Empresa Distribuidora y Comercializadora Norte SA

NYSE:EDN

Earnings Call Transcript 2020-Q2

[Operator]

Good morning ladies and gentlemen and thank you for waiting. At this time we would like to welcome to the Edenor's Second Quarter 2020 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 company's remarks are completed there will be a question-and-answer session. At that time further instructions will be given. [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 to the company. 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 welcome to the Edenor conference call for the second quarter 2020. As we usually do first we will focus on the main events that recently took place and then briefly review the results 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. But first I'd like to acknowledge the extraordinary efforts our staff is making to continue giving service to users while maintaining high quality and security standards even the unique circumstances we are facing with the COVID-19 outbreak.

With that said we will focus on the relevant events taking place lately. First on may 15 the regulator issued a note authorizing the reading of static one customer's meters thus regularizing the reading process for all user categories. The note provided instructions on the methodology applicable to the settlement of conceptions between such reading and the last actual reading depending on whether this difference is for or against the consumer.

After performing the readings of all meters for which estimates have been made perform to enter the solution number 27 passed on May 5. The financial impact on revenues from estimates which were lower than the actual consumptions amounted to 530 million Pesos which would have been recoverable in six installments payable as for September this year.

Additionally on May 5 the [error resolution] number 28 provided for the creation of the electricity distribution panel which aims to foster an environment for the communication coordination and articulation of technical and commercial issues within the framework of the social preventive and mandatory lockdown. The first meeting addressed certain matters like the reading and estimate issue mentioned before.

Following this line on May 15 error resolution number 35 established that status 2, status 3 and willing system customers covered by the mandatory lockdown which have suffered a 50% for a greater reduction in their power capacity demand may suspend payments or make partial payments on account of the hired power capacity and the recovery in demand which is 70% whereas the obligation to pay all other charges will remain in effect.

Furthermore, customers may opt to terminate the contract or request that service recapitalization in the light of the new super binding rescue service. Furthermore, on June 18 the national executive branch issue executive order number 5.3 which extended the tariff freeze for an additional 180-day term. In turn it modify the time of our service suspensions to vulnerable uses in case of default or non-payment of up to six bills dues from March 2020. Users with an ongoing disconnect notice are covered by the executive order.

Finally, [indiscernible] four the chamber of deputies gave house approval to a build expand the national budget for the year 2020 by almost 1.9 billion Pesos to pay for social productive and labor plans destined to alleviate the economic crisis as a consequence of the COVID-19 pandemic. Regarding the electricity sector it includes the recognition of credits equivalent to three times the average monthly bill of the last 12 months of the transactions in the wholesale electricity market of the distribution agent that provided service in a province or granting power that has adhered to the right maintenance provided in December 2019 under the conditions established by the enforcement authority.

The credits recognized will be applied only to distributors that as of October 21, 2020 do not have debt in the wholesale electric market or have adhered to a refinancing plan with CAMMESA which should not exceed 60 monthly installments with 12 months upgrade, the rate of interest on balance equivalent to 50% of starting force in the whole sale electric market and comply with the conditions established by the enforcement authorities to guarantee the fulfillment of future monthly payment obligations by the distributors. The approval of the senate and its regulation is still trending in order to evaluate the scope and the impact for the company.

Regarding our credit rating on July 8, a standard pool global research [indiscernible] the company’s corporate bonds maturing in 2022 from double [indiscernible] in the local scale and from triple C plus to triple C in the global scale in both cases with a negative outlook. This downgrade is mainly due to the extension of the tariff freeze and the lack of a formal compensation mechanism alternative to that provided under the internal term review. Of course this downgrade was made before mentioned bill was treated in the Congress.

Now moving on to our results in the first quarter of 2020. Revenue from sales decreased by 31% reaching 18 billion Pesos in second quarter this year against 26 billion Pesos in the same period last year. This 8 billion Pesos decrease is mainly due to the tariff freeze in both the distribution values and the seasonal price passed through to tariffs which enhanced a decrease in revenues in real time as well as the core recognition in the second quarter of 2019 of income always due to the application of caps to clients with social tariff in 2018 and not seasonably recognized and for conceptions of settlements under the framework agreement for almost a total amount of 2 billion pesos.

The failure to apply the update mechanism on the own distribution cost in August 2019 and February, ‘20 has a negative impact in revenues of the quarter in the amount of approximately 3 billion pesos. Lower revenues are also due to lower billings on accounts of the real term decrease in the cost passed on the tariff of energy participation in pesos for 2 billion pesos.

