Earnings Call Transcript - CEPU Q4 2020

Operator, Operator

Good morning, and welcome to the Central Puerto conference call following the results announcement for the quarter ended on December 31, 2020. 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 the IFRS and are stated in Argentinian pesos unless otherwise noted. It is worth noting that the financial statements for the quarter ended on December 31, 2020, 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 of 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 security 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 Jorge Rauber, Chief Executive Officer; Fernando Bonnet, Chief Operating Officer; Milagros Grande, Financial Management; and Nicolas Macchi, Investor Relations Officer. And now I would like to turn the call over to Jorge Rauber. Mr. Rauber, you may begin. Thank you.

Jorge Rauber, CEO

Thank you very much. Good morning, and welcome. We are joining you today with our management team from Buenos Aires, Argentina, to report on the results of the fourth quarter and full year 2020 and then answer any questions you may have. I would like to begin today's call by analyzing the developments of the fourth quarter, commenting on the progress of our expansion projects, and analyzing the operating figures of the quarter and full year. Fernando will present the recent financial years and results. The COVID-19 crisis has affected almost all the world and, among other consequences, the electricity demand in Argentina. As you can see on Page 3, electricity demand decreased 2.2% during the fourth quarter of 2020 compared to the same period of 2019. As a reference, during 2020, total electricity demand declined 1.3% compared to the prior year. Nonetheless, as you may recall, it's worth noting that electricity 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 remuneration, which is not related to the energy generation of the units. Finally, when demand decreases, so does dispatch of the older, inefficient units, which are remunerated under the Energía Base framework compared to the new efficient ones that have a higher remuneration to contracts, known also as power purchase agreements, or PPA. Going now to Page 4. As you may recall, the measures adopted to prevent the spread of the COVID-19 virus impacted the progress of our projects under construction: La Genoveva I wind farm and Terminal 6 new cogeneration unit. Regarding La Genoveva I, we are pleased to announce that the project reached commercial operation for its 88.2 megawatts on November 21, 2020, and is currently remunerated under a 20-year PPA with CAMMESA. It should be highlighted that the wind farm had 2 partial CODs on September 11, 2020, and October 30, 2020, for 50.4 megawatts and 33.6 megawatts, respectively. This is 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. On November 21, 2020, the plant obtained partial commissioning of its gas turbine, 269.5 megawatts selling energy under the spot market regulation, Resolution 31, 2020. While the COD for the full project is expected to be achieved in the third quarter of 2021, the plant will be remunerated under a 15-year PPA on the energy side and sales to a private off-taker under another 15-year contract. Moving now to our key performance indicators for the quarter. As you can see on Page 5, energy generation during the fourth quarter was 3.8 terawatt hours of electricity, 7% lower than the same period in 2019. This was largely due to a 281 gigawatt hour drop in generation from our Piedra del Águila hydro plant related to lower water inflows and a 159 gigawatt hour decline in generation from Puerto's combined cycle and Brigadier López power plant, partially offset by the generation from the new wind farms, Manque, Olivos, and La Genoveva I. Renewable energy increased 157 gigawatt hours compared to the same quarter in 2019. Steam production during the fourth quarter increased 4% due to good dispatch and availability of the Luján de Cuyo cogeneration plant. Regarding the availability of our thermal units, during the fourth quarter of 2020, it reached 91% compared to 94% during the same quarter in 2019. This was mainly due to certain small failures in Puerto's combined cycle during October 2020 and the unavailability of some steam turbines of the Puerto and Luján de Cuyo plants. Still, this indicator remains significantly higher than the market average availability for thermal units, which is 78% for the same period according to data from CAMMESA. On Page 6, you can review the annual key indicators for 2020. Generation reached 14.3 terawatt hours of electricity, 3% lower than 2019. The decline was due to a 485 gigawatt hour decrease from Piedra del Águila due to lower water inflows and a 627 gigawatt hour drop in the electricity generation of Luján de Cuyo's combined cycle due to unavailability registered during the second quarter of 2020 and, to a lesser extent, due to a lower dispatch of Central Puerto's combined cycle, partially offset by a full year of generation from the new Luján de Cuyo cogeneration unit and energy generation from renewable units, which increased 598 gigawatt hours. La Castellana II, La Genoveva II wind farms that commenced their commercial operation during the third quarter of 2019 accomplished a full year of operation, while Manque, Los Olivos, and La Genoveva I reached COD in 2020. During 2020, machine availability for thermal units reached 89% compared to 93% in 2019, mainly due to a significant failure in the main transformer of the Siemens branded combined cycle and, to a lesser extent, due to some power limitations on the steam turbines from Luján de Cuyo and the Puerto complex, certain small failures in the combined cycle during June and October 2020 and unavailability of some steam turbines. As referenced, the market average availability for thermal units for the same period was 82% according to data from CAMMESA. Finally, steam production showed an increase of 6%, mainly due to Luján de Cuyo's cogeneration COD. And now, I will turn the call over to Milagros, who will comment on the financial highlights.

