Central Puerto SA (CEPU) 2019 Q1 法說會逐字稿

Good afternoon, good morning, and welcome to the Central Puerto conference call following the results announcement for the quarter ended on March 31, 2019. (Operator Instructions) Please also note, today's 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 recent filings with the SEC. Central Puerto assumes no obligation to update forward-looking statements except as required under applicable securities laws. In addition, all financial figures were prepared in accordance with IFRS and are stated in Argentinian pesos, unless otherwise noted.

On the call today from Central Puerto is Jorge Rauber, Chief Executive Officer; and Tomás Daghlian, Investor Relations 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 team from Buenos Aires, Argentina to report on the results of the first quarter 2019 and to answer any questions that you may have. Today is with me, Tomás Daghlian, who is our Investor Relations officer, who will replace Fernando Bonnet, our Chief Financial Officer, who was originally announced for this conference, and Tomás will be in charge of reporting and explaining the results of the company.

I will first refer to the operating figures of the quarter and then continue with some recent news regarding Central Puerto and the electric energy sector. Finally, Tomás will analyze the financial results.

During the first quarter, we generated 3.5 terawatt hours of electricity, a 3% increase as compared to the same quarter 2018. This increase was mainly due to a 2% increase in hydrogeneration and a 156 megawatt hour of additional energy from wind farms, Achiras and La Castellana, which started operations during the 3 (sic) [third] quarter 2018. This was partially offset by the 2% decrease in energy generation from our thermal units.

For the general market according to CAMMESA, electricity demand during the quarter decreased 70% due to lower temperatures within the summer and a decrease in the demand by commercial and industrial customers. On the other hand, the availability of our thermal units reached 92% in the period, which is 2% lower as compared to the first quarter 2018 but 13 percentage point higher than the average availability of the market with the same period of 2018. During this quarter, we continue with the construction of our new projects.

Regarding the thermal project, Luján de Cuyo and Terminal 6-San Lorenzo, during the first quarter of 2018, we continuously will work for the construction of the new cogeneration units and their auxiliary equipment and pleased to confirm that both projects are within our budget.

Regarding the renewable energy projects, during the quarter, we continue with the construction of our La Genoveva I project, which will provide energy through the RenovAr regulatory framework. We also continued with the construction of the wind farms, La Castellana II; La Genoveva II; Manque and Los Olivos, the last 2 previously known as the Achiras II project; and the solar farm, El Puesto, which will provide energy to private offtakers through the term market for renewable energy, MATER.

Regarding the projects under the MATER regulatory framework, it's important to mention that we have already signed contracts for 61% of our expected electricity generation from this project. It is important to note that these are long term by other contracts entered into directly with customers with prices set in U.S. dollars. We believe that this -- all these projects have set us ahead and reaffirm our position as market leaders in terms of power generation.

We will continue to sharpen the ability to consistently increase our installed capacity, satisfying the demand of energy for our customers. As you may recall, on September 7, the Secretary of Energy issued a Resolution 70 of 2018 according to which authorize generators to purchase their own fuel for the Energía Base thermal units. The generation companies that take this option have to declare a variable cost of production for each unit to CAMMESA, who pays the fuel in accordance to such declaration. According to CAMMESA procedures, the machines with a lower variable cost of production are dispatched first and consequently have better load factors. Additionally, if a generation company purchase the fuel at a lower price than the one paid by CAMMESA, this may have a result for that generator. CAMMESA continues to supply the fuel for those generation companies that do not take this option. According to this resolution, during the first quarter, we purchased the necessary fuel for our unit, which had a positive impact for our businesses, especially during January and February. Going forward, we plan to continue purchasing our own fuel for our combined cycle and cogeneration units provided that the conditions are favorable.

Regarding the Brigadier López power plant, as you may recall, on February 27, Central Puerto was notified that it had been awarded the IEASA Bid called by IEASA to acquire the Central Termoeléctrica Brigadier López power plant. The position of the Brigadier López power plant was subject to the satisfaction of certain conditions that had to occur prior to April 1, 2019. Since some of those conditions to the IEASA Bid have not been satisfied, Central Puerto and IEASA are negotiating, among other things, on a new closing date.

Finally, regarding the remuneration of our thermal units under the Energía Base framework, as you may recall, on March 1, 2018, the government issued Resolution #1, which reduced the prices for the power and the energy produced by those machines. According to Resolution #1, this remuneration system will have a transitional application until the following is defined and implemented: a regulatory mechanism aimed at reaching an autonomous, competitive and sustainable operation that allows the freedom of contract between supply and demand; a technical, economic and operative functioning for the integration of the different generation technologies so as the guarantee -- so as to guarantee a reliable and cost-effective system. However, we expect the effect of these changes will be offset by the income from our new renewable and thermal units.

Finally, regarding the trade receivables associated with the Vuelta de Obligado agreement, as of today, we received the payments related to January and February 2018 corresponding to installments 11 and 12, and we continue in conversation with CAMMESA in order to collect the unpaid amounts previous to those installments.

