Earnings Call Transcript - CEPU Q2 2020

Operator, Operator

Good morning and welcome to the Central Puerto Conference Call discussing the results for the quarter ended June 30, 2020. All participants will be in listen-only mode. After the presentation, there will be an opportunity for questions. This event is being recorded. If you do not have a copy of the press release, please visit the Investor Support section on the company's website. A replay of today's call can be accessed through the webcast in the Investor Support section of the Central Puerto website. Before we start, please note that all financial figures are prepared in accordance with IFRS and are presented in Argentinean pesos unless stated otherwise. The financial statements for the quarter ended June 30, 2020, reflect the effects of inflation adjustments. Therefore, the financial figures discussed, including data from previous periods and growth comparisons, are presented in Argentinean pesos as of the end of the reporting period. Additionally, some statements made during this call are forward-looking, and we direct you to the forward-looking statements section in our earnings release and recent SEC filings. Central Puerto does not have an obligation to update forward-looking statements unless required by applicable securities laws. For an improved discussion, please download the webcast presentation available on the company's website. Be aware that some numbers mentioned during the call may be rounded to simplify the discussion. Present on the call from Central Puerto are Jorge Rauber, Chief Executive Officer; Fernando Bonnet, Chief Operating Officer; Milagros Grande, Financial Manager; and Tomas Daghlian, Investor Relations Officer. Now, I will turn the call over to Jorge Rauber. Mr. Rauber, you may begin.

Jorge Rauber, CEO

Thank you very much. Good morning. I would like to begin today's call by analyzing the developments of the second quarter, commenting on the advances of our expansion projects, and analyzing the operative figures of the quarter. Fernando will analyze the financial results of the quarter and we'll answer any questions that you may have. As you know, the COVID-19 crisis has affected almost all the world, including Argentina. The mitigation measures issued by the Federal Government such as the stay-at-home order or quarantine have remained in place, though some degree of flexibilization and exceptions have recently been approved. As a consequence, as you can see on Page 3, electric energy demand increased 11% in a prior agreement, down to 7.6% in May 2020, as compared to the same month of the prior year. However, demand increased 1.2% in June due to higher economic activity and lower average temperatures. Therefore, during the second quarter of 2020, electricity demand decreased 5.5% as compared to the same period of the prior year. Additionally, in July, demand increased 1.5%. However, it is worth noting that the decrease has a less than proportional impact on the income of the generation companies. In the case of renewable energy units, they have been unaffected since they have dispatch priority and can serve all the generated electricity. In the case of thermal units, they have a high proportion of their income associated with fixed power remuneration, which is not related to the energy duration. Additionally, when demand increases, the units that stop remunerating electricity first tend to be the older, inefficient ones. These units receive low remuneration under the regulatory framework compared to the new efficient ones that have a higher remuneration under Power Purchase Agreements (PPA). Going now to Page 4. As you may recall, the measures set up just to prevent the spread of the COVID-19 virus had an impact on the progress of our projects under construction of a wind farm and the new cogeneration unit in the United States. In the quarter, we continued to advance in the project under restricted health and safety protocols to protect our personnel and the community. Taking into account the consequences of the declining time, the energy secretariat instructed amendments to extend the due date for the Commercial Operation Date (COD) of the project 185 days regarding the regulatory framework. As we mentioned in our prior calls, on February 27, 2020, the Secretariat of Energy issued resolution 221, which changed the prices for the unit which was ARS7 with a monthly adjustment using a mix between the consumer price index and wholesale price index. However, on April 8, 2020, the Secretariat of Energy in the context of the COVID-19 crisis instructed to postpone further notice such assessments. As of today, the mechanism remains suspended. Finally, regarding our renewable energy division, on June 24, 2020, the Board of Directors of Central Puerto, with the aim of increasing the exposure of the company to the segment, authorized the purchase of the minority shareholder's stake of CP Renovables holdings, and now we own a 100% stake in the company. CP Renovables owned through special purpose subsidiaries five wind farms with a total installed capacity of 244 megawatts. All of them are truly operational, performing above the expected levels, and have long-term power purchase agreements under which they sell their electricity production. Following the trends that have been observed globally, renewable energy is rapidly gaining ground in Argentina; metrics in 2018 indicated that renewable generation in Argentina represented 5.8% of total production and is expected to increase significantly in 2020, in which Central Puerto is one of the leading companies. Going now to our key performance indicators for the quarter, as you can see on Page 5, energy generation during the second quarter was 2.7 terawatt-hours of electricity, 18% lower than the same period of 2019. This was largely due to a significant failure in the main transformer which blocked our common cycle from becoming available until mid-April. On July 16, 2020, after replacing the damaged equipment with a backup transformer stored in our plant, the unit became online again. The downtime implied a reduction of energy generation and power availability, which had a significant economic impact during the second quarter but will be mitigated by a comprehensive operational risk and loss of profit insurance. Due to these effects, energy generated decreased 0.5 terawatt-hours in the second quarter compared to the same period in the previous year. Additionally, due to the effects of the quarantine, the rest of the thermal units reduced their energy generation to 146 kilowatt-hours. On the other hand, renewable energy increased by 158 megawatt-hours due to the positive impact of the La Castellana II, La Genovava II, Manque, and Los Olivos wind farms. Regarding our thermal unit, dependability dropped to 82% as a consequence of the damage in the Lujan de Cuyo common cycle. Now I will turn the call over to Fernando, who will comment on the financial highlights.

