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Edited Transcript of CEPU4.BA earnings conference call or presentation 13-Aug-19 5:00pm GMT

Q2 2019 Central Puerto SA Earnings Call

Buenos Aires, Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Central Puerto SA earnings conference call or presentation Tuesday, August 13, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jorge Anibal Rauber

Central Puerto S.A. - CEO & Vice Chairman of the Board

* Tomás Arshak Daghlian

Central Puerto S.A. - IR Officer

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Conference Call Participants

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* Arthur Everett Byrnes

Deltec Asset Management, LLC - Senior MD

* Ezequiel Fernández López

CrediCorp Capital, Research Division - VP of Utilities

* Frank J. McGann

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Central Puerto conference call following the results announcement for the quarter ended on June 30, 2019. (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 website 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 from Central Puerto is Jorge Rauber, Chief Executive Officer; Fernando Bonnet, Chief Financial Officer; (inaudible), Corporate Finance Manager; and Tomás Daghlian, Investor Relations officer.

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

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Jorge Anibal Rauber, Central Puerto S.A. - CEO & Vice Chairman of the Board [2]

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Thank you. We are joining you today with our team from Buenos Aires, Argentina to report on the results of the second quarter 2019 and to answer any questions you may have regarding the current situation. Yesterday was a very difficult time for our company and the Argentina Stock Market in general. We want to ensure you that our team is closely looking at the situation in order to mitigate any impact on the recent events. That said, I will refer first to the operating figures of the quarter and then continue with some recent news regarding Central Puerto. Finally, Tomás will analyze the financial results.

In the second quarter, we generated 3.3 terawatt-hours of electricity, a 4% increase as compared to the same quarter 2018. This increase was mainly due to a 16% increase in thermal generation, which in the second quarter 2018 was affected by the maintenance of our Central Puerto common cycle and 147 gigawatt-hour of additional energy from the wind farms, Achiras and La Castellana, which started operating during the third quarter 2018. This increase was partially offset by a 36% decrease in energy generation from hydropower plants due to less water flow.

For the general market, electricity generation during the quarter decreased 9.1% compared to the same period of the previous year, according to CAMMESA, mainly due to a decrease in demand by residential and industrial customers. Our thermal units reached 92% of availability in the period, increasing 13 percentage point from the level of time during the second quarter 2018. As a comparison, the average availability of the thermal units during the second quarter 2019 was 80% according to CAMMESA. We continued with the construction of our thermal and renewable energy projects. Regarding Luján de Cuyo, we expect that the unit to start commercial operations in November this year and the Terminal 6 San Lorenzo project to start the operation during the second quarter of 2020.

We have good advances in our renewable energy projects too. On July 16, the wind farm La Castellana II commenced its operations and we expect the same for La Genoveva II during the next weeks. Regarding the Manque projects, we have recently changed the schedule for the construction and we're expected to start the commercial operation on November this year instead of September as originally planned. The budget for this project remain the same. The rest of the renewable energy projects have also good advances in their construction schedules and are within budget as well.

Regarding the projects under the term market regulatory framework, it's important to mention that we have already signed contracts for 79% of our expected electricity generation from them. These are long-term bilateral contracts entered into directly with our customers with prices set in U.S. dollars.

During this quarter, we signed the transfer of the Brigadier López power plant adding 208-megawatt to our current installed capacity. The result IEASA Bid to the Brigadier López plant has been included on Central Puerto's income statement starting from June 2018.

Finally, we continue with the collection of the monthly installments of the Vuelta de Obligado agreement as scheduled. Additionally, during June and July, we collected ARS 2,562 million and ARS 825 million, including value-added tax related to the installments corresponding to the first to 10th installment of this agreement, respectively, which totaled approximately equivalent of ARS 57.2 million and ARS 19.8 million using the exchange rate up to date of each collection.

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

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Tomás Arshak Daghlian, Central Puerto S.A. - IR Officer [3]

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Thank you, Jorge. Before starting, it's worth noting that the financial statements as of and for the quarter ended on June 30, 2019, include the effects of the inflation adjustment, applying international accounting standard #29. Accordingly, the financial figures that I will mention have been stated in the terms of Argentine pesos of the end of the reporting period, including the data from the previous periods and the growth comparisons here mentioned. Consequently, the comparative information included in the financial statements for the quarter ended on June 30, 2018, is not comparable to the financial statements previously published by us.

The results achieved during the second quarter of 2019 are in line with our expectations, considering the reduction in the power and energy prices for the units under Energía Base regulatory framework. Revenues from continuing operations increased 74% to ARS 5.8 billion in the second quarter. Mainly driven by, one, an increase in energy generated during the second quarter of 2019 of 4% as compared to the second quarter of 2018; and 13 percentage point increase in availability of thermal units under Energía Base, which was 92% during the second quarter of 2019. Two, an increase in exchange rate for the quarter higher than the inflation for the period, which impacted tariffs set in U.S. dollars in terms of Argentine pesos current at the end of the reporting period. As a reference, the average foreign exchange rate during the second quarter increased 87% compared to the second quarter of 2018. While the inflation rate for the 12-month period ended on June 30, 2019, was 56%. Three, an increase in fuel remuneration for units under Energía Base, which amounted to ARS 1.8 billion during the second quarter of 2019, mainly because of income in accordance to Resolution 70 in some of the units under the Energía Base regulatory framework compared to ARS 202 million during the second quarter of 2018.

