Earnings Transcript for CEPU - Q3 Fiscal Year 2024

Operator: Good morning, ladies and gentlemen. Welcome to Central Puerto's Third Quarter of 2024 Earnings Conference Call. A slide presentation is accompanying today's webcast and is also available on the Investors section of the company's website at www.centralpuerto.com/en/investors. All participants will be in listen-only mode during the presentation. After that, 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 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 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 US dollars for comparison purpose only. The exchange rate used to convert Argentine pesos to US dollars was the reference exchange rate reported by the Central Bank for US dollars for the end of each period. The information presented in US dollars is for the comparison of the readers only and you should not consider these translations to be representations that the Argentine pesos amounts actually represent these US dollars amounts or could be converted into US dollars at the rate indicated. Finally, it's worth noting that the financial Statements for the third quarter ended on September 30, 2024, include the effects of the inflation adjustment. Also, please take into consideration that certain statements made by the company during this conference call and answers to your questions may include forward-looking statements which are subject to risks and uncertainties that could cause actual results to differ materially 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 the 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. And now I will turn the call over to Alejandro Diaz Lopez. Please, Alejandro, you may begin.

Alejandro Diaz Lopez: Thank you very much and good morning everybody. Thank you for joining us today on a new session of earnings presentation where we are going to discuss our financial results of the third quarter of 2024. Before we get started, 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 third quarter of 2024, followed by a quick update of the regulatory framework and relevant news. Then I will show an overview of the Argentine electricity industry, 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 third quarter of 2024. The group's installed capacity is 6,703 megawatts and energy generation amounted to 5,685 gigawatt hours during the third quarter of 2024, decreasing 1% year-over-year. Regarding our financial results, it should be noted that due to Central Puerto's accounting methodology, all items in pesos must be inflation-adjusted to the end of the quarter or local currency. While the company reports its results in dollars by converting them at the end of the period official exchange rate the so called Central Bank A 3500 exchange rate. This causes a non-cash impact that affects positively or negatively as appropriate our financial metrics. Revenues for the third quarter of 2024 amounted to US$185 million increasing 14% year-over-year compared to the third quarter of 2023 results, while adjusted EBITDA reached US$93 million raising almost 1% versus the third quarter of 2023. Net income for the period was positive in US$40 million doubling year-over-year. Finally, after debt consolidation as a result of M&A's operation, loan repayments, and dividend payments, net debt as of September 30 of 2024 amounted to US$149 million, a reduction of US$137 million vis-a-vis December of 2023, showcasing a net debt to adjusted EBITDA ratio of 0.5 times. Now, let's move to the most recent regulatory updates and news. We have anticipated in our last call the cancellation of the thermal generation tender called Terconf by means of Resolution 151 issued by the Secretary of Energy on July 8. After the price adjustment established last June through Resolution 99, we were granted with a 3% increase in August with Resolution 193, a 5% increase in September with Resolution 233, and a 3% increase in October with Resolution 285. Please take into account that this last resolution has no impact for the third quarter of 2024 figures. Resolution 294 deserves a special mention. It was established a contingency plan for the electricity industry with the aim to mitigate possible critical situations during the period December 2024 to March 2026 with action plans for generation, transmission and distribution as well as for major demand. Regarding generation, an additional complementary and exceptional remuneration for power and energy is established with the purpose of ensuring the availability of equipment in critical months and hours. The scheme is for thermal power plants located in critical nodes determined in Annex 1 of the said resolution that do not have PPAs nor have adhered to the Resolution 59. As you remember, this was established for combined cycles. This exceptional compensation will be in place for summer periods December, January, February, and March between 12

Operator: Thank you very much for the presentation. We will now begin the Q&A session for investors and analysts. [Operator Instructions] Our first question comes from Martin Arancet from Balanz. Please, Mr. Martin, your microphone is open.

Martin Arancet: Hi. Can you hear me?

Alejandro Diaz Lopez: Yes, very well.

Martin Arancet: Okay, thanks. Thank you. Hi. Thank you for the presentation. I have three questions or topics actually that I want to discuss and if okay, I will run them one by one. The first one is regarding the new auctions for hydro assets that if I'm not mistaken, include Piedra del Aguila and they should happen by first quarter '25. But before that, I think it will be important to settle some things like the pricing, whether CAMMESA will be an intermediary, and probably some guarantees that the terms of the concessions will be fulfilled this time. So, my question there is, do you think that it can all be ready by first quarter '25? How much do you think these assets should get paid compared to the current situation? And finally, if you have any additional color or thoughts on these auctions.

Alejandro Diaz Lopez: Okay, thank you, Martin, for your interest. As you mentioned, the government established 180 days period to launch this auction to make a new concession. They are working, so we have been talking with them. They are working -- the new -- this new unit occupied by -- sell the assets. The government assets are taking the control of the process in -- with the Secretary of Energy. So they are working hard in order to accomplish that 180 days. The points under discussion right now with how to balance, establish a competitive auction with competitive price to bring new participants, not only the ones that are operating right now. They are discussing this new scheme, as you mentioned, perhaps with the PPA around the CAMMESA or the demand, that is the discussion right now. And of course the conditions of that new PPA, they need to balance how many or the pricing of the new PPA and, of course, how this new price impacting the actual prices of the electricity. As you know, the price right now that they are paying for the hydros are very low, around US$13 per megawatt, which is a very, very low price. And this price not being attracted for a new auction. So they are discussing the scheme and the pricing for this new tender option that they will call next year. But they don't have a definition yet. So we have been talking with them and they don't have the definition. Of course, this not only implies the PPA, it implies the prices for all the electricity that we sell in the market. Not only the hydros, the thermal. So, they need to balance the whole scheme, the FONI plans, also the pricing for that. So, it's not only the hydros, they need to work on the whole tariff scheme for the generation and the system. But they are confident that they will have the new tender ready for the second quarter of this new -- in the next year.

Martin Arancet: Okay, great. Well, regarding that of the, well, the regulatory change for the coal system, there are some rumors regarding a probably regulatory change that will allow thermal generation to sign private PPAs. So, I was wondering as far as you know, is the government working on a change of that sort and also were you and other thermal generators convent to discuss this change?

Alejandro Diaz Lopez: Yeah, as we talk with the government and they are working previous to the Daniel Gonzalez arrived, they are working on that sense. They want to allow or they want to promote the contractualization in the market -- in the electricity market. And they thinking in, yes, establish a new private market, of course, there are some contracts that are still in place with CAMMESA. So, they will maintain that, but in talking about the spot market, the actual spot market, they want to allow the contractualization between the generators and the demand, at least the big demand, the big users, and open the market that we have for the renewables right now to a market that the thermal units can enter in. The timing of that, they are analyzing the timing for that, if it could be perhaps a transition, because when you are talking about thermal contract, we need to talk about also the fuel that the thermal unit consumes. So, as you know, right now the fuel are all by CAMMESA and they give us the fuel to generate, the gas, and the diesel and fuel oil also. So they are also analyzing how they can start dismantling that or giving the diesel transmit that to an open possibility for the generator to buy their own fuel. So, they are working on these two sides of the same problem, which is open the market in terms of generation electricity and in terms of fuel, diesel and gas. But they are working on that. And I think it's a transition that need to occur sooner or later, gas.

Martin Arancet: Yeah. And regarding that, as a follow-up on that, while you mentioned that they are working on this regulatory change, but I'm guessing that probably efficient thermal units will be competitive to sign these new private PPAs, but probably more inefficient ones won't but they are still necessary for the system. I don't know if you share that view and if you think that current legacy prices are enough for those legacy units, inefficient legacy units, or if you think that legacy prices should keep improving in order to have healthy thermal assets.

Alejandro Diaz Lopez: No, I don't think that we need to separate inefficient or inefficient. The thing that we need to understand here is, you have in the electricity sector you have two components. You have the energy itself and you have the power. And when you talk about energy, of course, you need to talk about efficient. And there we have, as you know, very efficient combined cycles, selling the electricity at the spot market right now with the tariff that is very, very -- if you compare with a new capacity, with the same efficiency, a new combined cycle that you build or an auction that we saw in 2017, 2018 and '19, the prices are very, very low. So, the prices need to go up a little bit to maintain that efficient -- energy and efficient energy for a long period of time. But when you talk about power is that power is something that you need when you have peaks of demand, and then when you talk about that kind of power, electricity for peaks, you talk about less efficient unit like open cycle TGs, steam turbines that we already have. So -- and that is not easy to construct in the private market because it's something that you will have as a backup of the system when the system goes up in terms of demand because the climate change or a specific period of time. So it's not easy to establish a private contract regarding about that. So in that sense this is something that the system operator in this case CAMMESA or any system operator in other countries make some specific allocations to provide power for peaks and to have the backup of the system. This is our unit that have low dispatch perhaps 10% of the time, less than 10%, 5%. So, in that sense, for sure, you need to increase the prices, the prices that are paid already are not sufficient to have new power or maintain the power that we have been operating right now. So, for sure, you need to think in new prices. The prices are the same that you saw in the last tender, the Terconf, that are prices for power, not specifically for energy. So, power prices for not high efficient units. So, you need to consider that I think with electricity and energy we can talk about private contracts. And in terms of power, you will need some aggregator in the system that establish new options for power and with prices, of course, going up from the prices that we are seeing now.

Martin Arancet: Okay, very clear. And my final question then, while you have a strong cash position and low debt levels, I don't know what can you share regarding investment plans for the next couple of years, and if you are considering an investment under the RIGI scheme.

Alejandro Diaz Lopez: Oh yes, for sure. In terms of new power and thermal power, we are expecting, we have been talking with the government and we are expecting a new tender for power. Perhaps less than the Terconf that we saw last year, but more focusing specific points in AMBA. So, we are ready to participate there and we want to continue the replacing of our units in AMBA. In terms of renewables, we are seeing opportunities and we have been talking with the customers in terms of providing a solution for mining companies in the north. Not only providing the electricity, providing the transmission line they need for connect to the grid. We are talking with the lithium mining companies in the north. So we expect that if the lithium continue growing in the north and we can find an agreement with the mining companies that we can enter there in construction of transmission line and providing the renewable energy they want for the mining companies in the north. We are looking for that and that are big, big project for us. Then we are looking, as you may see, we are looking opportunities in the mining sector. So we are looking for opportunities in -- as you saw entering in a silver and gold mining company. And we are -- we are trying to look at additional opportunities there. And also we are seeing something in lithium and we are trying to develop our forest business trying to, of course it's not easy, the forest, as you know, the forest business in Argentina is complicated because the logistic cost put our good resources in stress. Because the cost of these logistics are higher, much more higher than anywhere in the world. But we are trying to look at opportunities there to industrialize a portion of our production. And, of course, we are also seeing opportunities in electricity, electricity sector opportunities to acquire or increase our megawatts in renewables also. And of course internal opportunities that we are looking and seeing.

Martin Arancet: Great. Just one little follow-up. Do you have any timeline expected for the new auction for thermal units?

Alejandro Diaz Lopez: No, in fact, but we expect if we understand what the government are saying, not specifically days, but they want to move forward previous to the end of the year, but we don't have any specific dates or timing.

Martin Arancet: Okay, well, pretty soon. Well, that's all on my side. Thank you very much.

Alejandro Diaz Lopez: Thank you for your interest.

Operator: Our next question comes from Ludovic Casrouge from Autonomy. Please, Mr. Ludovic, your microphone is open.

Ludovic Casrouge: Yes, good morning and congratulations for the results. My question was about the contingency plan from December 2024 to March 2026 and that you would receive higher remuneration for some poor plants. What could be the impact on EBITDA concretely?

Alejandro Diaz Lopez: Well, we are not expecting a huge impact because it's a small remuneration for the steam turbines and the gas turbine operating in an open cycle. So and also this brings a new -- a new CapEx and new OpEx for these units. So we are not expecting a huge or a big impact in our EBITDA. No basically will be less than, I don't know, if you can remember me, but it is US$10 million or around that more than that because it's very short period of time and impact on only a portion of our -- a small portion of our generation and the increase is not big increase. So, it's only something to prevent for downgrading of our old units that had been downgrading for a lot of years. It seems that their remuneration are freeze since I think 2019 or 2018, but it's not big amount.

Ludovic Casrouge: Okay, thanks a lot.

Operator: Our next question comes from Gustavo Faria from Bank of America. Please, Mr. Faria, your microphone is open.

Gustavo Faria: Hi, guys. Thank you for taking my question. Just a quick thing on our side, do you expect any increase in the thermal power plant dispatch or availability given the ongoing gas pipelines projects in Argentina, so does higher gas availability for your thermal power plants? And do you think it could be enough to replace all the power imports of Argentina?