In order, in terms lower physical electricity sales volumes resulted in 339 million pesos decreasing revenues. It's worth highlighting that resolution number 14 provided for a 5% increase in the seasonal price for non-residential demand and a 7% increase for large users from August 2018 as no new tariffs teams were issued at that moment this increase was not passed on to tariffs but it was included in the payments made by the [indiscernible] for a total amount of 239 million pesos in the second quarter this year.

In turn the failure to grant the tariff updates in an inflationary context as that observed in 2018 and 2020 has a very negative impact on the distribution value that is combined with the fact that the composition of the on distribution cost formula which replicates the [indiscernible] structure has a greater weight on the salary index evolution of the consumer's price index and the wholesale price index.

Taking into consideration our operational results, the volume of energy size decreased by 1.2% this quarter reaching 4.79 terawatt hour against 4.85 terawatt hour for the same period last year. It's worth mentioning that this quarter has been marked by the outbreak of the COVID-19 crisis and implementation of the mandatory social isolation which impacted the whole quarter generating strong changes in energy consumptions.

Consumptions by commercial and industrial customers decreased by 17.4% and 18.1% respectively. This decrease was partially offset by an 18.8% increase in the consumption by residential customers in the second quarter of 2020 compared to the previous year.

The 135 kilowatt hour at 300 kilowatt hour decreases for commercial industrial customers were mainly due to the partial or social closure of stores and industries resulting from the measures implemented under the mandatory lockdowns.

In turn the residential demand increased by 379 kilowatt hour mainly because people spend more time at home due to the restrictions on movement which has been enhanced by lower average comparatives mainly in May and June which were almost 2 Celsius degree lower each month.

Additionally, the improvement in sales volumes may be partly explained by the tariff. Furthermore another customer's rate rose by 1.3% mainly an account of increasing residential customers as a result of implemented market discipline actions and installation during the last year of almost 38,000 integrated energy meters that were mostly tested to regularize clandestine connections.

The electricity power purchases decreased by 19% to 11.8 billion pesos in the quarter against 14.6 billion pesos for the same period last year. This 2.8 billion pesos decrease is mainly due to the 19% decrease in the average parties price in real terms which generated 2.4 billion pesos decreasing purchases as a result of the entry into effect of a new reference seasonal prices for electricity applicable from May and August 2018 personal resolution 14 of the secretary of renewable resources and electricity market. But that did not reflect the inflation of the period.

This increase was partially offset by a 2.3% increase in energy volumes net of losses due to increase in demand. It was valued at approximately 2.7 million pesos. In turn the electricity reference seasonal price for a central customer is actually serviced by the federal government especially in the case of residential customers when the second quarter is ready training the subsidy reaches 52% average of the systems after generation cost.

Additionally, the energy lost rate decreased from 19.2% in the second quarter last year to 18.7% in the same quarter this year. It should be mentioned that energy losses for second quarter this year were estimated since their reading cycles of our tariff one clients could not be completed for a period of two months given the restrictions on grievance in the initial phases of the lockdown.

In turn, costs associated with these losses decreased by 36.8% of real terms resulting in lower purchases for [574] million pesos. It's important to highlight that over the past few years Edenor has suffered a systematic deterioration of its assets and financial persistence as a result of the tariff lag. The increasing operating costs, the drop in demand and the increase in energy cost. Furthermore, the outbreak of the world pandemic has brought several consequences in global economic activities which directly affected the company's activity generating reduced collections especially in the beginning of the lifetime. For this reason we have seen the need to partially defer payments to CAMMESA for the energy acquired in the wholesale electricity market and from maturities taking place in March 2030. We hope to have our situation regularized in the near future in order to comply with our payments to CAMMESA in the short term.

Meanwhile, operating expenses have remained stable reaching 8.32 billion pesos in second quarter against 8.36 million pesos in the same period last year. This is mainly explained by increasing the allowance for bad debt in the amount of 1.2 billion pesos as a result of increase in delinquency resulting from the COVID-19 context and the substantial increase in the delinquent balances.

This increase in cost was offset by 428 million pesos decrease in penalties as a result of the improvement in service quality levels and secondly the updates of penalties recorded in the second quarter 2018 in the amount of 300 million pesos which were later included in the liabilities regularization agreement.

Furthermore, lower remuneration expenses in the amount of 229 million pesos were disclosed as a result of pending collective bargaining negotiations for 2020 and last extra hours. Lastly lower fees and remuneration for services in the amount of 101 million pesos were recorded an account of lower expense and corrected maintenance and readings as a consequence of the restrictions imposed on certain operating activities due to the lockdown measures especially in the initial phases.

