Central Puerto S.A. Q4 FY2022 Earnings Call

Good morning, and welcome to the Central Puerto conference call following the results announcement for the fourth quarter ended on December 31, 2022, and full year 2022. 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 IFRS and are stated in Argentinian pesos, unless otherwise noted. It is worth noting that the financial statements for the fourth quarter ended on December 31, 2022, and full year 2022 include the effects of the inflation adjustment. 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 you 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 security 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. And now I will turn the call over to Federico Bozhori. Mr. Bozhori, you may begin.

Thank you very much. Good morning, and welcome. We are joining you today with our management team from Buenos Aires, Argentina to report on the results of the fourth quarter of 2022 and full year and then 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 for fourth quarter and full year of 2022 and the most recent financial news and results. I would like to mention the following updates regarding Central Puerto. On December 14, 2022, the Secretariat of Energy issued the resolution number 826 which increases the tariff for capacity power energy and energy generation under the base energy scheme. The resolution increases retroactively 20% from September of 2022, an additional increase of 10% from December of 2022, 25% increase from February of 2023, and 28% from August of 2023. On February 7 of 2023, through Resolution 59 of 2023, the Secretariat of Energy authorizes generators that have combined cycle units to sign agreements on availability of power and improvement of efficiency with the aim of encouraging the necessary investments in major and minor maintenance of the machines. Through this agreement, other generators undertake to achieve at least 85% availability of average monthly power in exchange for a new power and generation price. In the case of power, an amount of $2,000 per megawatt month is established plus the sum in pesos corresponding to 85% and 65% of the power value established in Resolution 826 of 2022 for the periods of spring and autumn and summer and winter, respectively. Additionally, the price for generated energy is set at $3.5 per megawatt hour in the case of using gas and at $6.1 per megawatt hour for alternative fuel. The adherence to the agreement by the company, together with improvements enacted by Resolution 826 represents a significant increase in the income of the thermal units, the effects of which will be fully verified in the 2023 period. On December 23, 2022, the ordinary general assembly of Central Puerto decided to distribute as a dividend the amount of PEs 2.88 per share. Regarding new investments and acquisitions, in line with our growth strategy focused on new opportunities in the energy sector and other businesses in which Argentina shows strong competitive advantages, we performed the following transactions. On December 27 of 2022, Proener, an affiliate controlled by Central Puerto, acquired 100% of the capital stock and votes of Forestal Argentina and Masisa Forestal. Both companies were acquired from Masisa Chile, consisting of approximately 72,000 hectares in the province of Entre Rios and Corrientes, of which approximately 43,000 hectares are planted with eucalyptus and pine. The transaction price was $69.4 million. This is the largest transaction in the forestry sector in the last 30 years in Argentina. In this way, Central Puerto becomes the main Argentine company in the forestry sector, a market in which foreign capital companies mostly operate. Central Puerto has made a strategic decision to invest in those sectors in which the country has clear competitive advantages. Argentina has one of the highest growth rates, not only in the region but also worldwide. Trees grow about 10 times faster than in the Northern Hemisphere. That is why the forestry sector provides one of the businesses with the greatest competitive advantages and higher growth potential in Argentina. It serves as a source of future business opportunities linked to carbon credits and energy generation with biomass. On February 17, 2023, Proener acquired from Enel Argentina, 75.68% of the capital voting and stock of Enel Generacion Costanera. The transaction price amounted to $48 million. By acquiring Central Costanera, Central Puerto reinforces its growth in Argentina, consolidating as a market leader in the generation sector. The value of Central Costanera represents a unique opportunity as a strategic asset. The growth potential