And four, a 445% increase in sales under contracts, which amounted to ARS 546 million during the second quarter of 2019 as compared to ARS 1 million in the second quarter of 2018, mainly due to the energy generated off wind farms Achiras and La Castellana I, which started operations during the third quarter of 2018 and revenues related to the recently acquired Brigadier López plant accrued during June 2019, as Jorge mentioned before, which amounted to ARS 344 million.

It's worth noting that according to the transfer contract, the economic impacts of these transaction were considered as of April 1, 2019. However, applying the accounting standards, the results associated to Brigadier López plant have been included on Central Puerto's income statement starting on June 2019, since the results of April and May were considered as part of a fair value of the liabilities and assets acquired. This increase in revenues was partially offset by the decrease in energy and power prices for units under the Energía Base regulatory framework, established by Resolution 1, as Jorge mentioned before, starting on March 1, 2019.

Our gross profit in the quarter increased 64%. This increase was due to the above-mentioned revenues and was partially offset by an increase in the cost of sales that totaled ARS 3.3 billion compared to ARS 1.8 billion in the second quarter of 2018. The increase in the cost of sales was mainly driven by first, an increase in the purchase of fuel and related concepts, which totaled ARS 1.8 billion during the second quarter of 2019, as compared to ARS 0.4 billion in the second quarter of 2018, due to, a, the cost of self-supplied fuel purchased in accordance to Resolution 70, it was mentioned before; and b, a higher price of natural gas used in the units that generate steam or electric energy under the Energía Plus framework, mainly due to an increase in the exchange rate for the second quarter of 2019, which was higher than the inflation for the period, which impacted the U.S. dollar-denominated prices of natural gas in terms of the Argentine pesos.

As a reference, the average foreign exchange rate during the second quarter of 2019 increased 87% compared to the second quarter of 2018, while inflation rate for the 12-month period ended on June 30, 2019, was 56%.

And second, an 8% increase in nonfuel-related cost of production, which totaled ARS 1.5 billion in the second quarter of 2019 as compared to ARS 1.4 billion in the second quarter of 2018, mainly due to, a, a 16% increase in compensation to employees and a 150% increase in maintenance cost, which was partially offset by a 31% decrease in fees and compensation for services.

Operating income before other operating results net increased 86% to ARS 2.1 billion compared to ARS 1.1 billion in the second quarter of 2019. The increase was due to the above-mentioned increase in gross profit and a less-than-proportional increase in administrative and selling expenses that totaled ARS 421 million, which represents a 3% increase as compared to ARS 409 million in the second quarter of 2018.

Our adjusted EBITDA was around ARS 3.1 billion, which includes ARS 377 million in interest on foreign exchange difference associated with the FONI and similar programs trade receivables, which are denominated in U.S. dollars. Without taking into account this effect, our adjusted EBITDA during the second quarter of 2019 was ARS 2.8 billion, an increase of 55% as compared to ARS 1.8 billion obtained in the same period of 2018. This increase was mainly driven by the increase in gross profit mentioned above.

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 second quarter, we collected ARS 3 billion from the FONI trade receivables, including the collections from CVO mentioned by Jorge earlier. Consolidated net income was ARS 1.4 billion in the second quarter of 2019. In addition to the above-mentioned factors, net income was, a, positively impacted by lower financial expenses that amounted to ARS 590 million in the second quarter of 2019 compared to ARS 2.1 billion in the second quarter of 2018; and b, negatively impacted by a lower financial income, which amounted to ARS 556 million during the second quarter of 2019 compared to ARS 1.4 billion in the second quarter of 2018. In each case -- in both cases in A and B, mainly due to the foreign exchange difference of our U.S. dollar-denominated debt and financial assets, respectively, which excludes FONI and other trade receivables.

Additionally, the results from the share of profit of associated decreases -- decreased to ARS 240 million in the second quarter of 2019 as compared to ARS 484 million in the second quarter of 2018, mainly due to weaker results from operations of Ecogas.

Finally, results for exposure to the exchange rate -- to the exchange in the purchasing power of currency totaled ARS 1.2 billion during the second quarter of 2019, as compared to ARS 770 million in the second quarter of 2018. During the second quarter of 2019, we received loans to finance our expansion projects. We received ARS 100 million for the acquisition of Brigadier López plant, ARS 44 million for the Luján de Cuyo project, ARS 37.5 million for La Genoveva II and ARS 12.5 million for La Castellana II. We used the proceeds of these loans for the expansion of our current installed capacity, including the acquisition of the Brigadier López plant and the thermal and renewable energy projects.

