Central Puerto SA (CEPU) 2020 Q1 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 March 31, 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 of 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 security laws. In addition, all financial figures were prepared in accordance with IFRS and stated in Argentinian pesos, otherwise -- unless otherwise noted.

For 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 today from Central Puerto is Jorge Rauber, Chief Executive Officer; Fernando Roberto, 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, and good morning. I would like to begin today's call analyzing the developments of the first quarter. After that, I will comment on the advances of our expansion projects and analyze the operating figures of the quarter. Finally, Fernando will analyze the financial results and comment on the recent news on the company.

As you know, the COVID-19 crisis has affected almost all the world, including Argentina. As a consequence, the federal and local government have issued mitigation measures in order to slow down the spread of the virus. Among them on March 20, 2020, the federal government released a stay-at-home order or quarantine, as you can see on Page 3. However, electricity generation activity was considered an essential service and thus exempt from the restrictions. In order to protect our essential workers, we have implemented strict health and safety protocols for them, while the rest of our personnel is doing home office. The quarantine did not have significant consequences during the first quarter, but it is expected to have a deeper impact during the second quarter.

For example, as a consequence of the effects of the quarantine on the economic activity, electricity energy demand decreased 11.5% during April and 10% during the first 3 weeks of May compared to the same period of 2019, according to data from CAMMESA. 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, and they do not lose energy generation. 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 Energía Base framework as compared to the new efficient ones that have a higher remuneration through contracts, also known as Power Purchase Agreement or PPAs. As a consequence of the decrease of economic activity due to pandemic, on April 8, 2020, the Secretary of Energy instructed CAMMESA to postpone until further notice the application of price update mechanism established by Resolution 31 for the Energía Base units, that is the spot sales. However, it's worth noting that during the first quarter 2020, around 50% of our EBITDA came from units that have contracts and not from the spot sales units. Furthermore, for the full 2020 year, we expect that 70% of our business will come from units that have their contracts set in U.S. dollars due to the new capacity coming online during this year.

Finally, the COVID-19 crisis had an impact on our projects under construction La Genoveva I and Terminal 6, as you can see on Page 4. Initially, the construction of private sector energy infrastructure was not included as an exemption to the quarantine but was included on April 7, 2020. Consequently, after taking all necessary precautions and implementing corresponding protocols to protect the personnel and the community where the projects are developed, the construction of La Genoveva I wind farm and Terminal 6 San Lorenzo Terminal plant was resumed on April 9 and April 27, respectively.

Additionally, in the case of La Genoveva I on February 21, 2020, Vestas the supplier of the wind turbine of La Genoveva I project notified the company that the COVID-19 outbreak affected its manufacturing activities worldwide, causing delays on the supply chain for the delivery of certain Chinese-origin manufacturing components required for the completion of the wind turbines. In its communication Vestas did not specify the impact that this situation may have on the agreed schedule. Furthermore, logistic restriction imposed by the federal and local governments may also slow down the construction.

In the case of the Terminal 6 project, the construction was restarted after 1 month with 1/3 of the personnel that was working prior to the quarantine due to the health and safety protocols agreed with the health authorities. Additionally, the project may also be affected by travel restrictions for international specialists that participate in the construction. Due to these restrictions, the CODs of La Genoveva I and Terminal 6-San Lorenzo are expected to be delayed and depend on the evolution of the situation in the region in which both projects are located and the measures implemented by the government.

On the other hand, as you can see on Page 5, during the first quarter of 2020, we reached the commercial operation date for Los Olivos wind farm, adding 23 megawatts and increased the installed capacity of the wind farms Manque and La Castellana II, which now have 57 and 15 megawatts, respectively. Projects together with La Genoveva II wind farm have already signed long-term contracts with prices set in U.S. dollars directly with private customers for 100% of their capacity.

