Earnings Call Transcript - CEPU Q3 2020

Operator, Operator

Good morning, and welcome to the Central Puerto conference call following the results announcement for the quarter ended on September 30, 2020. Please note that this event is being recorded. If you do not have a copy of the press release, you can find it in the Investor Support section on the company's corporate website at www.centralpuerto.com. A replay of today's call can also be accessed through 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 according to IFRS and are presented in Argentinian pesos unless stated otherwise. It is important to note that the financial statements for the quarter ended on September 30, 2020, reflect the effects of inflation adjustment. As a result, the financial figures discussed during the call, including data from previous periods and growth comparisons, are stated in Argentine pesos at the end of the reporting period. Additionally, please note that certain statements made by the company during this conference call are forward-looking, and we urge you to refer to the forward-looking statements section of our earnings release and recent SEC filings. Central Puerto is under no obligation to update forward-looking statements unless required by applicable securities laws. To enhance your understanding of the discussion, please download the webcast presentation available on the company's website. Be aware that some of the numbers mentioned during the call may be rounded for simplicity. Joining the call from Central Puerto are Jorge Rauber, Chief Executive Officer; Fernando Bonnet, Chief Operating Officer; Milagros Grande, Financial Manager; and Tomás Daghlian, Investor Relations Officer. I will now turn the call over to Jorge Rauber. Mr. Rauber, you may begin.

