Central Puerto S.A. (CEPU) Q2 2019 Earnings Call Transcript

Central Puerto S.A. (CEPU 1.11%)
Q2 2019 Earnings Call
August 13, 2019, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Central Puerto conference call following the results announcement for the quarter ended on June 30, 2019. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the * key followed by 0. 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 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 Tomas Daghlian, Investor Relations Officer.

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

Jorge Rauber -- Chief Executive Officer

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 assure you that our team is closely looking at the situation in order to mitigate any impact from the recent events. That said, I will refer first to the imperative figures of the quarter and then continue with some recent news regarding Central Puerto. Finally, Tomas will analyze the financial results.

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% in thermal generation, which in the second quarter 2018 was affected by the maintenance of our Central Puerto common cycle and one 147 gigawatt hours of energy from the windfarms, Achiras and La Castallana, which started operating during the third quarter of 2018. This increase was partially offset by a 36% decrease in energy generation from hydropower plants due to less waterflow.

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 into demand by residential and industrial customers.

Our thermal units reached 92% availability in the period, increasing 13 percentage points from the level of time during the second quarter 2018. As a comparison, the average availability of the thermal units during the second quarter 2018 was 80% according to CAMMESA.

We continue with the construction of our thermal and renewable energy projects. Regarding the [inaudible], we're expecting 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 16th, the windfarm La Castellana commenced its operations and we expect the same for La Genoveva II during the next weeks. Regarding the [inaudible] projects, we have recently changed the schedule for the construction and we are expected to start commercial operation in November of this year instead of September as originally planned. The budget for this project remains the same.

The rest of the renewable energy projects have also good advances in their construction schedule 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 US dollars.

During this quarter, we signed the transfer of the Brigadier López Power Plant, adding 280 megawatts to our current install capacity. The results associated to the Brigadier López Plant has been included on Central Puerto's income statement starting in June 2018.

Finally, we continue with the collection of the installments of the Vuelto de Obligado agreement, as scheduled. Additionally, during June and July we collected 2,562 million pesos and 825 million pesos, including value added tax related to installments corresponding to the first to tenth installment of these agreements, respectively, which totaled approximately 557.2 million and 19.8 million using the exchange rate to date of each collection.

Now, I will turn the call over to Tomas, who will comment on the financial highlights of the quarter.

Tomas Daghlian -- Investor Relations Officer

Thank you, Jorge. Before starting, it's worth noting that the financial statement are for the quarter ended on June 30, 2019 include the inflation adjustment, applying International Accounting Standard No. 29. Accordingly, the financial figures that I will mention have been stated in the terms of Argentine pesos at the end of the reporting period, including the data from the previous period 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 were in line with our expectations, considering the reduction in the power and energy prices for the units under the line about the regulatory framework.

Revenues from continuing operations increased 74% to 5.8 billion pesos 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% here in the second quarter of 2019.

Two, an increasing exchange rate for the quarter, higher than inflation for the period, which impacted tariffs set in US 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 inflation rates 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 1.8 billion pesos 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 202 million during the second quarter of 2018.

And four, a 445% increase in sales under contract, which amounted to 546 million pesos during the second quarter of 2019 as compared to 1 million pesos in the second quarter of 2018, mainly due to the energy generated off windfarms Achiras and La Castallana 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 344 million.

It's worth noting that according to the transferred contracts, the economic effects of these transactions were considered as of April 1, 2019. However, applying the accounting standards, the results associated to Brigadier López Plant have been included in the third quarter's income statement, starting in June 2019. As a result, April and May were considered as part of the fair value of the liabilities and assets acquired.

This increase in revenue 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 revenue and was partially offset by an increase in the cost of sales that start out 3.3 billion compared to 1.8 billion in the second quarter of 2018.

An increase in the cost of sales was mainly driven by first, an increase in the purchase of fuel and related content, which stood out 1.8 billion in the second quarter of 2019 as compared to 0.4 billion in the second quarter of 2018 due to a) the cost of self-supplied fuel purchased in accordance to Resolution 17, as was mentioned before, and b) a higher price of natural gas used in the units that generate steam or electric energy under the Energía Base 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 US dollar-denominated prices of natural gas in terms of the Argentine peso.

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

Second, an 8% increase in non-fuel-related cost of production, which totaled 1.5 billion in the second quarter of 2019, as compared to 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 costs, which was partially offset by a 31% decrease in fees and compensation for services.

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

Our adjusted EBITDA was around 3.1 billion, which includes 377 million in interest and foreign exchange difference associated with the FONI and similar programs' strict receivables, which have been nominated in US dollars. Without taking into account these effects, our adjusted EBITDA during the second quarter of 2019 was 2.8 billion pesos, an increase of 55% as compared to 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 3 billion pesos from the FONI trade receivables, including the collections from CVO, mentioned by Jorge earlier.

Consolidated net income was 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 590 million in the second quarter of 2019 compared to 2.1 billion in the second quarter of 2018 and b) negatively impacted by lower financial income, which amounted to 556 million during the second quarter of 2019 compared to 1.4 billion in the second quarter of 2018.