of this acquisition is based on operational and corporate synergies, experienced management, and knowledge in technical and operational fields. We believe that it is necessary to increase the power availability of the Central Costanera machines in order to strengthen and cover the demand at the national level. All of this means that the acquisition costs do not accurately reflect the enormous growth potential of Central Costanera. Proener celebrated a stock purchase agreement with Enel Argentina and Enel Americas, in which Enel Americas agreed to sell to Proener its interest in Inversora Dock, representing 57.4% of Inversora Dock Sud capital and voting stocks. Enel Argentina agreed to sell to Proener its interest in Inversora Dock Sud of 0.24% of central Dock Sud capital and voting stocks, indirectly representing 41.25% of the capital and voting stock. This transaction is subject to certain conditions that were not accomplished at the time of this report. $55 million is the amount offered by Central Puerto to acquire the participation interest in Inversora Dock Sud. Now I would like to comment on the main metrics of the industry, as you can see on Page 5. In terms of installed capacity, the system reached 42,927 megawatts in the fourth quarter of 2022, compared to 42,988 megawatts in the fourth quarter of 2021, resulting in a 0.1% decrease. As of December 2022, the installed capacity is divided into 59% thermal, 25% hydro, 4% nuclear, and 12% renewable. In the fourth quarter of 2022, energy generation decreased 1% to 35,084 gigawatt-hours compared to 35,534 gigawatt-hours in the fourth quarter of 2021, mainly due to, firstly, a 10% decrease in thermal; secondly, an 83% decrease in nuclear, which was partially offset by a 60% increase in hydro; and a 7% increase in renewables. The decrease in thermal generation was mainly due to lower dispatch related to increased hydro dispatch and lower availability of certain machines, which caused an average system availability of 75% in the fourth quarter of 2022 compared to 78% in the fourth quarter of 2021. In the case of generation from nuclear sources, the decrease was related to the shutdown for maintenance at Atucha I and Embalse nuclear power plants, as well as a technical problem with the Atucha II turbines. In contrast, the increase in hydro generation is mainly related to the increase in the inflow of the Paraná River due to the opening of the gates of Brazilian dams on the Iguazú River, a tributary of the Paraná River, which softened the water inflow drop due to the droughts that occurred in the region. Regarding renewable energies, the increase in generation was related to the increase in installed capacity. In 2022, energy generation decreased 2% to 138,741 gigawatt-hours, compared to 141,797 gigawatt-hours in 2021, mainly due to: firstly, a 9% decrease in thermal generation; secondly, a 27% decrease in nuclear, which was partially offset by a 25% increase in hydro generation and an 11% increase in renewables. Energy demand increased 3% to 34,564 gigawatt-hours, compared to 33,478 gigawatt-hours in the fourth quarter of 2021, in which residential demand grew 4%, commercial 2%, and large industrial/commercial demand of 3%. This same trend can be observed in 2022, in which demand increased by 4% to 138,753 gigawatt-hours, compared to 133,477 gigawatt-hours in the 2021 period. In which residential energy demand grew 4%, commercial activity grew 5%, and large industrial/commercial demand grew 2%. Going now to our key performance indicators for the quarter. As you can see on Page 8, energy generation during the fourth quarter of 2022 was 4,687 gigawatt-hours, 26% higher than the same period of 2021. The increase was mainly caused by first, a 2% increase in energy generation from thermal units, mainly from higher dispatch of Puerto´s steam turbines, TV07 and TV08. Secondly, a 158% increase in energy generation from the hydro plant Piedra del Águila due to higher water inflows. The reservoir levels started to recover in June 2022 as the inflow from the Limay and Collón Curá Rivers started to rise. Thirdly, a 12% increase in energy generation from renewable units due to an increase in the wind resource and better availability of our wind turbines. During the fourth quarter of 2022, availability for thermal units was 86%, compared to 88% in the same period of 2021, due to an extension in the programmed maintenance on Puerto's turbine 09 and non-programmed maintenance of TG 27 at Lujan De Cuyo site. As a reference, the market average availability for thermal units for the same period was 75%, according to data from CAMMESA. Steam production decreased 