Finally, I would like to give you an update on recent development for the second quarter. In April 2020, the Siemens branded combined cycle of Luján de Cuyo plant became unavailable due to significant failure in its main transformer. The normal lead time for a complete reparation of the -- of the replacement of the equipment is around 12 months. However, the company is evaluating alternatives to return the unit service sooner. Although this may reduce the energy generation from this unit during the time equipment remains unavailable, the company has a comprehensive operational risk and loss of profit insurance that covers the breakdown cost and the consequence of lost profits.

Going now to our key performance indicators of the quarter, as you can see on Page 6, energy generation during the first quarter was 3.9 terawatt hours of electricity, 10% higher than the same period of 2018. As a reference, energy demand during the period increased 4.2% and domestic energy generation increased 7.4%. Increase in energy generation was first due to an 88% increase from renewable sources, mainly due to the positive impact of La Castellana II, La Genoveva II, Manque and Los Olivos wind farms. Second, hydro generation from Piedra del Águila increased 10% due to higher available water flows.

Finally, generation from our thermal units increased 5%, mainly due to the positive impact of the purchase of the Brigadier López plant and the new Luján de Cuyo cogeneration unit and to a lesser extent, to an increase in energy generation on some of the steam turbines of the Puerto Complex due to higher temperatures during the summer.

Regarding our thermal units, as you can see on the graph on the right in the same page, we continue to show an excellent track in terms of availability, reaching 93%, 3 percentage points higher than the same quarter of 2019. This figure is 10 percentage points above the average availability of thermal units for the total market showing Central Puerto's competitive advantage.

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

Thank you, Jorge. Before starting, it's worth noting that the financial statement for the quarter ended on March 31, 2019, include the effect of the inflation adjustment. Accordingly, the financial figures that I will mention, including the data from previous periods and the growth comparisons, has been stated in terms of Argentine pesos of the end of the reporting period.

I will first refer to the results of the first quarter 2020 as compared to the first quarter of 2019. As you can see on Page 7, our revenues were ARS 8 billion in the quarter, a 13% decrease compared to ARS 9.3 billion during the first quarter of 2019. This decrease was driven by the discontinuation of fuel purchase operation that we did during 2019 due to new regulations that centralized in CAMMESA, the fuel purchase for all generators. These effects represent a ARS 3.5 billion variation, as you can see on Page 7. Excluding this effect, revenues for the first quarter of 2020 will have increased approximately 40%. This increase was mainly driven by an increase in sales under contracts, which amounts to ARS 3.4 billion during the first quarter of 2020 as compared to ARS 768 million in the first quarter of 2019, mainly due to the revenues related to the Brigadier López Plant power plant, which was acquired in June 2019, the new Luján de Cuyo cogeneration unit, which started operation in October 2019 and the wind farms La Castellana II, La Genoveva II, Manque and Los Olivos, which started operation on June, September, December 2019 and February 2020, respectively.

A 10% increase in energy generation, as Jorge mentioned before, and a 3% increase in the availability of thermal units under Energía Base framework. This increase was partially offset by a decrease in price for units under Energía Base Regulatory framework established by Resolution 31, in force since February 1, 2020.

Going to Page 8, we can see the changes in our EBITDA, which reflects the increase in our gross profit, which in the quarter rise 22% as compared to the same period of 2019. This was due to variation in revenues mentioned before and was partially improved by a 39% decrease in our cost of sales that totaled ARS 3.3 billion compared to ARS 5.4 billion in the same period of 2019. The decrease in the cost of sales was primarily driven by an 81% decrease in the purchase of fuel and related concepts due to the discontinuation of this operation in the quarter according to the new regulations. This was partially offset by a 29% increase in nonfuel cost of production, mainly due to an increase in our installed capacity following the acquisition of Brigadier López power plant and the COD of the new thermal and renewable energy projects.

Gross profit margin totaled 59% during the first quarter of 2020 as compared to 41% in the first quarter of 2019. This change was mainly a consequence of an operation of purchase of self-supplied fuel, which was in force during the first quarter 2019, but not during the first quarter of 2020.