Milagros Grande, Financial Management

Thank you, Jorge. I will first refer to some recent financial news for the company and then comment on the results for the fourth quarter of 2020 and the full year. On December 22, the company signed an amendment to a syndicated loan obtained to fund the acquisition of Brigadier López thermal plant, modifying among other terms, the amortization schedule in order to comply with the requirements of Communication A 7106 issued by the Central Bank, extending the financials of December 2020 and March 2021 installments until June 2023, incorporating monthly repayments from January 2021 to January 2022 and maintaining the repayments foreseen initially scheduled for June, September, and December 2021, which equivalent to 20% of the capital. Furthermore, in December 2020, 40% of the installment scheduled for those months was canceled. Additionally, the agreed modification included a limitation for the payment of dividends during 2021 and a maximum allowed of $25 million for 2022. Certain guarantees were granted, including a pledge of the turbines of Brigadier López power plant, a mortgage on the land on which said power plant is located, and an assignment of certain FONI collections. On February 25, 2021, the Central Bank extended the litigation through a program payment schedule between April and December of this year. Nowadays, we are working with the banks on this regard. Moving now to the results for the quarter. If you can see on Page 7, our revenues were ARS 9.3 billion compared to ARS 15.5 billion during the fourth quarter of 2019. This decrease was driven by the discontinuation of the fuel purchases operations due to a regulatory change on December 31, 2019, that centralized the fuel purchases for all generators in CAMMESA. This effect represented a 4.565 million 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 10.9 billion in the last quarter of 2019. This decrease was mainly driven by a decrease of ARS 2.125 million in revenues coming from Resolution 31, which, without considering the remuneration associated with the said procured fuel mentioned above, totaled ARS 3.585 million in the fourth quarter of 2020 compared to ARS 5.710 million in the fourth quarter of 2019, mainly due to a lack of monthly price adjustment of Resolution 31 as charted by the Secretary of Energy on April 8 of 2020 and to a drop of 6% in energy generation from the thermal unit. The decrease in revenues was also explained by a decrease of ARS 60 million in the steam sale, which totaled ARS 240 million in the fourth quarter of 2020 compared to ARS 300 million in the fourth quarter of 2019 despite an increase of 4% in steam production. This was partially offset by an increase of ARS 510 million in sales under contracts, which amounted ARS 4.759 billion during the fourth quarter of 2020 compared to ARS 4.249 billion in the fourth quarter of 2019, mainly due to the new format mentioned above. The gross profit was ARS 4.7 billion during the fourth quarter of 2020 compared to ARS 7 billion in the same period of 2019. This was due to the variation in revenues mentioned before and was partially offset by a 26% reduction in cost of sales that totaled ARS 4.5 billion compared to ARS 8.5 billion in the same period of 2019. The decrease in the cost of sales was primarily driven by a decrease of ARS 3.8 billion in the purchase of fuel and related concepts due to the continuation of operations according to the new regulations. Given the current scenario, with no price adjustment for units under the Energía Base framework, the company made a strong review of all nonfuel-related costs of production. Therefore, administrative and selling expenses were reduced by 25% in real terms, saving more than ARS 283 million during the fourth quarter of 2020 compared to the same period of 2019. The gross profit margin totaled 51% during the quarter compared to 45% in the same period of 2019. Moving to Page 8, we can see the change in our EBITDA, which was around ARS 6.8 billion in the fourth quarter of 2020 compared to ARS 5.6 billion in the fourth quarter of 2019. In addition to the variation in gross profit mentioned, this was due to an increase of ARS 3.599 million in the other operating results, mainly due to a foreign exchange difference gain of ARS 980 million, mainly related to dollar-denominated FONI trade receivables which generated an ARS 3.1 billion gain during the fourth quarter of 2020 compared to ARS 