Central Puerto S.A. Q2 FY2024 Earnings Call

Good morning, ladies and gentlemen. Welcome to Central Puerto's Second Quarter 2024 Earnings Webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. If you do not have a copy of the press release, please refer to the Investor Relations Support section on the company's corporate website at www.centralpuerto.com. In addition, a replay of today's call may be accessed by accessing the webcast link at the same section of Central Puerto's website. Before we proceed, please be aware that all financial figures were prepared in accordance with IFRS and were converted from Argentine pesos to U.S. dollars for comparison purposes only. The exchange rate used to convert Argentine pesos to U.S. dollars was the reference exchange rate reported by the Central Bank for U.S. dollars for the end of each period. The information presented in U.S. dollars is for the convenience of the reader only, and you should not consider these translations to be representations that the Argentine peso amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Finally, it is worth noting that the financial statements for the second quarter ended on June 30, 2024 include the effects of the inflation adjustments. Also, please take into consideration that certain statements made by the company during this conference call and in response to your questions may include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by industry remarks. Thus, 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 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 discussion. On the call today from Central Puerto is Fernando Bonnet, Chief Executive Officer; Enrique Terraneo, Chief Financial Officer; and Alejandro Díaz López, Corporate Finance and Investor Relations Coordinator. And now, I will turn the call over to Alejandro Díaz López. Please Alejandro, you may begin.