Finally, Other operating results net decreased ARS 1.9 billion in the quarter, mainly due to an impairment on property, plant and equipment, which amounted to ARS 774 million in the quarter due evaluation at fair value of 2 Siemens branded gas turbines stored in the supplier's facilities, which were valuated aside using the fair value less cost of sales approach. And a ARS 2.4 billion gain during the first quarter 2020 from the foreign exchange difference and operating assets, mainly due to a FONI trade receivables compared to ARS 3.9 billion during the first quarter of 2019, mainly due to an 8% depreciation of the Argentine peso during the first quarter of 2020 compared to the 15% depreciation during the same period in the previous year and a lower average balance of the trade receivables maintained during the quarter. As a consequence of this variation, the adjusted EBITDA was around ARS 7.6 billion in the first quarter of 2020, 7% lower than ARS 8.2 billion in the same period of 2019. However, adjusted EBITDA, excluding the foreign exchange difference and interest on FONI trade receivables and the impairment on property, plant and equipment, was ARS 5.8 billion in the first quarter of 2020, 53% higher than ARS 3.8 billion during the same period of 2019, showing the stellar result of the new plants.

Going to Page 9, the consolidated net income was ARS 1 billion compared to ARS 1.8 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 2.2 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 financial income due to lower interest rates during the quarter and lower foreign exchange difference of our U.S. dollar-denominated financial assets, which excludes FONI and other trade receivables. These effects were partially compensated by affordable net monetary position during the first quarter of 2020, resulting in a gain in real terms, while the situation was the opposite during the first quarter of 2019.

Going to Page 10, you can see the cash flow for the first quarter of 2020. Net cash provided by operating activities was ARS 3.5 billion. This includes ARS 1.5 billion in collection from FONI and CVO installments, which is not contained in EBITDA. The cash flow from operations was partially offset by ARS 1.2 billion CapEx invested in the expansion projects and ARS 1.5 billion used to servicing debt.

Thank you, and now you invite to ask any questions to our team.

(Operator Instructions) And our first question today comes from Ezequiel Fernández.

Yes, this is Ezequiel Fernández from [Balanz] Capital. I have 3 initial questions. I would like to go one by one, if you don't mind. First on the Luján de Cuyo stoppage. Can you please tell us a bit more about what happened? And if the transformer failure led to damages in other more critical or core equipments? Also, what is the CapEx that you expect to spend to fix this? And what are the processes and time frames involving collecting from the insurance company?

Okay. Let me go and address this question. And the first term, thank you for your question. What happened is that transformer is that it took a fire, the root cost analysis has not been performed yet, so we don't know exactly what happened with the unit. That will be analyzed and assessed by the specialist in order to determine what exactly was the origin of that failure. It would take 12 months if we have to go so far as to purchase a completely new transformer. Our first evaluation is that the unit has been severely damaged. In fact, what happened is the complete destruction of the central column of the transformer, that means that the transformer should be completely revived. It will take 12 months if we have to replace it for a new one, but we are analyzing this with some of the firms involved in the replacement of transformer and the possibility of the repairing it instead of completely discarding it and go to purchase a new one. The total CapEx involved in these operations, if we have to go for a new transformer will be $3.5 million more or less. And if we have the opportunity to repair instead it could be around $1 million, something like this. Each month out of service of the unit means $2.5 million, more or less. We have a period for insurance purposes. We have a period of time the [insurance] covers half its amount through the years. And in the case of the cost of reparation it would be $0.5 million. So we are working today in order to basically a new one spare transformer that we had in each network, which is initially supposed to function as a spare part for the common site we had in Central Puerto (inaudible). So it's not exactly the same transformer, but we have -- we are analyzing the possibility of modifying something -- somehow in the equipment in the Luján de Cuyo power plant in order to operate -- connect this spare transformer and operate with that one. In this case, of course, the time involved in the out-of-service period would be reduced.

Okay. Great. And just to be clear, do you expect the full 300 megawatts to be out of service? Or is it only a partial?

