Central Puerto SA (CEPU) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Central Puerto conference call following the results announcement for the fiscal year ending in December 31, 2018. (Operator Instructions)

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 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 our recent filings with the SEC. Central Puerto assumes no obligation to update forward-looking statements except as required under applicable security laws. In addition, all financial figures were prepared in accordance with the IFRS and are stated in Argentinian pesos unless otherwise noted.

On the call today from Central Puerto is Jorge Rauber, Chief Executive Officer; and Fernando Bonnet, Chief Financial Officer.

And now I will turn the call over to Jorge Rauber. Mr. Rauber, you may begin.

Thank you, and welcome, everyone. We are joining you today with our management team from Buenos Aires, Argentina, to report on the 2018 (technical difficulty)

answer any questions you may have.

I will refer first to the operating figures of the fourth quarter 2018 and then continue with some recent news regarding Central Puerto and Electric

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Finally, Fernando will analyze the very good results for the year.

During the fourth quarter, we have generated 3.5-terawatt hours of energy generation, a decrease of 14% compared to the fourth quarter of 2017. The decrease was mainly due to a 44% decrease in the hydrogeneration explained by the decision from CAMMESA to increase the water reserves for the [2018] summer months and a reduction in the water flows from the Limay and the Collón Curá rivers. Thermal production during this period decreased 2% as compared to the same period of 2017.

For the general market, electricity demand during the quarter decreased 6% due to the lower temperatures during the last month of the spring and the beginning of the summer and a decrease in the demand by commercial and industrial consumers. On the other hand, availability of our thermal units improved, reaching 94% in the period, 3 percentage points higher than our availability in the fourth quarter 2017 and 15 percentage points higher than the average availability of the market during the fourth quarter of 2018, according to data from CAMMESA.

During this quarter, we continue with the construction of our new projects.

Regarding the thermal ones. As you may recall, in 2017, Central Puerto was awarded with a new cogeneration project through Luján de Cuyo and San Lorenzo, that will add more than 420 megawatts to our installed capacity. During the third quarter, we continued with the purchase of the main components needed for this project and received awards for the construction of the new generation unit and the auxiliary equipment. I am pleased to confirm that both projects are on time and within budget.

I would like to give you now a brief overview of the operational progress of our renewable projects. The fourth quarter was the first quarter of fuel operation -- full operation for both La Castellana I and Achiras I wind farms. We are happy to announce that the average load factor for this first quarter of operation was 51%, as expected before the construction of the project.

Regarding the rest of our projects during the quarter. We continue with the construction and purchase of equipment for our La Genoveva I project, which will provide energy through the RenovAr regulatory framework. We also continue with the La Castellana II, La Genoveva II and Achiras II wind farms and El Puesto solar farm, which will provide energy to private offtakers through the Term Market for Renewable Energy, MATER.

Regarding the [positive standard] of the MATER regulatory framework, it's important to mention that we already signed contracts for 42% of our available installed capacity. As you may recall, in November 7, the Secretary of Energy issued a Resolution 70, according to which authorized generators to purchase their own fuel for the Energía Base thermal units. The generation companies that take this option have to declare variable cost of production for each unit to CAMMESA, who pays for the fuel in accordance with such declaration. According to CAMMESA procedure, the machines which -- with a lower variable cost of production are dispatched first and consequently, have better load factors. Additionally, if a generation company purchased the fuel at a lower price than the one paid by CAMMESA, this may have [a result] for the generators.

CAMMESA continues to supply the fuel for those generation companies that do not take this option. According to this resolution, during November and December, we started to purchase the necessary fuel for our unit, which had a positive impact for our business. During January and February, we continue with the purchase of our own fuel, and we plan to continue with this opportunity provided that the conditions are favorable.

Regarding the revenues. As you may know, we have been awarded the Brigadier López plant in the auction conducted by Integración Energética Argentina, a state-owned company. The plant currently operates with a gas turbines of 280-megawatt in an open-cycle configuration and is currently in the last stages to add a steam turbine in a combined-cycle configuration, which will add 140 megawatts. Once completed, the combined cycle will increase its efficiency significantly, becoming the most efficient combined cycle of Argentina in terms of heat rate, according to CAMMESA estimations. The power capacity and the energy produced will be taken by CAMMESA under PPAs agreements with high prices. The price offered for this transaction was $165 million, from which $155 million will be paid in cash and $10 million will be settled with the transfer of the trade receivables owed to the company by CAMMESA. Central Puerto will also assume $161 million in debt to be paid in 41 monthly installments.

To finance this transaction and the CapEx needed to finish the combined cycle, we are in the process of getting the loan facility with 4 international banks. The plant is scheduled to be transferred effectively on April 1, 2019, and we expect to finish the construction of the combined cycle by the end of 2020. The estimated capital expenditure for this project is around $110 million.

We believe that all these projects have set us ahead and reaffirmed our position as market leaders in terms of power capacity. We will continue to show the ability to consistently increase our installed capacity, satisfying the demand of energy of our customers.