2.1 billion during the fourth quarter of 2019. As a reference, during the fourth quarter of 2020, the Argentine peso depreciated 10.4% compared to 3.9% for the same period of 2019. Variation was also due to a ARS 2.544 million lower noncash charge related to the property, plant, and equipment impairment registered, which totaled ARS 2.516 million during the last quarter of 2020 compared to ARS 5.060 million for the fourth quarter of 2019, mainly related to the price reduction of the Energía Base regulatory framework established by Resolution 31. Moving to Page 9. The consolidated net income was ARS 0.6 billion compared to ARS 1.8 billion in the same period of 2019. In addition to the factors mentioned before, net income was positively impacted by higher financial income that increased ARS 393 million in the fourth quarter of 2020 compared to the same period of 2019, mainly due to higher FX difference results on the financial assets denominated in foreign currency, which excludes FONI and other trade receivables measured in Argentine pesos and a higher mark-to-market gain on financial assets. This was negatively affected by higher financial expenses, which increased ARS 2.854 million due to a higher foreign exchange difference on loans, most of which are denominated in U.S. dollars. Additionally, the share of profit of associates had a negative impact of ARS 237 million, there was a gain of ARS 34 million during the fourth quarter of 2020 compared to ARS 271 million during the same period of 2019, mainly due to the lower results from the operations of Ecogas due to the lack of tariff adjustments for the natural gas distribution business during 2020. Finally, the gain on net monetary position totaled ARS 219 million in the fourth quarter of 2020 compared to ARS 145 million in the fourth quarter of 2019, resulting in a positive impact of ARS 73 million. Moving to Page 10, you can see our cash flow for the 12-month period ended in December of 2020. Net cash provided by operating activity was ARS 19.3 billion. This included ARS 6.6 billion in collection from FONI and CVO installment. The cash flow from operation was partially offset by ARS 12 billion in CapEx disbursements for the expansion projects and ARS 5.5 billion used in short-term investments, among other things. Additionally, on the financing side, ARS 7.5 billion were used for principal and interest debt services, which was partially offset by ARS 4.1 billion in new loans received during the period, mainly related to the green bonds issued during the third quarter of 2020, among other things. Finally, on Page 11, the key financial figures for the full year 2020. Revenues decreased ARS 38.1 billion for 2020 compared to ARS 49 billion of 2019. The decrease in revenues was mainly affected by the obligation of Resolution 70 of 2019 and lower remuneration given by Resolution 31, 2020 and the lack of monthly adjustment as described in the quarterly analysis before. During 2020, energy generation decreased 3% despite the addition of new thermal and renewable energy plants as described in the highlights. Adjusted EBITDA for 2020 reached ARS 33.9 billion compared to ARS 42.8 billion in 2019, mainly due to lower gross profit and operating income negatively impacted by lower FX difference and the interest on trade receivables, which declined from ARS 5.3 billion and ARS 6.7 billion, respectively. Finally, consolidated net income was ARS 7 billion in 2020 compared to ARS 11.8 billion in 2019, mainly due to a lower gain of ARS 1.4 billion on the share of profit from associates and higher financial expenses for ARS 617 million, partially offset by higher financial income for ARS 258 million. FONI collections totaled ARS 6.6 billion during 2020. Thank you. And now we invite you to ask any question you may have to our team.

Operator, Operator

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

Frank McGann, Analyst

I have two questions. First, could you explain how the payment process with CAMMESA is currently functioning? Is everything proceeding normally, and what is the timeframe for receiving payments? Secondly, looking ahead, considering that demand levels have been generally lower over the past year, how do you think your dispatch might benefit from the restricted capacity being added to the systems as demand begins to recover and grow again? Do you anticipate that this could have a positive effect on the volumes you sell into the market over time?

