Earnings Call Transcript - CEPU Q2 2023

Operator, Operator

Good morning ladies and gentlemen. Welcome to Central Puerto's Second Quarter 2023 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 are stated in Argentine pesos, unless otherwise noted. It is worth noting that the financial statements for the second quarter ended on June 30, 2023, 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 take into consideration that certain statements made by the company during this conference call and answers 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 the discussion. On the call today from Central Puerto is Fernando Bonnet, Chief Executive Officer; Enrique Terraneo, Chief Financial Officer; and Pablo Calderone, Corporate Finance and Investor Relations Manager. And now I will turn the call over to Pablo Calderone. Please, Pablo, you may begin.

Pablo Calderone, Corporate Finance and Investor Relations Manager

Thank you very much and good morning to you all. We are joining you today with our management team from Buenos Aires, Argentina to comment on our results of the second quarter of 2023. Taking a moment of your attention to review today's agenda, I would like to begin the presentation by addressing the latest development of the company during the period, then move on to analyze the evolution of the Argentine energy sector in the quarter, and finally, delve into Central Puerto's operating and financial results. At the close of my presentation, we will be happy to address any questions that you may have. To begin with, and in line with our strategy to increase our environmental performance and contribute to the global decarbonization goals on May 3, 2023, Proener, one of our subsidiaries, acquired 100% of the capital stock and votes of the forestry companies Empresas Verdes Argentina, Las Misiones and Estancia Celina S.A., which contributed a total of 88,000 hectares geographically located in the center of the province of Corrientes, of which approximately 36,000 hectares are productive and 26,000 on credit accounts with plantations. Following the recent acquisition of Central Costanera and in order to comply with the provision of the capital market law and the CMV rules on March 17, 2023, Proener promoted the tender offer to all the holders of voting shares of Central Costanera. The tender offer was opened from May 30 until June 12, 2023. And the notice of results was published on the following day, June 13, 2023, mentioning that over 65,000 shares of the company participated in the tender offer. Consequently, Proener’s shareholder in the company represents now 75.69% of the company’s capital stock. The shares of those holders of Central Costanera that did not participate in the tender offer continue to be outstanding and trading on the Buenos Aires Stock Exchange. With this acquisition, Central Puerto reinforces its growth in Argentina, consolidating its position as market leader in the power generation sector. Now let’s use the next two slides to analyze the evolution of the Argentine energy market during this quarter. As we can see in Slide 5, the country’s installed generation capacity increased by 1% or 524 megawatts, reaching a total of 43,405 megawatts compared to 42,881 megawatts in the second quarter of 2022. This increase in capacity was mainly due to the incorporation of 349 new megawatts from renewable sources, increasing 7% vis-à-vis the same period of 2022, of which 237 megawatts correspond to solar photovoltaic projects, 95 to wind farms, 12 to renewable hydro projects, three megawatts to biomass, and finally, one megawatt of biogas generation units. In turn, thermal capacity sources recorded a net 1% increase or 175 megawatts as a combination of the incorporation to the system of 780 megawatts of new combined cycles and the decommissioning of 567 megawatts and 38 megawatts of gas turbines and diesel engines, respectively. Now, moving to the analysis of the power generation and demand of the period, in the second quarter of the year, energy generation in the local market decreased by 7% to 32,046 gigawatts per hour compared to the same quarter of 2022, with a 12% and 8% reduction in thermal and hydro generation, respectively, partially offset by an increase in energy supply from renewable sources of 3% and for renewables of 1%. In addition, a 13% increase in imports from neighboring countries, mainly from Brazil, contributed to the lower overall power generation of the period. This lower power generation in the second quarter of 2023 vis-à-vis the same period of 2022 was a consequence of a 6% contraction in energy demand, which was essentially driven by a 10% decline in residential demand as a result of milder temperatures recorded during the quarter compared to the same period of the last year. As an example of this phenomenon, the average temperature in May 2023 was 16.4 degrees Celsius, while in the same month of the previous year, it was 13.8 degrees Celsius, while the historical average for