Earnings Call Transcript - CEPU Q3 2021

Operator, Operator

Good morning, and welcome to the Central Puerto Conference Call following the results announcement for the Third Quarter Ended on September 30, 2021. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that 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 financial statements for the third quarter ended on September 30, 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 the 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. 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; Milagros Grande, Financial Manager; and Nicolas Macchi, Investor Relations Officer. And now, I’ll turn the call over to Fernando Bonnet. Mr. Bonnet, you may begin.

Fernando Bonnet, 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 third quarter 2021 and then answer any questions you may have. I would like to begin today’s call by analyzing the recent events, comment on the progress of our expansion projects and analyze the operating figures of the quarter. Milagros will present the latest financial news and results. First of all, I want to highlight the new Resolution Number 1037 of 2021, which was published in the Official Gazette on November 2, 2021. The Secretary of Energy, upon verifying the high energy supply requirement by Brazil due to the drought in the area, created an export account where the income margin for the electricity energy exports operations will be accumulated and will be applied in the financing of the energy infrastructure projects. In addition, this resolution established an additional and transitory remuneration for the spot-generating agents included in Resolution 440 that will cover economic transactions between September 1, 2021, and February 28, 2022. The amount of this additional remuneration will be defined by the Secretary of Energy through future regulatory instructions which have not been published yet. Now going to Page 3, I would like to talk about Terminal 6 San Lorenzo cogeneration plant, the latest project in Central Puerto's expansion plan. On August 15, 2021, we finally reached the commercial operation of the Terminal 6 steam turbine, commencing operation as a combined cycle and started the cell energy under the Power Purchase Agreement signed with CAMMESA. Additionally, after the fine-tuning of the steam pipe, the steam supply contract starts on October 31, 2021. Due to the strong impact of COVID-19 and the related restrictions, we suffered a delay of 53 days in reaching the commercial operation date set in the Power Purchase Agreement. On August 23, 2021, CAMMESA informed us that a penalty of US$4.4 million would apply for the delay of the 53 days. The company rejected it and sent all the evidence of the extraordinary COVID-19 impact to the Secretary of Energy and CAMMESA to reverse such penalty. With this new power plant finished since 2018, we successfully accomplished the construction of two cogeneration plants of 484 megawatts of thermal energy and seven wind farms of 374 megawatts of renewable energy with an investment exceeding US$900 million. Another important development to highlight is that Central Puerto published its third sustainability report, where the economic, social, and environmental management and actions taken during 2020 are described. Now I would like to comment on the latest developments in the industry, as you can see on Pages 4 and 5, in terms of installed capacity, the system reached 42.589 megawatts in the third quarter of 2021, resulting in a 3% increase compared to the third quarter of 2020. Based on the new thermal units, which raised 2%, and the renewable projects that grew 25%, our plants, Terminal 6 and Genoveva I wind farm are part of the new capacity, which commenced operations in this period. As of September 30, 2021, the installed capacity is divided as follows: 59% thermal, 25% hydro, 4% nuclear, and 11% renewable. In the third quarter of 2021, energy generation increased 11% to 37.058 gigawatts hour compared to the third quarter of 2020, mainly due to a 24% increase in thermal production, a 17% increase in nuclear energy, and a 40% increase in renewables, partially offset by a decrease of 33% in hydro generation. Overall, the improvement was due to higher demand and more exports. The rise in thermal and renewables was attributed to new installed capacity. In contrast, the drop in hydro generation is related to the declines experienced in the region in the past month, resulting in lower flows. During the third quarter of 2021, the main source of energy generation continued to be thermal and hydro, with a share of 64% and 15%, respectively. Meanwhile, renewables kept growing and represent 12%, which is 3 points more than the third quarter of 2020. Finally, on Page 5, energy demand increased 5% up to 34.446 gigawatt hours compared to the third quarter, with residential demand rising 16% and commercial growing 4%. This was partially offset by a 1% decrease in residential usage. The increase in commercial and residential demand in the third quarter of 2021 is attributed to the recovery of economic activity and lower restrictions imposed by the government compared to the same period of the previous year. All three months of the quarter show comparable increases. As of the third quarter of 2021, and regarding the demand structure, 47% is represented by residential users, 26% by commercial activity, and the remaining 27% is related to mixed demand. Going now to our key performance indicators for the quarter, as you can see on Page 6, energy generation during the third quarter of 2021 was 3.44 gigawatt hours of electricity, which is 12% lower than the same period of 2020. The decrease was mainly caused by a drop of 582 gigawatt hours in hydro generation from Piedra del Águila due to lower water inflows in the Limay and Collón Curá Rivers. This was partially offset by a 107 gigawatt hour rise in energy generation from renewable units, primarily due to Genoveva I's full operation, and a 13 gigawatt hour increase in thermal production, mainly resulting from Terminal 6 starting operation. Steam production during the third quarter increased 4% due to a good performance from Lujan de Cuyo’s cogeneration plant. Regarding the availability of our thermal units during the third quarter of 2021, it reached 90%, in line with the strong availability history of Central Puerto's equipment and shows an improvement from the 89% of the third quarter of 2020. As a reference, the market average availability for thermal units for the third quarter of 2021 was 82%, according to data from CAMMESA. And now I will turn the call over to Milagros, who will comment on the financial highlights.

