Empresa Distribuidora y Comercializadora Norte SA

NYSE:EDN

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Edenor's Fourth Quarter 2020 Results Conference call. We would like to inform you that this event is being recorded. [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, CFO]

Thank you very much. Good afternoon, everyone, and welcome to Edenor's Earnings Conference Call for the Fourth Quarter 2020. I truly hope that you and your family are safe and healthy during these strange times, and we really expect the vaccination process will be successful.

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 call any member of our team for more details on the response of the period or any doubts you might have.

I'd like to first acknowledge the extraordinary efforts our staff has made during this special 2020 to continue giving service to users while managing high-quality and security standards, given the unique circumstances we face, and we are still facing with the COVID-19 outbreak.

With that said, we will focus on the relevant events that taken place lately. First, on December 28 last year, the controlling company, Pampa Energia, holder of 100% of Edenor Class A shares representing 51% of its capital stock, acting as a seller, entered into a share purchase agreement with Empresa de Energia del Cono Sur. The agreed purchase price consists of almost 22 million Class B shares of Edenor, a pricing cash of $95 million and a contingent payment for 50% of the generated gain in case of change of control in the buyer or Edenor during the first year after the closing of the transaction or as long as the price balance is pending settlement.

The closing day is subject to the fulfillment of the present conditions, which are the sales approval by Pampa Energia and the regulatory agency, the ENRE and the payment of the second installment of $50 million. In this respect, on February 17 this year, Pampa Energia's Shareholders' Meeting approved the transaction. And as of today, the approval procedure by the regulatory agency is still in progress.

Furthermore, as Edenor has outstanding market [Technical Difficulty]

[Operator]

Pardon me, ladies and gentlemen, there seems to be a problem with the speaker line at the speaker's end. We'll be rejoining them very shortly.

[Leandro Montero, CFO]

[Technical Difficulty] And to offer restructuring of the debt that allows at the same time to extend the maturity terms.

[Unidentified Company Representative]

[Foreign language]

[Operator]

Pardon me, this is the conference operator. I've rejoined the speaker line. Mr. Leandro, please continue.

[Leandro Montero, CFO]

Okay. Thank you very much. Okay. Well, I will start from the last point I was talking about. Furthermore, Edenor has a standing market that it is on prospective contemplate a change of control clause which stipulates that each corporate bondholder will be entitled to require the company to repurchase all or any part of that holder's company bonds -- corporate bonds through the presentation of a change of control offer. This offer must be made within 30 days of the change of control under certain conditions.

In this regard, the company has contacted different banks specialized in debt restructuring to evaluate the possible courses of action. This is in addition to any other alternatives that the buyer of the majority share package of the company is evaluating in the event that the transaction is perfected. In other matters, periodically or driven by change in circumstances, the company analyzes the recoverability of its long-live assets, which is measured as the higher of value in use and fair value less cost of sales at the end of the period may be incurred. In view of the lack of tariff updates and the economic and health situation affecting the country, the company's projections regarding the recoverability of its property, plant and equipment have been updated.

The value in use is determined on the basis of projected undiscounted cash flow using discount rates that reflect the time value of money and the specific risk of the assets under consideration. Given the current uncertainty, several scenarios have been developed with their respective probabilities. After performing the recoverability analysis, the company has accounted for in its financial statement closing on December 2020, an impairment of property, plant and equipment in the amount of ARS 17 point billion.

Now moving over to events related to our regulation, on December 16th last year, pursuant to effective order number 1020, the national executive branch declared the launch of the interim tariff review renegotiation, which may not exceed 2 years of negotiations suspending until then the agreement corresponding to the respective current internal tariff review with the scope to be determined in each case by the regulatory agencies. It is provided that transitory negotiation agreements may be executed to modify to a limited extent the specific condition of the tariff review by establishing a tariff regime until reaching a final renegotiation agreement.

Furthermore, tariff administrative intervention provided for by effective order 277 last year was postponed until December 31 this year or until the conclusion of the charge review renegotiation. In turn, the electricity tariff freeze was extended until March 31 this year or until the entry into effect of the new transitory tariff schemes resulting from the transitory tariff regime, whichever occurs earlier.

