Empresa Distribuidora y Comercializadora Norte SA

BCBA:EDN

Earnings Call Transcript 2021-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 2021 Results Conference call. We would like to inform you that this event is being recorded. And all participants will be in a 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’s. 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 afternoon – good morning, everyone, and welcome to Edenor's Earnings Conference Call for the First Quarter 2021. I truly hope that you and your family are safe and healthy, and we really expect the vaccination process to continue to be successful and help us to return to normal life. 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 member of our team for more details on the results of the period or any doubts you might have.

I'd like to first acknowledge the extraordinary efforts our staff has made to continue giving service to users while managing high-quality and security standards, given the unique circumstances we face, and we are still facing in Argentina and in particular in our operating area with the COVID-19 second wake outbreak. With that said, we will focus on the relevant events taken place lately.

First, on March 31, pursuant to ENRE Resolution number 78, the regulator issued the new tariff schemes effective as from April 1, based on the wholesale electric markets winter seasonal programming. The new tariff scheme reflects the incorporation of the last increase of 5% with the exception of residential users in August 2019, as provided by Resolution number 14 of that year of the secretary of renewable resources and electricity market, which have not been passed to tariffs and was being burdened by Edenor.

In turn, the seasonal price increase for large distribution users is also incorporated, making them equal to the rest of the large wholesale electric market users. These increases reflect changes in the seasonal price of energy that are transferred to the final tariff without affecting Edenor's income from the value-added by distribution or VAD.

Regarding VAD, on March 30, Edenor filed its presentation in the public hearing, addressing the distribution's transitory tariff update. Later on April 13 and pursuant to resolution number 107, the regulatory entity established a new tariff schemes including a 9% tariff update applicable to users for regions as from May 1st this year. This partial update involves a 20.9% VAD increase for Edenor generating higher estimated revenues in the amount of ARS 5 billion for the May, December period.

In other matters on April 30, 2021 and pursuant to resolution number 371, the Secretary of Energy moved forward with the regulation of Section 87 of the 2021 budget. This resolution provides for the application of the Special Liabilities Regularization Regime approved in resolution number 40 earlier this year, which set a limited number of credits to be applied to compensate CAMMESA bill according to the following criteria.

For the tariff freeze, the maximum amount of one average monthly CAMMESA bill will be recognized. For policies implemented to benefit the demand during the period March to December 2020, including the effects of executive order number 311, a maximum amount of two CAMMESA bills. For the investment plan to be submitted a maximum amount of another one CAMMESA bill. In turn, CAMMESA is instructed to perform all necessary acts to process the information submitted by each distribution agent to draw up and submit to the Secretary of Energy a summary chart establishing the treatment to be given to the debt under the above described criteria. In our case the average monthly CAMMESA bill is around ARS 5 billion, but we have no clue how the authorities will apply these credits.

Regarding our corporate bond ratings on April 9, Moody's Local downgraded Edenor's domestic currency ratings from A to BBB+ and foreign currency ratings from A- to BBB, maintaining the negative outlook in both cases. The change reflects the impact of the tariff lag and the uncertainty on the recoverability of costs under current regulatory framework.

Finally, regarding the sale of Edenor's controlling stake as of the date of this conference call the transaction closing is still subject to the approval by the ENRE and the payment of the second installment by [indiscernible] which should be fulfilled after the regulatory approval.

Now moving on to our results of the first quarter of 2021, revenue from sales decreased by 28% to ARS 21 billion in the first quarter this year against ARS 29 billion for the same period last year. This ARS 8 billion decrease is mainly due to the tariff freeze in both the VAD and the seasonal price passed on to tariffs in an inflationary context, which entailed a decrease in revenues in real terms. The failure to apply the updated mechanism on the VAD resulted in lower sales in real terms of approximately ARS 3.5 billion.

