Central Puerto S.A. (CEPU) Q1 2019 Earnings Call Transcript

Central Puerto S.A. (NYSE: CEPU) Q1 2019 Earnings Call May 14, 2017, 1:00 p.m. ET

Prepared Remarks:

Operator

Good afternoon, good morning, and welcome to the Central Puerto Conference Call following the results announcement for the quarter ended on March 31, 2019. All participants will be in a listen-only mode. Should 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 also note, today's 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 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 sections 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 Argentinean pesos unless otherwise noted.

On the call today from Central Puerto is Jorge Rauber, Chief Executive Officer; and Tomás Daghlian, Investor Relations Officer. And now, I will turn the call over to Jorge Rauber. Mr. Rauber, you may begin.

Jorge Rauber -- Chief Executive Officer

Thank you and welcome, everyone. We are joining you today with our team from Buenos Aires, Argentina to report the results of the first quarter 2019 and to answer any questions that you may have.

Today is with me, Tomás Daghlian, who is our Investor Relations Officer, who will replace Fernando Bonnet, our Chief Financial Officer, who was originally announced for this conference. And Tomás will be in charge of reporting and explaining the results of the company.

I will first refer to the operating figures of the quarter and then continue with some recent news regarding Central Puerto and the electric energy sector. Finally, Tomás will analyze the financial results.

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During the first quarter, we generated 3.5 terawatt hours of electricity, a 3% increase as compared to the same quarter of 2018. This increase was mainly due to a 2% increase in hydro generation and a 156-megawatt hour of additional energy from wind farms Achiras and La Castellana, which started operation during the third quarter 2018. This was partially offset by the 2% decrease in energy generation from our thermal units.

For the general market, according to CAMMESA, electricity demand during the quarter decreased 70%, due to lower temperatures during the summer and the decrease in the demand by commercial and industrial customers. On the other hand, the availability of our thermal units reached 92% in the period, which is 2% lower as compared to the first quarter 2018, but 13 percentage points higher than the average availability of the market with the same period for 2018.

During this quarter, we continued with the construction of our new projects. Regarding the thermal projects, Luján de Cuyo and Terminal 6-San Lorenzo, during the first quarter of 2018, we continuously worked for the construction of the new refrigeration units and their auxiliary equipment. And I'm pleased to confirm that both projects are within our budget.

Regarding to renewable energy projects, during the quarter, we continued with the construction of our La Genoveva project, which will provide energy through the RenovAr regulatory framework. We also continued with the construction of the wind farms La Castellana II, La Genoveva II, Manque, and Los Olivos -- the last two previously known as the Achiras II project -- and the solar farm, El Puesto, which will provide energy to private off-takers through the term market for renewable energy, MATER.

Regarding the projects under the MATER regulatory framework, it's important to mention that we have already signed contracts for 61% of our expected electricity generation from this project. It is important to note that these are long-term biannual contracts entered into directly without customers, with prices set in U.S. dollars. We believe that all these projects have set us ahead and reaffirm our position as market leaders in terms of power generation. We will continue our ability to consistently increase our installed capacity, satisfying the demand of energy for our customers.

As you may recall, on September 7th, the Secretary of Energy issued the Resolution 70 of 2018, according to which authorized generators to purchase their own fuel for the Energia Base thermal units. The generation companies that take this option have to declare a viable cost of production for each unit to CAMMESA, who pays the fuel in accordance to such declaration. According to CAMMESA proceedings, the machine with a lower variable cost of production are dispatched first and consequently have better load factors. Additionally, if a generation company purchased the fuel at a lower price than one paid by CAMMESA, this may have a result for that generator.

CAMMESA continues to supply the fuel for those generation companies that do not take this option. According to these resolutions, during the first quarter, we purchased the necessary fuel for our units, which had a positive impact for our business, especially during January and February. Going forward, we plan to continue purchasing our own fuel for our combined cycle and cogeneration units, provided that the conditions are favorable.