No, no. It's a complete out of -- because what happens is the unit which has been damaged is the transformer corresponding to the gas turbine. So it's the main transformer of the unit. That means that the complete unit is out of service, the common cycle.

Okay. That's very clear. Great. And my second question is related to San Lorenzo and La Genoveva. If you could tell us what was the work advance, ideally in percentage of completion that you had until the moment?

Well, I will answer regarding San Lorenzo, perhaps Fernando could add something regarding the renewable one. In the case of San Lorenzo, the percentage of -- I mean, we -- as usual as happened in all the construction involved in terms of infrastructure due to the quarantine, the work there was stopped when the quarantine was disposed by the government. The work has been resumed at the end of April, as we mentioned, when we described the current situation. But of course, it's advancing subject to a new and quite strict protocol in terms of safety. This means that the work is going ahead at a very slow pace compared with the (inaudible) we have before the quarantine. What we expect perhaps -- it's very difficult to, I mean, to forecast the exact timetable for the project today, given the situation, the situation is changing every day. But we expect at least, I mean, a date of more than 3 months, perhaps the first quarter next year as a kind of completion of the project given the how fast we are advancing today.

Okay, perfect.

Fernando can you -- sorry, I don't know if I was clear or did you have another question regarding San Lorenzo specifically?

No, no, no. I was -- that's perfect. We can move to La Genoveva.

Okay. Thank you for the question. In the case of La Genoveva, it's simpler, of course, closer than Terminal 6 which is a bigger one. But as Jorge mentioned, we had started the construction in late April. So right now, we are in the phase of mounting the generators. We are mounting not at the same pace as we did before the quarantine because, as you know, the measures of the government and the provincial government and the local governments are taking a very, very strict, especially in the place of -- in the region of Santa Fe and (inaudible) region. In (inaudible) region in another in green firm that are under construction, they appear 3 cases of coronavirus. So the authorities are very, very strict right now there, but instead of allowing the construction are getting more strict in terms of having the people in their towns. So it's not easy, but we are still working on the construction. We are mounting the generators. We have -- we have been mounting, I think, between 3 or 4 of the total 21 that we have in this new firm. So we expect that if we can continue doing that without any case of coronavirus and without any restriction from the local authorities, additional that we are suffering now, we can finish around third quarter this year -- the La Genoveva power plant at the end of the third quarter.

Okay. Perfect. And my third question is related to -- on the financial side. How are your conversations with banks going regarding revolving some of your loans and specifically the larger syndicated loan of around $180 million?

Okay. In terms of short-term debt, we are not facing any problem. We have all our lines with banks available. In fact, we don't have a lot of debt in the short term. In the case of the big one loan that you have mentioned, the one for the acquisition of the Brigadier López, the first (inaudible). So the capital are set for December this year. So we have a lot of time. We are talking with them. And we are -- of course, we need to wait because as Jorge mentioned, right now, we are not suffering in a strong problems with the quarantine because our income are coming normally. Of course, we received some reductions for the production. But as you know, our income is mainly driven by the availability of our units. So we are analyzing opportunities to renegotiate that loan, but it's not urgent for us to advance right now. Of course, we are talking with the banks. But we are not in a position that we need urgent renegotiate that because we don't have the cash to pay. So we are talking with them but we are analyzing the future of our income and work flow. And right now, it's not that urgent.

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

Just -- you mentioned the potential for weaker demand in the release related to COVID-19 in the market in Argentina. And I was just wondering what you -- what effects this could potentially have on your business in terms of overall dispatch and such? And what -- basically, just how you're seeing the next couple of quarters in terms of effects coming from COVID-19?