Later, on January 19, 2021, the ENRE passed resolution #16, launching the transitory tariff update procedure, which objective is to establish a transitional tariff regime until the definitive renegotiation agreement is complete. To this effect, the regulatory agency has requested as a first measure, the submission of certain financial information as well as information on the 2021-2022 investment plan based on the investment plan established in the 2017 internal tariff review.

In connection with this process on February 24, through resolution number 53, the regulatory agency determined in order to inform our clear opinions regarding the transitional tariff regime for Edenor and Edesur to call a public hearing for March 30 this year. The hearing will be done virtually.

Regarding our debt with CAMMESA, on December 11, 2020, executive order number 990 partially approved the 2021 budget law, which in its section 87 provides for a regime for the regularization of liabilities outstanding with CAMMESA for the debt with electricity distributors accumulated as of September 30 last year, whether on account of energy consumptions, power capacity, interest and/or penalties under the conditions to be established by the Secretary of Energy, which may grant receivable for up to 5x the monthly average bill or 66% of the existing debt, whereas the balance should be regularized in up to 60 monthly installments with a grace period of up to 6 months and after the wholesale electricity markets current rate reduced by 50%.

The secretariat of energy may enter into regularization agreement specifically with each of the distributors. In line with this, on January 21, the secretariat of energy passed Resolution 40, which established the special liability of regularization regime for debts held with CAMMESA, validating the previously mentioned items. Under this resolution, the company filed on March 1 all the information required. As of today, the company is evaluating the scope and implication of this regime.

As for our regulating authority determination, on January 19 this year, the company expressed its conformity with agreement on the shunt exercise of regulation and control of the electricity distribution public utility entered into by the federal government, the province and the city of Buenos Aires which acknowledges that the title and capacity of electricity distribution public utilities granting authority in the company's concession area will remain vested in the federal government, agreeing to overview a series of instruments associated with the transfer of said utility to the local jurisdictions and committing to create a tripartite body for the regulation and control of the activity.

Regarding the collection of energy consumptions of shantytowns, on December 16, we entered into an agreement for the development of the preventive and corrective work plan for the electrical distribution grid of the metropolitan area of Buenos Aires to guarantee electricity supply to lower-income neighborhoods in the metropolitan area of Buenos Aires. As of December 31, the accumulated debt for shantytown consumptions in the concession area of Edenor was ARS 2.7 billion corresponding to the electricity supply during the October '17, December '20 period to shantytown and low-income neighborhoods, except for the portion paid by the federal government until May 2019, and the social tariff discounts contributed by the province of Buenos Aires since January 1, 2019, that are both already paid.

Under this agreement, debts were recognized for ARS 2.1 billion for consumption until July 2020, amount to be applied to the works plan for the performance of corrective and preventive maintenance works in the grids in charge of distributors and associated with low-income neighborhoods to improve the quality of service provided there. In January 2021, the company received the first disbursement in the amount of ARS 1.5 billion.

The second disbursement for ARS 500 million will be in the first quarter 2021. And the third disbursement, an additional amount of ARS 500 million in the second quarter this year. Lately, the fourth disbursement for the reminder, must be still validated by the ENRE and corresponds to the total consumption of shantytown between the month of August and December 2020. Moreover, on February 24, through resolution number 131, the Ministry of Energy determined to modify the stabilized price of energy of the large use distribution users to equate it with the large users of the wholesale electricity market for the period between 1 February and April 30.

In term, the category public health and education agencies large user was created and accepted from the increase. Additionally, through this resolution, the new value for the tax for the National Electricity Fund was increased from ARS 80 to ARS 160 per megawatt hour. Then through resolution ENRE number 270, the price change of this tax was postponed for invoices issued as of March 1 this year.

Finally, on another note, as informed previously in November 2015, Edenor had completed the acquisition of a real estate asset from contracting company Ribera Desarrollos, which breached the contracts, not even starting construction of the office building. Hence, Edenor terminated the contract for cost attributable to the -- to Ribera Desarrollos and filed a claim with the insurance company. Later in 2019, the collection of the surety bond in the amount of $15 million was agreed with Edenor's receivable from Ribera Desarrollos still being pending. In Ribera Desarrollos reorganization proceeding, 4 alternatives were submitted for the recovery of the receivables.