the same month stands at approximately 14.5 degrees Celsius. The decrease in demand prompted the lower thermal dispatch, which was also negative due to the lower availability rates of certain power stations, registering an average availability of 74% in the second quarter of 2023, compared to 77% in the same period of last year. The lower thermal dispatch was compensated with more nuclear and renewable generation as commented before. The increase in nuclear generation was mainly due to greater energy production from the nuclear plant at Atucha I and, to a lesser extent, from Embalse, while the Atucha II nuclear plant is still under maintenance and is expected to resume operations in the coming months. Regarding renewable energies, the increase in generation was related to the increase in installed capacity. Finally, the more hydro generation was primarily a result of a lower water flow in the Uruguay and Paraná rivers, which was mainly driven by the lack of rainfall and the consequent drought that hit the center and north of the country during the first half of 2023. Going now to our key performance indicators for the quarter on Slide 7. During the second quarter of 2023, Central Puerto’s operated power generation increased by 11% to 4,762 gigawatts per hour compared to the 4,280 gigawatts per hour in the second quarter of 2022. It should be noted that this increase includes the incorporation of 953 gigawatts generated by Central Costanera, which was acquired during the previous quarter. Thus, when excluding the power generation from Central Costanera, power generation in the second quarter of 2023 decreased by 11%, representing a drop of 4 percentage points beyond the 7% contraction of the market as previously explained. This was mainly due to a 14% lower power generation as a consequence of a lower availability of the steam turbines at the Central Puerto site and lower dispatch of its combined cycle. In turn, during the quarter, wind generation recorded a 2% increase in a year-over-year comparison due to a higher capacity factor of our wind farms on the back of higher wind rates, while power generation at Piedra del Águila increased by 1%, driven by a higher water flow of the Limay and Collón Curá rivers. Regarding thermal availability for a better understanding, let's break it down by technology. The availability of our steam and gas turbines was 57% in the quarter compared to 73% in the same period of 2022. Combined cycle availability reached 84% in the quarter compared to 95% in the same period of the previous year. It's worth noting that the 2023 figures are impacted mainly by lower availability of some steam turbines, especially those of Central Costanera and the shutdown of the Buenos Aires Combined Cycle at the same power station. Thus, when excluding Central Costanera, from a quarter-over-quarter comparison, the availability of Central Puerto’s steam and gas turbine would reach 73% and the metric for combined cycle will be 96%. It is worth mentioning that the Buenos Aires Combined Cycle is expected to undergo maintenance by the end of this month and to be back in service by the end of the next quarter. Finally, the steam production in the quarter decreased by 4%, amounting to 560 million tons compared to the 586 million tons in the second quarter of 2022. This was mainly due to the lower demand from YPF's Lujan de Cuyo refinery. Before going into a more detailed analysis of the evolution of our main financial metrics, let me briefly review the consolidated results of the Central Puerto Group during the second quarter of 2023. Our consolidated revenues in the quarter amounted to Ps. 38.7 billion, decreasing 6% compared to the same period of the previous year. Adjusted EBITDA, which excludes foreign exchange differences and interest related to foreign trade receivables by variation in the fair value of biological assets from our Forestry segment, totaled Ps. 17.1 billion, being 34% lower than the adjusted EBITDA of the second quarter of 2022. Net income for the period was Ps. 4.3 billion, recording a decrease of 14% vis-à-vis the Ps. 5.1 billion of the second quarter of 2022. At the same time, during the quarter, we continued to leverage the company despite the recent acquisitions. As a result, the group’s total consolidated debt was reduced by 22% to Ps. 87.2 billion, while the net debt position as of June 30 declined to Ps. 24.3 billion. Now assuming in our revenues analysis, as you can see on Slide 9, this amounted to Ps. 38.7 billion in the quarter as compared to Ps. 41.3 billion in the same period of 2022. First, it should be noted that in this quarter, revenues of the Central Puerto group include those corresponding to the recent acquisition of Central Costanera and the Forestry companies, which contributed with Ps. 4.9 billion and Ps. 1.8 billion, respectively. Thus, when excluding these effects, the variation in revenues would be a 23% decrease or Ps. 9.3 billion mainly due to the following factors: a 