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

Thank you, Jorge. Before starting, it's worth noting that the financial statements as of and for the quarter ended on March 31, 2019, include the effects of inflation adjustment, applying the International Accounting Standard Number 29. Accordingly, the financial figures that I will mention have been stated in terms of Argentine pesos of the end of the reporting period, including the data from previous periods and the growth comparison here mentioned. Consequently, the comparative information included in the financial statements for the quarter ended on March 31, 2019, is not comparable to the financial statement previously published by us.

The results that we achieved during the first quarter of 2019 were very good even when considering the reduction in the power and energy prices for the units under the Energía Base regulatory framework. Revenues from continuing operations increased 118% to ARS 6.2 billion in the first quarter, mainly driven by: one, an increase in the exchange rate for the first quarter of 2019, higher than inflation for the period, which impacted power and energy prices set in U.S. dollars in terms of Argentine pesos current at the end of the reporting period. As a reference, during the 12-month period ended on March 31, 2019, the foreign exchange rate increased 115%, while the inflation rate for the same period was 55%.

Two, an increase in fuel remuneration for units under Energía Base regulatory framework and other related concepts, which amounted to ARS 2.5 billion during the first quarter of 2019, mainly because of income in accordance to Resolution 70 in some of the units under this regulatory framework compared to ARS 245 million during the first quarter of 2018.

Three, a 540% increase in sales under contracts, which amounted to $518 million -- ARS 518 million, sorry, during the first quarter of 2019 as compared to ARS 81 million in the first quarter of 2018, mainly due to the energy generation of wind farms, Achiras and La Castellana, which started operations during the third quarter of 2018

And four, ARS 83 million in the first quarter of 2019 from revenues from the CVO thermal plant management, which started operation on March 20, 2018. This was partially offset by the decrease in energy and power prices for units under Energía Base regulatory framework established by Resolution 1, as Jorge mentioned before, starting on March 1, 2019.

Our gross profit in the first quarter increased 75%. This increase was due to the above-mentioned increase in revenues and was partially offset by an increase in cost of sales that totaled ARS 3.7 billion compared to ARS 1.4 billion in the first quarter of 2018. The increase in cost of sales was primarily driven by: one, an increase in the purchase of fuel and related concepts, which totaled ARS 2.3 billion during the first quarter of 2019 as compared to ARS 0.4 billion in the first quarter of 2018 due to: a, the cost of self-supplied fuel purchased in accordance to Resolution 70, as mentioned before; and b, a higher price of natural gas used in the units that generate steam or electric energy under the Energía Plus regulatory framework, mainly due to an increase in exchange rates during the last 12 months that was higher than the inflation for the period, which impacted in the U.S. dollar-denominated prices of natural gas in terms of Argentine pesos current at the end of the reporting period. As a reference, during the 12-month period ended on March 31, 2019, the foreign exchange rate increased 115%, while the inflation rate was, for the same period, 55%.

Two, a 34% increase in nonfuel-related costs of production, which totaled ARS 1.4 billion in the first quarter of 2019 as compared to ARS 1 billion in the first quarter of 2018, mainly due to: a, a 61% increase in maintenance costs totaling ARS 170 million; and b, a 59% increase in depreciations due to increase in property, plant and equipment related to the new thermal and renewable energy projects, amongst other increases.

Operating income before other operating results net increased 84% to ARS 2.1 billion compared to ARS 1.2 billion in the first quarter of 2018. This increase was due to the above-mentioned increase in gross profits and a less-than-proportional increase in administrative and selling expenses that totaled ARS 455 million, a 42% increase as compared to ARS 320 million in the first quarter of 2018.

Our adjusted EBITDA was around ARS 5.5 billion compared to ARS 14.5 billion in the first quarter of 2018, which included a ARS 12.3 billion onetime gain from the CVO commercial approval. Without taking into account this extraordinary gain, the increase would have been 154%. This variation was driven by: a, the increase in operating results before other operating income mentioned above; b, a ARS 2.9 billion during the first quarter 2019 as compared to ARS 500 million in the first quarter of 2018 from the foreign exchange difference and interest accrued on trade receivables denominated in U.S. dollars mainly from the FONI trade receivables; and c, the increase in depreciations and amortizations, which totaled ARS 470 million during the first quarter of 2019 as compared to ARS 330 million in the first quarter of 2018.

Consolidated net income was ARS 1.2 billion in the first quarter of 2019 compared to ARS 10.9 billion in the first -- in the same period of 2018, which included a ARS 12.3 billion onetime gain during the first quarter of 2018 from the CVO effect.

In addition to the above-mentioned factors, net income was: a, negatively impacted by higher financial expenses that amounted to ARS 1.5 billion in the first quarter of 2019 compared to ARS 770 million (sic) [ARS 670 million] in the first quarter of 2018; and b, positively impacted by higher financial income, which totaled ARS 380 million during the first quarter of 2019 compared to ARS 265 million in the first quarter of 2018. In each cases under a and b, mainly due to the foreign exchange difference over U.S. dollar-denominated debt and financial assets, respectively, which included FONI -- which excludes FONI and other trade receivables.