Edenor expressed its conformity with one of them, which requires making additional financial contributions. Given the company's complex economic and financial situation and to focus resources in the investment plan to maintain service quality added to the uncertainty regarding the recoverability of the credit subject to the evolution of the Ribera Desarrollos bankruptcy, the Board of Directors in its meeting held on January 18 this year, accepted the offer for the transfer of such credit for the total amount of ARS 400 million plus the contingent price subject to the execution of the project under certain conditions. It is worth highlighting that the partial recovery of the provision is accounted for in the first quarter 2021 under current accounting standards.

Now moving on to our results of the fourth quarter of 2020. Revenue from sales decreased by 26%, reaching ARS 18.3 billion in the quarter against ARS 24.6 billion in the same period of 2019. This ARS 6.3 billion decrease is mainly due to the tariff freeze in both the distribution value-added and the seasonal price passed on to tariff in inflationary context, which entailed a decrease in revenues in real terms. The failure to apply the update mechanism on the own distribution costs since March 2019, generates the same quarter-on-quarter nominal sales price resulting in lower sales in real terms for approximately ARS 2.4 billion.

Lower revenues are also due to lower billings on account of the real term decrease in the cost of financial purchases, measured in pesos for ARS 3.9 billion. Besides the physical volume of electricity sales, excluding consumption from shantytowns, experienced a slight decrease, generating lower revenues for ARS 16 million in the fourth quarter 2020 compared to the same period of the previous year. Taking into consideration our operational results, the volume of energy sales increased by only 0.1% this quarter, reaching 4.75 terawatt hour. It is worth highlighting that this quarter has been affected by the outbreak of the COVID-19 crisis, which generated strong changes in energy consumption.

Electricity consumption by residential customers increased by 8.1%, whereas commercial and industrial customers decreased their consumption by 10.6% and 7.1% respectively. The residential demand increased by 152 gigawatt hour, mainly because people spend more time at home and the implementation of the home office modality. The 85 gigawatt hour and 63 gigawatt hour decreases for commercial and industry customers respectively, were mainly due to the partial or total closure of stores and industries resulting from the measures implemented regarding the health protocols.

However, despite the above-mentioned decreases, this sector show a recovery in this quarter compared to the first month of the mandatory isolation. Additionally, the recovery in sales volumes may be partly explained by the tariff lag. Furthermore, Edenor's customer base rose by 1.1%, mainly on account of the increase in residential customers as a result of the market discipline actions implemented before the mandatory isolation and installation over the last year of more than 25,000 integrated energy meters that were mostly destined to regularize clandestine connections.

The electricity power purchases decreased by 28% to ARS 11.7 billion in the quarter against ARS 16.1 billion for the same period last year. This ARS 4.4 billion decrease is mainly due to the 24.5% real-term decrease in the average purchase price, which generated lower purchases in the amount of ARS 3.9 billion. The last increase of which residential customers were expected was 5% in August 2019, pursuant to Resolution #14 of the Secretariat of Renewable Resources and Electricity Market. The decrease was not affected by the energy volumes, net of losses, which only increased by 0.3% and was valued at approximately ARS 31 million.

In turn, the reference seasonal price for customers is still subsidized by the federal government, especially in the case of residential customers where between October and November 2020, the subsidy reached 54% of the system's actual generation costs. Additionally, the energy loss rate decreased from 19.4% in the fourth quarter last year to 18.4% for the same period in 2020, but we should consider the increase in bad debt at the same time. In turn, costs associated with these losses decreased by 35% in real terms due to the failure to update the reference seasonal price in an inflationary context, resulting in lower purchases for ARS 537 million.