Regarding the Brigadier Lopez power plant, as you may recall, on February 27th, Central Puerto was notified that it had been awarded the IEASA Bid called by IEASA to acquire the Central Termoelectrica Brigadier Lopez power plant. The acquisition of the Brigadier Lopez power plant was subject to the satisfaction of the certain conditions that had to occur prior to April 1, 2018. Since some of those conditions today, the IEASA Bid has not been satisfied, Central Puerto and IEASE are negotiating, among other things, on a new closing date.

Finally, regarding the remuneration of our thermal units under the Energia Base framework, as you may recall, on March 1, 2018, the government issued a solution number one, which reduced the prices for the power and the energy produced by those machines. According to the Resolution I, these remuneration systems will have a transitional application until the following is defined and implemented, as regulators make aim at reaching an autonomous, competitive, and sustainable operation that allows the freedom of contract between supply and demand; technical, economic, and operative functioning for the integration of the different generation technologies, so as to guarantee a reliable and cost-effective system. However, we expect the effect of these changes will be offset by the income from our new renewable internal units.

Finally, regarding the trade receivables associated with Vuelta de Obligado agreement, as of today, we received the payments related to January and February 2018 corresponding to installments 11 and 12. And we continue in conversation with CAMMESA in order to collect the unpaid amounts previous to those installments.

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

Tomás Daghlian -- Investor Relations Officer

Thank you, Jorge. Before starting, it's worth noting that the financial statements as of and for the quarter ended on March 31, 2019 include the effects of inflation adjustments, applying the International Accounting Standards Number 29. Accordingly, the financial features that I will mention have been stated in terms of Argentine pesos of the end of the reporting period, including the data from previous periods and the growth comparisons here mentioned. Consequently, the comparative information, including the financial statements for the quarter ended on March 31, 2019, is not comparable to the financial statement previously published by us.

The results that we achieved during the first quarter of 2019 were very good, even when considering the reduction in the power and energy prices for the units under the Energía Base regulatory framework. Revenues from continuing operations increased 118% to 6.2 billion pesos in the first quarter, mainly driven by: one, an increasing exchange rate for the first quarter of 2019, higher than the inflation for the period, which impacted power and energy prices set in U.S. dollars, in terms of Argentine pesos current at the end of the reporting period. As a reference, during the 12-month period ended on March 31, 2019, the foreign exchange rate increased 115%, while the inflation rate for the same period was 55%.

Two, an increase in fuel remuneration for units under Energía Base regulatory framework and other related concepts, which amounted to 2.5 billion during the first quarter of 2019, mainly because of income in accordance to Resolution 70 in some of the units under this regulatory framework compared to 245 million during the first quarter of 2018.

Three, a 540% increase in sales under contract, which amounted to 518 million dollars -- Argentinian pesos, sorry -- during the first quarter 2019, as compared to 81 million in the first quarter 2018, mainly due to the energy generation of wind farms Achiras and La Castellana, which started operation during the third quarter of 2018.

And four, 83 million in the first quarter of 2019 from revenues from the CVO thermal plant management, which started operations on March 20, 2018. This 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 first quarter increased 75%. This increase was due to the above mentioned increase in revenues and was partially offset by an increase in cost of sales at total 3.7 billion compared to 1.4 billion in the first quarter of 2018. The increase in cost of sales was primarily driven by: one, an increase in the purchase of fuel and related concepts, which totaled 2.3 billion during the first quarter 2019, as compared to 0.4 billion in the first quarter of 2018, due to: A, the cost of self-supplied fuel purchased in accordance with Resolution 70, 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 regulatory framework, mainly due to an increase in the exchange rate during the last 12 months that was higher than the inflation for the period, which impacted in the U.S. dollars denominated price of natural gas, in terms of Argentine pesos current at the end of the reporting period. As a reference, during the 12-month period ended on March 31, 2019, the foreign exchange rate increased 115%, while the inflation rate for the same period was 55%.

Two, a 34% increase in non-fuel-related costs of production, which totaled 1.4 billion in the first quarter of 2019, as compared to one billion in the first quarter of 2018, mainly due to: A, a 61% increase in maintenance costs totaling 170 million, and B, a 59% increase in depreciations due to the increase in property, plant, and equipment related to the new thermal and renewable energy project, among other increases.

