Central Puerto S.A. (CEPU) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Central Puerto's Second Quarter 2024 Earnings Webcast. [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 Relations Support section on the company's corporate website at www.centralpuerto.com. In addition, a replay of today's call may be accessed by accessing the webcast link at the same section of the Central Puerto's website. Before we proceed, please be aware that all financial figures were prepared in accordance with IFRS and were converted from Argentine pesos to U.S. dollars for comparison purposes only, the exchange rate used to convert Argentine pesos to U.S. dollars with the reference exchange rate reported by the Central Bank for U.S. dollars for the end of each period. The information presented in U.S. dollars is for convenience of the reader only, and you should not consider these translations to be representations that the Argentine peso amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Finally, it is worth noting that the financial statements for the second quarter ended on June 30, 2024, include the effects of the inflation adjustments. Also, please take into consideration that certain statements made by the company during this conference call and answer to your questions may include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by industry remarks. Thus, 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. To follow 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 to simplify discussion. On the call today from Central Puerto is Fernando Bonnet, Chief Executive Officer; Enrique Terraneo, Chief Financial Officer; and Alejandro Diaz Lopez, Corporate Finance and Investor Relations Coordinator. And now I will turn the call over to Alejandro Diaz Lopez. Please, Alejandro, you may begin.

Thank you very much, and good morning to you all. Thank you for joining us today on our earnings presentation, where our management team from Buenos Aires, Argentina, is going to comment on our financial results of the second quarter of 2024. I would like to take a moment to review today's agenda. I will begin the presentation by addressing shortly the main figures of the second quarter of 2024, followed by a quick update of the regulatory framework and relevant news. Then I will show an overview of the Argentine energy sector, moving afterwards to our operational and financial results. Finally, at the end of the presentation, we will be happy to address any questions you may have. Before going into a more exhaustive analysis of our financial and operational results, let me briefly review Central Puerto's main figures for the second quarter of 2024. The group's installed capacity is 6,703 megawatts, and energy generation amounted to 4,985 gigawatt hour during the second quarter of 2024, increasing 5% year-over-year. So with these figures, Central Puerto keeps its leading position as a private power generation company, both in terms of installed capacity and energy generation through a well-diversified portfolio asset and power generation technologies. Regarding our financial results, it should be noted that after the sharp devaluation that happened on December of 2023, the exchange rate kept almost flat during the first 6 months of 2024. While inflation, though decreasing since December of 2023, was significantly higher. This dynamic generated inflation in dollars in Argentina. Due to Central Puerto's accounting methodology or items in pesos must be adjusted for inflation to the end of the quarter local currency. While the company reports its results in dollars by converting them at the end of the period official exchange rate, I mean the so-called Central Bank A-3500 exchange rate. This causes a noncash impact that affects positively or negatively as appropriate our financial metrics. Revenues for the second quarter of 2024 amounted to $168 million, increasing 15% year-over-year compared to the second quarter of 2023, while adjusted EBITDA reached $46 million, shrinking 27% versus the second quarter of 2023. Net income for the period was positive in $8 million, decreasing 49% year-over-year. Finally, after debt consolidation as a result of recent M&A's operation, loan repayments and dividend payments, net debt as of June 30, 2024, amounted to $229 million, a reduction of $58 million vis-a-vis December of 2023, showcasing a net debt-to-adjusted EBITDA ratio of 0.9x. Now let's move to the most recent regulatory updates and relevant facts. We have anticipated in our last call the Resolution 58 issued by the Secretariat of Energy on May 6th, concerning unpaid receivables with CAMMESA. Regarding this resolution, Central Puerto finally accepted on May 16th the payment mechanism by means of which trade receivables accrued in December of 2023 and January of 2024, were paid with Argentine Republic USD bonds at face value, while trade receivables accrued in February of 2024 were paid with funds available in CAMMESA's bank's account and transfer made by the National Government to the Stabilization Fund. This resolution carried out a consolidated loss of approximately ARS 20,459 million or approximately $22.5 million. However, it should be noted that this resolution did not affect the ordinary course of business of the company, its payment capacity, nor its available financing options. Regarding the situation of Piedra del Aguila hydro operation, on May 17th, the Secretariat of Energy issued Resolution 78 by means of which it extended the transition period up to December 28, 2024, as it is allowed in the concession contract. On June 14th, the Secretariat of Energy issued Resolution 99, which updated remuneration prices for energy and power sold in the spot market. Remuneration values increased 25% since June 1, 2024. So this price adjustment affects positively our revenues during the period under analysis, but just for 