Thank you very much and good morning to you all. Thank you for joining us today on our earnings presentation where our management team from Buenos Aires, Argentina, is going to comment on our financial results of the second quarter of 2024. I would like to take a moment to review today's agenda. I will begin the presentation by addressing shortly the main figures of the second quarter of 2024, followed by a quick update of the regulatory framework and relevant news. Then, I will show an overview of the Argentine energy sector, moving afterwards to our operational and financial results. Finally, at the end of the presentation we will be happy to address any questions you may have. Before going into a more exhaustive analysis of our financial and operational results, let me briefly review Central Puerto's main figures for the second quarter of 2024. The group's installed capacity is 6,703 megawatts. Energy generation amounted to 4,985 gigawatt hours during the second quarter of 2024, increasing 5% year-over-year. So with these figures, Central Puerto keeps its leading position as a private power generation company, both in terms of installed capacity and energy generation through a well-diversified portfolio of assets and power generation technologies. Regarding our financial results; it should be noted that after the sharp devaluation that happened in December of 2023, the exchange rate kept almost flat during the first six months of 2024. While inflation, though decreasing since December of 2023, was significantly higher; this dynamic generated inflation in dollars in Argentina. Due to Central Puerto's accounting methodology, all items in pesos must be adjusted for inflation to the end of the quarter in local currency, while the company reports its results in dollars by converting them at the end of the period's official exchange rate; I mean, the so-called Central Bank at 3,500 exchange rate. This causes a non-cash impact that affects positively or negatively, as appropriate, our financial metrics. Revenues for the second quarter of 2024 amounted to $168 million, increasing 15% year-over-year compared to the second quarter of 2023 while adjusted EBITDA reached $46 million, shrinking 27% versus the second quarter of 2023. Net income for the period was positive at $8 million, decreasing 49% year-over-year. Finally, after debt consolidation as a result of recent M&A operations, loan repayments, and dividend payments, net debt as of June 30, 2024, amounted to $229 million, a reduction of $58 million vis-à-vis December of 2023, showcasing a net debt adjusted EBITDA ratio of 0.9 times. Now let's move to the most recent regulatory updates and relevant facts. We have anticipated in our last call, the Resolution 58 issued by the Secretary of Energy on May 6, concerning unpaid receivables with CAMMESA. Regarding this resolution, Central Puerto finally accepted it on May 16, the payment mechanism by means of which trade receivables accrued in December of 2023 and January of 2024 were paid with Argentine Republic USD bonds at face value, while trade receivables accrued in February of 2024 were paid with funds available in CAMMESA’s bank account and transfers made by the national government to the Stabilization Fund. This resolution caused a consolidated loss of approximately ARS20,459 million, or approximately $22.5 million. However, it should be noted that this resolution didn’t affect the ordinary course of business of the company, its payment capacity, nor its available financing options. Regarding the situation of the Piedra del Aguila hydro operation, on May 17, the Secretary of Energy issued Resolution 78 by means of which it extended the transition period up to December 28, 2024, as allowed in the concession contract. On June 14, the Secretary of Energy issued Resolution 99 which updated remuneration prices for energy and power sold in the spot market. Remuneration values increased 25% since June 1, 2024. This price adjustment positively affects our revenues during the period under analysis but just for one month. Then, the Third Mile Generation Tender Process called TER-Conf was finally cancelled as determined by Resolution 151 issued by the Secretary of Energy on July 8. Finally, there was another price adjustment determined recently by the Secretary of Energy, although it has no impact on second quarter figures, it should be noted that a 3% increase in power and energy prices was granted since August 1 by means of Resolution 193. Continuing with news and relevant facts, we have also anticipated in our last call, the investment made in the mining industry. Let me recall that on April 22, our subsidiary, Proener, entered into a common-share subscription agreement with AbraSilver Resource Corporation, by means of which it was granted a 4% interest in the share capital of the aforementioned company, which is the owner of the silver-gold project Diablillos, located in the northeast region of Argentina. With regards to the investment project currently in execution, let me tell you that in the case of San Carlos Solar Farm, construction agreements with Shanghai Electric Power Construction Company were signed off on March 27, and works began on July 31, with April of 2025 as the COD. As of today, all permits are in place, local vendors have already initiated their purchasing process, and the site is being prepared for construction and assembly. Also, equipment is being delivered to Argentina. In the case of Brigadier López combined cycle, as you may recall, Central Puerto is going to convert an open cycle thermal power plant with the gas turbine into a combined cycle thermal power plant with the addition of a steam turbine. The EPC supplier, Sacdeh, received the notice to proceed on February 26, 2024, and the COD is scheduled for October 2025. As of today, works on the site have already started with the assembly of pipes and wires, communication system, and water intake system. It is important to note that both projects are on schedule and on budget. Now let's skip to the Argentine energy market picture of this quarter that will be shown on Slides 7 and 8. By the end of the second quarter of 2024, the country's installed capacity reached 43,603 megawatts, which means an increase of 0.5% or 198 megawatts compared to the 43,405 megawatts recorded as of June 30, 2023. The variation is a combination of the installation of new power facilities, and in addition to capacity adjustment and repowering of power plants that were already in operation. The positive variation of 198 megawatts is decomposed as follows; we have an increase of 533 megawatts of renewable sources of which 368 megawatts corresponds to wind farms, 50 megawatts of new power plants installed during the second quarter of 2024, 155 megawatts of solar plants, of which 12 megawatts corresponds to new power plants installed during the second quarter of 2024, and 9 megawatts to biogas power plants. Then we have a decrease of 335 megawatts in thermal sources which includes a positive variation of 527 megawatts of combined cycles and a negative variation of 862 megawatts of gas and steam turbines and diesel engines. Generation rose 6% during the quarter on a year-over-year basis. The growth was basically driven by nuclear and hydro generation. Renewable generation also rose but on a much smaller scale. Nuclear generation was significantly higher as a result of the reincorporation of Atucha II power plant, which was in maintenance shutdown during the first half of 2023. This power plant resumed operation in August of 2023. The hydro generation rate of flow was remarkable, especially in May, with 60% of the year-over-year increase due to the outstanding increment in the flow of the river. We have Uruay river with a growth of 500%, Delimai river with 82% growth, and the Cushan Kuda river with a 45% rate of growth. The higher