It is worth highlighting that over the past few years, Edenor has suffered a systematic deterioration of its asset and financial position as a result of the tariff lag, the increase in operating costs, the drop in demand and the increase in energy theft. Besides, the outbreak of the global pandemic has brought several consequences in global economic activities, which directly affected the company's activity, generating reduced collections, especially at the beginning of the mandatory lockdown. For these reasons, we have seen the need to partially defer payments to CAMMESA for the energy acquired in the wholesale electricity market as from maturities taking place in March 2020, accumulating as of December 30, 2020, at ARS 12.4 billion debt before interest.

In this sense, the debt accumulated as of September 30, 2020, should be recovered by the special liability regularization regime approved by resolution number 40 of the Secretariat of Energy. But despite the fact that of the date of this report, the company has admitted all the information that has been required under this resolution, it's still uncertain the scope and implication of this regime.

Meanwhile, operating expenses have mostly remained stable, reaching ARS 9.5 billion in the fourth quarter 2020. This is mainly explained by ARS 332 million increase in fees and remuneration for services and increasing the allowance for the impairment of receivables in the amount of ARS 278 million because of the increase in the [uncollectable] rate associated with the COVID-19 context, which resulted in a substantial increase in the delinquent balance.

Finally, salaries and Social Security taxes have increased by ARS 137 million and communication expenses by ARS 54 million. These increases were partially offset by lower penalties in the amount of ARS 417 million as a result of the improvement in service quality levels and lower supply consumption in the amount of ARS 362 million caused by the reduction of certain activities as a consequence of the measures adopted by the regulator because of the pandemic.

Regarding our financial results, we experienced an 11% increase in losses, which amounted to ARS 3.2 billion in the fourth quarter 2020 against losses for ARS 2.9 billion in the same period last year. This difference is mainly due to higher accrued interest on the debt incurred with CAMMESA for ARS 2.2 billion, and our profit in the amount of ARS 625 million from the repurchase of own corporate bonds made in the fourth quarter last year. These results were partially offset by lower financial interest charges for ARS 1.8 billion and a positive change in the value of financial assets for ARS 948 million.

Finally, net results decreased by ARS 13.3 million, recording losses for ARS 15.6 billion in the fourth quarter 2020 against losses for ARS 2.4 billion for the same period in 2018. This difference is mainly due to the result of the impairment of assets recorded in 2020 for ARS 17.4 billion as a result of the analysis of the recoverability of the assets under the context of tariff uncertainty for Edenor and economic and health emergency for the country.

Without considering this effect, operating results would have decreased by ARS 2.2 million -- ARS 2.2 billion in the fourth quarter 2020 against the same period of the previous year. These negative results were partially offset by better results from inflation adjustment and the effect in income tax of the assets impairment accounted for in the quarter.

Talking about Edenor adjusted EBITDA, it showed a ARS 1.4 billion loss in the fourth quarter, ARS 2.1 billion lower than in the same period of 2019. The EBITDA adjustment in the quarterly comparison period corresponds with the impairment of assets.

Regarding Edenor's capital expenditures, during this quarter, our investments totalized ARS 3.2 billion compared to ARS 2.6 billion in the same quarter of the previous year, from which 38% corresponds to network infrastructure expansion and 52% to network maintenance. CapEx increased by 27% compared to the same period previous year is mainly a result of the company's efforts, although the tariff freeze and the restrictions generated by the pandemic throughout the year. This higher investment compared to the same period of 2019 added to the recovery in the fourth quarter of the deferments in investment of the previous month as a consequence of the delays caused by the preventive and mandatory social isolation.

The lack of predictability in the near future as a consequence of the tariff freeze and the accumulated drop in demand registered over the last year, may affect the pace of investment in the ambitious plan set by Edenor, always making sure this slowdown does not affect compliance with service quality indicators, which have exceeded regulatory requirements. All this with the due care of our employees, contractors and customers, and the application of strict health, safety and hygiene protocols in each of the activities conducted under this unprecedented circumstance.

The investment highlights for the quarter were the commissioning of the Colegiales, Libertad and Jose C Paz station and the new El Cruce step-down transformer center for 240 megawatt. Additionally, the 2 new capacitor banks of 150 megawatts each were mounted in the Rodriguez substation. Lastly, 19 kilometers of new high-voltage transmission lines were constructed, where other 4.5 kilometers were renewed.