Jorge Rauber, CEO

Thank you very much. Good morning, and welcome. I would like to begin today's call analyzing the developments of the third quarter, commenting on the progress of our expansion projects and analyzing the operating figures of the quarter. Fernando will present the recent financial news and results of the quarter. And finally, we'll answer any questions that you may have. As you know, the COVID-19 crisis has affected almost all the world, and among other consequences, the electric energy demand in Argentina. However, during the third quarter, we have seen some degree of recovery, thanks to the partial flexibilization of the quarantine. As you can see on Page 3, electricity demand decreased just 2.2% during the third quarter 2020 as compared to the same period 2019. As a reference, during the second quarter 2020, electricity demand decreased 5.5% as compared to the same period of the prior year. We believe that this trend may consolidate in the future quarters. Nonetheless, as you may recall, it's worth noting that the decrease has a less-than-proportional impact on the income of generation companies. In the case of renewable energy units, they are unaffected since they have dispatch priority, so they can sell all the electricity that they generate. In the case of thermal units, they have a high proportion of their income associated with fixed power moderation, which is not related to the energy production of the unit. Finally, when demand decreases, the units that stop generating electricity first tend to be the older, inefficient ones, which are remunerated under the Energía Base framework as compared to the new efficient ones that have a higher remuneration to contracts, also known as power purchase agreement or PPA. Going now to Page 4. As you may recall, the measures adopted to prevent the spread of the COVID-19 virus had an impact on the progress of our project under construction of La Genoveva I wind farm and Terminal 6 new cogeneration unit. Regarding La Genoveva I, we are pleased to announce that as of today, we have 20 of the 21 wind mills in operation, and we expect to reach the commercial operation date, or COD, for the complete project during this month. Once the COD is reached, this plant will be remunerated under a 20-year PPA entered into with CAMMESA. This will be the seventh wind farm that we commissioned since 2016, reaching a total installed capacity of 374 megawatts of wind power. During the quarter, we have continued with the construction of the new Terminal 6-San Lorenzo cogeneration plant. For this month, we expect to achieve the partial commissioning of the 284-megawatt gas turbine in an open cycle configuration for operation with natural gas, an important milestone for the project, which will allow us to sell energy under the spot market regulation. Once the COD for the full project is achieved, which is expected for the first half of 2021, then we'll be remunerated under a 15-year PPA on the energy side and also sell steam to a private offtaker under another 15-year contract. Going now to our key performance indicators for the quarter. As you can see on Page 5, energy generation during the third quarter was 3.9 terawatt hours of electricity, 1% lower than the same period of 2019. This was, to a large extent, due to the 21% drop in generation from our Piedra del Águila hydro plant related to lower water availability and was partially offset by the generation from the new wind farms, La Castellana II, La Genoveva II, Manque, and Los Olivos and the new Luján de Cuyo cogeneration unit. Steam production during the third quarter 2020, which was generated by the new Luján de Cuyo cogeneration unit, reached its expected capacity. During the third quarter 2019, the steam production had a decrease due to the scheduled halt of the old cogeneration unit of the Luján de Cuyo plant to allow the necessary civil works in the steam pipeline for the connection of the new cogeneration plant, which started operations on October 5, 2019. Therefore, due to this effect, the output of the third quarter 2020 was 31% higher than the third quarter of 2019, reaching normal levels. Regarding the availability of our thermal units, during the third quarter 2020 it reached 89% as compared to 94% during the third quarter 2019. It was mainly because of the failure of the main transformer of the Siemens-branded combined cycle of the Luján de Cuyo plant that occurred on April 12, 2020, which returned to service on July 16, 2020, and to a lesser extent, to smaller events in some of the steam turbines of the Puerto and Luján de Cuyo plants. Still, this indicator remains higher than the market average availability for thermal units, which was 84% according to data from CAMMESA. 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 some of the recent financial news for the company and then comment on the results of the third quarter of 2020. As you can see on Page 6, on August 31, our subsidiaries, CP Manque and CP Los Olivos, issued 2 green bonds in the local security market for the equivalent of USD 50 million, replacing outstanding bridge loans with Central Puerto. The placement consists of a dollar-linked series, Class 1, integrated in Argentine pesos for $35 million with a maturity of 3 years, and a series in Argentine pesos with a maturity of 1 year for the equivalent of USD 15 million. The issuance was recognized by Fix Ratings, an affiliate of Fitch Ratings, with the green bond rating BV1, and the bonds were included in the Panel of Social, Green and Sustainable bonds at Bolsa security market, BYMA, being the first one to be included in this panel with the issuance. This is an important milestone for the company and the Argentine security market. And we look forward to continuing with the development of this kind of investment alternatives for which we expect a growth in demand. Going now to the results for the quarter. As you can see on Page 7, our revenues were ARS 9.1 billion as compared to ARS 10.6 billion during the third quarter of 2019. This decrease was driven by the discontinuation of the fuel purchases operations that we did during 2019 due to the new regulations that centralized the fuel purchases for all generators in CAMMESA. This effect represents an ARS 1.7 billion variation during the quarter compared to the same period of the prior year. Excluding this effect, revenues were ARS 8.9 billion compared to ARS 8.7 billion in the third quarter of 2019. This increase was mainly driven by an increase in sales under contracts, which amounted to ARS 4.3 billion during the third quarter of 2020 as compared to ARS 3.5 billion in the same period of the previous year, mainly due to the new Luján de Cuyo cogeneration unit, which will start operations in October 2019 and the wind farms, like La Castellana II, La Genoveva II, Manque, and Los Olivos, which started operations during June, September, December 2019 and February 2020, respectively. Furthermore, there was an increase in steam sales that during the quarter totaled ARS 330 million from the new Luján de Cuyo cogeneration plant compared to ARS 98 million in the third quarter of 2019. This increase was partially offset by the decrease in sales under Energía Base framework of ARS 1 billion, mainly driven by a decrease in prices established by the Resolution 31 enforced since February 1, 2020, and the suspension of the monthly price adjustment procedure of such a resolution instructed by the Energy Secretary on April 8, 2020. The gross profit was ARS 5.5 billion during the third quarter of 2020 as compared to ARS 6.3 billion in the same period of 2019. This was due to a variation in revenues mentioned before and was partially offset by a 13% reduction in cost of sales that totaled ARS 3.6 billion compared to ARS 4.4 billion in the same period of 2019. The decrease in the cost of sales was primarily driven by a 56% decrease in the purchase of fuel and related concepts due to the discontinuation of this operation according to the new regulations. Given the current scenario, no tariff adjustment for units under the Energía Base framework, the company made a strong review in order to maintain non-fuel-related costs of production as low as possible. As a consequence, administrative and selling expenses were reduced in 26% in real terms, saving more than ARS 208 million during the third quarter of 2020 compared to the same period of 2019. Gross profit margin totaled 60% during the quarter as compared to 59% in the same period of 2019. Going to Page 8, we can see the changes in our EBITDA, which was around ARS 7.7 billion in the third quarter of 2020 compared to ARS 19.3 billion in the third quarter of 2019. In addition to the variation in gross profit mentioned before, this was due to a reduction of ARS 11.3 billion in other operating results, mainly due to a reduction in foreign exchange difference gain related to dollar-denominated FONI trade receivables that generated an ARS 1 billion gain during the third quarter of 2020 compared to ARS 8.5 billion during the third quarter of 2019 when the Argentine peso registered a depreciation of 36% mainly related to the outcome of the primary elections in 2019, and an ARS 4.8 million onetime gain in interest registered in the third quarter of 2019 associated with 2013 to 2016 CAMMESA trade receivables cancellation. Going to Page 9, the consolidated net income was ARS 2.3 billion compared to ARS 4.8 billion in the same period of 2019. In addition to the factors mentioned before, the net income was negatively affected by lower financial income, which decreased ARS 270 million due to a lower foreign exchange difference on financial assets denominated in U.S. dollars, partially compensated by a higher mark-to-market gain and a positive impact from lower financial expenses that decreased ARS 8.8 billion in the third quarter of 2020 compared to the same period of 2019, mainly due to a lower financial exchange difference on loans, most of which are denominated in U.S. dollars. Additionally, the result on net monetary position was ARS 300 million in the third quarter of 2020 compared to ARS 1.1 billion in the third quarter of 2019. Finally, the share of profit of associates was ARS 486 million lower during the third quarter of 2020 as compared to 2019, mainly due to lower results from the operation of natural gas distribution associates related to a lack of tariff adjustment for the natural gas distribution business in 2020. Going to Page 10, you can see our cash flow for the 9-month period ended on September 2020. Net cash provided by operating activities was ARS 12.8 billion. This includes ARS 4.6 billion in collection from FONI and CBO installments. The cash flow from operations was partially offset by ARS 8.5 billion CapEx disbursement for the expansion projects and ARS 4.1 billion used in short-term investments. Additionally, on the financial side, ARS 5.6 billion were used for principal and interest debt services, which was partially offset by ARS 3.7 billion in new loans received during the period, mainly related to the green bond issuance mentioned before. Thank you, and now we invite you to ask any question to our team.