supply of nuclear, hydro, and renewables, along with lower thermal dispatch, resulted in a lower fuel consumption, with a 12% decrease registered in equivalent natural gas in million cubic meters. Focusing now on the demand. As you can see, electricity demand increased 2% to 33.4 terawatt hours compared to 32.9 terawatt hours recorded during the second quarter of 2023, which is basically explained by a rise in residential consumption due to weather conditions. On average, the temperature was 0.9 degrees lower during the second quarter of 2024 compared to the same period of last year. May was the coldest month during the second quarter of 2024, with temperatures 3.7 degrees lower than the same month of 2023. Not surprisingly, residential consumption skyrocketed during this single month, increasing 29%. Although the electricity trade balance during the second quarter of 2024 resulted in a net import situation, exports were higher and imports lower during this quarter compared to the second quarter of 2023, thus reducing the net import balance. We now move to Slide 9 for our key operating indicators for the quarter. We can see that energy generated by Central Puerto rose 5% to 4,985 gigawatt hours compared to 4,762 gigawatt hours during the second quarter of 2023. In the second quarter of 2024, hydro energy generation from Piedra del Aguila increased 94% as compared with the second quarter of 2023, reaching 978 gigawatt hours as a direct result of higher levels of water available for generation from increased river flow, as we have recently explained. With regards to renewables, energy generation increased 5% in the second quarter of 2024 compared to the second quarter of 2023, primarily due to the 48 gigawatt hours generated by the Guañizuil solar farm, which was acquired in October of 2023. Speaking specifically of wind generation, it decreased almost 8%, or 30 gigawatt hours, reaching 354 gigawatt hours during the second quarter of 2024. This decline was primarily due to the storm that hit Bahia Blanca in December of 2023, which impacted La Castellana II. Generation from La Castellana I was also lower due to maintenance work to some blades. Regarding thermal generation, it decreased 7% in the second quarter of 2024 compared to the second quarter of 2023, primarily as a result of lower dispatch of some units due to higher hydro and nuclear aggregate supply in the system, as we explained earlier. Regardless of the lower dispatch, it should be highlighted that the availability figures for the quarter were good, both against the market average and Central Puerto’s own metrics for the second quarter of 2023. Despite the lower thermal dispatch during this quarter, I mean the second quarter of 2024 for the whole system and Central Puerto; it should be noted the higher generation of Buenos Aires combined cycle, as a consequence of the maintenance program carried out last year. Now, let's move to our revenue breakdown. As you can see on Slide 10, this amounted to $168 million in the quarter as compared to $147 million in the same period of 2023. It should be noted that the gap between inflation and devaluation in the period has positively affected the second quarter of 2024 figures at a non-cash level due to the company's accounting methodology and the conversion into dollars using the end of the period's official exchange rate; thus making the comparison with the second quarter of 2023 more complex to analyze. Hence, having in mind this effect, the variation in revenues is a consequence mainly of a 14% or $10 million increase in spot sales driven by a higher dispatch of Piedra del Aguila hydro power plant, higher availability of some thermal units, especially in Central Castellana; and also higher generation from Buenos Aires combined cycle. An 8% or $5 million increase in sales under contract, mainly explained by the recent acquisition of the solar farm Guañizuil and higher sales from cogeneration units; basically, we are speaking of La Castellana facility. Sales from our wind farms were lower due to lower wind generation, as we mentioned before; La Castellana II was hit by a twister in December of 2023 and there was maintenance work carried out on some blades in La Castellana I. Finally, there was a 42% or $3 million increase in steam sales driven by higher production levels in our facility, which is primarily a consequence of higher availability of units and a higher demand from YPF. On Slide 11, we can see the dynamic of our adjusted EBITDA. During the second quarter of 2024, the group's adjusted EBITDA amounted to $46 million, shrinking 27% or $17 million when compared to the $63 million in the same quarter of 2023. When analyzing the adjusted EBITDA, we can observe that the variation is mainly explained by the previously stated higher aggregate sales driven by spot sales and sales from contracts, and a positive non-cash effect on the gap between currency devaluation and inflation. We then have a 4% or $2 million decrease in the cost of sales, explained basically by a reduction of some production costs, compensation of employees, consumption of materials and spare parts, and forestry and forest production services expenses, being partially offset by a negative non-cash effect on the gap between currency devaluation and inflation. SG&A decreased 9% or $2 million, mainly due to lower fees and compensation for services and lower taxes; again, being partially offset by a negative non-cash effect on the gap between currency devaluation and inflation. Finally, other operating results net in the second quarter of 2024 were lower than the second quarter of 2022 figures by 365% or $42 million, basically as a consequence of the impact of Resolution 58. There were also lower interest from clients, lower positive FX differences, and a negative non-cash effect on the gap between currency devaluation and inflation. Moving to the next slide; the consolidated net income. During the second quarter of 2024, Central Puerto's net income amounted to $8 million, decreasing 54% or $9 million on a year-over-year basis. The net income was positively affected by non-cash effects, including results generated by the change in purchasing power of the currency, variation in biological assets, and lower D&A. These items were practically offset by lower funny effects, differences, and interest. Then we have net financial results which decreased by $1 million year-over-year, basically due to lower interest earned and lower variation in the full value of financial assets. These items were partially offset by lower foreign exchange differences on financial liabilities, lower bank commissions, and higher share of the profit of associates. Finally, on Slide 13, we have the cash flow dynamic during the six months of 2024. Net cash provided by operating activities was $67 million during the six months of 2024. This amount is mainly explained by higher income before income tax for the period and higher interest and from clients, being partially offset by tax payments. Then, the net cash used by investing activities was $13 million during the first six months of 2024. This amount is basically explained by the CapEx allocated to San Carlos and Brigadier López projects, being partially offset by the sale of sound financial assets. Finally, financing cash flow was negative at $66 million during the first six months of 2024; this is basically the result of long-term loan repayments, interest payments, and dividend payments being partially offset by lower bank and investment account overdrafts and long-term loan disbursements. Consequently, our cash position as of June 30, 2024 amounted to $5 million. If financial assets are included, our total current liquidity amounts to $158 million. With this, I conclude the presentation. And now we invite you to ask any questions to our team. Thank you very much for your attention.

