Earnings Call Transcript - CEPU Q1 2020

Operator, Operator

Good morning, and welcome to the Central Puerto Conference Call following the results announcement for the quarter ended on March 31, 2020. All participants will be in 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 Support section on the company's corporate website. A replay of today's call will be accessed by accessing the webcast of the Investor Support section of the Central Puerto corporate website. Before we proceed, please note that certain statements may be 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. In addition, all financial figures were prepared in accordance with IFRS and are stated in Argentinean pesos, unless otherwise noted. For following 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 in order to simplify the discussion. On the call today from Central Puerto is Jorge Rauber, Chief Executive Officer; Fernando Bonnet, Chief Financial Officer; Milagros Grande, Financial Manager; and Tomas Daghlian, Investor Relations Officer. And now, I will turn the call over to Jorge Rauber. Mr. Rauber, you may begin.

Jorge Rauber, CEO

Thank you, and good morning. I would like to begin today's call by analyzing the developments of the first quarter. After that, I will comment on the advances of our expansion projects and analyze the operative figures of the quarter. Finally, Fernando will analyze the financial results and comment on the recent news on the company. As you know, the COVID-19 crisis has affected almost the entire world, including Argentina. As a consequence, the federal and local governments have issued mitigation measures in order to slow down the spread of the virus. Among them, on March 20, 2020, the federal government released a stay-at-home order or quarantine. However, electricity generation activity was considered an essential service and thus exempt from the restrictions. In order to protect our essential workers, we have implemented strict health and safety protocols for them, while the rest of our personnel is working from home. The quarantine did not have significant consequences during the first quarter, but it is expected to have a deeper impact during the second quarter. For example, as a consequence of the effects of the quarantine on economic activity, electricity demand decreased 11.5% during April, and 10% during the first three weeks of May, compared to the same period of 2019 according to data from CAMMESA. It's 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 are unaffected since they have dispatch priority and do not lose energy generation. 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 generation of the units. Additionally, when demand decreases, the oldest inefficient units tend to stop generating electricity first. These units receive a lower remuneration under the Energía Base framework, compared to the new efficient ones, which have higher remuneration contracts also known as Power Purchase Agreements, or PPAs. As a consequence of the decrease in economic activity due to the pandemic, on April 8, 2020, the Secretary of Energy instructed CAMMESA to postpone, until further notice, the application of the price update mechanism established by Resolution 31 for spot sales units. However, during the first quarter of 2020, around 50% of our EBITDA came from units that have contracts and not from the spot sales units. Furthermore, for the full year 2020, we expect that 70% of our business will come from units that have their contracts set in U.S. dollars due to the new capacity coming online during this year. The COVID-19 crisis also had an impact on our projects and construction, like in La Genoveva I and Terminal 6. Initially, the construction of private sector energy infrastructure was not included as an exemption to the quarantine but was included on April 7, 2020. Consequently, after taking all necessary precautions and implementing corresponding protocols to protect the personnel and the community, the construction in La Genoveva I wind farm and Terminal 6 and Lorenzo thermal plant was resumed on April 9 and April 27 respectively. Additionally, in the case of La Genoveva I on February 21, 2020, Vestas, the supplier of the wind turbines of La Genoveva I project, notified the company that the COVID-19 outbreak had affected its manufacturing activities worldwide causing delays in the supply chain for the delivery of certain Chinese-origin manufacturing components required for the completion of the wind turbines. This communication from Vestas did not specify the impact that this situation may have on the agreed schedule. Furthermore, logistic restrictions imposed by the federal and local governments may also slow down construction. In the case of the Terminal 6 project, construction was restarted after one month, with one-third of the personnel that was working prior to the quarantine due to the health and safety protocols agreed with the health authorities. Additionally, the project may also be affected by travel restrictions for international specialists that participate in construction. Due to these restrictions, the CODs of La Genoveva I and Terminal 6 and Lorenzo are expected to be delayed and depend on the evolution of the situation in the region in which both projects are located and the measures implemented by the government. During the first quarter of 2020, we reached a commercial operation date for Los Olivos wind farm, adding 23 megawatts and increasing the installed capacity of the wind farms Manque and La Genoveva II, which now have 57 and 15 megawatts respectively. These projects, together with La Genoveva II wind farm, have already signed long-term contracts with prices set in U.S. dollars directly with private customers for 100% of their capacity. I would like to give you an update on recent developments for the second quarter. In April 2020, the Siemens-branded combined cycle of the Luján de Cuyo plant became unavailable due to a significant failure in its main transformer. The normal lead time for a complete replacement of the equipment is around 12 months. However, the company is evaluating alternatives to return the unit to service sooner. Although, these may reduce the energy generation from this unit during the time the equipment remains unavailable, the company has a comprehensive operational risk and loss of profit insurance that covers the breakdown costs and the consequential loss of profits. Going to our key performance indicators of the quarter, energy generation during the first quarter was 3.9 terawatt hours of electricity, 10% higher than the same period of 2018. As a reference, energy demand during the period increased 4.2%, and domestic energy generation increased 7.4%. The increase in energy generation was primarily due to an 88% increase from renewable sources, mainly due to the positive impact of La Castellana II, La Genoveva II, Manque, and Los Olivos wind farms. Secondly, hydro generation from Piedra del Águila increased 10% due to higher available water flows. Finally, generation from our thermal units increased 5% mainly due to the positive impact of the purchase of the Brigadier López plant and the new Luján de Cuyo cogeneration unit, and to a lesser extent, to an increase in energy generation from some of the steam turbines of the Puerto complex due to higher temperatures during the summer. Regarding our thermal units, we continue to show an excellent track record in terms of availability, reaching 93%, three percentage points higher than the same quarter of 2018. This figure is 10 percentage points above the average availability of thermal units for the total market, demonstrating Central Puerto's competitive advantage. Now, I will turn the call over to Fernando, who will comment on the financial highlights.