Regarding our financial results experienced a 56.5% increase in losses which reached 2 billion pesos in the second quarter against 1.3 billion pesos for the same periods last year. This difference is mainly due to higher exchange rate losses in the amount of 920 million pesos resulting from migrating to evaluation of the Peso against the U.S. dollars in the second quarter this year compared to the same period last year as well as lower revenues from commercial interest in the amount of 146 million pesos. These effects were partially affected by lower commercial interest accruals on the debt with CAMMESA for 426 million pesos as a result of the regularization of liabilities recorded in the second quarter of 2019.

Finally net response decreased by 17.8 billion pesos recording losses for 2.6 billion pesos in second quarter 2020 against profit for 15.8 billion pesos for the same period in 2019. This difference is mainly due to a 5.3 billion pesos decrease in the gross margin and the 14.2 billion pesos impact net of income tax of the regulatory liability agreement.

Furthermore, increasing financial losses and lower inflation results were recorded in the amount of 725 million pesos and 1.7 billion pesos respectively which were more than offset by lower income tax approval for 8 billion pesos including the aforementioned agreement income tax effect.

The results of the periods would present a fall of 3.6 billion pesos compared to the same period of the previous year to be considered the result of the second quarter 2019 without taking into effect the impact of the adjustment of liabilities net office income tax which would have yielded a gain of 1 billion pesos last year.

Talking about edenor's adjusted EBITDA it showed a 2.4 billion pesos loss in the second quarter, 4.7 billion pesos lower in the same period of 2018 assessment corresponds to the update of penalties for the transition period and commercial interest. Regarding the Edenor's capital expenditures during the quarter our investment totalized 2.5 billion pesos compared to 3.2 billion pesos in the same quarter the previous year from which 60% corresponds to network infrastructure and expansion and 40% into network maintenance.

Investment were reduced just by 21% compared to the same period of the previous year mainly on account of the slowdown in the plan set by Illinois as a result of labor revenues due to the falling [indiscernible] volumes, the referral of tariff updates and the restrictions imposed in carrying out certain activities due to the mandatory isolation measures taken in the country since March 20 this year.

The plan maintains focus on the efficient use of resources on investments improving the service quality which can be seen in the fulfillment of the quality curves required by the regulatory entity in the comprehensive review as all this with the due care of our employees, contractors and customers and the application of strict health, safety and machine protocols in each of the activities conducted under this unprecedented [indiscernible]. The investment highlights for the quarter where the activation of the transformation bank in general [indiscernible] transformation station expansion of the capacity of the [indiscernible] high voltage electrodes for a total of 4.5 kilometers. The latter with commissioning in September 2020.

Regarding quality standards, these are measures based on the duration and frequency of service outages using this [indiscernible] to indicate those. At the closing of the first quarter of 2020 side and set indicators were 13.4 hours and 5.3 outages per year per client over the last 12 months evidencing a 28% and 17% improvement respectively compared to the same periods of the previous year.

In turn these indicators are 44% and 33% lower than those requires in the interior chart review. This recovery in service levels is mainly due to the ambitious plans devised by the company since the [indiscernible] review. The plan success is also evidenced by the fact that these indicators exceed the service quality improvement path defined starts the regulatory entity.

Taking into account our energy losses they received 18.7% in the second quarter against 19.2% for the same quarter last year. As I mentioned before losses for the second quarter were estimated regarding or because previous cycles could not be completed to obtain the real data after estimating the consumption of our tariff one client for the period of two months due to restrictions on the reading activity in the initial phases of the lockdown. Costs associated with these losses decreased by 36% of real terms resulting in a 574 million pesos improvement. Over the last year multi-disciplinary teams were created to work on new solutions to analysis losses. Furthermore, activities aimed to reducing losses continue and analytical and artificial intelligence tools were used to enhance effectiveness in the routine of inspections.

Market discipline factions continue with the objective of detecting and normalizing regular connections. Fraud and energy threats an installation of inclusion meters for more users were intensified. Over the last year approximately 557,000 inspections of 31 meters were conducted with a 54% efficiency and more than [37,000] millimeters were installed.

Regarding the recovery of energy besides the customers put back to normal with mid-emitters constant customers with conventional meters were also put back to normal in all cases extracted fraud receivable [indiscernible] was observed.

Finally, as far as financial debt is concerned the outstanding principle of our dollar denominated financial debt amounts to $148 million whereas the net debt amounts to $69.8 million. The financial debt consists of $135.5 million corresponding to corporate bonds maturing in 2022. Net of repurchases and $12.5 million to the bank's loan taking out with Industrial and Commercial Bank of China ICBC Dubai branch currently both liabilities bear interest at a fixed rate. Finally after the financial assignment closing date repurchases of corporate bonds were made for a total face value of $22.1 billion.

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

[Leandro Montero, Chief Financial Officer]

Thank you very much for joining us in this conference call. Please keep health, keep safe because of this situation. Have a nice day. Bye.

[Operator]

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