Earnings Call Transcript - CEPU Q1 2021

Operator, Operator

Good morning, and welcome to the Central Puerto conference call following the results announcement for the quarter ended on March 31, 2021. 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 quarter ended on March 31, 2021 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 securities laws. Following the discussion, 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 for Central Puerto is Fernando Bonnet, Chief Executive Officer; Enrique Terraneo, Chief Financial Officer; Milagros Grande, Chief Financial Manager; and Nicolas Macchi, Investor Relations Officer. And now I will turn the call over to Fernando Bonnet. Mr. Bonnet, thank you. You may begin.

Fernando Bonnet, CEO

Thank you very much. Good morning and welcome. It's a pleasure for me as the CEO to join you today with our management team from Buenos Aires to report on the results of the first quarter 2021, and then answer any questions you may have. I would like to begin today's call by analyzing the developments of the first quarter, commenting on the progress of our expansion project and analyzing the operating figures of the quarter. Milagros will present the recent financial news and results. First of all, I’m going now to Page 3. As you may recall, during 2020 the measures adopted to prevent the spread of the COVID-19 virus have impacted the progress of our project Terminal 6 new cogeneration unit. During the quarter, we have continued with the construction of the new Terminal 6 San Lorenzo generation plant and reached a progress of 92%. It's important to remark that since November 2020, the plant obtained a partial commissioning of its gas turbine of 269 megawatts selling energy under the spot market regulation. Once the COD of the full project is achieved, which is expected for the third quarter of 2021, the plant will be remunerated under the 15-year PPA on the energy side and sell to a private offtaker under a 15-year contract. Moving now to our key performance indicators for the quarter. As you can see on Page 4, energy generation during the first quarter was 3,479 gigawatt hours of electricity, 11% lower than the same period of 2020. This was mainly due to a 306 gigawatt hour drop in generation from our Piedra del Águila hydro plant related to lower water inflows and a 180 gigawatt hour decline in our thermal generation, mainly due to small failures in our Puerto's combined cycle and some of our steam turbines, partially offset by the generation from the new wind farms, Manque and Los Olivos, and La Genoveva I, which increased 56 gigawatts compared to the same quarter of 2020. The steam production during the fourth quarter increased 3% due to good availability and generation from our Luján de Cuyo cogeneration plant. Regarding the availability of thermal units, during the first quarter of 2021, it reached 89%, compared to 93% during the same quarter of 2020. This was mainly due to small failures in our Puerto's combined cycle during March 2021 and some of the steam turbines at Puerto and Luján de Cuyo plants. Still, this indicator remains significantly higher than the market average availability for thermal units, which was 81% for the same period according to data from CAMMESA. Finally, regarding the spot market tariffs scheme, it's worth mentioning that we have had several calls and meetings with the sub-secretary of energy in which we discussed the necessity and urgency of having an adjustment in this remuneration scheme, which has been frozen since February 2020, and we are expecting to have news in this regard in the next weeks. And now I will turn the call over to Milagros, who will comment on the financial highlights.