Milagros Grande, Financial Manager

Thank you, Fernando. I will start by referring to some recent financial news for the company and then comment on the results for the third quarter of 2021. On September 3, 2021, Vientos La Genoveva II and CPR Energy Solutions, both subsidiaries of Central Puerto, met all requirements and conditions established in the financial documents for the project completion. As a result, the corporate guarantee granted by Central Puerto to each project was released. Going now to the results of this quarter. As you can see on Page 8, our revenues were ARS13.3 billion compared to ARS13.8 billion during the third quarter of 2020. This 4% decrease was mainly due to a 6% decrease in sales under contracts, which totaled ARS6.3 billion in the third quarter of 2021 compared to ARS6.6 billion in the third quarter of 2020. This was due to a higher inflation adjustment over the peso depreciation for the same period and despite the higher generation produced by Terminal 6 and Genoveva I. We also noted an 8% drop in steam sales, which totaled ARS0.5 billion in the third quarter of 2021 compared to the same period of 2020, also due to inflation versus depreciation valuations and despite the production increase. Moving on to Page 9, we can see changes in our EBITDA, excluding impairment and funding effect differences and interest, which was ARS6.5 billion in the third quarter of 2021 compared to ARS9.6 billion in the third quarter of 2020. This decrease was due to a 26% or ARS1.4 billion increase in the cost of sales and a 25% or ARS0.2 billion rise in administrative and selling expenses. The increase in the cost of sales was primarily driven by a 45% or ARS0.6 billion increase in purchases of materials and spare parts, and a 20% or ARS0.9 billion increase in cost of production, mainly due to increases in depreciation, rising fees, compensation services, and more materials and spare parts. In other results, we can mention a 38% decrease in foreign exchange differences on operating assets, mainly related to trade receivables due to a lower depreciation of the Argentine peso in the quarter and lower trade receivable balances. There was also a negative result of ARS1.2 billion for provision charges, which impacted the adjusted EBITDA. On Page 10, the consolidated net income was ARS2.7 billion compared to a consolidated net income of ARS3.5 billion in the same period of 2020. In addition to the factors mentioned before, the net income was affected by lower financial income that amounted to ARS0.3 billion in the third quarter of 2021 compared to ARS1.4 billion in the third quarter of 2020, mainly due to a ARS1.2 billion reduction of net guidance on financial assets at fair value. Net income was positively impacted by lower financial expenses, which amounted to ARS2.1 billion during the third quarter of 2021 compared to ARS6.7 billion in the third quarter of 2020, due to less foreign exchange differences, which decreased by ARS3.9 billion, mainly due to lower depreciation of the Argentine peso during the quarter and lower dollar-denominated debt balance. Funding collections totaled ARS3.2 billion in the third quarter of 2021, including VAT associated with the FONI trade receivables for the Vuelta de Obligado power plant, compared to ARS2.1 billion in the third quarter of 2020. The amounts are being collected on time and according to a signed contract. On Page 11, you can see our cash flow for the nine months of 2021. Net cash provided by operating activities was ARS16.8 billion. This included ARS3.2 billion in collections from Vuelta de Obligado installments. Net cash used by investing activities was ARS4.3 billion, mainly due to the construction of Terminal 6, loss from the sale of short-term financial assets, partially offset by the sale of property, plant, and equipment. Additionally, on the financing side, ARS12.6 billion were used for the payment of loans for ARS8.7 billion and interest and other loan costs for ARS3.5 billion. Thank you. And now we invite you to ask any questions of our team.

Operator, Operator

Your first question is coming from Martin from Balance Capital. Your line is live.

Unidentified Analyst, Analyst

Hi. Martin here from Balance Capital. First of all, thank you for the details as always. I have two questions, if I may. First of all, do you have any projects on-site going forward given your cash generation from now on? And my second question is, we have real sales in earnings calls an improvement in commercial payments. What do you see in that area going forward?

Fernando Bonnet, CEO

Okay. Thank you. Thank you for your questions and your interest. First of all, after finishing Terminal 6, in fact, we are having some additional or closing CapEx on Terminal 6, remaining CapEx, so we expect to finish the project completely during this month. Apart from that, we are analyzing different alternatives. One of them is the closing of the combined cycle of Brigadier Lopez. We are analyzing that and we’re assessing the financing opportunities for that. We are also considering the evolution of the COVID-19 issue in order to have a clearer path to start a new construction project. As you know, the challenges during the construction of Terminal 6 regarding COVID, not only the illness but the restrictions that the government established brought a lot of costs and difficulties to the construction. So we are analyzing all of this. We have projects in the pipeline, as I mentioned. Perhaps the first one is the closure of the combined cycle of Brigadier Lopez. Apart from that, we are monitoring how the COVID situation evolves and how financial possibilities in the market develop. After the elections, when the COVID-19 situation becomes clearer, we will be able to clarify how the new projects will come. But as I mentioned, we have a pipeline; however, we need to wait until we have more clarity about those issues. The next question is regarding the payments, particularly the commercial payments. We observe a reduction in the delay. Currently, we see delays of about 20 to 25 days, improved from the previous 35 to 40 days of delays in the past month. Therefore, we are seeing a positive trend. They still need to increase the budget for the subsidy that the treasury sends to CAMMESA. We may need to wait until they increase the budget in order to clarify if we can maintain these reductions or if we will see some increases. Additionally, good news is that CAMMESA is exporting energy to Brazil, which brings new inflows of money. Because of that, they established this new regulation about how they can use that money. However, we need to wait for clarity on whether the treasury will increase the budget for the subsidies sent to CAMMESA, which will then provide more insight into the delays. But we are confident that we can maintain the delays between 25 and 30 days that we are currently seeing.

Unidentified Analyst, Analyst

Okay. One follow-up question, if I may. Those renewable projects that you are considering, will these be under matter?

Fernando Bonnet, CEO

Yes, yes. We are analyzing – there are not big projects because there are some limitations in terms of grid capacity. So I see some expansion of the projects that we already have, small expansions to serve private contracts, yes.

Unidentified Analyst, Analyst

Okay. Thank you very much.

Operator, Operator

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

Fernando Bonnet, CEO

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.