1 month. Then, the thermal generation tender process called Terconf was finally canceled as it was determined by Resolution 151 issued by the Secretariat of Energy on July 8th. Finally, there was another price adjustment determined recently by the Secretariat of Energy. Although it has no impact on second quarter figures, it should be noted that a 3% increase on power and energy prices was granted since August 1st by means of Resolution 193. Continuing with news and relevant facts. We have also anticipated in our last call the investment made in the mining industry. Let me recall that on April 22nd, our subsidiary, Proener, entered into a common shares subscription agreement with AbraSilver Resource Corporation by means of which it was granted with a 4% interest in the share capital of the aforementioned company, which is the owner of the silver-gold project, Diablillos, located in the Northeast region of Argentina. With regards to the investment project currently in execution, let me tell you that in the case of San Carlos solar farm, construction agreements with Shanghai Electric Power Construction Company were signed of March 27th, and works began on July 31st, being April of 2025 the COD. As of today, all permits are in place, local vendors have already initiated their purchasing process, and the site is being prepared for construction and assembly. Also, equipment is being delivered to Argentina. In the case of Brigadier Lopez Combined Cycle, as you may recall, Central Puerto is going to convert an open cycle thermal power plant with a gas turbine into a combined cycle of thermal power plant with the addition of a steam turbine. The EPC supplier, SACDE, received the notice to proceed on February 26, 2024, and the COD is scheduled for October of 2025. As of today, works on the site have already started with the assembly of pipes and wires, communication system and water intake system. It is important to notice that both projects are on schedule and on budget. Now, let's skip to the Argentine energy market picture of this quarter, that will be shown on Slides 7 and 8. By the end of the second quarter of 2024, the country's installed capacity reached 43,603 megawatts, which means an increase of 0.5% or 198 megawatts compared to the 43,405 megawatts recorded as of June 30, 2023. The variation is a combination of the installation of new power facilities and the addition of capacity, adjustment and repowering of power plants that were already in operation. The positive variation of 198 megawatts is decomposed as follows. We have an increase of 533 megawatts of renewable sources, of which 368 megawatts corresponds to wind farms, 50 megawatts of new power plants installed during the second quarter of 2024, 155 megawatts to solar plants, of which 12 megawatts corresponds to new power plants installed during the second quarter of 2024 and 9 megawatts to biogas power plants. Then we have a decrease of 335 megawatts in thermal sources, which includes a positive variation of 527 megawatts of combined cycle and a negative variation of 862 megawatts of gas and steam turbines and diesel engines. Generation rose 6% during the quarter on a year-over-year basis. The growth was basically driven by nuclear and hydro generation. Renewable generation also rose, but on a much smaller scale. Nuclear generation was significantly higher as a result of the reincorporation of Atucha II power plant, which was in maintenance shutdown during the first half of 2023. This power plant resumed operation in August of 2023. Hydro generation rate of growth was remarkable, especially in May with 60% of growth year-over-year due to the outstanding increment in the flow of rivers. We have Uruguay River with a growth of 500%, the Limay River with 82% of growth and the Collon Cura River with a 45% rate of growth. The higher supply of nuclear, hydro and renewables prompted a lower thermal dispatch and as a consequence, a lower fuel consumption was registered. 12% decrease was registered in equivalent natural gas million cubic meters. Focusing now on the demand. As you can see, electricity demand increased 2% to 33.4 terawatt hour compared to 32.9 terawatt hour recorded during the second quarter of 2023, which is basically explained by a rise in residential consumption due to weather conditions. On average, the temperature was 0.9 grades lower during the second quarter of 2024 when compared to the same period of last year. May was the coldest month during the second quarter of 2024 with temperatures 3.7 grades lower than the same month of 2023. Not surprisingly, residential consumption skyrocketed along the single month, increasing 29%. Although the electricity trade balance during the second quarter of 2024 resulted in a net import situation, exports were higher and imports lower during this quarter vis-a-vis the second quarter of 2023, thus reducing the net import balance. We now go to Slide 9 to our key operating indicators for the quarter. We can see that energy generated by Central Puerto rose 5% to 4,985 gigawatt hour compared to 4,762 gigawatt hour during the second quarter of 2023. In the second quarter of 2024, hydro energy generation from Piedra del Aguila increased 94% as compared with the second quarter of 2023, reaching 978 gigawatt hour as a direct result of higher levels of water available for generation, which was a direct consequence of higher flow of river, as we have recently explained. With regards to renewables, energy generation increased 5% in the second quarter of 2024 compared to the second quarter of 2023, being basically explained by the 48 gigawatt hour generated by Guanizuil solar farm acquired in October of 2023. Speaking specifically of wind generation, it decreased almost 8% or 30 gigawatt hour, reaching 354 gigawatt hour during the second quarter of 2024. This is primarily due to the storm that hit Bahia Blanca