Central Puerto SA (CEPU) 2020 Q2 法說會逐字稿

Good morning, and welcome to the Central Puerto conference call following the results announcement for the quarter ended on June 30, 2020. (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 be aware that all financial figures were prepared in accordance with the IFRS and stated in Argentinian pesos, unless otherwise noted. It's worth noting that the financial statements for the quarter ended on June 30, 2020, include the effects of the inflation adjustment. Accordingly, the financial figures mentioned during the call, including the data from previous periods and growth comparisons, have been stated in terms of Argentinian pesos of 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, recent filings with the SEC. Central Puerto assumes no obligation to update forward-looking statements, except as required under applicable securities laws. For following 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 in order to simplify the discussion.

On the call from Central Puerto is Jorge Rauber, Chief Executive Officer; Fernando Bonnet, Chief Operating Officer; Milagros Grande, Financial Manager; and Tomás Daghlian, Investor Relations Officer.

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

Thank you very much. Good morning. I would like to begin today's call analyzing the developments of the second quarter, comment on the advances of our expansion projects, analyze the operating figures of the quarter. Fernando will then analyze the financial results of the quarter, and we'll answer any questions that you may have.

As you know, the COVID-19 crisis has affected almost all the world, including Argentina. The mitigation measures issued by the federal government, such as the stay-at-home order, quarantine have remained in place although some degree of flexibilization and exception have recently been approved. As a consequence, as you can see on Page 3, electric energy demand decreased 11% in April and 7.6% (sic) [7.4%] In May 2020, as compared to the same month of the prior year. However, demand increased 1.2% in June due to higher economic activity and lower average temperatures. Therefore, during the second quarter 2020, electricity demand decreased 5.5% as compared to the same period of the prior year.

Additionally, in July, demand increased 1.5%. However, it's worth noting that the decrease has a less than proportional impact in the income of the generation companies. In the case of renewable energy units, they are unaffected since they have dispatch priority so they can sell all the generated electricity. In the case of thermal units, they have a high proportion of their income associated to fixed power remuneration, which is not related to the energy generation of the units.

Additionally, when demand decreases, the unit that stops generating electricity first tend to be the older, inefficient ones. These units receive a lower remuneration under the Energía Base framework as compared to the new efficient ones that have a higher remuneration through contract, also known 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 had an impact on the progress of our projects under construction, La Genoveva I wind farm and Terminal 6 new cogeneration unit. During the quarter, we continue with advances in the project under strict health and safety protocols to protect our personnel and the community.

Taking into account the consequences of the quarantine, the Energy Secretariat instructed CAMMESA to extend the due date for the commercial operation date, or COD, of the projects 185 days. Regarding the regulatory framework for the Energía Base units, as we mentioned in our prior calls, on February 27, 2002 (sic) [2020], the Secretariat of Energy issued Resolution 31, which changed the prices for the units, which were set in pesos with a monthly adjustment using a mix between the Consumer Price Index and Wholesale Price Index. However, on April 8, 2020, the Secretariat of Energy, in the context of the COVID-19 crisis, instructed CAMMESA to postpone until further notice such adjustment. As of today, the mechanism remains suspended.

Finally, regarding our renewable energy division on June 24, 2020, the Board of Directors of Central Puerto, with the aim of increasing the exposure of the company to this segment, authorized the purchase of the minority shareholder stake of CP Renovables, holding Central Puerto now 100% stake in the company. CP Renovables owned, through a special purpose vehicle subsidiaries, 5 wind farms with a total installed capacity of 244 megawatts.

All of them are fully operational, performing above the expected load factor and have long-term power purchase agreement under which they sell their electricity production. Following the same trend of the rest of the world, renewable energy is rapidly gaining ground in the Argentina metrics. In 2018, renewable generation in Argentina represented 5.8% of total production and is expected to increase significantly in 2020, which Central Puerto is one of the leading companies.

Going now to our key performance indicators for the quarter. As you can see on Page 5, energy generation during the second quarter was 2.7 terawatt hours of electricity, 18% lower than the same period of 2019. This was, to a large extent, due to the Luján de Cuyo combined cycle, which became unavailable in mid-April due to a significant failure in its main transformer.

On July 16, 2020, after replacing the damaged equipment with a backup transformer stored in our Buenos Aires plant, the unit became online again. The downtime implied a reduction of the energy generation and power availability, which had a significative economic impact during the second quarter but will be mitigated by a comprehensive operational risk and loss of profit insurance. Due to this effect, energy generation decreased 0.5 terawatt hours in the second quarter 2020 as compared to the same period of the previous year.

Additionally, due to the effect of the quarantine, the rest of the thermal units reduced their energy generation to 146 gigawatt hours. On the other hand, renewable energy increased 158 megawatt hour due to the positive impact of La Castellana II, La Genoveva II, Manque and Los Olivos wind farms. Regarding our thermal units, the availability dropped to 82% as a consequence of the damage in the Luján de Cuyo combined cycle.

Now I will turn the call over to Fernando, who will comment on the financial highlights.