Frank, thank you for your question. Perhaps it's a different situation if you compare Argentina with other more industrialized countries. In Argentina specifically, the demand has decreased 11.5%. So it's not such a huge reduction in terms of demand. Perhaps the most important effect because of the coronavirus was mostly related with collection and that kind of is not so much with demand. So we don't see -- I mean, perhaps somehow would affect our dispatch because of that situation, but we don't see a dramatic reduction in terms of production. Our combine cycle in quarter, for sure, would be in dispatch, our -- probably our income is out of dispatch because of this impact. But perhaps, there are other factors, the fact that our transformer in Mendoza is out of service. That kind of things are more important in terms of projecting our results for this year than the coronavirus. Perhaps, the most important thing regarding this situation is with target under construction and collection. We don't have to be either being in the market in order to get more money, increase subsidy 3x the subsidy that we were sending to the market in order to keep all the collection change active and maintain all the systems operating. So it's more related with collection than with demand generation. And in fact, all the renewable projects had priority of dispatch, so they are not going to be affected. Our common cycle is quite efficient in dispatch. Our cogeneration investment is operating and perhaps it is possible there will be reduction with the other more -- the older turbines. In terms of remuneration it was mentioned in our statement, it's not so much affected because more -- part of the remuneration is based on capacity, not so much on production. So we don't see a direct impact in terms of production or remuneration but more related with collection perhaps in higher subsidy needed from the government in order to keep collection operating and active.

Okay. And have you seen an increase in the time it takes for you to get compensated by CAMMESA?

Not so much. In fact, the last month, they have reduced the time. I mean, at the beginning of the quarantine, it was an impact, it was a delay, but now the government is sort of going back on track. So not so much affected because of this. The problem was before that. I mean, I guess the delay in collection was mostly related with the change in government in December than because of the quarantine. But during the quarantine, it was sort of maintained at the same pace of payments that we had before.

Our next question comes from Antonella Rapuano with Santander.

I would like to make 2 questions, if I may. The first one is regarding the FONINVEMEM program and specifically on the thermal plant Belgrano and San Martín. I was wondering if you could give us an update on the transfers of the assets to the trust, where you have material interest. And when do you expect to start registering this equity income in your financial statement? And also, if you have any remaining payments for the FONINVEMEM from Belgrano and San Martín for the remaining of the year? Or this payment have already been solved, the receivable payments, I am referring to?

Okay. Fernando, can you answer the question?

Yes. Okay. No problem. In terms of receivables, we already collect the full balance of the receivables from San Martín and Belgrano power plants. So this is completely set on time. And in terms of the transfer of the assets, we have fulfilled all the procedures the agreement requires in terms of the government commitment in the operating companies that was established in the agreements -- in the regional agreements. So we performed the shareholders' meeting for the 2 companies in order to give the opportunity to the government to enter. We did it in the terms that the government asked in the terms of participation. As you know, we have some discussions about that, we think that the participation of the government needs to be reduced in terms of how much they contribute to the construction of the power plant. But in order to not use the opportunity to (inaudible) the power plants in the operating companies, we agree to allow them to enter in the proportion that they want, reserving our rights to reclaim the difference in further movements or further actions. So we did that. We comply with the obligation, and the government and the (inaudible) which is the ones that caps the power plants in the trustee are analyzing all the presentation and requiring some additional information. And I think we are -- they are doing all the analysis in order to transfer the assets to the company. We don't know when this will happen, but we think that needs to be, I don't know, in the next months. So whenever this happens, we are going to have a complete -- so whenever this happens, we're going to recognize the income in our balance sheets.

Right. And could you -- just a follow-up. Could you give us some measure of the magnitude of this income from Belgrano and San Martín?

Well, we need to perform evaluation, very difficult because we need to finish this issue with the participation. And after that, we need to perform evaluation for sure to incorporate these assets in our balance sheet. I don't know, right now, I don't have evaluation for sure yet. But you can do it thinking that these power plants receive the same remuneration to combine cycle right now in the Resolution 31. So more or less, these will be the income that this power plants will receive from now on.

Sure. Great. And my other question is regarding the PPI, the contract capacity. If you see any risk of changes in prices may be translated to pesos in the case of sharp depreciation of the local currency?

You see. I mean, regarding the PPA?

Yes.

No. We don't see any -- a month ago or something at least it was in the press and rumors regarding this, but we don't see a clear risk to have a specification related to the PPA.