Regarding quality standards, these are measured on the duration of frequency of service outages using the SAIDI and SAIFI indicators. At the closing of the fourth quarter of 2020, SAIDI and SAIFI indicators were 12.2 hours and 4.6 outages per year over the last 12 months, evidencing a 23% and 26% improvement respectively, compared to the same period of the previous year. In turn, we are proud to say that these indicators are 44% and 37% lower than those required in integral target review to this period.

This recovery in service levels is mainly due to the ambitious plan devised by the company since 2014, the various improvements implemented in the operating processes and the adoption of technology applied to the grid operation and management. The success of this plan is also evidenced by the fact that these indicators exceeded the service quality improvement path defined by the regulatory agency, even complying with indexes required for 2021.

Taking into account our energy losses that reached 18.4% in the fourth quarter this year against 19.4% for the same period in 2019. Costs associated with these losses decreased by 35% in real terms, resulting in a ARS 537 million improvement. The works of multidisciplinary teams to develop new solutions to energy losses continued as well as activity aiming to reduce them. Analytical and artificial intelligence tools were used to enhance effectiveness in the routing of inspections and market discipline actions continue with the objective of detecting and normalizing regular connections, fraud and energy test.

Over the last year, approximately 462,000 inspections of Tariff 1 meter were conducted with a 57% efficiency and 25,000 MIDE meters were installed. Regarding the recovery of energy, besides the customer put back to normal with MIDE meter, clandestine customers with conventional meters were also put back to normal. Moreover, a new energy balance system was implemented and developed of micro-balance in private neighborhoods and country class. In all cases, a striking rate of recidivism in fraud has been observed. Along these lines, 349 preliminary rulings were made, 125 criminal complaints were filed and 71 people were arrested in 42 operations carried out together with the security forces.

Finally, as far as financial debt is concerned, the outstanding principal of our dollar-denominated financial debt amounts to a 98.3% -- $98.3 million, sorry, whereas the net debt amounts to $21.9 million. The financial debt consists of $98.3 million corresponding to corporate bonds maturing in 2022 as the last prepayment of the loan taken with -- taken out with ICBC in the amount of $12.5 million was made in October 5.

Lastly, after the closing of the year on January 24, treasury corporate bonds in the amount of $114,000 were canceled, so $98.2 million debt remains outstanding.

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

[Operator]

The floor is now open for questions. [Operator Instructions] Our first question comes from Frank McGann with Bank of America.

[Frank McGann, Bank of America]

Just a question on the tariff review process. First of all, there's a lot of press reports about what could happen in terms of an increase over the near term. I was wondering if you have any indications yet as to what could be proposed for that and what the net effect could be for yourselves? And then secondly, in terms of the 2-year process or up to 2 years to do a full tariff review, how do you expect that to move forward? And what -- how will the basis for that review be different, say, than what has been done in the past?

[Leandro Montero, CFO]

Thank you, Frank. Well, regarding the first question, we don't have any clue about how much the increase will be for the next month or the short term. Of course, we are making our requirement according to the regulations. So we don't know exactly how much the regulator will approve. But what we think that finally it could be -- what -- we don't know exactly if it could be a mixture between subsidy and tariff increase that will allow to put the company in an income level that allows it to pay for the OpEx and the CapEx, at least during this transitory period.

And at the same time, we have this special regime set by the Secretariat of Energy in order to compensate the debt we have with CAMMESA making a recognition about the past income that we didn't collect from our clients because of the tariff freeze. And regarding the second questions, I don't know exactly how it will be developed, the new comprehensive tariff review. It's very, very soon to talk about it.

We think that finally, we will be working during this 2-year period in a new tariff review that will allow us to reach in 2 years a new tariff scheme. But we -- it's very soon to know how that tariff review or definite tariff review will result.

[Operator]

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

[Leandro Montero, CFO]

Well, thank you for joining the conference call. Please keep you and your family safe and healthy as far as you can, and have a nice afternoon. Bye-bye.

[Operator]

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