Jorge Rauber, CEO

Fernando, would you like to answer the first question?

Fernando Bonnet, CFO

In response to your question about delays in the CAMMESA payment, I can say that the delays are stabilizing at around 30 to 35 days. We are not experiencing any significant delays beyond this. For energy payments, we are on track and receiving payments on time. The FONI payments are also being received as scheduled, along with payments for renewable contracts guaranteed by the government. The only delays we are encountering are with the Energía Base framework and thermal contracts, which remain stable at around 30 to 35 days. We are not facing additional challenges with delays compared to last year. The Secretary of Energy and CAMMESA are currently working on regularizing these delays by negotiating with distribution companies to increase tariffs and establish a payment plan for past dues. We anticipate some updates soon that may help reduce the current delays, and we expect to have more information on this in the coming month or two concerning payments.

Jorge Rauber, CEO

Yes. Essentially, the government is addressing any delays we might experience on the customer side. Specifically, at the start of the quarantine in Argentina around March or April last year, we faced payment issues due to the scale of the final customers, but the government quickly intervened to stabilize payments. Currently, our situation is not worse than it was a year ago; it remains stable. Regarding dispatch, we are now reaching a baseline for our plant operations. Our current dispatch consists of our most efficient plants, particularly combined cycles, along with our renewable energy sources, which have dispatch priority. Therefore, we do not expect significant changes in dispatch or revenue. As previously mentioned, our remuneration is based on installed capacity instead of dispatch, apart from renewables, where we enjoy dispatch priority. Thus, we foresee minimal impact. If demand rises post-quarantine as the country starts to recover, there may be a slight uptick in dispatch, but it will not greatly affect revenue. The current dispatch level is stable, and we plan to improve our revenue by focusing on pricing rather than quantity. With our Terminal 6 project, we anticipate full operation once the plant is completed, which we expect by the third quarter of this year.

Frank McGann, Analyst

Okay. If I could follow up just a moment.

Fernando Bonnet, CFO

Sorry. No, I want to add something that Jorge mentioned, which was clear, but I want to add that the main reduction, if you compare 2019 with 2020, is guided by 2 facts. One is our big problem in our combined cycle in Mendoza, the transformer issue that we had during the second quarter; it was out of service for more than I think 70 days. That was a big impact on our production. And of course, that time since July last year has also impacted our dispatch, it was not dispatch; it was a failure in the transformer. The second impact on our generation during 2020 was the lower inflows, water inflows in Piedra del Águila, which also reduced dispatch since we had less water to produce electricity in our hydro plant. So if you see in terms of dispatch, the reduction is not so high. Additionally, we increased production in terms of renewables. So if you see in terms of dispatch, as Jorge mentioned, we have not seen a problem in our efficient units. In the other ones, since we have additional exportation to Brazil during the last of 2020 and 2021, also, the equipment, the steam turbines were more dispatched than in the previous year. So as Jorge mentioned, we are not seeing a real problem in our efficient units to reduce dispatch in the future.

Frank McGann, Analyst

Okay. Great. If I could just follow up. In terms of legacy prices, has there been any movement or discussions about possibly going back to having inflation adjustments or some sort of an adjustment factor?

Jorge Rauber, CEO

Yes, in fact, we have been having a lot of discussions with the government. The problem is that they are kind of linking the discussion regarding prices with the distribution companies. We are in a year where we have an election this year, so it's difficult in political terms. But for sure, we are having discussions with them. According to the information we have, they are convinced that they have to do something with prices, going somehow back to the prices we agreed upon or setting a resolution last year. When they changed and put in place Resolution 31, they specified the prices at that time, reduced the prices in dollar terms, specified them, but they were supposed to have an adjustment. That adjustment was postponed somehow. So the discussions are basically focusing on this aspect. I mean we have to go back. The government is convinced that they have to go back, but they are kind of linking this with a bigger discussion they have with the distribution companies in order to try to figure out how to solve that problem because basically, our system now is relying again on a high portion of subsidies. So they have to completely change. But I mean the discussion is ongoing all the time. In fact, we have a meeting tomorrow with them, again.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Rauber for 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 your lines.