In each case, in A and B, mainly it is a foreign exchange difference over US dollar-denominated debt and financial assets, respectively, which excludes FONI and other trade receivables. Additionally, the results from the share of profits of associated decreases to 240 million in the second quarter of 2019 as compared to 484 million in the second quarter of 2018, mainly due to weaker results from operations of Ecogas.

Finally, results for exposure to the exchanging of purchasing power of currency, 1.2 billion during the second quarter of 2019 as compared to 770 million in the second quarter of 2018. During the second quarter of 2019, we received loans to finance our expansion projects. We received $100 million for the acquisition of the Brigadier López Plant, $44 million for the [inaudible] project, $37.5 for La Genoveva II, and $12.5 million for La Castellana II.

We used the proceeds of these loans for the expansion of our currency sell capacity, including the acquisition of the Brigadier López Plant and the thermal and renewable energy projects.

Thank you. Now, we invite you to ask any questions.

Questions and Answers:

Operator

We will now begin the question and answer session. To ask a question, you may press * then 1 on your touch tone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause for a moment to assemble our roster.

Our first question today will come from Frank McGann of Bank of America. Please go ahead.

Frank McGann -- Bank of America -- Analyst

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

Jorge Rauber -- Chief Executive Officer

Okay. Thanks, Frank, I will answer this question. The first thing to say is that we assume that the government, if change is expected, will not change the regulation regarding the PPAs, which are currently set [inaudible]. All of our expansion plan is based on PPAs paid in dollars and we don't expect any kind of change. But why? It's what they did in the past. They were in power for a long time and all of us complied with the rules regarding the PPAs.

So, our expansion plan, the units that we are building today, the renewable projects and the power plants will continue basically as expected without any kind of change. Probably the regulation will change for the existing plans. 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 a change in regulation would be a very bad sign for the market and we don't expect them to take that kind of measure.

Frank McGann -- Bank of America -- Analyst

If I could just follow-up -- in terms of FONI payments, is it correct to say that in the past, since they've started that plan and they paid all the amounts that were due at the time, that you would not expect any changes in payments that would come from remuneration from that plan?

Jorge Rauber -- Chief Executive Officer

No, for sure. They created that scheme. Our contract was signed with them. For the years that we were related to that kind of province with that government, they always complied with the installments. They paid all the amounts that were agreed. We don't expect change regarding this. It was a project created by them.

Tomas Daghlian -- Investor Relations Officer

Another important thing regarding that to consider is the amount that is still unpaid is not a significant amount for a government. We have in our balance sheet $400-something million and we are the biggest. So, a portion of that fundamental scheme is not relevant for the government.

Frank McGann -- Bank of America -- Analyst

Thank you very much.

Operator

Again, if you would like to ask a question, please press * and then 1. Our next question today will come from Ezequiel Fernandez of Creditcorp. Please go ahead.

Ezequiel Ferndandez -- Creditcorp -- Analyst

Good day. This is Ezequiel Fernandez from Creditcorp. A couple of questions have already been addressed. Thank you. I would like to go back to the FONI receivables. If you could give us 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.

Jorge Rauber -- Chief Executive Officer

It's basically an agreement between the government and the private generators in order to invest in accounts receivables that were outstanding at that time. It's basically this. After that, it was implemented through a trust, but it's basically an agreement between the government and the private generators, the previous administration, which was previous to Macri, the Kirchner administration.

Ezequiel Ferndandez -- Creditcorp -- Analyst

I'm aware of the layoffs history, but I wanted to know if the contract is precisely with the federal government or [inaudible] contract between private entities or not.

Jorge Rauber -- Chief Executive Officer

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

Ezequiel Ferndandez -- Creditcorp -- Analyst

Okay. Great. Thank you very much.

Operator

Once again, ladies and gentlemen, if you would like to ask a question, please press * and then 1. We have a question from Arthur Byrnes of Deltec Asset Management. Please go ahead.

Arthur Byrnes -- Deltec Asset Management -- Analyst

Thank you, gentlemen. I wanted to ask the question -- assuming your revenues continue to be honored going forward, does the 25% devaluation of the currency affect in any way your ability to repay debt?

Tomas Daghlian -- Investor Relations Officer

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

Fernando Bonnet -- Chief Financial Officer

Besides that, we assess that for next year, 65% of our EBITDA will come from the PPA contracts, which are not subject to changes and the currency in which they are set. So, we think we are in a good position. Besides, we have the [inaudible] cash flow.

Arthur Byrnes -- Deltec Asset Management -- Analyst

Very good. Thank you very much.

Operator

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.

Jorge Rauber -- Chief Executive Officer

Thank you to 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 afternoon.

Operator

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

Duration: 24 minutes

Call participants:

Jorge Rauber -- Chief Executive Officer

Tomas Daghlian -- Investor Relations Officer

Fernando Bonnet -- Chief Financial Officer

Frank McGann -- Bank of America -- Analyst

Ezequiel Ferndandez -- Creditcorp -- Analyst

Arthur Byrnes -- Deltec Asset Management -- Analyst

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