35% or Ps. 8.3 billion reduction in sales on the contract mainly as a result of the end of the Brigadier López gas turbine PPA contract in August 2022, and to a lesser extent to the negative impact of a higher inflation rate compared to the peso depreciation of the period; a 23% or Ps. 0.5 billion contraction in steam sales as production levels decreased in line with the lower demand from YPF’s Lujan de Cuyo refinery; and a 3% or Ps. 0.4 billion decrease in Spot/Legacy energy sales, which amounted to Ps. 13.3 billion in the second quarter of 2023 compared to the Ps. 13.7 billion in the same period of the year. It was mainly driven by a 65% increase in remuneration by means of Resolution 826 that was below the inflation rate of the period. All of this was partially offset by the implementation of Resolution 59 in March of this year, which partially dollarized combined cycles remuneration and to a lesser extent, the recognition of fuel costs from CAMMESA. Moving now to Slide 10 for a better understanding of the evolution of our adjusted EBITDA during the second quarter of 2023. The group’s adjusted EBITDA reached Ps. 17.1 billion, including the adjusted EBITDA of the recently acquired companies Central Costanera and the Forestry companies for Ps. 1.3 billion and Ps. 1.2 billion, respectively. Thus, on a consolidated basis, the adjusted EBITDA of the quarter recorded a contraction of 34% compared to the Ps. 25.8 billion in the second quarter of 2022 as explained before. When analyzing the adjusted EBITDA excluding acquisitions, we can observe that the variation is mainly explained by the previously mentioned drop in revenues at 21% or Ps. 3 billion increase in the cost of sales, explained primarily by higher consumption of materials and spare parts due to the maintenance performed on the gas turbines at the Lujan de Cuyo plant and an 8% increase or Ps. 0.2 billion in SG&A mainly driven by higher third-party services and personnel costs. All of this was partially offset by an 85% increase or Ps. 1.3 billion in other operating results, mainly due to higher interest accrued on receivables from CAMMESA. Moving to the next slide, consolidated net income for the quarter amounted to Ps. 4.3 billion, decreasing 14% on a year-over-year basis. In addition to the lower adjusted EBITDA of the period, the net income was impacted by a combination of a higher loss on net monetary position of Ps. 4.1 billion, partially offset by better results on our associated companies of the Ecogas Group for Ps. 0.2 billion; an increase of Ps. 2.1 billion in income tax, which is basically the result of higher deferred income tax and adjustment to the provision of the previous period with respect to the amount actually paid in the current period; partially offset by a lower current income tax for this period. All of this was partially offset by a lower loss in net financial results, accounting for a positive variation of Ps. 6.2 billion driven by a gain in the deferred value of financial assets, partially offset by higher net interest and negative foreign exchange differences; higher positive foreign exchange differences and interest related to the FONI receivables for Ps. 3.9 billion; and finally, higher positive results from an increase in the variation of the fair value of our biological assets from our Forestry segment. Finally, going to Slide 12, we can see the evolution of our cash flow during the first half of the year. Operating cash flow totaled Ps. 26.4 billion as a result of the adjusted EBITDA for the period coupled with Ps. 5.9 billion in collection of interest from clients including FONI receivables and Ps. 3.8 billion in positive working capital variations, being all partially offset by income tax payments of Ps. 8.8 billion. Net cash used in investing activities was Ps. 12.2 billion, mainly due to a Ps. 16.2 billion deployed in the acquisition of companies made during the first half of the year, coupled with Ps. 2.4 billion in investments in property planning equipment and Ps. 0.7 billion in inventory purchases, being all partially offset by Ps. 6.6 billion from the selling of short-term financial assets and a collection of Ps. 0.6 billion in dividends during the period. Finally, net cash used in financing activities was negative in Ps. 21.5 billion. It was basically the result of Ps. 12.1 billion in debt service amortizations, primarily related to the Brigadier Lopez syndicated loan, along with Ps. 5.9 billion in interest and other financing costs related to our bank long-term loans and the cancellation of overdraft in checking accounts for Ps. 2.4 billion, and finally, Ps. 1.1 billion in dividends paid. As a consequence, our cash position as of June 30, 2023, amounted to Ps. 4.5 billion, which is current investments in financial assets included; our total current liquidity amounts to Ps. 24.3 billion. With this, I would like to conclude my presentation. And now we invite you to ask any questions of our team. Thank you for your attention.