Lower revenues are also due to lower billing on account of the real term decrease in the cost of energy purchased measured in pesos for ARS 4.9 billion. On its part, the physical volume of electricity sales excluding consumption by shantytowns experienced a slight increase generating higher revenues for ARS 51 million in the quarter compared to the same period of the previous year. If all adjustments of it to date had been implemented, the VAD for the quarter should have increased by ARS 5.5 billion.

Taking into consideration our operational results. The volume of energy sales increased by only 0.2%, reaching 5,212 gigawatt hour in the first quarter of this year, only nine gigawatts hour more than the same period of 2020. It is worth highlighting that this quarter has been affected by the COVID-19 crisis, we generated strong phases in energy consumptions compared to same period last year, which was only affected for the last 10 days of the quarter.

Electricity consumption by residential customers increased by 3.3%, whereas commercial small and medium and industrial customers, decreased their consumption by 5.2% and 4.5% respectively. The residential demand increased by 72 gigawatt hour, mainly because people spend more time at home due to the restrictions of movement and implementation of the home office modality, despite having an average compared for the quarter 1.4 Celsius degrees lower than the previous year.

The 45 gigawatt hour and 42 gigawatt hour decreases for commercial and industrial customers respectively are mainly due to the partial or total closure of stores and industries, resulting from the different restrictions applied according to the measures implemented. However, the abrupt decline in activity evidenced at the beginning of the restrictions imposed last year have been decreasing and reversing. And a recovery in the industrial production index can be observed in the quarter, compared to the first month of the mandatory isolation or even if we compare the demand behavior in the month of March in comparison to the previous year.

Additionally, the recovery in sales volumes may be partially explained by the tariff lag. Furthermore, Edenor's customer base rose by 1.4%, mainly on account of the increase in residential customers as a result of the market discipline actions and installation over the last year of more than 33 [Indiscernible] integrated energy meters that were mainly distinct to regularize planned time connections.

The electricity power purchases, decreased by 30% to ARS 12.7 billion in the first quarter, against ARS 18.3 billion for the same period in 2020. This ARS 5.6 billion decrease is mainly due to a 28% decrease in the average purchase price in real terms, which generated lower expenses from ARS 4.8 billion. The purchase price process since August 2019 has had no modifications between the comparison periods. The update established by Resolution 78 I mentioned before applies to us from April 2021. So it has no effect in the third quarter. This decrease was not affected by the energy volume net of losses which only fell by one -- sorry by 0.5% and was valued at approximately ARS 58 million.

In turn the reference seasonal price for customers is still subsidized by the federal government especially in the case of residential customers where the subsidiary reached 64% of the system after generation costs in the first quarter of 2021. Additionally, the energy loss rate decreased from 18.4% in the first quarter 2021 to 16.6% or from -- to sorry 16.6% in the same period last year. Therefore, the decrease in purchases is also explained by the cost associated with energy losses which decreased by 45% in real terms due to the failure to update the reference seasonal price in an inflationary context resulting in lower purchases for ARS 682 million.

This is worth highlighting that over the past few years Edenor has suffered a systematic deterioration of its assets and financial position as a result of the tariff lag and the increase in operating costs, especially during the last two years. The drop in demand and the increase in energy sales.

Besides the outbreak of the global pandemic has brought several consequences to the economic activities worldwide that directly affected the company's activity, generating reduced collections especially at the beginning of the lockdown. For these reasons, we have seen the need to partially defer permits to CAMMESA for the energy acquired in the wholesale electricity market as from maturities taking place in March 2020 accumulating as of March 31, 2021, a ARS 14.9 billion debt before interest.

As regards to the treatment of the debt accumulated as of September 30, 2020 pursuant to resolution number 371, the Secretary of Energy moved forward with the regulation of the Special Liabilities Regularization Regime and requested information to CAMMESA for their determination. As of the date of this report, the company is elaborating all the additional information requested by this resolution.

Meanwhile, operating expenses increased by 2% reaching ARS 9 billion against ARS 8.8 billion in the first quarter last year. This is mainly explained by the ARS 704 million increase in penalties as a result of the recording of recoveries in the first quarter last year of almost ARS 500 million and the decrease of the kilowatt hour price established in Resolution 78 that impact on the penalties accumulated as of first Q 2021.