Milagros Grande, Chief Financial Manager

Thank you, Fernando. I will start by referring to some recent financial news for the company and then comment on the results of the first quarter 2021. On February 25, the Central Bank decided to extend the FX regulatory restrictions established by communication 7106 until December 31, 2021 through the issuance of communication 7230. The installments under the syndicated loans signed with Citibank, JPMorgan Chase Bank, and Morgan Stanley Senior Funding for the acquisition of Brigadier López Plant are maturing on June, September, and December 2021. Therefore, as of the date of this press release, we are maintaining negotiations with these banks to reschedule those installments. Moving now to the results this quarter. As you can see on Page 5, our revenues were ARS10,164 million as compared to ARS11,419 million during the first quarter of 2020. This decrease was mainly due to a 31% decrease in Spot Sales/Energia Base, which totaled ARS4,166 million in the first quarter of 2021 as compared to ARS6,050 million in the first quarter of 2020, mainly due to the lack of monthly price adjustment of Resolution 31 instructed by the Secretary of Energy on April 8, 2020, and to a lesser extent, to small failures in Puerto's combined cycle and some of its steam turbines. This was partially offset by a 13% increase in sales under contract, which amounted to ARS5,444 million during the first quarter of 2021 compared to ARS4,833 million in the first quarter of 2020, mainly due to the new wind farms mentioned above, and a 9% increase in steam sales, which totaled ARS281 million in the first quarter of 2021 compared to ARS258 million in the first quarter of 2020, as the steam production increased 3% in the quarter. The gross profit was ARS4,973 million in the first quarter of 2021 compared to ARS6,686 million in the first quarter of 2020. This decrease was due to the aforementioned variation in revenue and a 10% increase in the cost of sales that totaled ARS5,191 million compared to ARS4,734 million in the first quarter of 2020. This increase in the cost of sales was primarily driven by a 43% increase in purchases of materials and spare parts, which totaled ARS1,645 million during the first quarter as compared to ARS942 million in the first quarter of 2020, and also a 6% increase in the cost of production, which totaled ARS4,052 million in the first quarter of 2021 as compared to ARS3,806 million in the first quarter of 2020, mainly due to the increase in depreciation of ARS349 million and an increase in maintenance expenses of ARS173 million. Given the current scenario of no tariffs adjustment for units under the Energía Base framework, the company made a strong review of expenses. Therefore, administrative and selling expenses were reduced by 11% in real terms, saving more than ARS100 million during the first quarter of 2021 as compared to the same period of 2020. The gross profit margin was 49% during the first quarter of 2021, as compared to 59% in the first quarter of 2020. Going to Page 6, we can see the changes in our EBITDA, which is ARS9,679 million in this quarter compared to ARS10,848 million in the first quarter of 2020. In addition to the variation in gross profit mentioned, this was mainly due to a 17% decrease in foreign exchange differences on operating assets, mainly related to foreign trade receivables that generated ARS2,862 million gain during the first quarter of 2021 compared to ARS3,461 million during the first quarter of 2020. It is worth mentioning that during 2020 CAMMESA completed full scheduled payments of principal and interest in accordance with the FONI agreements for Termoeléctrica José de San Martín and Termoeléctrica Manuel Belgrano. This was partially offset by a higher depreciation of the Argentine peso. As a reference, during the first quarter of 2021, the Argentine peso depreciated 9.28% as compared to 7.77% during the first quarter of 2020. The variation in gross profit was also due to a decrease in interest from clients with a total of ARS613 million during the first quarter of 2021 compared to ARS1,094 million in the first quarter of 2020, mainly related to the total collection of the FONI agreements for San Martín and Belgrano during 2020. All this was partially offset by an increase in depreciation and amortization that totaled ARS1,913 million during the first quarter of 2021 as compared to ARS1,657 million during the first quarter of 2020. During this quarter, no impairment was accounted compared to the ARS1,105 million in the first quarter of 2020. Going to Page 7, the consolidated net income was ARS640 million compared to ARS1,364 million in the same period of 2020. In addition to the factors mentioned before, the net income was positively impacted by a higher financial income, which amounted to ARS422 million during the first quarter of 2021 compared to ARS185 million in the first quarter of 2020, and lower income tax expenses that amounted to ARS450 million in the first quarter of 2021 compared to ARS2,635 million in the first quarter of 2020. Also, the net income was negatively affected by higher financial expenses that amounted to ARS7,012 million in the third quarter of 2021 compared to ARS6,213 million in the first quarter of 2020, mainly due to higher foreign exchange differences on loans, most of which are denominated in US dollars. Additionally, the share of profit of associates was an ARS267 million loss during the first quarter of 2021 compared to a ARS77 million gain during the first quarter of 2020, mainly due to lower results of the operations of Ecogas due to the level of tariff adjustments for the natural gas distribution businesses. Finally, the gain on net monetary position totaled ARS191 million during the first quarter of 2021 as compared to ARS447 million in the first quarter of 2020. Going to Page 8, we can see our cash flow for the first quarter ending on March 2021. Net cash provided by operating activities was ARS4,021 million. This included ARS1,109 million in collections from Vuelta de Obligado. Also, net cash provided by investing activities was ARS303 million. Additionally, on the financing side, ARS4,439 million were used for banks and investment accounts of our debt payment for ARS1,121 million, long-term loans for ARS2,228 million, and interest and other loan costs for ARS1,041 million. Thank you. And now we invite you to ask any questions to our team.

Operator, Operator

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

Frank McGann, Analyst

I wondered in terms of the legacy price adjustment that you said you've been discussing with the Secretary of Energy, and others have suggested that as well. It sounds like you’re fairly confident, I guess. I'm just wondering if you have any feel for how material that could be, how it might be structured, particularly in light of what we saw with the distribution increase that was granted recently, just wondering if how much risk maybe there is associated with getting it? And then secondly, just a couple of more mundane things, just in terms of the current hydro situation for Piedra del Águila and the Puerto plant. The issues that you had with it, if you could provide a little bit more detail maybe and if those are completely resolved at this stage.