4%, totaling 345,173 tons produced during the fourth quarter of 2022, compared to 360,411 tons during the fourth quarter of 2021, due to lower demand from our client Terminal 6 S.A. Finally, I will refer to the key performance indicators of the full year as stated on Page 9. In 2022, energy generation increased 21% to 17,484 gigawatt-hours compared to 14,392 gigawatt-hours for the same period ended 2021. The increase in the energy generated by Central Puerto was due to: firstly, an increase of 23% in the energy generation from thermal units due to San Lorenzo combined cycle’s full year operation and higher dispatch of Puerto site steam turbines. Secondly, a 28% increase in energy generation from the hydro plant Piedra del Águila due to increases in the water inflows in the Limay and Collón Curá rivers. Thirdly, a 3% increase in the energy generation from renewable units due to an increase in the wind resource and better availability. During 2022, machine availability for thermal units reached 84%, compared to 89% in the same period of 2021, due to first, extraordinary maintenance in Luján de Cuyo Cogeneration; secondly, failure in the connection line of Puerto Combined cycle; thirdly, extended programmed maintenance in TV9 steam turbine from Puerto site and certain small failures, and unavailability in some steam turbines. As a reference, the market availability for thermal units for the same period was 75%, according to data from CAMMESA. Steam production increased 62%, totaling 1.96 billion tons produced during 2022, compared to 1.21 billion tons during 2021. Going now to the results for this quarter. You can see on Page 10, our revenues decreased to PEs 21.4 billion in the fourth quarter of 2022 as compared to PEs 27.4 billion in the fourth quarter of 2021. This 22% decrease was mainly due to: firstly, a 48% decrease in sales under contracts, which amounted to PEs 9.6 billion during the fourth quarter of 2022 as compared to PEs 18.5 billion in the fourth quarter of 2021. It was impacted by the ending of Brigadier Lopez TG PPA contract in August of 2022, which amounted to around PEs 5.6 billion. Secondly, extraordinary maintenance in TG27 of the Lujan de Cuyo Cogeneration plant; and thirdly, a negative impact from a higher inflation adjustment over the peso depreciation in the period. It's worth mentioning that the impact related to the ending of the Brigadier Lopez TG PPA contract will be recovered with the new PPA contract for the Brigadier Lopez steam turbine when we finish the closing of the combined cycle expected for the first quarter of 2025. The decrease in revenues was partially offset by a 40% increase in Spot/Energía Base Sales, which totaled PEs 10.5 billion in the fourth quarter of 2022 as compared to PEs 7.5 billion in the fourth quarter of 2021 due to retroactive increases related to Resolution 826 price adjustments and higher hydro generation. Secondly, a 6% increase in steam sales with a total of PEs 0.8 billion in the fourth quarter of 2022 compared to PEs 0.7 billion in the fourth quarter of 2021. Going to Page 11, we can see the changes in our adjusted EBITDA, which was PEs 6.9 billion in the fourth quarter of 2022 compared to PEs 17.7 billion in the fourth quarter of 2021. This 61% decrease was driven by the following changes: firstly, the above-mentioned drop in revenues; secondly, a 16% increase in administrative and selling expenses that totaled PEs 2.1 billion in the fourth quarter of 2022 as compared to PEs 1.8 billion in the fourth quarter of 2021; thirdly, a decrease in other operating results, mainly due to PEs 2.4 billion on a one-time gain in the fourth quarter of 2021 related to a recovery of a commercial credit; fourthly, a PEs 6.8 billion increase in foreign exchange differences on operating assets, mainly related to FONI trade receivables, that generated a PEs 8.8 billion gain during the fourth quarter of 2022, compared to PEs 2.1 billion gains during the fourth quarter of 2021, due to a higher depreciation of the Argentine peso during the quarter; and fifthly, a 20% decrease in depreciation and amortization that totaled PEs 4.4 billion during the fourth quarter of 2022 as compared to PEs 5.5 billion during the fourth quarter of 2021, partially offset by a 6% decrease in the cost of sales that totaled PEs 12.6 billion compared to PEs 13.4 billion in the fourth quarter of 2021, primarily driven by a 3% decrease in production costs which totaled PEs 10.4 billion in the fourth quarter of 2022 as compared to PEs 10.7 million in the fourth quarter of 2021. As a result, adjusted EBITDA including FX difference and interest related to FONI trade receivables and