We will now begin the question-and-answer session. And the first question today is coming from Martin Arancet from Balanz Capital. Martin, your line is live.

First, thank you for the presentation. And I have three questions, and I would like to run them one by one, if that's okay. The first one probably is recent, so I don't know if you might have an answer. But last Friday, the government issued a resolution to auction again some hydro plants, including Piedra del Aguila, but to prioritize them. And apparently, you will have the control of the asset until the end of 2024, after which there should be a transition period to the new owner. I was wondering what do you think about this privatization process if you are interested in participating, probably for Piedra del Aguila or maybe another hydro plant? And also, if you consider that being the current operator of Piedra del Aguila gives you an advantage if you choose to participate?

Thank you, Martin, for your question. As you noted, the government has extended the timeline established in the contract transition period, and the additional award now extends until December 24, 2024. Today, the government announced a new decree granting an extension for Piedra del Aguila, shifting the end date to December 2025, which means we will continue to operate Piedra del Aguila until then. The decree includes certain reductions related to the bidding process for a new 30-year concession. Before December 2025, there is a possibility of reducing that period by 90 days if the bidding process cannot be carried out effectively; otherwise, we will operate the hydro until December 2025. We are keen to take part in that upcoming bidding process for a new 30-year period for Piedra del Aguila. The decree does not outline the process itself but instructs the Secretary of Energy to initiate the process within 180 days. It also does not clarify how the bidding will be conducted or how prices will be set for the new concession periods, which will follow market pricing under a PPA. We are unclear on the specifics and will need to wait for further details regarding the new concession period. The current concession period has been quite challenging, as market prices were established initially, but after seven years, we faced substantial price controls, which complicated the concession beyond our initial expectations. Looking ahead to the new period and our role in the process, we need more information about remuneration and the new conditions. To answer your question, we are very interested in participating if the conditions are favorable. We are familiar with the asset and believe that gives us an advantage, as we have the knowledge and personnel to operate it effectively.

Thank you. Very clear. My second question then is, well, we learned that you will be interested in moving forward with a transmission project to take energy to the mining companies in the north of the country. I was wondering if you could tell us a little bit more about this project. And also, we heard something similar with YPF. I don't know if they are two separate projects, or if you are considering probably moving forward together as they mentioned that they were trying to add other important participants in that project?

Yes, we are exploring new developments in renewable energy, and as one of the larger players in this sector, we see that current demand is not enough to support new projects. We are hitting limits in terms of transmission capacity and demand, as existing contracts and key players have already been secured. The expansion must focus on aligning renewable developments with new demand, which is primarily coming from mining companies, especially lithium miners in the North. The challenge is that these companies lack the necessary infrastructure, as they operate at high altitudes. We need to deliver renewable energy to them by developing new transmission lines in the North. We are working to collect demand to ensure it is substantial enough to justify the project, which will involve transmission lines passing through Salta and parts of Catamarca. We are aware that YPF has previously discussed processes that could align with our project, but we have not yet had the chance to engage with them further. However, we are open to collaboration if their vision aligns with ours. At this moment, we are still in the initial stages of gathering demand and conducting necessary engineering assessments, as this project presents significant challenges. We are collecting information, engaging with key stakeholders, and discussing the project with provincial authorities.

Okay. Just a follow-up on that one. How would you recover the investment? Could you charge for the transmission line or would you have to recover that through the energy contract?

Well, the regulation is not fully established. If we construct the transmission line, we will need to have a new regulatory scheme because right now there is not a clear regulatory path for that. However, if we can build the transmission line, and we are granted the exclusivity to operate that transmission line, we will, of course, want to produce and deliver our renewable energy; so we foresee a combination of businesses there: not only the transmission line by itself, and in case the renewables are offered separately, we will look at the transmission line and the renewable procurement as a combined business for us.

Okay, thanks. My final question then is, what are you expecting in terms of CapEx for the remainder of 2024 and 2025? And if you are considering tapping the debt market anytime soon?

The expected CapEx is consistent with what we have been managing, which includes the closure of the DRL office related to the combined cycle and the San Carlos project we are developing in Salta. Together, these two projects amount to approximately $150 million; however, we have less than $90 million available for expansion. For the San Carlos project, we anticipate spending around $15 million, and we estimate that we could invest about $13 million from now until the second or third quarter of next year.

Okay, thank you very much. That's all on my side.

Thank you. And there were no other questions. And that concludes our question-and-answer session. I would like to turn the conference back over to Mr. Fernando Bonnet for any closing remarks.

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

Thank you. This does conclude today's conference. You may disconnect at this time. Have a wonderful day. Thank you for your participation.