Fernando Bonnet, CEO

In terms of the tariff increase in Resolution 31, as you mentioned, we have had several meetings last year with the sub-secretary of energy. And we have additional meetings with Dario Martinez, who is the Secretary of Energy. In those meetings, we discussed resolutions and adjustments of this tariff increase. They really understand the situation. They agree with our condition. They want to work collaboratively on the different tariff increases, not taking them one by one. They want to solve the increases as a whole, and they are working on the gas sector and the electricity distribution sector, as you mentioned. In our case, we talked with them to reestablish Resolution 31, which, in fact, established a mechanism for tariff adjustments, and we think that they may consider that but they are thinking more about an adjustment done once a year to cover inflation. This is pending the final number and when it will apply. We talked with them about establishing a retroactive effect from February. I think they are willing to assess this for a new tariff adjustment from February, but we do not have the final number yet. In the case of generation, an increase of 30% would result in a very small impact on the final tariff, less than 1.5%. They want to address the issue in a coordinated manner. We are confident that we will move forward and that they will address new increases to account for at least part of the inflation that we suffered. We don’t yet have the final number from them. They asked calculations from CAMMESA surrounding a 29% increase, but we don’t have formal confirmation yet. Regarding your question about Piedra del Águila, the situation is similar to last year. We are experiencing a dry period in inflows of water, which are lower than the normal median of the last 15 to 20 years. We are having very dry years with Piedra del Águila. We are analyzing with specialists what next year might bring in terms of inflows, but we hope this is just a dry period. In terms of Central Puerto, we faced some small failures in our combined cycle here in Buenos Aires. All these failures are minor issues related to pumps and the boiler, and they do not significantly impact operations. The combined cycle is operating normally now without issues, and we do not anticipate these minor failures occurring again in the near future.

Frank McGann, Analyst

Can I just follow up? Yes, you mentioned that an estimate of a 30% increase in the legacy tariffs would be what percentage of the legacy prices, is 1.5 what you said?

Fernando Bonnet, CEO

No, this is the impact we expect, but we don't know the exact number yet, as we mentioned. We have seen some news in the press. The Secretary of Energy has asked for calculations from CAMMESA regarding a 29% increase. But I mentioned that this 29% would result in an impact of less than 1.5% on the final tariff.

Operator, Operator

Our next question comes from Ramon Vasiloudis with Volante Capital.

Unidentified Analyst, Analyst

I would like to ask you about Terminal 6. You mentioned that you have reached 92% completion. So what's the remaining CapEx for this? And then another question, are you planning to tap the market during 2021?

Fernando Bonnet, CEO

Yes, we are at 92%. The remaining CapEx for Terminal 6 is around $15 million. Regarding the second question, we are not currently planning to return to the market in 2021 because we do not have any additional CapEx planned for this year. We are restructuring our short-term debt according to the resolution of the central bank, but we do not see the need to go to the market right now.

Unidentified Analyst, Analyst

So do you have any updates on the syndicate negotiation?

Fernando Bonnet, CEO

We are discussing the extension regarding 60% of the last three installments. We are in the process with the banks. These negotiations are not final yet, but we have made some progress.

Operator, Operator

Our next question comes from the line of Alan Ross.

Unidentified Analyst, Analyst

My question is, two questions, mainly regarding Resolution 3120. First thing is, is there a strategy in discussion? Is it going to be like an increase to the fixed price for another term or can it be like a variable price? And then the second thing is, is there any deadline because you said we don't have any information from the parties? Is there like a timeframe that they have to provide us either yes or no? There could be an increase in the price or definitely no for a deadline? And then if there is any update, where would we see that, would it be in the news or on the website as a new posting? That's it.

Fernando Bonnet, CEO

Based on our discussions with them and the current situation, we do not see a new pricing scheme. We anticipate an increase to the fixed price, at least for this upcoming month. The subsequent discussion about any further increases will depend on inflation developments. However, a new resolution will be necessary for any future adjustments. Given the current situation, the increase will be for a specified period, but I don't know the length of that yet. If inflation stabilizes, this might hold until the elections, but any increase in inflation will require us to negotiate further adjustments. As for the updates on increases, it will be public because it is a resolution, but we can also share information on our website or through a relevant press release.

Operator, Operator

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

Fernando Bonnet, CEO

Well, 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. Thank you.

Operator, Operator

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