Regarding the remuneration of our thermal units under Energía Base framework. On March 1, 2019, the government issued a Resolution #1, which reduced the prices for the power and the energy produced for those units. Under the new scheme, the new price of energy generation will be $5.4 per megawatt-hour when burning natural gas and $8.4 per megawatt-hour when burning liquid fuels. Additionally, power prices will be up to $7,000 per megawatt per month during December, January, February, June and July, 6 months of the year and August, and up to $5,500 per megawatt per month during March, April, May, September, October and November, the rest of the year. These prices are multiplied by a percentage, which depends on the average utilization factor of each unit during the previous last 12 months.

So if the utilization factor is above 70%, the units receive 100% of the price, which is the case for our combined cycles and co-generated units, which during 2018, had a utilization factor above 90% and totaled 1.2-gigawatt of installed capacity. If the utilization factor is below 30%, the units receive 70% of the price. This may be the case for some of our small steam turbines, which total 365 megawatts. And if utilization factor is between 30% and 70%, the machine receives a linear proportion between 70% and 100%. This will be the case for some of our large steam turbines that total 500 and had an average utilization factor of around 60% during 2018; and some of our small steam turbines totaling 205 megawatts, which had a utilization factor of between 30% and 35% during 2018.

It is worth noting that the remuneration of the hydro plants has not suffered major changes as the price continued to be denominated in U.S. dollars. Moreover, we expect that the same reduction pursuant to these changes will be lower than the increase in our income pursuant to the purchase of the Brigadier López plant.

According to Resolution 1, this remuneration system will have a transition application until the following is defined and implemented: regulatory mechanism aimed to reaching an autonomous competitive and sustainable operation that allows for freedom of contract between supply and demand; and technical, economic and operative functioning for the integration of the different generation technologies for us to guarantee a reliable and cost-effective system.

Finally, regarding the trade receivables associated with the Vuelta de Obligado agreement. As of today, all the necessary documentation has been finalized by CAMMESA. This month, we are going to collect the installment corresponding to January 2019.

And now I will turn the call over to Fernando, who will comment on the financial highlights of the quarter.

Okay, thank you, Jorge. Before starting, it's worth noting that the financial statements as of -- and for the year ended on December 31, 2018, include the effects of the inflation adjustment, applying the international accounting standard #29. Accordingly, the financial figures that we will mention have been stated in terms of Argentine pesos of the end of the reporting period, including the data from the previous periods and the growth comparison herein mentioned. Consequently, the information included in the financial statement for the year-end of -- on December 31, 2018, is not comparable to the financial statement previously published by us.

The results achieved during 2018 were excellent, even when considering the current context. Revenues from continuing operations increased 48% to ARS 14.3 billion in 2018, mainly driven by the tariff increase established by Resolution 19, which established higher prices for energy generation and machine availability and denominated them in U.S. dollars; an increase in the exchange rate for 2018 higher than the inflation for the same period, which impact in our tariffs set in U.S. dollars in terms of Argentine pesos. As a reference, during 2018, the foreign exchange rate increased 102%, and the inflation rate was 48%, while, during 2017, the foreign exchange rate increased 17% and the inflation rate was 25%.

And finally, the impact of the operations since November 2018, as Jorge mentioned, with self-supplied fuel recognized by CAMMESA in accordance to Resolution 70 that was used during November and December 2018 in our units under the Energía Base Regulatory framework amount to around ARS 2.1 billion. This was partially offset by [7% less] energy generated -- generation from continued operations that totaled 4.5 -- sorry, 14.5 terawatts-hour during 2018 and less availability from our [terminal] during 2018, especially in the first quarter, mainly because of the scale of maintenance of our combined-cycle -- [Central Puerto] combined-cycle plant.

Profit margin increased 8.5 points to 15%. The mentioned increase in revenues was partially offset by a less-than-proportional increase in costs total ARS 6.5 billion, a 25% increase as compared to ARS 5.2 billion in 2017. The increase in cost of sale was primarily the cost of the self-supplied fuel purchased in accordance to Resolution 70, [this allowing] for the total amount of ARS 1.9 billion; and an increase in terms of [gas natural] prices set in U.S. dollars related to the production of the steam and energy under the Energía Plus framework; and an increase in the

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mainly due to a decrease of ARS 220 million in operational and maintaining cost due to a decrease in energy generated and ARS 59 million decrease in (technical difficulty).

Operating income before operating results net increased 89% to ARS 6.389 million compared to ARS 3.383 million 2017. This increase was due to the mentioned increase in gross profit

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an increase in administrative and selling expenses that totaled ARS 1,389 million, a 32% increase

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ARS 1,060 million in 2017.

Our adjusted EBITDA was around ARS 32 billion, which includes ARS 12 billion in interest and foreign exchange difference associated with the FONI and similar programs; trade receivables, which are denominated in U.S. dollars; and the CVO effect of ARS 11 billion. Without taking in account this effect of FONI on receivables and CVO effect, our adjusted EBITDA during 2018 was ARS 9 billion, an increase of 64% as compared to ARS 5.5 billion obtained in 2017. This increase was mainly driven by the increase in gross profit mentioned above. In order to have a more precise estimation of the operation and cash flow generated during the period, it's important to consider the FONI collections during 2018. We collect ARS 654 million from FONI collections associated with San Martin and Manuel Belgrano plants. As for the trade receivables associated with CVO agreement, as Jorge mentioned, we expect to start collecting them on March -- on this March.

As for our financial position, we maintain a solid cash balance, which at December 31, totaled approximately ARS 2 billion for Central Puerto as an individual entity and ARS 2.2 billion on a consolidated basis.

On the left side, at December 31, 2018, financial debt was almost nonexistent for Central Puerto as an individual entity and was approximately ARS 5.9 billion, which includes $152 million associated with the IFC and IIC facilities for the construction of the wind farms Achiras I and La Castellana I.

Finally, during the period, we invest ARS 2.7 billion for development of Luján de Cuyo and Terminal 6 cogeneration projects and ARS 2.8 billion for the renewal project.

Continuing with our expansion, our estimated CapEx for our terminal project is around $280 million for 2019, plus the necessary CapEx to close the Brigadier López combined cycle of around $110 million, as Jorge mentioned before. This expansion will allow us to add 1,079 megawatts to our portfolio, an increase of more than 28%, reaching 4.9 gigawatts of total installed capacity by the last quarter of 2020.

And thank you, and now we invite you to ask any questions to our team.

(Operator Instructions)

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

Just 2 questions, if I could. One is -- and perhaps you said this and I just missed it, but I don't think so. In terms of the changes to pricing that were announced a couple of weeks ago, have you come up with an estimate of what that would mean in terms of reduced profitability? I know you indicated that combined with the new plant that you should be perhaps ahead. But if you had an estimate of what the effects would be on profitability, that would be helpful. And then secondly, given the more comfortable supply-demand situation in Argentina in terms of generation capacity, I was wondering how you're thinking about the ability to bring on new projects going forward. Is it likely to be a little bit slower to add new projects or to want to add new projects? Or do you still see good opportunities to bring on new plants?

Okay, thank you, Frank, for your questions. Regarding the first one, we have -- I have to say a couple of things. The first one is this is, as I mentioned, a resolution which is not the final regulatory framework. So we don't know exactly how long it will last. According to the meeting we had yesterday, the government told us that they were planning to have a new regulation by next year. So we have to think of this regulation as one resolution, which is just the transition between now and the new one. So it's not a definite regulatory framework. But going to what you asked, our estimation is an impact of, more or less, 15%, 20% in terms of EBITDA for the EBITDA we have today. So without the new projects that are going to be online by the end of the year, the cogeneration project and the new projects we are going to have online next year, the cogeneration projects. So more or less, that kind of range. Of course, it depends on the actual dispatch of each plant and the dispatch has been changed in the last month because of the fact that CAMMESA started using the real price of the gas, which is imported from Bolivia. That means an increase of our generation because we are mostly supplied from [CAM], which is a cheaper gas price. So dispatch has been changing. So just a kind of rough estimation considering a full year impact. And as I mentioned, we are not sure that this resolution will last 1 year. And the second one, what we see today is a kind of excess capacity in the markets. So we don't see much opportunity for new project except, perhaps, for renewables. We don't have the objective, which was set by law, in order to comply with this objective, which is have 20% of the total demand-supply using renewable sources. They have first to increase transmission capacity and, after that, auction for those new projects. So this opportunity is rather difficult because of the financial and economic condition of the country today in order to -- I mean, just to expand the transmission system is very difficult today to do it because of the funds for the country. And just renewables, I would say, after an increase in transmission lines.

Okay. If I could maybe just follow up just in terms of -- you mentioned the meeting and a possible additional step towards what I assume would be a more competitive market. Did they give you any indication of what types of additional changes they could make?

Not really. Not really. The only thing they said was they say, "Okay, don't think of this as the definite one. We are planning to start working on a new regulation by mid -- by June or something this year." But for sure, we think that next year, we will have a new regulation. For sure, this cannot be the final resolution because it provides no incentive for efficiency and doesn't solve any kind of problem regarding [results]. And I mean, the interaction between renewable sources of energy, which are basically unstable and not firm, with a firm capacity. So all those [signals] should be provided by a new regulation, and they intend to start working on this, as I mentioned, in May or June this year. But they didn't give us any kind of clear indication what kind of framework they are thinking about.

(Operator Instructions)

And we have a follow-up question from Frank McGann with Bank of America.

Okay. I was just wondering if you had thought if you might provide the fourth quarter stand-alone numbers. Or is that something we need to make our own estimate of what the 9-month numbers would be and kind of estimate the fourth quarter?

Normally, we don't provide that information because, in fact, we don't have this number audited by our auditors. We can give some information about the operational performance, some information in our press release, but we can provide you some operational information about the assets. But normally, we don't have these numbers audited by our auditors.

(Operator Instructions)

And this will conclude our question and answer session. I'd like to turn the conference back over to Mr. Rauber for any closing remarks.

Well, thank you to everyone for your interest in Central Puerto and your continued support to our company. We encourage you to call us at any time for any information you may need. Thank you, and have a (technical difficulty)