Central Puerto S.A. (CEPU) Q2 2020 Earnings Call Transcript

Central Puerto S.A. (NYSE: CEPU) Q2 2020 earnings call dated Aug. 27, 2020

Corporate Participants:

Jorge Anibal Rauber — Chief Executive Officer

Fernando Roberto Bonnet — Chief Operating Officer

Analysts:

Frank McGann — Bank of America — Analyst

Ezequiel Fernandez — Balance Capital — Analyst

Martin Wesenack — AR Partners — Analyst

Presentation:

Operator

Good morning, and welcome to the Central Puerto Conference Call following the results announcement for the quarter ended on June 30, 2020. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. 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 of 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 IFRS, and stated in Argentinean 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 in 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 security 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 today from Central Puerto is Jorge Rauber, Chief Executive Officer; Fernando Bonnet, Chief Operating Officer; Milagros Grande, Financial Manager; and Tomas Daghlian, Investor Relations Officer.

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

Jorge Anibal Rauber — Chief Executive Officer

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, and analyze the operative figures of the quarter. Fernando will then analysis the financial results of the quarter and will 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 or quarantine have remained in place, although some degree of flexible [Phonetic] 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% 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 not affected 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 fix power remuneration, which is not related to the energy generation of the units.

Additionally, when demand decreases, the unit that stop generating electricity first tend to be the older inefficient ones. This units receive a lower remuneration under Energia 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 [Indecipherable] unit. In 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 to 185 days.

Regarding the regulatory framework for the Energia Base units. As we mentioned in our prior calls, on February 27, 2002 [Phonetic] the Secretariat of Energy issued Resolution 31, which changed the prices for the unit, 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 the segment authorized the purchase of the minority shareholder stake of CP Renovables, holding Central Puerto now 100% stake in the company. CP Renovables, owns through special purpose vehicle subsidiaries five 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 Argentine matrix. In 2018 [Phonetic], renewable generation in Argentina represented 5.8% of total production and is expected to increase significantly in 2020 in 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 Lujan 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 store in our Buenos Aires plan, the unit became online again. The downtime implied a reduction of energy generation and power availability, which had a significant 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, availability dropped to 82% as a consequence of the damage in the Lujan de Cuyo combined cycle.

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

Fernando Roberto Bonnet — Chief Operating Officer

Thank you, Jorge. I will first refer to 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 ARS7.2 billion in the quarter, 14% decrease compared to ARS8.3 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.

With the new regulation that centralized the fuel purchase for all generators in CAMMESA. [Indecipherable] represented ARS2.3 billion variation [Phonetic] during the second quarter. Excluding this effect, revenues for the second quarter of 2020 were ARS7.2 billion, compared to ARS6 billion in the second quarter of 2019. This increase was mainly driven by an increase in sales under contracts, which amounts to ARS3 billion during the second quarter of 2020, as compared to ARS7.8 [Phonetic] billion in the same period of the previous year, mainly due to the revenues related to Brigadier Lopez power plant, which was acquired in June 2019, the new Lujan de Cuyo cogeneration unit, which has 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. This increase was partially offset by a decrease in sales under Energia Base framework of ARS1.9 billion due to a decrease in prices for units under Energia Base Regulatory framework established by Resolution 31, 2020 in force since February 1, 2020. 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, and we can see the changes in our EBITDA, which was around ARS7.6 billion in the second quarter of 2020, compared to ARS4.4 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 as mentioned before and was partially improved by a 28% decrease in the cost of sales that totaled ARS3.4 billion compared to ARS4.7 billion in the same period of 2019. The decrease in the cost of sales was primarily driven by a 79% decrease in the purchase of fuel and related costs due to continuation of these operations in this quarter according to the new regulation. This was partially offset by 36% increase in non-fuel related costs of production, mainly due to an increase in our installed capacity following the acquisition of Brigadier Lopez and the COD of the new thermal and new 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 ARS2.2 billion higher in the quarter, mainly due to the foreign exchange difference on operation — operating assets, mainly driven by Central Vuelta de Obligado 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 of fair value of certain gas turbines that we held in storage.

And going to Page 8, the consolidated net income was ARS2.2 billion, compared to ARS1.9 billion in the same period of 2019. In addition to the factors mentioned before, the net income was mainly affected by a higher financial expenses, which increased ARS4.3 billion due to the loans obtained for the thermal and renewable energy expansion projects and the decision of the Brigadier Lopez power plant, and a lower share of profit associates mainly due to a weaker results from Ecogas. This effect was — were partially compensated by a favorable net monetary position during the quarter resulting in a gain in real terms, while the situation was the opposite during the second quarter of 2019 and ARS0.6 billion [Phonetic] 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 ARS8.2 billion. This include ARS1.3 billion in collection from CVO instalments, which is not contained in the EBITDA. The cash flow from operations was partially offset by ARS3 billion capex invested in the expansion projects and ARS4.2 billion used in financing activities. Recent news on [Indecipherable] security regulator approve are showing program for our domestic bond issuance. The commission by CP Manque and CP Olivos, two wholly owned subsidiaries of CP Renovables, for up to ARS18 [Phonetic] million. This is the first step for bond issuance to get long term financing for these projects.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Frank McGann of Bank of America. Please go ahead.

Frank McGann — Bank of America — Analyst

Yes, thank you very much. Just two 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 effect customer cash flows? Thanks.