Operating income before other operating results net increased 84% to 2.1 billion, compared to 1.2 billion in the first quarter of 2018. This increase was due to the above-mentioned increase in gross profits and a less-than-proportional increase in administrative and selling expenses that totaled 455 million, a 42% increase as compared to 320 million in the first quarter of 2018.

Our adjusted EBITDA was around 5.5 billion, compared to 14.5 billion in the first quarter of 2018, which included 12.3 billion one-time gain from the CVO commercial approval. Without taking into account this extraordinary gains, the increase would have been 154%. This variation was driven by: A, the increase in operating results before other operating income mentioned above; B, a 2.9 billion during the first quarter 2019, as compared to 500 million in the first quarter of 2018 from the foreign exchange difference on interest accrued on trade receivables denominated in U.S dollars, mainly from the foreign trade receivables; and C, the increasing depreciation and amortization which totaled 470 million during the first quarter of 2018, as compared to 330 million in the first quarter of 2018.

Consolidated net income was 1.2 billion in the first quarter of 2019, compared to 10.9 billion in the same period of 2018, which included a 12.3 billion one-time gain during the first quarter of 2018 from the CVO effect. In addition to the above mentioned factors, net income was: A, negatively impacted by higher financial expenses that amounted to 1.5 billion in the first quarter of 2019, compared to 770 million in the first quarter of 2018; and B, positively impacted by higher financial income, which totaled $380 million during the first quarter of 2019, compared to $265 million in the first quarter of 2018. In each case, under A and B, mainly due to the foreign exchange difference over U.S. dollar-denominated debt and financial assets, respectively, which includes FONI and other trade receivables.

Additionally, during 2018, the results from the discontinued operations during 2018, during the first quarter of 2018, we had results from the discontinued operations of La Plata Plant for $309 million, and the profit, the share of profit or associated decrease in the first quarter of 2019 to 97 million, as compared to 164 million in the first quarter of 2018, mainly due to weaker results from the operations at Ecogas.

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 first quarter, we collected 800 million from the FONI trade receivables, including the collections from the CVO receivables mentioned by Jorge earlier, as compared to 160 million in the same period of 2018. Finally, results from exposure to the change in purchasing power of the currency totaled 1.3 billion during the first quarter of 2019, as compared to 310 million in the first quarter of 2018.

As for our financial position, we maintain a solid cash flow -- a solid cash balance, which, as of March 31st, totaled approximately two billion pesos for Central Puerto as an individual entity and 2.1 billion as a consolidated basis.

On the debt side, as of March 31, 2019, financial debt was almost nonexistent for Central Puerto as an individual entity and was approximately 6.6 billion, including the tax from subsidiaries, which include the IFC and IIC long-term project finance facilities for the construction of the wind farms Achiras and Castellana. Finally, during the period, we invested 2.1 billion pesos for the development of the Lujan de Cuyo and Terminal 6 cogeneration projects and 0.2 billion pesos for the renewable energy project.

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

Questions and Answers:

Operator

Ladies and gentlemen, we'll now begin the question and answer session. To ask your question, you may press * and then 1 on your touchtone phones. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys to ensure the best sound quality. If at any time, your question has been addressed and you would like to withdraw your question, you may do so by pressing * and 2. Once again, that is * and then 1 to ask a question. At this time, we'll pause momentarily to assemble the roster.

And our first question today comes from Frank McGann from Bank of America. Please go ahead with your question.

Frank McGann -- Bank of America -- Analyst

Okay. Thank you very much. If I could just two questions, one just in terms of SG&A. The year-over-year increase is relatively low compared to currency changes and inflation. I was just wondering how you thought that might act as we go through following quarters, whether we should expect to see a pickup related to what we've seen in the first quarter?