Fernando Bonnet, CFO

Thank you, Jorge. Before starting, it's worth noting that the financial statement for the quarter ended on March 31, 2018, includes the effects of the inflation adjustments. Accordingly, the financial figures that I will mention, including the data from previous periods and the growth comparison, have been stated in terms of Argentine pesos at the end of the reporting periods. I will further refer to the results of the first quarter of 2020, as compared to the first quarter of 2019. As you can see on page seven, our revenues were ARS 8 billion in the quarter, a 13% decrease compared to ARS 9.3 billion during the first quarter of 2019. This decrease was driven by the discontinuation of fuel purchase operations that we conducted during 2019 due to new regulations that centralized fuel purchases for all generators through CAMMESA. These effects represent an ARS 3.5 billion variation. Excluding this effect, revenues for the first quarter of 2020 would have increased approximately 40%. This increase was mainly driven by an increase in sales under contracts, which amounted to ARS 3.4 billion during the first quarter 2020 as compared to ARS 768 million in the first quarter of 2019, primarily due to the revenues related to the Brigadier López power plant, which was acquired in June 2019, the new Luján de Cuyo cogeneration unit, which started operations in October 2019, and the wind farms La Castellana II, La Genoveva II, Manque, and Los Olivos, which started operations in June, September, December 2019, and February 2020 respectively. Additionally, we experienced a 10% increase in energy generation as Jorge mentioned before, and a 3% increase in availability of thermal units under the Energía Base framework. However, this increase was partially offset by a decrease in price for units under the Energía Base framework established by Resolution 31 as of February 1, 2020. Moving to page eight, we can see changes in our EBITDA, which reflects the increase in gross profit, which in the quarter rose to 22% compared to the same period of 2019. This was due to the increase in revenues mentioned before, and was partially improved by a 39% decrease in our cost of sales that totaled ARS 3.3 billion, compared to ARS 5.4 billion in the same period of 2019. The decrease in the cost of sales was primarily driven by an 81% decrease in the purchase of fuel and related concepts due to the discontinuation of this operation in the quarter according to new regulations. This was partially offset by a 29% increase in non-fuel related costs of production, mainly due to an increase in our installed capacity, following the acquisition of the Brigadier López power plant and the COD of the thermal and renewable energy projects. Gross profit margin totaled 59% during the first quarter of 2020, compared to 41% in the first quarter of 2019. This change was mainly a consequence of an operation for the purchase of self-supplied fuel, which was enforced during the first quarter of 2019 but not during the first quarter of 2020. Finally, other operating results net decreased ARS 1.9 billion in the quarter, primarily due to an impairment in property, plant, and equipment, which amounted to ARS 774 million in the quarter due to valuation at fair value of two Siemens-branded gas turbines installed at the suppliers' facilities, which were evaluated using the fair value less cost of sales approach. Moreover, we had an ARS 2.4 billion gain during the first quarter of 2020 from foreign exchange differences in operating assets, mainly due to FONI trade receivables, compared to ARS 3.9 billion during the first quarter of 2019, primarily due to an 8% depreciation of the Argentine peso during the first quarter of 2020, compared to the 15% depreciation during the same period in the previous year, and a lower average balance of trade receivables maintained during the quarter. As a consequence of these variations, the adjusted EBITDA was around ARS 7.6 billion in the first quarter of 2020, 7% lower than ARS 8.2 billion in the same period of 2019. However, adjusted EBITDA, excluding foreign exchange differences and interest on FONI trade receivables and the impairment on property, plant, and equipment, was ARS 5.8 billion in the first quarter of 2020, 53% higher than ARS 3.8 billion during the same period of 2019, showing the solid performance of the new plant. Going to page nine, the consolidated net income was ARS 1 billion compared to ARS 1.8 billion in the same period of 2019. Additionally, due to the factors mentioned before, the net income was mainly affected by higher financial expenses which increased ARS 2.2 billion due to losses obtained from thermal and renewable energy expansion projects and the acquisition of the Brigadier López power plant, as well as lower financial income due to interest rates during the quarter and lower foreign exchange differences on U.S. dollar denominated financial assets excluding FONI and other trade receivables. These effects were partially compensated by a favorable net monetary position during the first quarter of 2020, resulting in a gain in real terms, while the situation was the opposite during the first quarter of 2019. In terms of the cash flow for the first quarter of 2020, net cash provided by operating activities was ARS 3.5 billion. This includes ARS 1.5 billion in collections from FONI and CVO installments which are not included in EBITDA. The cash flow from operations was partially offset by ARS 1.2 billion CapEx invested in expansion projects and ARS 1.5 billion used to service debt. Thank you. Now we invite you to ask any questions to our team.

