we have had some discussions with the previous government about energy matters. With the new administration, we believe it's necessary to restart discussions. We haven't yet spoken with the new ministry of economy, so we need to re-engage in dialogue to understand the new expectations regarding concessions. It's too soon to provide detailed insights on this, but addressing it remains on our agenda, and we hope to have more updates in the next quarter.

Okay. If I could follow up just quickly. Could you remind us what percentage of EBITDA, if you can disclose it, Piedra del Águila represents? And what percentage of EBITDA is currently in U.S. dollar PPAs, if you have the number?

Yes. Right now, with all the equipment we have under construction installed, approximately 70% to 75%, depending on the performance of Piedra del Águila, is in dollars, while the rest is in pesos at the current exchange rate. The percentages have significantly changed after completing the construction of projects started in 2017 and 2018. In terms of EBITDA, Piedra del Águila generates around $30 million. That's about the EBITDA figure for Piedra del Águila.

Your next question is coming from Ezequiel Fernández from Balanz.

I have five questions. I apologize for the extension, but I promise they will be quick. I would like to address them one by one, if that’s okay. The first question is about the CAMMESA payment days. How early are they right now, or how did they close the quarter? What occurred in July and early August?

Thank you for your question. Regarding the quarter, the payment situation has improved. Previously, there was a delay of 30 days, which decreased to almost 15 days by June. However, after the administrative change, we experienced additional delays at first due to some signing issues and staff renewals in the economy and energy sectors. This resulted in delays increasing to 45 or 50 days. Currently, with the new changes in the economy, we are seeing delays of around 60 days. We anticipate that once the new personnel take office and start working, we could reduce this delay back to between 15 and 30 days.

Okay, great. Regarding Luján de Cuyo, I know you have been working on various structural fixes over the past quarters. I'm not sure if the situation has been resolved by now.

Sorry. Could you repeat your question about maintenance? What would you like to know?

Yes. About the level of overall availability at Luján de Cuyo, which had some issues last quarter.

Last quarter, at the end of June, we experienced a failure in one of our cogeneration units, specifically unit 26. This is similar to the issue we encountered last year with unit 27, which involved a problem with the GR box. The GR box is responsible for connecting the turbine to the generator, and according to Siemens, we need to replace some components of this GR box. The parts required are large and need to be transported via special cargo, leading to delays in securing a plane for delivery. We expect to have the unit operational again around mid-August, likely between the 15th and 19th. We do not anticipate any further problems this year, as we are replacing the main components and do not foresee additional failures related to the GR box.

Okay. Great. Regarding the San Carlos projects in Salta, congratulations on that. It's 10 megawatts. I don't know if you can share with us any CapEx expectation for the project and if you could break that down in terms of how much is for the panels and how much is for the transmission payment that you have to make to CAMMESA.

In terms of the new projects, we have been granted capacity for 10 megawatts. We anticipate receiving the confirmed capital expenditure this month, and we expect to allocate around $10 million for the CapEx, deploying approximately 30% by the end of the year and the remainder over the next two quarters. This project is connected to a 33-kilowatt line, so there won't be significant additional CapEx related to the transmission line. As previously mentioned, the primary components of the cost are the panels and trackers, which account for about 70%. The remaining costs are associated with civil works for some connections, but these are not a significant portion.

Okay. No, no. I was exactly referring to that, the amount of money that you need to pay to CAMMESA for the transport.

In terms of the capacity payment, it's around $150,000 per quarter is the amount of capacity payment that we need to pay to CAMMESA. The duration of this project will be around between 15 and 18 months.

In terms of the capacity payment, it's around $150,000 per quarter that we need to pay to CAMMESA. The duration of this project will be around between 15 and 18 months.

Quarter.

Per quarter until you finish construction?

Yes.

Okay. That's great. And I don't know if you have any updates regarding the Brigadier López closing.

We are still working on the project and analyzing the amount of capital expenditures in detail. We're also looking closely at the complexities related to COVID to ensure everything is ready when we complete our analysis. Additionally, we are conducting an extensive examination of how NASA maintains the equipment. This process requires time, and we are collaborating with Siemens on it. We are currently in the preliminary stages of analysis and aim to be prepared to launch the project when the economic and COVID-related conditions become clearer. However, we have not initiated the launch yet.

Great. I have a final one related to dividends. I understand that you're still limited by some of the covenants on the loans that you took. If we could expect that to be changed at some point in time this year or the next one.

We do not anticipate any changes this year. For the next year, we will need to pay a portion of the loan, which amounts to $35 million. We might be able to assess our ability to meet that obligation and potentially have some flexibility in that requirement, but definitely not this year.

I don’t know if you have any questions from the webcast that you’d like to address. It seems we have no additional questions on the phone lines. I will now turn it back over to the management for any closing comments.

Okay. Thank you, everyone, for your interest in Central Puerto. We encourage you to call us for any information that you may need. Have a great day.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your phone lines, and have a wonderful day.