Jorge Anibal Rauber — Chief Executive Officer

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 months in the last year. So the month start to recovery, obviously the industrial demand is below the level it had the last year. The increase is mostly driven by the preferential [Phonetic] demand, but we see I mean basically what we are operating today is our renewable plants, which have priority in terms of the patch. So they have — there are unaffected. And we are operating basically cycle — combined cycles and our cogeneration plant in Mendoza. So operations has not mainly been affected by the decrease of demand. We had in the previous two months or three 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 [Indecipherable] 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 happen in the market is that the government has intervened increase in subsidies. So even though the distribution companies are paying below the 100%. They are being more or less in average at 17% of the total bill, they are receiving month after month. The government has intervened in order to keep paying normal. So we have not been affected by the current time since it’s started. In fact, today we have a payment, which is even a little better than the one we have in March, for example.

Frank McGann — Bank of America — Analyst

Okay, great. Thank you very much.

Jorge Anibal Rauber — Chief Executive Officer

You’re welcome.

Operator

The next question is from Ezequiel Fernandez of Balance. Please go ahead.

Ezequiel Fernandez — Balance Capital — Analyst

Good morning, everybody. Thank you for the time and the materials. I have four questions. If you don’t mind, I would like to go one by one. The first one is related to the [Indecipherable] 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?

Jorge Anibal Rauber — Chief Executive Officer

Fernando, you want to answer?

Fernando Roberto Bonnet — Chief Operating Officer

Yes, thank you for asking. In terms of the insurance. We have an insurance that cover the property loss and the beneficial — the beneficial loss. So we are thinking that is preliminary, because we don’t have the closing [Technical Issues] but we think that we can cover the new — we are buying a new transformer, we are [Indecipherable] 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 — of the — of the cost.

In terms of beneficial loss, we have a deductible there of 30 days and total time that the unit was out was around 2.5 months or three months. So, we recover these additional one and half months or two months of loss or profit. That is the situation with the insurance. Right now of course, we need to close the incident. We then — so we have — and report that say that this was an incident powered by the secured — by the insurance, but we need to close the incident. I think we are going to do that in the next two months. And after that, and you have some delay on the payment around three months. I think we recover the [Indecipherable] in the mix. We have at the end of the year and the beginning of the next one.

Ezequiel Fernandez — Balance Capital — Analyst

Okay, perfect. I don’t know if you can comment on a monetary value for all that or is it too early?

Fernando Roberto Bonnet — Chief Operating Officer

It’s too early. So we now — we can do some numbers together. Loss of profit was around [Indecipherable] or less and the total loss of profit and the cost of the new equipment is around $1.6 million. So these are the cost.

Ezequiel Fernandez — Balance Capital — Analyst

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 for Lorenzo?

Jorge Anibal Rauber — Chief Executive Officer

Okay. For La Genoveva, we are almost finished. We have this around — I know something like 15, between $15 million and $18 million. And we are very, very close to finish. In Terminal 6 in San Lorenzo, is more open because issue also we have an additional cost that every day — I don’t know, problems in terms of COVID and new regulation. So it’s very difficult to say the final number or an exact number, but will be around I think in the range of $50 million, $55 million.

Ezequiel Fernandez — Balance Capital — Analyst

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

Jorge Anibal Rauber — Chief Executive Officer

I don’t know, if you want to.

Fernando Roberto Bonnet — Chief Operating Officer

Okay. Well, 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 permanently evaluating the moment to go ahead with the — with the closing of that cycle. And we haven’t started, 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 given priority to closing the plants we are currently in construction.

Ezequiel Fernandez — Balance Capital — Analyst

Great, thank you. My final question is related to 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?

Jorge Anibal Rauber — Chief Executive Officer

Sorry, could you repeat?

Ezequiel Fernandez — Balance Capital — Analyst

Yeah, the outstanding amount of the Central Vuelta de Obligado [Indecipherable] at the end of the second quarter, was it 450 million, is that correct?

Jorge Anibal Rauber — Chief Executive Officer

Yes. Million dollars.

Ezequiel Fernandez — Balance Capital — Analyst

That’s all from my side. Thank you very much.

Jorge Anibal Rauber — Chief Executive Officer

You’re welcome.

Operator

[Operator Instructions] The next question comes from Martin [Phonetic] Wesenack of AR Partners. Please go ahead.

Martin Wesenack — AR Partners — Analyst

Hey, good morning. I wanted thank you first for your — for the call. I have three questions, if you don’t mind. I will say them now. First, was the purchase of the 30% of CPR you set in the second quarter of cash flow? Then, if we have any news related with the progress in [Indecipherable], particularly I wanted 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 units in Lujan de Cuyo?

Jorge Anibal Rauber — Chief Executive Officer

Okay. I know for the last, I start with the last one. The beneficial lost was around $6 million, $6.2 million in the — in the — total beneficial loss, but we have an deductible for the insurance of one month. So the recovery will be less than that of course. And I was just in the last one, the other one was around — was about Genoveva II or Genoveva I sorry? Genoveva I?

Martin Wesenack — AR Partners — Analyst

Yes, it is about Genoveva I. I want to know if it will be in the operations in third quarter of 2020, or in the last quarter?

Jorge Anibal Rauber — Chief Executive Officer

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

Martin Wesenack — AR Partners — Analyst

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

Jorge Anibal Rauber — Chief Executive Officer

Yes, was reflected in the second quarter. But as we pay in [Indecipherable] yes, in our financial assets we — we don’t reflect it in the cash flow itself. That you have a note in the financial statements that express that in the second quarter.

Martin Wesenack — AR Partners — Analyst

Okay. Thank you very much.

Jorge Anibal Rauber — Chief Executive Officer

You are welcome.

Operator

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

Jorge Anibal Rauber — Chief Executive Officer

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.

Operator

[Operator Closing Remarks]