Operator, Operator

We will now begin the question-and-answer session. And our first question today comes from Ezequiel Fernández. Please go ahead.

Ezequiel Fernández, Analyst

Good morning. Yes, this is Ezequiel Fernández from Balanz Capital. Thanks for the materials. I have three initial questions. I would like to go one by one if you don't mind. First on the Luján de Cuyo stoppage, can you please tell us a bit more about what happened, and if the transformer failure led to damages in other more critical equipment? Also, what is the CapEx that you expect to spend to fix this, and what are the processes and timeframes involved in collecting from the insurance company?

Fernando Bonnet, CFO

Okay, let me go ahead and address this question, and first, thank you for the question. What happened with the transformer is that it caught fire. The root cause analysis has not been performed yet. So, we don't know exactly what happened with the unit, but it will be analyzed and assessed by the specialists to determine the exact origin of that failure. In 12 months, we will have to completely purchase a new transformer. Our first evaluation is that the unit has been severely damaged. In fact, the complete central column of the transformer has been destroyed. This means that the transformer will need to be completely rewound. It will take 12 months if we have to replace it with a new one, but we are analyzing with some of the firms involved in the replacement of the transformer the possibility of repairing it instead of completely discarding it. The total CapEx involved in this operation, if we decide to go for a new transformer, will be around ARS 3.5 million, and if we have the opportunity to repair it, it could be around ARS 1 million or something like this. Each month out-of-service of the unit corresponds to an ARS 3.5 million cost. In terms of insurance purposes, we have a coverage period of two years, which covers half this amount, and in the case of replacement, it will be less than ARS 0.5 million. So, we're currently working with a spare transformer that we had confirmed in the third quarter, which was initially supposed to function as a spare part for the common site that we had in the third quarter. So, it is not exactly the same transformer that we have. We're analyzing the possibility of modifying something in the equipment in the Luján de Cuyo power plant in order to connect this spare transformer and operate with it during the out-of-service period.

Ezequiel Fernández, Analyst

Okay, great. And just to be clear, do you expect the full 300 megawatts to be out-of-service, or is it only a partial?

Fernando Bonnet, CFO

No, it's a complete outage, because the unit which has been damaged is the transformer corresponding to the gas turbine. So, it's the main transformer of the unit. That means that the complete unit is out-of-service.

Ezequiel Fernández, Analyst

Okay. That's very clear, great, and my second question is related to Lorenzo and La Genoveva. If you could tell us what was the work advance ideally in percentage of completion that you had until this point?