in December of 2023, which impacted La Castellana II. Generation from La Castellana I was also lower due to maintenance works carried on some blades. Regarding thermal generation, it decreased 7% in the second quarter of 2024 compared to the second quarter of 2023, basically as a result of lower dispatch of some units, which was a direct consequence of higher hydro and nuclear aggregate supply in the system, as we explained earlier. Regardless the lower dispatch, it should be highlighted the good availability figures for the quarter both against the market average and against Central Puerto own metrics for the second quarter of 2023. Despite the lower thermal dispatch during this quarter, I mean, the second quarter of 2024, for the whole system and Central Puerto, it should be noted the higher generation of Buenos Aires Combined Cycle as a consequence of the maintenance program carried out last year. Now let's move to our revenues breakdown. As you can see on Slide 10, this amounted to $168 million in the quarter as compared to $147 million in the same period of 2023. It should be noted that the gap between inflation and devaluation in the period has positively affected the second quarter of 2024 figures at the non-cash level due to the company's accounting methodology and the conversion into dollars is in the end of the period official exchange rate, thus making the comparison with the second quarter of 2023 more complex to analyze. Hence, having in mind this effect, the variation in revenues is a consequence mainly of a 14% or $10 million increase in spot sales, driven by a higher dispatch of Piedra del Aguila hydro power plant, higher availability of some thermal units, especially in Central Costanera and also higher generation from Buenos Aires Combined Cycle, an 8% or $5 million increase in sales under contract, mainly explained by the recent acquisition of the solar farm, Guanizuil, and higher sales of cogeneration units, basically, we are speaking of Lujan de Cuyo facility. Sales of wind farms were lower due to lower wind generation. As we mentioned before, La Castellana II was hit by a twister in December of 2023, and there was maintenance work carried on some blades in La Castellana I. Finally, there was a 42% or $3 million increase in steam sales, driven by basically higher production levels in Lujan de Cuyo facility, which is basically a consequence of higher availability of units and higher demand from YPF. On Slide 11, we can see the dynamic of our adjusted EBITDA. During the second quarter of 2024, the group's adjusted EBITDA amounted to $46 million, shrinking 27% or $17 million when compared to the $63 million in the same quarter of 2023. When analyzing the adjusted EBITDA, we can observe that the variation is mainly explained by the previously stated higher aggregate sales driven by spot sales and sales from the contract and a positive non-cash effect on the gap between currency devaluation and inflation. Then we have a 4% or $2 million decrease in cost of sales, explained basically by a reduction of some production costs, compensations to employees, consumption of materials and spare parts, and forestry and forest production services expenses, being all partially offset by a negative non-cash effect on the gap between currency devaluation and inflation. SG&A decreased 9% or $2 million, mainly by lower fees and compensation for services and lower taxes, again, being partially offset by a negative non-cash effect on the gap between currency devaluation and inflation. Finally, other operating results net in the second quarter of 2024 were lower than the second quarter of 2023 figures by 365% or $42 million, basically as a consequence of the impact of the Resolution 58. There were also lower interests from clients and lower positive FX difference and a negative non-cash effect on the gap between currency devaluation and inflation. Moving to the next slide, the consolidated net income. During the second quarter of 2024, Central Puerto's net income amounted to $8 million, decreasing 54% or $9 million on a year-over-year basis. The net income was positively affected by non-cash effects, including results generated by the change in purchasing power of the currency, variation in biological assets and lower D&A. These items were practically offset by lower FONI FX difference and interest. Then we have net financial results, which decreased $1 million year-over-year, basically by lower interest earned and lower variation in the fair value of financial assets. These items were partially offset by lower foreign exchange difference on financial liabilities, lower bank commissions and higher share of the profit of associates. Finally, on Slide 13, we have the cash flow dynamic during the 6 months of 2024. Net cash provided by operating activities was $67 million during the 6 months of 2024. This amount is mainly explained by higher income before income tax for the period and higher interest earned from clients, being all partially offset by tax payments. Then, the net cash used by investing activities was $13 million during the first 6 months of 2024. This amount is basically explained by the CapEx allocated to San Carlos and Brigadier Lopez projects, being partially offset by the sale of some financial assets. Finally, financing cash flow was negative in $66 million during the first 6 months of 2024. This is basically the result of long-term loan repayments and interest payments, dividend payment, being all partially offset by lower bank and investment account overdraft and long-term loan disbursement. Consequently, our cash position as of June 30, 2024 amounted to $5 million. If financial assets are included, our total current liquidity amounts to $158 million. With this, I conclude the presentation, and now we invite you to ask any questions to our team. Thank you very much for your attention.