And our next question is a follow from Ezequiel Fernández with [Balanz] Capital.

Sorry. And 2 very quick follow-ups. The first one is, are you having access to the official FX market for debt repayment and imports without issues? And if you could tell us, please, about what was the size of the Central Vuelta de Obligado receivable outstanding at the end of March 2020?

Okay. The first one, we are not facing any problem to access to the fixed market to pay imports or to pay debt. That's the thing that we are seeing in the case of the renewable projects and in the case of transportation for Terminal 6 and the renewable process, we are not facing any kind of problem in terms of lag or question regarding to the Central Bank. So we are doing normally. Of course, we need to respect the times and the norms and regulations but not more than that.

In terms of the amount of the CVO receivables outstanding at March, the number is $440 million, which is the normal that's expected in the collections. During the last year and this year, we collect the normal amounts and the (inaudible) amounts. So this is the amount that needs to be outstanding at that time.

And our next question comes from Robert (inaudible) with Morgan Stanley.

Sorry, I was on mute. Can you give me any color on how -- what percentage would you expect the overall demand will be on the second quarter and the following quarters this year? And how will you see the liquidity of the company in the -- by the end of the year? Do you expect any to have any extra -- to ask for any extra debt or something like that?

I'm sorry, the first part of your question?

Sorry, I couldn't understand that part.

So I think, he asked about how the demand is going to evolve in the second quarter and the third quarter? I think that what your question. Correct?

Yes.

Yes, yes, understood. Well, more or less what I mentioned, I mean, the first quarter was unaffected. The fact that the quarantine was issued government at the end of March, March 20 to be more precise. And before that, we had an increase of almost 18% in terms of demand until that day. And after that, we had a reduction. In the second quarter, what we expect is more or less a 11% decrease of the demand compared with the same demand -- with the same month last year. So this is the whole impact that we expect and what we are seeing today. The government now is kind of relaxing the quarantine. So what we expect for the coming months unless we have a back in terms of quarantine because of the increase of cases of the virus or the disease. Unless we have that kind of situation what we expect is an increase in demand and growing back to normality to say so. So the worst-case would be 10% or 11%.

Okay.

I don't remember the second part of the question. Yes, I think you made those 2 questions.

Yes. How would you see the liquidity of the company in the remaining of the year, you expect to have any more CapEx needs that will require to have some -- to the company to enter into new debts or anything like that?

Okay, okay. Right now, we have sufficient liquidity to make the CapEx that we remain for the project Terminal 6 and the renewables one, the Genoveva I, sorry. And for that, we are not thinking to acquire some additional debt, long-term debt for sure, right now, but it's not the current moment. We are thinking in some liability management. We see some opportunities in the local markets, not for the big amounts, but we are seeing some opportunities in local markets, perhaps going to link initials that can give us some opportunities to acquire some additional debt at lower interest rates, which is perhaps something that we can do in terms of liability management. But we are not thinking to -- we don't need to do, for sure, in terms of to close the CapEx that we are doing right now. We have the liquidity, as Jorge mentioned, the impact of the coronavirus in our cash flow is not so relevant right now. The rates in CAMMESA are more or less stable. So we have some income and flow to cover all the CapEx that we still are performing for Terminal 6 and Genoveva I. So -- and in case of Genoveva I, we have the loan from the IFC remained in -- a big portion of this loan has remained in our cash and we can apply -- of course, we're going to apply to the Capex. So we are not thinking in a huge additional debt. We can do some, as I mentioned, from liability management taking an advantage of regarding these local funds available, especially for projects, but this is, I think, is going to slow the rest of the year for so forth. We're not planning to do international omission or important omission of that in the next month. We're going to see, as I mentioned, we're going to see in December for the payment of the syndicated loan, which are more or less $36 million when -- if we can do some liability management there, but not for CapEx.

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

Okay. Thank you, everyone, for your interest in Central Puerto. We encourage you to call us at any time for any information you may need. Thank you, and have a good day.

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