Alejandro Diaz Lopez: Okay, in terms of our units, I think could be, but marginally because our units are -- most of our units are dual fuel. So when we don't have gas, they consume diesel oil or fuel oil. So we are not expecting for our units a higher impact on dispatch. Of course, this will imply an impact on cost for sure, because the impact in a cost reduction because as you know, the price of gas are much more cheaper than fuel or diesel oil. But we are not expecting a huge impact on our dispatch. In terms of, I don't remember, sorry, the second question. Okay, yes, imports. Yes, in terms of imports -- in terms of imports of natural gas, yes, we are reducing the importation of natural gas from Bolivia, switching to gas from Vaca Muerta. In terms of importation of electricity, I don't think so, because as you know, we are -- in terms of peak periods, especially in summer, we are seeing as a constraint in terms of demand. So, depending on, of course, on the temperature of summer, but for this year, until we don't have this new Terconf or tender offer for new power in AMBA, we were seeing importation from Brazil of electricity during the peak periods, independent of the gas pipelines. For sure, when you have the Terconf and you have a new capacity entering, could be in a couple of years, could be a reduction. But this also depends on the evolution of the demand in Argentina. If we start growing again and the industry start growing again, we will need both. So, we need to increase our power plants or we need to still need some importation from Brazil during the peak times.

Gustavo Faria: Okay, thank you.

Operator: Our next question comes from Matias Cattaruzzi from AdCap Securities. Please. Mr. Matias, your microphone is open.

Matias Cattaruzzi: Hi, everyone. I'm Matias. I got a question about the summer months ahead with the contingency plan that the government wants to implement. How that would affect the company in like operating metrics, costs, and its overall financial performance. And do you have an EBITDA forecast for the following quarter and the next year? And as well I got another question about the dividends policy. You've been giving some dividends over the end of the last year and now you paid dividends again. Are you going to insert a rule of dividends or these are just retained earnings that you're phasing out?

Alejandro Diaz Lopez: Okay. I am going for the first question. In terms of operation during this summer, of course, as you know, we have a very short backup in terms of capacity in AMBA specifically in AMBA region. So for sure we expect our units operating in higher levels this summer, of course, depending on the climate and the temperature, but in the temperature that we are expecting, that is a high temperature for summer, we expect a higher dispatch of our units during the summer. In terms of remuneration, as I mentioned before, this new scheme is not a driver changing in terms of remuneration is an additional amount to maintain or to perform some additional maintenance to our units. But it's not a game changer. I think it's another step trying to increase or not in terms of, not increase, not keep going down our availabilities of units that are the spot market. But it's not a game changer. So we do not expect a higher impact in our EBITDA.

Matias Cattaruzzi: And then dividends?

Alejandro Diaz Lopez: And then dividends, yes, in terms of dividends, as you know, we are growing and we expect to grow in terms of capacity and in terms of investments. We're investing in closing our Brigadier Lopez open cycle. We are investing in new solar projects and we are looking for new opportunities. So we are paying dividends, trying to consider that. So as you mentioned, we don't have a strict policy of paying dividends yet because we are in a growing phase of the company and trying to catch opportunities. But, in terms of having said that, every year at the end of the year, when we analyze our cash flows and we see some cash that is available to pay dividends, we want to pay dividends and we go for that. But this is more or less how it works in terms of policy. Of course, when we have a more established path in terms of growth and in terms of opportunities in the market, we paid in more regular or tried to set more regular basis. But this is more or less how we are working right now, seeing the cash flow coming and expenses and opportunities and see how many cash we have available at the end of the year and we paid -- we used to pay dividends that amount.

Matias Cattaruzzi: Great. And one last question. Can you give us more guidance on next quarter and the following year in terms of EBITDA?

Alejandro Diaz Lopez: Yes. We are not seeing a different or a big change until we can -- the government establish this new scheme of new possibilities of signing PPAs or changes in the regulatory framework. We are seeing more or less the EBITDA that we are having this 2024 will be repeated. But if the government established that possibility to sign private contracts and to deregulate the acquisition of fuel, of course, we are expecting that the EBITDA will be very different from that we have right now. But it's not easy to establish a number because we are not having the regulatory change on the table right now.

Matias Cattaruzzi: Okay, great. Thank you so much.

Operator: [Operator Instructions] This does conclude the Q&A session. I would like to turn the conference back over to Mr. Fernando Bonnet for any closing remarks. Please go ahead sir.

Fernando Bonnet: 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.

Operator: This does conclude today's presentation. We thank you for your participation and wish you a very good day.