That are pending to be sanctioned for ARS 203 million. This increase was partially offset by lower consumption of supplies in the amount of ARS 232 million, lower salaries and social security taxes in the amount of ARS 203 million and a lower depreciation of property plant and equipment in the amount of ARS 128 million.

Regarding our financial results, we experienced a 55% increase in losses which amounted to ARS 4.3 billion in the first quarter 2021 against losses for ARS 2.8 billion in the same period in 2020. This difference is mainly due to higher interest accrued on the debt entered with CAMMESA for ARS 2.8 billion.

The results were partially offset by the result of the sale of the Ribera Desarrollos receivable in the amount of ARS 434 million made in January, a positive change in the value of financial assets in the amount of ARS 344 million, lower losses on account of exchange differences for ARS 320 million, resulting from a decrease in foreign currency denominated debt; and lastly, global financial interest charges in the amount of ARS 148 million.

Finally, net results decreased by ARS 1.7 billion, recording losses for ARS 656 million in the quarter against proceeds for about ARS 1 billion for the same period in 2020. This difference is mainly attributable to a lower operating income as a result of the tariff freeze in the amount of ARS 3.5 billion and higher financial losses in the amount of ARS 1.5 billion in the first quarter of 2021 compared to the same period of the previous year.

These negative results were partially offset by a higher result for pursuer to changes in purchasing power, caused in part by higher commercial debt and by a lower income tax charge.

Talking about Edenor's adjusted EBITDA it showed ARS 930 million profit, ARS 3.6 billion lower than in the first quarter of 2020, mainly on account of the lower operating income. There have been no EBITDA adjustments between the comparison period.

Regarding Edenor's capital expenditures, during this quarter, our investment totalized ARS 2.5 billion compared to ARS 2 billion in the same quarter the previous year from which half corresponds to network infrastructure expansion and half to network maintenance.

CapEx increased by 29% compared to the same period of the previous year, mainly as a result of the efforts made by the company, despite the reduction in the gross margin on account of the tariff freeze and the restrictions generated by the pandemic throughout the year.

These higher investments compared to the same period of 2020 are mainly due to the recovery in first quarter of the regulated costs in the previous months, because of the preventive measures taken by the national and the local governments.

The investment highlights for the quarter were the commissioning of the new Edison one and Jose C Paz substation of 80 megawatts each, which became operational in February and March this year.

The lack of predictability in the near future and the accumulated drop in demand registered over the last year may affect the pace of investments in the ambitious plans 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 a strict health, safety and hygiene protocols in each activities conducted under this unprecedented circumstance. Regarding quality standards, these are measured based on the duration of frequency of service outages during -- using the SAIDI and SAIFI indicators.

At the closing of the first quarter of 2021, SAIDI and SAIFI indicators were 11.7 hours and 4.4 outages per year over the last 12 months. Evidencing a 18% and 22% improvement respectively compared to the same period of the previous year. In turn, these indicators are 27% and 15% better performance respectively than those required in the integral service review for the end of 2021.

This recovery in service levels is mainly due to the ambitious plans devised by the company since 2014. The various improvements implemented in the operating processes and the adoption of technology applied to the grid's operation and management.

Taking into account our energy losses, we have reached 16.6% in the first quarter of this year against 18.4% for the same period in 2020. Costs associated with these losses decreased by 45% in real terms resulting in ARS 682 million improvement. The works of multidisciplinary teams to develop new solutions to energy loss continue as well as activities aiming to reduce them. Analytical and artificial intelligence tools were used to enhance effectiveness in the routine of inspections and market discipline actions continued with the objective of detecting a normalizing regular connections, fraud and energy test.

Over the last year, even despite the pandemic restrictions approximately 442,000 inspections of Tariff 1 meters were conducted with a 57% efficiency and almost 34,000 MIDE meters were installed. Regarding the recovery of energy, besides the customers 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 in all cases, a striking rate of recidivism in fraud has been observed.