Operator, Operator

We will now begin the question-and-answer session. And the first question comes from Martín Arancet from Balanz Capital. Martín, your line is live. Please go ahead.

Martín Arancet, Analyst

Hi. Well, first thank you for the materials as always and for taking my questions. I have five questions, sorry for the extent. I will try to be quick. I would like to run them one by one if that’s okay. My first question is regarding the Piedra del Águila concession. The government gave an extension on the concession of hydro assets, so it could be the next government, the one that determines the future of those assets. Do you think it is a taking decision to move those plants to government control, or could we still see any auction or an extension of the current concessions? And what is your estimate of EBITDA per year in Piedra del Águila?

Fernando Bonnet, CEO

Okay. Hi, Martin. Thank you for your interest and your questions. Regarding Piedra del Águila, as you say this government – the former government established an extension of the concession in our case that extension has two phases, 60 days first and another 60 days coming after. And that will give our end of concession or put our end of concession in February or April next year. So as you mentioned, the government that will analyze the extension or not extension will be a new government. And for what we have been talking with different, of course, we need to know who will be the new government. Since yesterday it seems not so clear who will be the new government. But we have been talking with different references from the candidates and the perception that we have is that they need to analyze in detail. They don’t have an answer yet about what to do with this concession. But they need to analyze that and indeed that not take a decision like the transfer to an OSA or to move toward a nationalization process without analysis and taking into consideration all the claims that the concession – the actual concessioners have and the relation with the province. And the other thing is the investment that these concessions need to have to extend another 30 years of operation. So in any case, that we have been talking with the different references of the opposition, we talk about taking this extension of one year that the concession has in – as a possibility not only two months or three months that the one that this government took. But taking this year of extension to analyze indeed all the aspects, so we are confident that we can have that extension and then start talking about how to proceed with this concession in the near future. So we are optimistic that we can have the opportunity to discuss that indeed with the next government. And the EBITDA that you mentioned is around – that’s pending because it’s in pesos, so with the new devaluation we need to recheck, but it’s around $30 million per year.

Martín Arancet, Analyst

Very clear. Thank you. My second question regarding results this quarter. Revenue increased quarter-over-quarter probably partially due to the acquisition of Central Costanera, but results were affected by an increase in OpEx that more than compensated for the additional revenue. Could you give us some color on the additional OpEx if it was related to Costanera? And what are your expectations of getting to more normalized levels?

Fernando Bonnet, CEO

Yes. No. Yes, it’s affected by not only Costanera, it’s affected by the big maintenance that we are doing in our combined cycles, especially in our combined cycles of cogeneration. In fact, our cogeneration of Lujan de Cuyo that we performed a big maintenance there. We are performing a big maintenance also in September in the Costanera combined cycle. And we are having extraordinary maintenance in the small combined cycle of Costanera, which is the Buenos Aires combined cycle, Siemens combined cycle is a small one that suffered an extraordinary failure in March. So we are having a big maintenance of our units, Costanera and Lujan de Cuyo plant, that are the reason for the increase that you see in the OpEx.

Martín Arancet, Analyst

Okay. So in the maintenance of September, we could see increased OpEx also next quarter and probably going back to normalized levels by the year-end?

Fernando Bonnet, CEO

Yes. Yes, you will see some increases, but we are paying this big maintenance since we and ENEL previously since September or October last year, so we are paying in advance. So you will see an increase in CapEx but not in cash flow because we have been paying most of the cash of the CapEx in advance.

Martín Arancet, Analyst

Okay. Perfect. Thanks. My third question then the government just devalued the official effects by more than 20%, as you just mentioned. Do you expect CAMMESA payments days to be the main tool that the government could use to cushion the blow on the increased subsidy view?