Jorge Rauber, CEO

I will address your question about Lorenzo, and perhaps Fernando can provide some insight regarding La Genoveva I. Regarding Lorenzo, the percentage of completion has been affected by the quarantine, which halted all construction activities. Work resumed at the end of April, as we noted when discussing the current situation, but progress is now subject to a new and quite stringent safety protocol. Consequently, the pace of work has slowed significantly compared to before the quarantine. It is challenging to predict the exact timetable due to the rapidly changing circumstances, but we anticipate that the completion of the project will take more than three months, possibly extending into the first quarter of next year.

Ezequiel Fernández, Analyst

Okay.

Jorge Rauber, CEO

Fernando, can you add anything regarding Lorenzo specifically?

Ezequiel Fernández, Analyst

No, no, no. That's perfect. Thank you very much. We can move to La Genoveva.

Fernando Bonnet, CFO

Okay, thank you for the question. In the case of La Genoveva, it's simpler. We had started the construction in late April. So right now, we're in the phase of construction. We are not moving at the same pace as we did before the quarantine, because the local provincial government is very strict. The authorities are very cautious. So, it's not easy, but we're still working on the construction. We are mounting the generators, and I think we've mounted three or four of the total 21 that we have planned. We expect to continue with that as long as there are no new restrictions due to coronavirus or local authorities. We anticipate that we can finish around the third quarter of this year because of these delays.

Ezequiel Fernández, Analyst

Okay, perfect. Thank you very much. And my third question is related to the financial side: how are your conversations with banks going regarding revolving some of your loans, and specifically the larger syndicated loan of around ARS 180 million?

Fernando Bonnet, CFO

In terms of short-term debt, we're not facing any problems. All our lines with banks are available. In fact, we don't have a lot of short-term debt. In the case of the big loan you mentioned, the syndication for the Brigadier López project, the capital is due in December this year. At this time, we are in discussions with them. Of course, we need to wait because as Jorge mentioned, right now we are not suffering from external problems with the quarantine since our income is stable. Of course, we received some reductions in production, but our income is mainly driven by the availability of our OEM. So, we're analyzing opportunities to renegotiate that loan, but it's not a pressing option for us or for banks right now.

Ezequiel Fernández, Analyst

That's very clear. Thank you.

Operator, Operator

And our next question comes from Frank McGann with Bank of America. Please go ahead.

Frank McGann, Analyst

Yes, thank you very much. You mentioned the potential for weaker demand in the release related to COVID-19 in the market in Argentina, and I was just wondering what effects this could potentially have on your business in terms of overall dispatch and such, and basically just how you're seeing the next couple of quarters in terms of effects coming from COVID-19?

Jorge Rauber, CEO

Frank, thank you for your question. The situation in Argentina is different compared to more industrialized countries. In Argentina, specifically, the demand has decreased by 11.5%. So, it's not a huge reduction in terms of demand. Perhaps the more important effect due to the coronavirus is mostly related to collections rather than demand. We don’t foresee a dramatic reduction in production. Our combined cycle in Puerto will surely be in dispatch. Our income may be affected because of the transformer issue in Mendoza; that's more relevant in projecting our results for this year than the coronavirus. Most importantly, the situation with construction and collections is creating pressure for the government to increase subsidy times in order to maintain the whole system operating. In fact, all renewable projects have priority dispatch, so they're not expected to be affected. Our generation investment is operational, and any reduction will come from older turbines. Renovation, as we mentioned in our statement, isn’t affected much because much of the renovation came from new capacity rather than production. Thus, we don’t see a direct impact related to demand but more regarding collection and a potential need for a higher government subsidy.

Frank McGann, Analyst

Okay, thank you. And have you seen an increase in the time it takes for you to get compensated by CAMMESA?

Jorge Rauber, CEO

Not significantly. In fact, last month they improved their timing. At the beginning of the quarantine, there was a delay, but the government has sort of returned normalcy. So, we have not seen significant delays because the previous decline was related more to the change in government last December than the quarantine itself. During the quarantine, the payment schedule has remained consistent.

Operator, Operator

Your next question comes from Antonella Rapuano with Santander. Please go ahead.

Antonella Rapuano, Analyst

Hi. Thank you for the presentation and for taking my question. I would like to make two questions if I may. The first one is regarding the FONINVEMEM program, and specifically on the thermal plants, Belgrano and San Martín. I was wondering if you could give us some updates on the transfers of the assets to regions where you have a material interest, and when do you expect to start recognizing these equity income in your financial statements? Additionally, do you have any remaining payments for FONINVEMEM from Belgrano and San Martín for the remainder of the year, or have these payments already been collected?

Jorge Rauber, CEO

Okay. Fernando, can you answer this question?