Thank you, Jorge. I will first refer to the result of the second quarter of 2020 as compared to the second quarter of 2019. As you can see on Page 6, our revenues were ARS 7.2 billion in the quarter, a 14% decrease compared to ARS 8.3 billion during the second quarter of 2019. This decrease was driven by the discontinuation of the fuel purchases operation that we did during the 2019 due to the new regulation that centralized the fuel purchase for all generators in CAMMESA. This effect represented a ARS 2.3 billion variation during the second quarter. Excluding this effect, revenues for the second quarter of 2020 were ARS 7.2 billion compared to ARS 6 billion in the second quarter of 2019.

This increase was mainly driven by an increase in sales under contracts, which amount to ARS 3 billion during the second quarter of 2020, as compared to ARS 0.8 billion in the same period of the previous year, mainly due to the revenues related to Brigadier López power plant, which was acquired in June 2019; the new Luján de Cuyo cogeneration unit, which started operations on October 2019; and the wind farms La Castellana II, La Genoveva II, Manque and Olivos, which started operation during June, September and December 2019 and February 2020, respectively.

This increase was partially offset by a decrease in sales under the Energía Base framework of ARS 1.9 billion due to a decrease in prices for units under the Energía Base regulatory framework established by Resolution 31, 2020, in force since February 1, 2020. And the decrease in energy generation and thermal units availability, mainly due to the failure in the main transformer of Mendoza combined cycle as Jorge mentioned before.

Going to Page 7, we can see the changes in our EBITDA, which was around ARS 7.6 billion in the second quarter of 2020 compared to ARS 4.4 billion in the second quarter of 2019. This was due to, first, a 5% increase in our gross profit as compared to the same period of 2019. This was due to the variation in revenues mentioned before and was partially improved by a 28% decrease in the cost of sales that totaled ARS 3.4 billion compared to ARS 4.7 billion in the same period of 2019. The decrease in the cost of sale was primarily driven by a 79% decrease in the purchase of fuel and related costs due to the continuation of these operations in this quarter according to the new regulation. This was partially offset by 36% increase in nonfuel-related cost of production, mainly due to an increase in our installed capacity following the acquisition of Brigadier López plant and the COD of the new thermal and renewable energy plants.

Gross profit margin totaled 53% during the second quarter as compared to 44% in the same period of 2019. This change was mainly a consequence of operation of purchase of self-supplied fuel, which was enforced during 2019.

Finally, other operating results net was ARS 2.2 billion higher in the quarter, mainly due to the foreign exchange difference on operation -- our operating assets, mainly driven by Central Vuelta de Obligado trade receivables due to a 9.3% depreciation of the Argentine peso during the period as compared to a 2% appreciation during the same period of 2019, which was partially offset by an impairment in property, plant and equipment due to evaluation at fair value of certain gas turbines that we held in storage.

And going to Page 8, the consolidated net income was ARS 2.2 billion compared to ARS 1.9 billion in the same period of 2019. In addition to the factors mentioned before, the net income was mainly affected by higher financial expenses, which increased ARS 4.3 billion due to the loans obtained for the thermal and renewable energy expansion projects and the acquisition of Brigadier López power plant, and a lower share of profit of associates mainly due to a weaker result from Ecogas. These effects was -- were partially compensated by a favorable net monetary position during the quarter, resulting in a gain in real terms when the situation was the opposite during the second quarter of 2019, and ARS 0.6 billion increase in financial income.

Going to Page 9, you can see our cash flow for the second quarter of 2020. Net cash provided by operating activities was ARS 8.2 billion. This includes ARS 1.3 billion in collection from CVO installments, which is not contained in the EBITDA. The cash flow from operations was partially offset by ARS 3 billion CapEx invested in the expansion projects and ARS 4.2 billion used in financing activities.

From recent news, on August 2020, CNB, the Argentine security regulator, approved a showing program for a domestic bond insurance recognitions by CP Manque and CP Olivos, 2 wholly owned subsidiaries of CP Renovables, for up to $80 million. This is the first step for a bond issuance to get long-term financing for these projects. Thank you.

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

(Operator Instructions) The first question today comes from Frank McGann of Bank of America.

Just 2 questions, if I could. One, I was just wondering in terms of as you're looking forward, demand seems to be recovering. Are you seeing any kind of mix change that might have an effect on profitability, perhaps in terms of where you're generating or how you're seeing the mix amongst your clients?

And then in terms of payments, how are you seeing payments from CAMMESA, payments from the -- your customers in general? Are you seeing more delays given the weakness in the economy that potentially affects customer cash flows?

Okay. I will answer this question. Thanks, Frank, for it. The first thing I have to say is that, as you mentioned, the demand of electricity has been recovering. In fact, in July, we had 1.5% above the level we had in the same month in the last year. So the demand started recovering. Obviously, the industrial demand is below the level it had last year. The increase is mostly driven by the residential demand. But we see -- I mean, basically, what we are operating today is our renewable plants, which have priority in terms of dispatch. So they have -- they are unaffected. And we are operating basically our cycle -- combined cycles and our cogeneration plant in Mendoza. So operation has not mainly been affected by the decrease of demand we had in the previous 2 or 3 months, now the demand is recovering.