Fernando Bonnet, CEO

I don’t know really. I don’t know. And in fact, CAMMESA was reducing the delays that we suffered in May and June, for example, we had a delay there of 60 days. And right now, we are at around 30 days of delay in payments from CAMMESA. And also the government, as you say, the devaluation impacts of course, because the cost of fuel and some contracts that are set in dollars. But on the other hand, the government increased the tariff or applied the full increase in the segmentation itself in tariff, that implies an impact of an increase on higher segments of the population. So I don’t know really if we can suffer. The good news is that we are ending the winter period in which the fuel and gas oil that we use increase. And that implies a huge quantity of money for CAMMESA. And we are ending that cold period and the reduction of the build – of the CAMMESA build isn’t important. So I don’t know. I don’t know. We are not expecting, for sure, increase in delays more than 60 days. That was the highest that we saw in May and June. But we are now, if we can go something like 40 days or 45 days, but not more than that.

Martín Arancet, Analyst

Very clear. Thank you. And you were just talking about this big maintenance. So I want to ask about thermal availability. It came at 71% lower than in the previous quarter. Where do you see availability after these big maintenance works in 2024?

Fernando Bonnet, CEO

Yes. Well, the 71% is an average. So you have there a different combination of equipment and places. If you see only the combined cycles of Central Puerto’s spill in Costanera, you reach 95% or 96%, which is our normal availability. When you combine that with the Costanera combined cycles, the one that I mentioned, the central monocytes combined cycle was affected, so the percentage will reduce to 84%. So whenever we can solve the problem of Buenos Aires, I think the – and Buenos Aires is all combined cycle. So we are suffering some problems of the life of this combined cycle. But on the other hand, the Mitsubishi combined cycle is very reliable. So if you exclude the Central Buenos Aires combined cycle, I think the availability of the combined cycles and relatively new units are very, very good. With Buenos Aires, well, we are working to get online. But it's an old combined cycle. So for sure, we'll see some ups and downs with this unit. But not the big ones, and Mitsubishi and GE and Siemens combined cycles are very, very reliable. On the other hand, the steam turbines, especially the Costanera ones, have a low availability this quarter related to long periods of maintenance due to some problems with the boilers that we hope we can reduce the frame, the timing of these interventions, of this maintenance and the boilers to replace the broken tubes. And we expect to see better timing or better performance on that maintenance and reduce the availability for the next quarters. Of course, they are all units, as you know, and the same as the steam turbines of Puerto. So the availability is not so high like combined cycles, but we expect to reach similar levels or close to similar levels to the steam turbines of Central Puerto, which are around 70% to 75% of availability in terms of steam turbines. So we are confident that we can increase that availability in the next quarters.

Martín Arancet, Analyst

Okay. So probably closer to Central Puerto all normalized levels of around 80%, 85%, something like that?

Fernando Bonnet, CEO

Yes, yes. In average, yes, but you need to – if you separate this better because excluding Buenos Aires combined cycle, the one that Costanera, the small one that I mentioned that is unavailable right now, you will see availability around 90% in the owned combined cycles and between 88% and 90% for the combined cycles. And for the steam turbines, we are expecting to see something related to 68% to 70% something. Those are the numbers that we expect. The Central Buenos Aires is more unpredictable, as I mentioned, because it's at the end of its life, and we don't have a full maintenance with Siemens. It's only a reduced target of maintenance because they are not producing all the parts of this combined cycle. So excluding that combined cycle, we are confident that we can reach good levels of availability.

Martín Arancet, Analyst

Very clear. Thank you. And my last question then, you got additional land for forest. How much EBITDA per year do you expect for that line of business, all the forest together, the one that you already got and this new one?

Fernando Bonnet, CEO

Well, as I mentioned last quarter, these forest lands are almost cutting the same as they are planting. So the EBITDA right now is close to CEO; is around $2 million or $3 million per year because we are increasing our hectares planted. So we are investing in new hectares planted. But right now, as I mentioned, it is $2 million or $3 million. We expect when we finish this process of planting new hectares, an EBITDA around $10 million, around $10 million and $15 million, between $10 million and $15 million.

Martín Arancet, Analyst

Thank you. That's all from my side.

Fernando Bonnet, CEO

Yes.

Operator, Operator

Thank you. And there are no further questions in the queue at this time. This does conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Fernando Bonnet for any closing remarks.

Fernando Bonnet, CEO

Okay. Thank you for your interest in Central Puerto. Have a good day. Bye-bye.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.