Thank you. And now, we invite you to ask any questions you all want to.

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Questions and Answers

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Operator [1]

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

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Frank J. McGann, BofA Merrill Lynch, Research Division - MD [2]

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I was just wondering how you're thinking about your investment program? And as you're looking at the uncertain environment here, the market itself has already been somewhat, I guess, soft because of a little bit of excess capacity. But I was wondering if you had any just thoughts on how the current uncertainty and perhaps your views on possible policy going forward could impact those investment plans?

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Jorge Anibal Rauber, Central Puerto S.A. - CEO & Vice Chairman of the Board [3]

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Okay. Thanks, Frank. I will answer this question as long as I can. The first thing to say is that we assume, our expectation is that the government changes expected will not change the regulation regarding the PPAs, which are currently setting us. All our expansion plan is based on PPAs paid in dollars and we don't expect any kind of change, but why? Because it's what they did in the past. In fact, they were in power for a long time and always complied with the rules regarding the PPA. So our expansion plan, the units that we are building today, the renewable projects and the power plants will continue as basically as expected without any kind of change. Probably the regulation will change or for the existing plants perhaps there is some risk of specification, but that will just target, which is called the legacy capacity and not the expansion of all the units of the system. Change in regulation regarding the PPAs will have a very bad impact on the market. There are a lot of projects under construction and the change in regulation regarding this will be a very bad sign for the market, and we don't expect them to take that kind of measure.

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Frank J. McGann, BofA Merrill Lynch, Research Division - MD [4]

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Okay. If I could just follow up, in terms of FONINVEMEM payments, is it correct to say that in the past since they started that plan or de Kirchner governments anyways, that -- and they paid all the amounts that were due at the time that, that you would not expect any change in payments that would come from remuneration from that plant?

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Jorge Anibal Rauber, Central Puerto S.A. - CEO & Vice Chairman of the Board [5]

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No, for sure. They created that scheme. So these -- I mean, our contract was signed with them, and for the years that we were related to that kind of programs, with that government, they always comply with the installments. They duly paid all the amounts that were agreed. So we don't expect changes regarding these. I mean it was a project created by them.

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Unidentified Company Representative, [6]

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Yes. And -- but I think to consider regarding that is the amount that is still unpaid is not a significant amount for the government. This is a very small portion. We have in our balance sheet $400-and-something million and we are the biggest. So the remaining portion of that FONINVEMEM scheme is not relevant for the government.

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Operator [7]

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(Operator Instructions) Our next question today will come from Ezequiel Fernández of CrediCorp.

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Ezequiel Fernández López, CrediCorp Capital, Research Division - VP of Utilities [8]

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This is Ezequiel Fernández from CreditCorp Capital. Couple of questions have been already addressed. I'd like to go back to the -- on FONINVEMEM receivable. If you can give us a little bit more color on what is the legal structure of the agreement? Is it a contract between private parties? Any sense of what could make this solid would be helpful?

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Jorge Anibal Rauber, Central Puerto S.A. - CEO & Vice Chairman of the Board [9]

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Okay. Basically -- I think, Ezequiel, is basically agreement between the government and private jurators in order to invest and account receivables, which were outstanding at that time. So it's basically these. I mean, after that, it was implemented through the trust, but it's basically a agreement between the government and the private jurators signed by the -- I mean the previous administration, which was previous to Macri, de Kirchner administration.

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Ezequiel Fernández López, CrediCorp Capital, Research Division - VP of Utilities [10]

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Yes. I am more or less aware of the legacy history with the FONINVEMEM, but I wanted to know if the contract is precisely with the federal government or being with CAMMESA, it can be seen as a contract with -- between private entities or not?

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Jorge Anibal Rauber, Central Puerto S.A. - CEO & Vice Chairman of the Board [11]

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I mean our agreement is directly with the government. After that it was implemented through an agreement -- a contract between a trust and CAMMESA in order just to collect the money that after that is sent to pay us. But our agreement is with the government.

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Operator [12]

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(Operator Instructions) We have a question from Arthur Byrnes of Deltec Asset Management.

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Arthur Everett Byrnes, Deltec Asset Management, LLC - Senior MD [13]

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I wanted to ask a question, assuming your revenues continue to be honored going forward, does the 20-odd percent devaluation of the currency effect in any way your ability to repay debt?

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Unidentified Company Representative, [14]

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No. No. We think not, no, because our debt is very small in comparison with our revenues today. We are below 1.5 -- 1.4x EBITDA. So we don't see any problem to repay our debt.

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Tomás Arshak Daghlian, Central Puerto S.A. - IR Officer [15]

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And besides that we expect that for next year. 65% of our EBITDA will come from the PPA contracts, which are not subject to changes in their products and the currency in which they are set. So we think that we are in a good position and besides, we'll have the FONINVEMEM cash flow.

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Operator [16]

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Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Rauber for closing remarks.

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Jorge Anibal Rauber, Central Puerto S.A. - CEO & Vice Chairman of the Board [17]

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

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Operator [18]

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