And then, secondly, just kind of stepping back and looking at the sector, the overall level of capacity in the sector seems, I guess, adequate now. Perhaps some people I talked to think there's quite a bit of capacity relative to demand, and certainly demand has fallen some. But thinking about it a little bit longer-term, I'm just trying to think of the potential for new investments and how you're seeing the need for new competitive capacity to come into the market. Clearly, this is a difficult time to do that, and really financing issues and such makes it difficult for the government and the players in the system to want to add capacity. But assuming things normalize and we have a better environment, do you think there's good opportunity for substantial new capacity?

Jorge Rauber -- Chief Executive Officer

Thank you, Frank. I will answer first on the second question you made. I would say, in general terms, putting aside the fact that we are, as you mentioned, living in a very tough situation in terms of financing, what we specifically see regarding the sectors, that we are facing a kind of excess capacity at the moment, especially because we, as you may know, demand of electricity is quite stable for the last three years, I would say. Before that, it was growing very fastly [sic], and now very faster [sic]. And now it's kind of stable, because of the economic situation, because of the increase of charge and the elasticity of the demand in terms of price.

So, what we see today and on the other side, we have the installation of new capacity, especially coming from the renewal projects and the ones that we as Central Puerto and the rest of generators have installed in terms of cogeneration projects and the closing of common cycles. So, what we see is installation of more 4,000-megawatts until May next year, more or less, and a demand which is not growing.

So, what we see is an excess capacity, and for sure, the situation should wait a little bit in order to add more capacity if the objective of that capacity is to meet the peak demand. So, this excess capacity in terms of megawatts installed. What we do have is an opportunity to replace very old and inefficient units for new ones. So, the problem is not so much related to in-store capacity, which is enough, as I mentioned, and probably an excess capacity, but in terms of efficiency, why not the challenge that the system has, it has to go back to a path of efficiency, which has been lacking in the last 10 or 15 years.

The system used to be a very, very efficient and model for the award, and now which are quite inefficient system where unit that are extremely old are still in operation, when should have been disassembled and put out of service several years ago. So, this is the challenge. I mean, we have to change the unit -- not to add more capacity, but to change the existing units, the old ones, for new ones in order to be more efficient in order to make more profit for the company, and in order to save fuel and reduce the price for the customers. So, that will be win-win suggestion, if we get our regulatory framework that can provide that kind of incentive, and the replacement for all units, for new ones in order to reduce cost and increase the profit of the company. And the first one was?

Tomás Daghlian -- Investor Relations Officer

Yes, I missed which line you were referring to, Frank. Would you repeat, please?

Frank McGann -- Bank of America -- Analyst

Yeah, no, the SG&A line, or the 455 million pesos that was up a limited amount. What is it, 42%, I guess, year-over-year. I was just wondering if you thought that we would see larger increases in that line as we go forward. I think wage increases year-over-year, I think we're up 27%, if I remember right, from the release. And should we expect the year-over-year increase to grow more?

Tomás Daghlian -- Investor Relations Officer

Yes, OK. So, in the first quarter of 2019, the company paid a bonus to the personnel, which was in accordance to the bylaws of the company, Section 33 of the bylaws of the company, which impacted the cost of salaries paid to personnel. It's included in that line. But it's an extraordinary result because these bonuses were related to the external results that we had last year, which we don't expect to happen again, which was because of the CVO effect. According to the bylaws, a portion of those results have to be distributed to the employees of the company, but this was a very one-time thing. And for the ongoing and ordinary wages of the company, as a matter of fact, I would say that the salaries are less -- were lower than the first quarter of 2018.

Tomás Daghlian -- Investor Relations Officer

Oh, OK. Thank you very much.

Operator

Once again, if you would like to ask a question, please press * and then 1. To remove yourself from the question queue, you may press * and 2. And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Jorge Rauber -- Chief Executive Officer

Well, thank you, everyone, and for your interest in Central Puerto and your continued support of our company. We encourage you to call us at any time for any information that 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.

Duration: 27 minutes

Call participants:

Jorge Rauber -- Chief Executive Officer

Tomás Daghlian -- Investor Relations Officer

Frank McGann -- Bank of America -- Analyst

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Contents:

Prepared Remarks:

Questions and Answers:

Call participants: