Empresa Distribuidora y Comercializadora Norte SA

NYSE:EDN

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Edenor's First Quarter 2019 Results Conference Call. We would like to inform you that this event is being recorded, and all participants will be in listen-only mode during the presentation. After the remarks are completed, there will be a question-and-answer session. [Operator Instructions]

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Edenor's management and on information currently available. They involve risks, uncertainties, and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Edenor and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I'll turn the conference over to Mr. Leandro Montero, CFO of Edenor. Mr. Montero, you may begin your conference.

[Leandro Montero, Chief Financial Officer]

Thank you very much. Good morning, everyone, and thanks for joining our first quarter 2019 earnings conference call. First, we will focus on the main events that recently took place and then briefly review the response of the quarter. As you know, you can always call any member of our team for more details on the results of the period or any doubts you might have.

In first place, at last minute last Friday I made the term, you will notice that the final of approval has been done by the corresponding authorities regarding the agreement the company entered into for the implementation of the tariff fixing transfer of the public electricity division service of Edenor from National Government to the Province of Buenos Aires and the Autonomous City of Buenos Aires.

Certain agreement stipulates that the province of City of Buenos Aires, they cover jointly the nature of the granting authority of self-service and that the public service rendered by the company will continue to be governed by the constitution contract and by all applicable legal national and regulatory principles.

Within this agreement, Edenor entered into, as well a liability regularization agreement with a Secretary of Energy on behalf of the National Government, thus, terminating the pending receivable claims originated in the 2006, 2016 transition period.

In this agreement, the company weighed all rights of action that maybe applicable against the National Government, including the action filed by Edenor in [2015] for failing to comply with obligation facility from the assessment agreement subscribed in 2006. At the same time, we undertake to settle pending debt related to the financing of certain CapEx to partially cancel [indiscernible] originated in the transition period.

Finally, we agreed to pay the users first-time penalties and compensations corresponding to that period and undertake the commitment from force additional investments to those included in the comprehensive tariff review CapEx plan aimed at contributing with the reliability and safety of the service.

The agreement implies total disbursement of about ARS7.6 billion in five years, including the payment corresponding to the income tax on generative purpose for an estimated amount of ARS2.9 billion.

In return, the National Government, partially acknowledges the previously mentioned claim duly performed by the company by means of total compensation of the pending obligations with the Wholesale Electricity Market for electric [energy practices] during the transition period. The partial [settlement of mutuums] for investment issued by CAMMESA also [indiscernible] and the settlement of penalties intended for the national treasury. That for total amount of ARS6.9 billion approximately.

This agreement was framed after the issuance of the financial experiment of March 31, 2018. The effect of such agreement will be reflected in the company financial retirement of the second quarter 2018. It’s worth mentioning that this agreement means that final stop to the normalization of the distribution segment under the Federal Government and implies the new start for – to focus on the main issues and opportunities the business has.

Regarding the [indiscernible] price of electricity, on April 30, the Secretariat of Renewable Resources and Electricity Market issued a solution number 14, which modified the power capacity reference prices and the stabilized prices for [energy] previously set by resolution number 366 for quarter-end period between May and October 2018.

[Portion] to this resolution, the power capacity price was maintained for all category. Demands lower [indiscernible] kilowatt hour were categorized as residential or non-residential. The stabilized price for energy was maintained for residential customers as the government knows before and increases were established for non-residential customers and last user.

In terms of Android resolution number 104 approved the values of Edenor tariff scheme as from May 1 this year and incorporated the new power capacity reference price and the stabilized prices for energy set by the Secretariat of Renewable Resources and Electricity Market in Resolution Number 14.

Moving to other matters, after successfully completing the first and second programs for the repurchase of our own shares for 2018, on April 8 this year, our Board of Directors approved a third program for a maximum amount of up to ARS800 million.

Under this new program, the portfolio of our shares may not [indiscernible] 10% of capitalized stock at a maximum price to be paid was set at $1.15 per ordinary share and $23 per ADR. Acquisitions are being made with net realized income and the term of the program is of 120 calendar days starting on April 10, 2019.

As of today, almost 2 million own shares have been purchased under this program for a total amount of around ARS74 million at an average price of $17 per ADR. Thus, the company holds 29 million own portfolio shares, representing 3.5% of the capital stock.

Finally, the first impairment of the loan taken out with ICBC, Dubai Branch in the amount of $12.5 million was made on April 11 this year. On the same date, $1.5 million were paid at an interest rate of 6.12%. The outstanding part prepayments also in the amount of $12.5 million, will mature in October this year and April and October 2020.

Moving on to operational results, the volume of energy sales decreased by 9.6% within 5-terawatt hour in the first quarter of 2018 against 5.5-terawatt hour for the same period of 2018. This decrease is mainly explained by a 11.1% reduction in the conception of residential customers, 10.9% decreases for medium and small commercial customers and 8.6 decreases for large users.

The residential demand decreased as a result of the lower average temperatures recorded in January, February, and March compared to the previous year, as well as the impact of the economic issues and tariff increase.

Small and medium commercial consumers were adversely affected by lower commercial activity levels, resulting from the economic situation, whereas large users were affected by the lower industrial activity, which is reflected in the fall in the industrial production index. It should be noted that the first quarter 2018 comparison period corresponds to a quarter with high activity levels.

Furthermore, Edenor’s customer base rose by 3.6%, mainly on account of the increase in residential customers, which have risen to levels above their historical growth as a result of the implemented market discipline actions and the installation during 2018, of approximately 100,000 meters that were mostly destined to regularize clandestine connections. By contrast, the number of commercial and industrial customers have experienced a decrease, due to the reduction in activity during the second semester of 2018.

Now, taking into consideration our results in the first quarter of 2019, net sales decreased by 9.1% reaching almost ARS16 billion again some ARS17.6 billion in the same quarter last year. This 1.6-billion drop is mainly due to the previously mentioned through our state volumes and the mismatch between [indiscernible] distribution value and the index is used to apply the inflation assessment, which generated decreases for approximately 1.6 billion each. This effect were partially offset by the increase in revenues resulting from the increase in the cost of energy prices, net of losses for another 1.6 billion.

Furthermore, under the deferred income recoverable in [four year] installment occurred during the period 2017, January 2018 period, 423 million were disclosed through the first quarter of 2019 and 473 million in the same period last year.

The deferral cost increases of August 2018 were ARS1 billion on February 2019 for ARS841 million were granted in March were recognized and will be collectible in five installments payable as from March 2019. This referral has a negative impact on the sides of the first quarter this year. Since if the full VAD updates have been timely recorded, revenues would have increased by 141 million.

Finally, within the comparison period, cost adjustments for 2018 and the second semester of 2017 were applied for a total 59.4%, the tariff being fully updated from March 2019. Electricity power purchases increased purchase increased by 19% to ARS10.5 billion in the first quarter of 2019 against ARS8.8 billion for the same period in 2018. This ARS1.7 billion increase is mainly due to the 29.7 increase – 29.7% increase in the average purchase price, which generated an impact of 2.6 billion, as well as [indiscernible] set forth by the Secretariat of Renewable Resources and Electricity Market aiming to reduce subsidies, but at the same time affected by the devaluation of the peso.

This increase was partially offset by an 8.2% decrease in the energy volume, which was valued at approximately ARS1.1 billion. Despite this increase, the reference seasonal prices for residential customers is still subsidizing by the national government, especially in the case of residential customers with the subsidy reaching 35% of the system average generation cost in the first quarter this year.

Additionally, the energy loss rate increased from 16.3% in the first quarter of 2018 to 17.4% in the same period this year and was mainly generated by an increase in the incentive to pro as a result of the economic recession and the impact of tariff increases. In-turn, cost associated with this losses increased by 24.8%, mainly on account of the application of the new average seasonal price determination.

Meanwhile, operating expense increased by 8.9% reaching ARS5.2 billion in the first quarter of this year, against ARS4.8 billion in the same period last year. This is mainly accounted for four reason.

First, by ARS555 million in penalties were explained by the change in the [indiscernible] applicable to the [indiscernible] of penalties in kilowatt hour. These charges are now determined based on the kilowatt price affected at the time the penalties is actually sanctioned by the [indiscernible].

The price increase in the cost of non-delivery energy and a more rigorous compliance pathway. Second, a 181 million increase on account of higher material conceptions, these increases were partially offset by ARS115 million decrease in the cost of salaries and social ability charges on account of changes in the first quarter of 2019 being lower than those assorted from [indiscernible] for annual inflation. The change is corresponded to the first quarter 2018.

And lastly, by 112 million decrease in the allowance for the impairment of trade receivables, due to lower increase in the delinquency balances in the first quarter this year compared to the same period last year.

Regarding our financial results, we experienced an 87% increase in losses, with an ARS2.1 billion loss in the fourth quarter of 2018 against ARS1.31 billion loss for the same period last year. This is mainly accounted for by higher commercial interest from the debt with CAMMESA, due to higher rates in the amount of ARS358 million and higher depreciation of the peso against the U.S. dollar during the quarter, which resulted in a total negative impact on account of exchange rate differences of ARS329 and an increasing debt interest in the amount of ARS282 million.

These effects were partially offset by higher income from financial interest in the amount of ARS51 million as a result of interest collected on account of an increase in holdings of own corporate bonds and dollar denominated bonds.

Finally, net result decreased by ARS2.7 billion regarding the profit of ARS131 million in the first quarter of 2019, against profit for ARS2.9 billion for the same period in 2018. The lower gross margin resulting from lower revenues from sales and higher purchases, mainly on account of a drop in the demand for energy, the VAD assessment in this market, and a higher average purchase prices were exacerbated by higher operating and financial expenses.

However, this decrease was partially offset by the positive impact of the results on the [indiscernible] power of the currency or inflation. Talking about Edenor's adjusted EBITDA, it shows ARS886 million profit in the first quarter of 2018, almost ARS3.5 billion lower than in the same period in 2017. Adjustment corresponds to penalties implemented after the tariff review for other period and commercial interest.

Regarding Edenor's capital expenditures. During this quarter, our investment totalized ARS2.1 billion, compared to ARS1.3 billion in the same quarter last year, from which 63% corresponds to network infrastructure and expansion and the remaining 37% to network maintenance.

The increase in investments results from the ambitious plan devised by Edenor for the 2017/2021 period, which focuses on investments optimizing service quality levels in accordance with the quality curves required in the comprehensive tariff review by the regulatory agency. The total amount invested in 2018 amounts to ARS9.6 billion at March 2019 restated figures, being the highest investment level for the company since its creation.

About quality standards, in the first quarter of 2018, [finance type] indicators improved with a 19.2%, a 15.4% decrease respectively compared to the same period of the previous year. This improvement in service level is mainly due to the fulfillment of the ambitious plan devised by the company since our comprehensive tariff review and the implementation different benchmark practices to make our personnel more productive.

Its success is also evident by the fact that this indicator succeeded the service quality improvement path established by the regulatory agency in 21.8 hours per [indiscernible] and 6.8 outages [indiscernible] per year during the last 12 months.

Going to our energy losses, they show with an increase reaching 17.4% against 16.3% for the period in – for the same period in 2018. The 2018 and 2019 tariff increases have generated a greater incentive to fraud by certain customers with a 49-gigawatt hour increase in the level of losses in physical units. Additionally, the drop in the demand from last user, which have substantially lower loss level, has a negative impact on the indicator.

Likewise, the rise in the average energy purchase price also increases the volume bases of these losses. Additionally, in the first quarter of 2019, the company created more disciplined teams to work on new solutions for energy losses and learn about the successful experiences of other distributors.

In turn, the company further increased its activities to reduce energy losses on two fronts. On the one hand, market discipline actions were intensified aiming to detect and normalize irregular connections and electricity theft and frauds. And on the other hand, there was an increase in the installation of inclusion meters to foster consumption, self-management and integration of users not having a regular income, at the same time encouraging consumption reduction and the prevention of irregular connections having an impact on the safety of customers. The company expects to intensify these actions until reaching the expected levels with a purpose of meeting their planned loss reduction goals.

Finally, as far as financial debt is concerned, the outstanding principal of our dollar-denominated financial debt amounts to $250 million, while net debt amounts to $100.4 million. Financial debt consists of $165 million from our senior notes in 2022, a $50 million from the bank loan taken out with Industrial and Commercial Bank of China, Dubai branch. [For sure], this is current liabilities interest at the fixed rate on April 11 after this report closing date. The first repayment of the loan taken out with ICBC was made in the amount of $12.5 million as I mentioned before.

So, this concludes my review on Edenor. Now, we are open for questions.

[Operator]

Thank you. The floor is now open for questions. [Operator Instructions] The first question comes from Frank McGann with Bank of America. Please go ahead.

[Frank McGann, Bank of America]

Yes, thank you. Good morning. Just a follow-up on the regulatory liabilities regularization agreement to make sure I understand completely the ASR7.6 billion is going to be paid out over a five-year period. The ASR6.9 billion in forgiveness I guess is – just takes place immediately. So, the – should we assume the net gain would be approximately ASR700 million that would be included in the second quarter?

[Leandro Montero, Chief Financial Officer]

Hi, good morning, Frank. Yes, your understanding is quite correct. There is another accounting effect that will impact in our second quarter results. But in general terms, as you mentioned, we will have to pay in the following year the ASR7.6 billion. Just to be more accurate, ASR3.1 billion are related to income tax and other expenses related to the trial or to the drop of the claim we have to do. That payment will be most of it the next year when we have to pay the income tax of the year of 2018.

And then we pay immediately ASR1.4 billion, which is the amount we’ll receive, but that’s in compensation. We’ll receive the credits related to the social tariff that the government had with us and the recognition of the framework agreement. That ASR1.4 billion were not accounted for in our financial statement or balance sheet, so they will be recognized at the same time, and that credit will be used to pay partially the loans from CAMMESA and partially other debts we have with the government related to certain works or investment the government has financed us. The remaining ASR3 billion is a commitment we agreed to make investment during the following five years.

[Frank McGann, Bank of America]

Okay. So, approximately ASR1.4 billion this year, ASR3.1 billion mostly in 2020 and the remainder spread out over the period for investments?

[Leandro Montero, Chief Financial Officer]

ASR1.4 billion this year, that is a compensation; ASR3.1 billion next year, it is related mainly to income tax; and ASR3.0 billion is the investment or the CapEx plan commitment to be made in the following five years.

[Frank McGann, Bank of America]

Okay, great. Thank you very much.

[Leandro Montero, Chief Financial Officer]

You’re welcome.

[Operator]

[Operator Instructions] Showing no further questions, this concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Montero for any closing remarks.

Oh! Pardon me. I do have a question sir from Francisco Sersale with PointState. Please go ahead.

[Francisco Sersale, PointState]

Hi, good morning. Thank you for holding the call and for taking questions. Just a follow-up on Frank McGann’s question. The additional CapEx, which you said ASR3.1 billion over the next five years, will that go towards the regulatory asset base and therefore impact the distribution tariff when the next regulatory review is held? Thank you.

[Leandro Montero, Chief Financial Officer]

Good morning, Francisco. That’s a very accurate question. No, they are not going to be included in the regulatory asset base and – well, the ASR3.0 billion CapEx plan committed will not be – have any impact on the tariff in the future, except for the maintenance cost that usually are related to the new CapEx, but not – will have not the impact in the – or will not be taken into consideration in the regulatory asset base.

[Francisco Sersale, PointState]

Okay, thank you.

[Leandro Montero, Chief Financial Officer]

You’re welcome.

[Operator]

This concludes the question-and-answer session. At this time, I’d like to turn the floor to back to Mr. Montero for any closing remarks.

[Leandro Montero, Chief Financial Officer]

Well, thank you very much for joining this conference call, and have a nice day. Thank you, bye.

[Operator]

Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.