impairment on property, plant, and equipment was PEs 12.6 billion in the fourth quarter of 2022 compared to PEs 21.6 billion in the fourth quarter of 2021. We can see that consolidated net income was PEs 2.4 billion in the fourth quarter of 2022 compared to a consolidated net income of PEs 1.7 billion in the same period of 2021. In addition to the above-mentioned factors, net income was positively impacted by: firstly, lower deferred income tax due to property, plant, and equipment impairment that amounted to PEs 1.4 billion gain in the fourth quarter of 2022 compared to PEs 4.7 billion loss in the fourth quarter of 2021, impacted by lower EBITDA and financial results; secondly, PEs 12.2 billion of fair value gains on forestry acquisitions. Negatively impacted by: firstly, an increase in net monetary position loss which amounted to PEs 8.3 billion during the fourth quarter of 2022 compared to a higher inflation and higher balance of monetary assets, partially offset by the share of profit of associates with PEs 0.2 billion gain during the fourth quarter of 2022 compared to PEs 0.2 billion loss in the fourth quarter of 2021; secondly, an increase in financial expenses, which amounted to PEs 13.5 billion during the fourth quarter of 2022 compared to PEs 5.2 billion in the fourth quarter of 2021, mainly due to an increase in foreign exchange differences due to a higher depreciation of the Argentine peso during the quarter, offset by an increase in financial income that amounted to PEs 8.4 billion in the fourth quarter of 2022 compared to financial income of PEs 2.5 billion in the fourth quarter of 2021, mainly due to higher financial asset results in the fourth quarter of 2022 of PEs 7.8 billion. FONI collections related to trade receivables for Vuelta de Obligado Plant totaled PEs 3.1 billion in the fourth quarter of 2022, including VAT compared to PEs 3.6 billion of the fourth quarter of 2021. The amounts are being collected on time and according to the signed contract. On Page 14, we can see the key financial figures for the full year. Revenues decreased 9% to PEs 101.4 billion for the 2022 compared to PEs 111.2 billion in 2021. The decline in revenues was mainly affected by the termination of the Brigadier Lopez TG PPA contract in August of 2022 and an extraordinary maintenance in TG 27 of Lujan De Cuyo Cogeneration plant, offset by retroactive increases related to Resolution 826 and 238 price adjustments and higher hydro generation. Adjusted EBITDA, excluding impairment and FONI FX difference and interest for 2022 reached PEs 67.5 billion compared to PEs 68.8 billion in 2021, mainly due to lower revenues and lower depreciation and amortization, partially offset by insurance recovery, lower financial cost of operating activities, lower production costs, and a decrease in administrative and selling expenses mainly explained by decreases in compensation services. Finally, consolidated net income was PEs 19.1 billion in 2022, compared to a net loss of PEs 1.3 billion in 2021, mainly due to fair value gains on forestry acquisitions and lower deferred income tax due to property, plant and equipment impairment. Going to Page 17, you can see our cash flow for fiscal year 2022. Net cash provided by operating activities was PEs 55.6 billion during 2022. This cash flow arises from PEs 25.8 billion from the other operating results net obtained during 2022; secondly, PEs 15.8 billion in collection of interest from clients, including the one from FONI; thirdly, PEs 3.4 billion in variations in other non-financial assets and inventories; fourthly, insurance recoveries of PEs 1.3 billion; and fifthly, adjustment to reconcile profit for the year before income tax with net cash flows of PEs 21.1 billion, which was partially offset by the income tax expense paid of PEs 8.0 billion and PEs 3.7 billion in variation in Trade Accounts Payable and other accounts payable. Net cash used in investing activities was PEs 31.3 billion in 2022. This amount was mainly due to PEs 17.9 billion from the investment in short-term financial assets, PEs 10.4 billion in Forestal Argentina acquisition, and PEs 3.3 billion in investment in financial assets and Capex, which was partially offset by PEs 0.3 billion in dividends collected. Net cash investing in financial activities was PEs 16.3 billion in 2022. This amount was mainly due to positive PEs 3.6 billion of dividends paid, PEs 6.3 billion in debt services, amortizations of existing loans mainly related to expansion projects, and PEs 6.4 billion in interest in financial expenses, mainly related to those loans. Thank you. And now we invite you to ask any questions to our team.