Operator, Operator

Our first question today comes from Frank McGann with Bank of America.

Frank McGann, Analyst

I have two questions. First, could you discuss the trends you're observing in the third quarter regarding demand, particularly your actual generation, especially in relation to hydro and the hydro conditions as you see them for the fourth quarter? Second, can you comment on the timing of the cash flow payments coming from CAMMESA at this time?

Jorge Rauber, CEO

I believe the first point to note is that demand remains a unique situation compared to last year, primarily due to a significant increase in residential demand. Customers are using 10% more than they did last year. However, industrial and commercial demand has decreased to a similar extent. This year has been particularly dry, with generation at the Piedra del Águila hydro power plant being 21% below normal levels. The demand situation is challenging, but we have seen some improvement thanks to the easing of quarantine restrictions. Nonetheless, the demand we experienced last year has not returned. We anticipate that the changes in government regulations will increase demand, but we expect the current circumstances to persist for at least a few more months.

Fernando Bonnet, CFO

And let me answer the second one.

Jorge Rauber, CEO

Yes.

Fernando Bonnet, CFO

In terms of payment, CAMMESA is currently undergoing changes. After they can increase or the government, the Secretary of Energy can increase the budget for subsidies in terms of energy. The payment flow has improved. We have a reduction in days of delay. We are seeing progress from previous experiences. We have around 40 days of delay and right now, we are at 30 days of delay in payment. So the payments are being processed. Of course, we are still experiencing that 30 days of delay, but we are better than 1 month or 2 months ago. The government said that they want to maintain that and not increase that quantity of days of delay. We are receiving more money and more flow. I think with that, we can still continue with these delays until the government can make the adjustment that they are saying will happen in 2021.

Operator, Operator

Our next question comes from Matías Wesenack with AR Partners.

Matías Wesenack, Analyst

This is Matías Wesenack from AR Partners. I have 2 in fact. The first one is, how efficient do you expect T6 to be in open cycle? Do you expect it to have a high dispatch factor? And the second one is, if you could give us more color on capital expenditures in the remaining of this year and 2021.

Jorge Rauber, CEO

I will address the first question, Matías. The operation in open cycle is anticipated to have a low dispatch. Currently, demand is high due to the coronavirus crisis and the renewable offerings we have. Therefore, we expect a very low dispatch, but as noted, most of the compensation for the units relies on availability rather than dispatch. Consequently, this unit operating in open cycle will still provide capacity payments until the combined cycle is expected to commence during the first half of next year. Now, I'll let Fernando respond to the second question.

Fernando Bonnet, CFO

Thanks, Jorge. In terms of capital expenditures, the only projects currently under construction are Terminal 6, as Jorge mentioned, which had approximately $7 million in capital expenditures for the last year. The remainder of the capital expenditures for the first quarter of 2021 are expected to be unspecified. Regarding the renewables, the last project under construction is La Genoveva I, which is set to start operations this month, and we anticipate about $15 million for the last quarter of this year. I think a portion of that, roughly $6 million, will be allocated for expansion and regular maintenance, which is around $15 million per year.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the call 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 call us for any information that you may need. Have a great day. Thank you.

Operator, Operator

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