[Operator Instructions] And the first question today is coming from Martin Arancet from Balanz Capital.

I have 3 questions, and I would like to run them one by one, if that's okay. The first one probably is recent, so I don't know if you might have an answer, but last Friday, the government issued a resolution to auction again some hydro plants, including Piedra del Aguila, but to prioritize them. So apparently, you will have the control of the asset until the end of 2024, after which there should be a transition period to the new owner. I was wondering what do you think about this prioritization process, if you are interested in participating probably for Piedra del Aguila or maybe another hydro plant? And also, if you consider that being the current operator of Piedra del Aguila gives you an advantage if you choose to participate?

[indiscernible] Thank you, Martin, for your question. In fact, as you mentioned, the government made an extension or used all the designing that is establishing the contract transition period and the additional year award was until the December '24 -- 2024. And today, the government issued a new decree establishing an additional extension going from December 2024 for Piedra del Aguila to December 2025. So we will be the operators for Piedra del Aguila until December 2025. There are some in the decree that established some reduction in that period if they perform the bidding process, and mentioned a new bidding process for a new 30-year concession. And before that -- December 2025, they could reduce 90 days in that period. But if they cannot perform the process, we will be operating the hydro until December 2025. Of course, as you mentioned, we are interested in continuing to participate in that bidding process -- a new bidding process for another 30-year period for Piedra del Aguila. The decree doesn't establish the process itself. They only call to Secretariat of Energy to start the process and to call -- or to start the process in 180 days by the -- it doesn't establish how will be the process with -- how will be the remuneration or the prices for this new concession period, it will be market prices or will be PPA already with the hydro. So we don't know yet the details and we need to wait until we see the details how will be that new concession period. As you know, the actual concession period was like challenging because they established market prices at the beginning and then after 7 years of market prices we will see a completely controlled prices going down and the concession was not the one that we imagined at the beginning. So for the new period and how will be our participation in this new process, we need to see the details about the remuneration and all the details about this new auction, to see it would -- but as your question, we're very interested to participate if the conditions are the correct ones. And as you mentioned, of course, we know the assets in detail. So we think that we will have an advantage there because we know the details, we have the people to operate that. So of course, as where are we, we have some advantages.