And probably the most important thing to mention is that our remuneration is not based on dispatch, but mostly on availability. So we don't expect any kind of impact because of the -- of any kind of affectation in terms of demand. So it's recovering. And if it didn't, we wouldn't have any kind of impact.

And the second question you mentioned, payment. Basically, what happened in the market is that the government has intervened increasing subsidies. So even though the distribution companies are paying below the 100%, they are paying more or less, in average, 17% of the total bill they are receiving month after month. The government has intervened in order to keep the payment normal. So we have not been affected by the quarantine since it started. In fact, today, we have a payment which is even a little better than the one we have in March, for example.

Our next question is from Ezequiel Fernández of Balanz.

I have 4 questions, if you don't mind, I would like to go one by one. The first one is related to the Luján de Cuyo incident. I wanted to know if you have any idea about what could be the recovery that you might get from insurance on that in terms of equipment and income loss.

Fernando, do you want to answer?

Yes, yes. Thank you for asking. In terms of the insurance, we have an insurance that covered the property loss and the beneficial loss. So we are thinking that it's preliminary because we don't have closing the incident yet. But we think that we can cover the new -- we are buying a new transformer. We are acquiring a new transformer, so we think that we can receive almost, I think, all of the amount. We have some deductions on the insurance, but we think that we can have -- cover at least 80% -- between 75% and 80% of the cost.

In terms of beneficial loss, we have a deductible there of 30 days and the total time that the unit was out was around 2.5 months or 3 months. So we recover this additional 1.5 months or 2 months of loss of profit. That is the situation with insurance. Right now, of course, we need to close the incident with them, and so we have a report that say that this was an incident covered by the insurance, but we need to close the incident. I think we're going to do that in the next 2 months.

And after that, you have some delay on the payment around 3 months. I think we'll recover them perhaps in the next -- perhaps at the end of the year or at the beginning of the next one.

Okay. Perfect. I don't know if you can comment on a monetary value for all that or if it's too early.

It's too early. Talking about the -- we can do some numbers together. The loss of profit was around $6 million or less, and -- the total loss of profit. And the cost of the new equipment is around $1.6 million. So these are the costs.

Okay. Perfect. And well, I wanted to know if you have an updated guidance on the -- how much CapEx is left for La Genoveva and San Lorenzo?

Okay. For La Genoveva, we are almost finished, perhaps it's around -- I know something like $15 million, between $15 million and $18 million. And in -- and we are very, very close to finish. And in Terminal 6 in San Lorenzo, it's more open because of this pandemic issue. Also, we have an additional cost that every day -- I don't know, problems with terms of COVID and new regulations. So it's very difficult to say the -- a fine number or an exact number, but it will be around, I think, in the range of $50 million, $55 million.

Okay. That's very helpful. My third question is related to Brigadier López. I don't know if you're still committed after everything that's been going on. And if so, when could work start for the closing.

I don't know, Jorge, if you want to...

Okay. We are -- in the first time, we are going to -- our plan is to finish first the project we have in Terminal 6, which is our priority. And we are primarily evaluating the moment to go ahead with the closing of that cycle. We haven't started yet. We are doing only the preservation of the existing assets and waiting for the moment to start. I mean obviously, the situation is not the best one, and we are giving priority to closing the plants we are currently in construction.

Okay. My final question is related to the Central Vuelta de Obligado receivable. Is it fair to say that at the end of the second quarter, the outstanding receivable was $440 million, so to speak?

Sorry, sorry, could you repeat?

Yes, the outstanding amount of the Central Vuelta de Obligado FONINVEMEM receivable at the end of the second quarter, was it $450 million, is that correct?

Yes. Million dollars, you said?

Yes.

(Operator Instructions) The next question comes from Matías Wesenack of AR Partners.

I have 3 questions, if you don't mind, I'll say them now. First, was the purchase of the 30% of CP R reflected in the second quarter's cash flow? Then if we have any news related with the progress in La Genoveva, particularly, I want to know if it will be -- if it will start operating this quarter or in the last quarter of this year.

And lastly, if you could repeat what you're expecting to receive from the beneficial loss due to the unavailability of the unit in Luján de Cuyo.

Okay. For the last one -- I'll start with the last one. The beneficial loss was around $6 million -- $6.2 million in the total beneficial loss. But we have a deductible for the insurance of 1 month. So the recovery will be less than that, of course.

The -- in the last one. The other one was around -- was about the Genoveva II -- or Genoveva I, sorry. Genoveva I.

Yes. About that, Genoveva I. I want to know if we will be starting operations in the third quarter of 2020 or in the last quarter.

No, we are thinking to have the operation on October this year. And the other one was about CP Re, about -- sorry, could you repeat the first one?

Yes. If the purchase of 30% was reflected in the second quarter's cash flow or it will be reflected in the third quarter?

Yes, it was reflected in the second quarter. But as we pay in [CP], yes, in our financial assets, we don't reflect it in the cash flow itself, that you have a note in the financial statement that expressed that in the second quarter, yes.

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

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. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.