Your first question is coming from Martin Arancet from Balanz Capital.

Martin Arancet here from Balanz Capital. There was a very new figure. And well, I have 5 questions. Sorry for this. I would like to run them one by one, if that's okay. First, going into the new forest line of business. I just wanted to confirm how much do you expect average EBITDA, considering, of course, the volatility that each year might have? And do you sell the wood on the spot or contract terms? Probably if you can share with us what index should we follow to better track pricing?

Sorry, we are experiencing some noise on the line. Can you repeat the question, please?

Yes, regarding the new forest line of business, I want to confirm the expected average EBITDA considering the volatility, and whether you sell the wood on the spot or through contract terms. Also, which index should we follow to better track pricing?

We are currently obtaining a new Power Purchase Agreement for the combined cycles operating in the spot market due to recent regulations. This regulation allows us to secure a PPA exclusively for the combined cycle units and not the steam turbines. Under this new framework, we will receive $2,000 per megawatt of installed capacity each month in dollars, while the remaining revenue will come as part of the actual regulation under Resolution 826. Consequently, our combined cycle revenue will consist of both dollars and pesos. Predicting the evolution of EBITDA is challenging since it will be influenced by foreign exchange rates. However, we estimate an impact ranging from $10 million to $15 million for our combined cycles, which are the units benefitting from this regulation. For our new acquisition at Central Costanera, we expect a similar impact of approximately $15 million, contingent upon foreign exchange trends and equipment dispatch. If equipment availability remains similar to what we experienced in 2022, these impacts will materialize alongside the new regulation. We also aim to maintain last year’s EBITDA levels, except for the conclusion of the PPA for Brigadier Lopez, which, as Federico mentioned, will reduce EBITDA by around $40 million. This outlines our expectations for EBITDA's evolution.

Okay. That's great. Can you hear me? I hear you correctly, but I don't know if you can hear me.

Yes, yes. I can hear you, but the quality of sound is not very good.

Okay. I will try to talk louder. About the forest line of business, I wanted to know if you sell the wood on the spot or if you have contracts?

Yes, we have both. We have contracts and we sell on the spot, yes. Mainly it's on the spot.

Is there an index that we can follow to track the pricing?

Yes, there is a price index available online.

Okay. Great. Going to my second question then. Regarding the 10 megawatt solar park that you will be constructing in the coming months, who will be involved and do you have land transmission rights, permits, and ancillary infrastructure to expand beyond those 10 megawatts if you get more of takers?

In fact, we have land, but there are some constraints in the transmission line. So we can enlarge it. But I think right now, with the lines as they are, I think we can go for 5 megawatts more, but not more than that with these line constraints that we are seeing. We are entering there; in fact, we are not entering at 500 kV or 132 kV; we are entering at 33 kV. So it's kind of at the level of distribution companies. So we don't have much more space to expand. Of course, we have land to expand, yes, but not the space in the transmission lines.

Okay. Very clear. Regarding your interest in mining, are you already in talks for potential acquisitions? Is it metallic mining that you're considering or lithium projects, or maybe both?

No, we are in the very first steps of understanding the markets and the sector, and getting to know the players. We attended the mining convention in Toronto. We are starting to make contact with the players, but we don't have any prospects in mind yet. In terms of materials, we are focusing on metals. Lithium is something that we observed, but we are in the early stages of evolving in the market in Argentina, and it is not easy to compete with Chinese companies and the big players. So it's not easy to enter there right now.

Okay. Great. Regarding Brigadier López, do you have any specifics to share with us, like updated CapEx or COD, for example?

Yes. In fact, we are starting the analysis with the constructor for the possible construction—an evaluative assessment—which is the previous phase before entering construction. We expect to have more or less 3 months to discuss this analysis, reevaluation, and all the information that they need to assess detailed engineering and what we have on site. After that, we expect between 20 and 24 months of construction. In terms of CapEx, we don't have a fully updated CapEx yet after this evaluation that I talked about. I think in 2 or 3 months, we will have a clear view of the CapEx amount. But we do not expect to exceed the previous amounts, which were around $120 million to $140 million.

Perfect. Very helpful. My final question is regarding the entire forestry business. Is the payment finalized in the last quarter? Or is there something still to be paid in 2023?

Yes, we paid in full. This is a complete payment. So we are not expecting any payment for this acquisition.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bonnet for any closing remarks.

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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.