Very clear. My second question then is, well, we learned that you will be interested in moving forward with the transmission project to take energy to the mining companies in the north of the country. I was wondering if you could tell us a little bit more of this project? And also, we heard something similar with YPF loss. I don't know if they are 2 separate process or if you are considering probably moving forward together as they mentioned that they were trying to add other important participants in that project?

Yes. We are -- as you know, we are looking forward new developments in terms of renewal. We are one of the bigger players there. And we see that the demand already -- or the demand that we have right now is not enough to develop new projects. We are reaching a limit there because -- in true sense, the limits in terms of transmission lines, but limits in terms of demand, the good contracts are already set, the good players have take [ yourself ] already cover. So we think that the expansion needs to come to try to put the -- or to take these new developments -- renewable developments to the new demand. The new demand is right now the mining companies -- in the lithium mining companies in the north. The problem is they don't have a line there because they are in the 4,000 meters above the -- they are [indiscernible] in the mountain. So we need to take the renewables or the energy produced by the renewals there and the only way to do it is try to develop new transmission lines in the north. And we are trying to get the -- to collect all the demands in order to know is it strong enough to develop a project there, which is a transmission line crossing Salta and some part of Catamarca, specifically Salta Province, but entering a portion of Catamarca also. We know that YPF was at the beginning of the year talking about some projects that could be similar or could be part of the project that we are seeing in, but we don't have the opportunity to talk with YPF yet in order to analyze possible -- working together project or working together scheme. But we are open to do -- perhaps it will happen -- if they have the similar idea that we have, it will happen. But we are in early stage yet because we are trying to collect the demand and understand if it's strong enough to move forward with the project that requires a lot of engineering analysis because it's a challenging project. So we are collecting information and talking with the takers and talking with the province and try to develop the project.

Just a follow-up on that one. How would you recover the investments? Could you charge for the transmission line? Or will you have to recover that through the energy contract?

Well, the regulation is not already set. If we construct the transmission line, we will need to have a new regulation scheme because right now they are not a clear regulation path to do it. But if we can deal with the transmission line and we have the exclusivity to operate the transmission line, we will, of course, want to produce and to deliver our -- also our renewable energy. So we will see that this will imply a charge for the transmission line and also charge for the renewable energy also. So we see a combination of businesses there, not only the transmission line by itself and in the other case the renewables going separate, we will see as together business. Transmission line and the renewable procurement will be together for us.

And my final question then is, what are you expecting in terms of CapEx for the remainder of 2024 and 2025? And if you are considering tapping the debt market anytime soon?

The CapEx that we are expecting is the one that we have been carrying on, which is the Brigadier Lopez, closing the combined cycle and the project that we -- the solar project that we are developing in Salta, which is the San Carlos project. The projects will -- The 2 projects together are talking about, for the Brigadier Lopez $150 million, but more or less we have left to expand around $90 million. And in terms of San Carlos, we are talking about $15 million, is kind of like $13 million -- we've spent $13 million from now to the second or the third quarter of next year there.

[Operator Instructions] There were no other questions, and that concludes our question-and-answer session. I would like to turn the conference back over to Mr. Fernando Bonnet for any closing remarks.

Thank you to everyone for your interest in Central Puerto. We encourage you to call us for any information that you may need. Have a great day.

Thank you. This does conclude today's conference. You may disconnect at this time. Have a wonderful day. Thank you for your participation.