Fernando Bonnet, CFO

Yes. Thank you, Antonella. In terms of receivables, we have already collected what was due from San Martín and Belgrano power plants. So, this is all settled on time. Regarding the asset transfers, we are aligning all materials required by Siemens as part of the government's regulations in the operating company established in the regional agreement. We were present in the shareholder meetings for both companies in line with the government's requests in terms of participation. We feel there’s room for discussion on the extent of government participation in the power plants to ensure we do not lose the chance to get the opportunity to repeat power plants in the operating companies. We agreed to allow them to participate to the extent they desire but reserve our rights to reclaim the difference in further moments for their actions. We complied with the application, and the government is analyzing all required information. We expect the transfer of the assets to happen in the near future, ideally in the next month.

Antonella Rapuano, Analyst

Right, thank you.

Fernando Bonnet, CFO

Once that happens, we will recognize the income in our balance sheet.

Antonella Rapuano, Analyst

Could you provide some measure of the magnitude of this income from Belgrano and San Martín?

Fernando Bonnet, CFO

We need to perform evaluations; it’s very difficult to estimate because we need to finish the issue with government participation first. After that, we need to perform an evaluation to officially incorporate these assets in our balance sheet. Currently, I do not have an evaluation, but you can infer that these power plants receive some forms of renovation to combine cycle based on Resolution 31. Thus, this will provide income from now onward.

Antonella Rapuano, Analyst

Sure, right. And my other question is related to the PPA contract capacity. Do you see any risk of changes in prices, maybe translated to pesos in case of a sharp depreciation of the local currency?

Fernando Bonnet, CFO

Regarding the PPA? No, we don't see any significant risk related to that. There have been some rumors, but we’re not concerned about any specific threats of depreciation affecting the PPA.

Operator, Operator

And our next question is a follow-up from Ezequiel Fernández with Balanz Capital. Please go ahead.

Ezequiel Fernández, Analyst

Yes. Hi again. Sorry, and two very quick follow-ups. The first one is, are you having access to the official FX markets for repayments and imports without issues? And could you tell us please what was the size of the Central Puerto receivable outstanding at the end of March 2020?

Jorge Rauber, CEO

Okay. On the first question, yes, we are not facing any problems accessing the FX market for imports or debt repayments. In terms of the Central Puerto receivables outstanding at March, the amount is ARS 440 million, which aligns with expected collections during the last year and this year.

Ezequiel Fernández, Analyst

Thank you. That was very clear. That's all from my side.

Operator, Operator

And our next question comes from Roberta with Morgan Stanley. Please go ahead.

Unidentified Analyst, Analyst

I'm sorry. I was on mute. Hi guys, thanks for taking my question. Can you give me any color on what percentage you expect the overall demand will be in the second quarter and following this year? Additionally, how do you see the liquidity of the company by the end of the year? Do you expect to have any extra financing needs?

Fernando Bonnet, CFO

Well, more or less what I mentioned: the first quarter was unaffected; the quarantine was imposed by the government at the end of March. Prior to that, we had an increase of almost 18% in demand right up until those measures. After that, we are expecting an approximate 11% decrease in demand compared to the same quarter last year. This is the overall impact we anticipate based on current trends. The government is now relaxing the quarantine; we hope that will allow demand to rise back to normality unless we face an increase in COVID-19 cases, in which case we may need to adjust our expectations. So gross estimates run around 10-11%.

Unidentified Analyst, Analyst

Okay.

Fernando Bonnet, CFO

Regarding liquidity, we currently have sufficient resources for ongoing CapEx for projects like Terminal 6 and renewable energy projects, specifically La Genoveva. We are not looking to take on new debt as we have enough cash flow to cover our current liabilities and projects. We are exploring opportunities for liability management and potentially taking on some additional low-interest debt based on market conditions, but it’s not urgent. We have plans to utilize the cash flow from operations to cover the necessary CapEx requirements. We are not anticipating any international offers or significant bills in the upcoming months. We will reassess in December for the repayment of the syndicated loan of around ARS 36 million, assessing opportunities for management but not for new CapEx.

Unidentified Analyst, Analyst

Great, thank you very much.

Fernando Bonnet, CFO

You're welcome.

Operator, Operator

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Rauber for any closing remarks.

Jorge Rauber, CEO

Okay. Thank you to everyone for your interest in Central Puerto. We encourage you to contact us anytime for any information that you may need. Thank you, and have a good day.

Operator, Operator

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