Additionally, during 2018, the results from discontinued operations during 2018 -- during the first quarter of 2018, we had results from the discontinued operations of La Plata plant for ARS 309 million, and the profit -- the share of profit of associate decreased in the first quarter of 2019 to ARS 97 million as compared to ARS 164 million in the first quarter of 2018 mainly due to weaker results from the operations of Ecogas.

In order to have a more precise estimation of the operational cash flow generated during the period, it is important to consider the FONI collections. During the first quarter, we collected ARS 810 million from the FONI trade receivables, including the collections from the CVO receivables mentioned by Jorge earlier as compared to ARS 160 million in the same period of 2018. Finally, results from exposure to the change in purchasing power of the currency totaled ARS 1.3 billion during the first quarter of 2019 as compared to ARS 310 million in the first quarter of 2018.

As for our financial position, we maintain a solid cash flow -- a solid cash balance, which as of March 31 totaled approximately ARS 2 billion for Central Puerto as an individual entity and ARS 2.1 billion as a consolidated basis.

On the debt side, as of March 31, 2019, financial debt was almost nonexistent for Central Puerto as an individual entity and was approximately ARS 6.6 billion when including the debt from subsidiaries, which includes the IFC and IIC long-term project finance facilities for the construction of the wind farms Achiras and La Castellana.

Finally, during the period, we invested ARS 2.1 billion for the development of Luján de Cuyo and Terminal 6 cogeneration projects and ARS 0.2 billion for the renewable energy project.

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 from Bank of America.

If I could, just 2 questions. One, just in terms of SG&A, the year-over-year increase is relatively low compared to currency changes and inflation. I was just wondering how you thought that might act as we go through the following quarters, whether we should expect to see a pickup related to what we've seen in the first quarter.

And then secondly, just kind of stepping back and looking at the sector. The overall level of capacity in the sector seems, I guess, adequate now. Perhaps, some people you talked to you think there's quite a bit of capacity relative to demand, and certainly, demand has fallen some. But thinking out a little bit longer term, I'm just trying to think of the potential for new investments and how you're seeing the need for new competitive capacity to come into the market.

Clearly, this is a difficult time to do that, and I realize financing issues and such makes it difficult to -- for the government and the players in the system to want to add capacity. But assuming things normalize and we have a better environment, do you think there's good opportunity for substantial new capacity?

Thank you, Frank. I will answer first on the second question you made. I would say in general terms, putting aside the fact that we are, as you mentioned, living in a very tough situation in terms of financing, what we specifically see regarding the sector is that we are facing a kind of excess capacity at the moment, especially because we -- as you may know, the demand of electricity is quite stable for the last 3 years, I would say. Before that, it was growing very fastly and now -- very fast and now it's kind of stable because of the economic situation because of the increase of tariff and elasticity of the demand in terms of price.

So what we see today and on the other side, we have the installation of new capacity, especially coming from the renewable projects and the ones that we at Central Puerto and the rest of the generators have installed in terms of cogeneration projects and the closing of combined cycle. So what we see is installation of more than 4,000 megawatt until May next year, more or less, and the demand which has not grown. So what we see is an excess capacity. And for sure, the situation should wait a little bit in order to add more capacity if the objective of that capacity is to meet the peak demand, so this excess capacity in terms of megawatts installed.

What we do have is an opportunity to replace very old and inefficient units for new ones. So the problem is not so much related to installed capacity, which is enough, as I mentioned, and probably in excess capacity but in terms of efficiency that one of the challenge that the system has is it has to go back to a path of efficiency, which has been launched in the last 10 or 15 years. The system used to be a very, very efficient and model for the world and now is a quite inefficient system, where units that are extremely old are still in operation when should have been disassembled and put out of service several years ago.

So this is the challenge. I mean we have to change the unit, not to add more capacity but to change existing unit, the old ones for new ones in order to be more efficient, in order to make more profit for the company and in order to save fuel and reduce the tariff for the customers. So that will be a win-win situation if we get a regulatory framework that can provide that kind of incentive, and the replacement for -- of old units for new ones in order to reduce costs and increase the profit of the company.

And the first one was...

I meant which line you were referring to, Frank? Could you repeat?

Yes. No, the SG&A line or the ARS 455 million. It was up a limited amount, what is it, 42%, I guess year-over-year. I'm just wondering if you thought that we would see larger increases in that line as we go forward. If I think wage increases year-over-year, I think was up 27% if I remember right from the release. And should we expect the year-over-year increases to grow more?

Yes. Okay. So in the first quarter of 2019, the company paid a bonus to the personnel, which was in accordance to the bylaws of the company, Section 33 of the bylaws of the company, which impacted the cost of salaries paid to personnel. It's included in that line but is an extraordinary result because these bonuses were related to the extraordinary results that we had last year, which we don't expect to happen again. This was because of the CVO effect.

According to the bylaws, a portion of those results have to be distributed to the employees of the company, but this was a very onetime thing. And for the ongoing and ordinary wages of the company, as a matter of fact, I would say that the salaries are less -- were lower than the first quarter of 2018.

(Operator Instructions) And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Okay. Well, thank you and -- to everyone and for your interest in Central Puerto and your continuous support of our company. We encourage you to call us at any time for any information that you may need. Thank you, and have a good afternoon.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.