Fernando Bonnet, CFO

Thank you, Jorge. I will first refer to the results of the second quarter of 2020 compared to the second quarter of 2019. As you can see on Page 6, our revenues were ARS7.2 billion in the quarter, a 14% decrease compared to ARS8.3 billion during the second quarter of 2019. The decrease was driven by the discontinuation of a few purchase operations that we did during 2019. With the new regulation that centralized the fuel purchases from our generation, this effect represented a ARS2.3 billion variation during the second quarter. Excluding the FX revenues, for the second quarter 2020, we recorded ARS7.2 billion compared to ARS6 billion in the second quarter of 2019. This increase was mainly driven by an increase in sales on the contract, which amounted to ARS3 million during the second quarter of 2020, compared to ARS0.8 billion in the same period of the previous year, mainly due to revenues related to the Brigadier Lopez power plant, which was acquired in June 2019, the Lujan de Cuyo regeneration unit which began operations in October 2019, and the wind farms like La Castellana II, La Genovava II, Manque, and Los Olivos which started operation during June, September, and December 2019 and February 2020, respectively. This increase was partially offset by a decrease in sales from contracts of ARS1.9 billion due to a decrease in prices for units under the regulatory framework since February 1, 2020, and the decrease in energy generation and thermal units availability, mainly due to the failure in the main transformer of the Mendoza combined cycle as Jorge mentioned. Going to Page 7, we can see the changes in our EBITDA, which was around ARS7.6 billion in the second quarter of 2020, compared to ARS4.4 billion in the second quarter of 2019. This was due to, first, a 5% increase in our gross profit as compared to the same period in 2019. This was due to the variation in revenue as mentioned before and was partially improved by a 28% decrease in the cost of sales that totaled ARS3.4 billion, compared to ARS4.7 billion in the same period of 2019. The decrease in the cost of sales was primarily driven by a 79% decrease in the purchase of fuel and related costs due to the discontinuation of these operations in this quarter according to the new regulation. This was partially offset by a 36% increase in non-fuel cost of production, mainly due to an increase in our installed capacity following the acquisition of the Brigadier Lopez plant and the COD of thermal or renewable energy plants. Gross profit margin totaled 53% during the second quarter compared to 44% in the same period of 2019. This change was mainly a consequence of reduced costs associated with fuel purchases which were enforced during 2019. Finally, other operating results were net ARS2.2 billion higher in the quarter, mainly due to the foreign exchange difference of operating assets, mainly driven by depreciation of trade receivables due to an ongoing 9.3% depreciation of the Argentine peso during the period compared to a 2% appreciation during the same period of 2019, which was partially offset by an impairment in property, plant, and equipment due to a reduction in fair value for certain assets we held in service. Moving to Page 8, the consolidated net income was at ARS2 billion compared to ARS1.9 billion in the same period of 2019. In addition to the factors mentioned before, the net income was mainly affected by higher financial expenses, which increased to ARS4.3 billion due to losses associated with the thermal and renewable energy expansion project and the decision related to the Brigadier Lopez Power Plant. This effect was partially compensated by a favorable net monetary position during the quarter resulting in a gain in real terms, contrasting with a loss in the second quarter of 2019, along with a 0.6 million increase in financial income. Moving to Page 9, you can see our cash flow for the second quarter of 2020. Net cash provided by operating activities was ARS8.2 billion; this includes ARS1.3 billion in collection from CVO installments, which are not contained in the EBITDA. The cash flow from operations was partially offset by ARS3 billion CapEx invested in the expansion project and ARS4.2 billion used in financing activities. As per recent news in August 2020, the Argentine Security Regulator approved a bond issuance program by CP Manque and CP Olivos, two wholly owned subsidiaries of CP Renewable, for up to $80 million. This represents an attempt for bond issuance to secure long-term financing for this project. Thank you, and now we invite you to ask any questions to our team.

Operator, Operator

Thank you. We will now begin the question-and-answer session. First question today comes from Frank McGann of Bank of America. Please go ahead.

Frank McGann, Analyst

Yes, thank you very much. Just two questions if I could. One, I was just wondering in terms of as you are looking forward, demand seems to be recovering. Are you seeing any kind of mix change that might have an effect on profitability, perhaps in terms of where you are generating or how you are seeing the mix amongst your clients? And then in terms of payments. How are you seeing your payments from customers in general? Are you seeing more delays given the weakness in the economy that potentially affects customer cash flows? Thanks.

Jorge Rauber, CEO

Okay I will answer this question. Thanks for it. The first thing I have to say is that, as you mentioned, the demand for electricity has been recovering. In fact, in July, we had 1.5% above the level we had in the same month last year. So the demand started recovering. Obviously, the industrial demand is below the level we had last year. The increase is mostly driven by the operational demand. I mean basically what we are operating today is our renewable plants which have priority in terms of dispatch. So they are unaffected. And we are operating basically common cycles and our cogeneration plant in Mendosa. So operations have not mainly been affected by the decrease in demand we've had in the previous two or three months. Now the demand is recovering. And probably the most important thing to mention is that our remuneration is not based on dispatch but mostly on availability. So we don't expect any kind of impact because of any variation in demand. So it is recovering, and if it didn't, we wouldn't have any kind of impact. And the second question you mentioned about payment. Basically what has happened in the market is that the government has intervened, increasing subsidies. So even though the distribution companies are paying below 100%, they pay on average about 17% of the total billed, they are receiving month after month. The government has intervened in order to keep the normal payment process, so we have not been significantly affected during the current period; in fact, today, we have a payment which is even better than what we experienced in March, for example.

Frank McGann, Analyst

Okay. Great. Thank you very much.

Jorge Rauber, CEO

You are welcome.

Operator, Operator

The next question is from Ezequiel Fernandez of Balanz. Please go ahead.