Finally as far as financial debt is concerned, the outstanding principal of our dollar-denominated financial debt amounts to ARS 98.2 million whereas the net cash position of financial debt amounts to ARS 2.1 million. The financial debt consists exclusively of corporate bonds maturing in 2022.

Lastly, after the closing of the quarter on May 4th, treasury corporate bonds in the amount of $110,000 were canceled, so $98.1 million remain outstanding.

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] Our first question comes from Ezequiel Fernandez with Balanz. Please go ahead.

[Ezequiel Fernandez, Balanz]

Hi. Good morning, everybody. Ezequiel Fernandez from Balanz. Thank you for the materials and congratulations on the work on lowering losses and the quality of service side. I have two questions. The first one is related to the seasonal price. I know that it does not impact your operational results directly, but it's helpful for us to know about the update in April for the GUDIs. What was the percentage increase for the overall average seasonal price?

And my second question is related to the regularization of the payables with CAMMESA. Right now, Edenor has something of $400 million in pending payables including different components too. Where do you think you should go maybe till year end? And at what pace if it's possible to comment a little bit on that? Thank you.

[Leandro Montero, Chief Financial Officer]

Hi, Ezequiel. Thank you very much for your words about the quality of service and energy losses. We are trying to control. First, regarding the seasonal price in the case of Edenor, the seasonal price had an impact of 11% average almost 11% average on the whole purchase of Edenor to the whole purchase of energy of Edenor to CAMMESA. But this increase as you mentioned before it will include two components. The first one is for all the demand for consumptions higher than 300 megawatts -- sorry kilowatt they are impacted by 5%. This increase its remaining increase or an increase that has been included to the CAMESSA bill in August 2019, but it has not been passed through to tariff. So it was being burdened by Edenor. And the company

[Ezequiel Fernandez, Balanz]

Okay.

[Leandro Montero, Chief Financial Officer]

No, no, the other components of the seasonal price increase is increased for Goodies as you mentioned before. And for Goodies it's almost 100% increase in the cost of energy included in their tariff okay? So I'm going to -- can you repeat the second question, sorry? About initial debt.

[Ezequiel Fernandez, Balanz]

Yeah. On the amount – yeah, the amount of account payables in the Edenor balance sheet at the end of March is around $450 million. That includes different components. And considering that you will have to start normalizing your payables with CAMMESA, we were wondering from these levels to where you could go by year-end, if it's possible for you to give us any indication at this moment?

[Leandro Montero, Chief Financial Officer]

Well it's not so simple. First, first of all ,I can say that during the first quarter this year we paid to CAMMESA the -- on average 83% of the bill, okay? So we just increased our debt with CAMMESA for around ARS 2.4 billion, which is this remaining 17% average. So that was the first quarter. Now to make an estimation on how much that we will have at the year-end, we should expect or we should wait which other measures the government will take. By the moment, they approved an increase for the VAD of about 21% which means that for the period May-December this year, we will collect approximately ARS5 billion or more. This increase, of course, doesn't cover the full cost of the company.

Just to have an idea, according to the internal tariff review, we should have received an increase of almost 137% applicable from May 1st. But instead, we received an increase of 21%. So we are still waiting for another 122% increase in VAD, okay. So we know that this will not happen during this year or at least not for the full amount. So we are discussing with the government, which will be the following steps.

Maybe we are trying to get to an agreement in order to complete the remaining amount of money we need to operate to complete the CapEx plan. So it depends on this agreement, we are trying to reach with the government. It depends on another agreement we are trying to reach with the government according to shantytowns consumption that could mean ARS1.5 billion in addition to our revenue, or at least to cover the cost of energy we delivered in the shantytowns that for 2021 is not being paid still by the government. And in addition to that, we should reach an agreement in connection with the debt or with -- or the amount owed to CAMMESA because of the past. So we have these three different agreements we are discussing with the government, but we have no clue on timing or even the amount that this agreement could involve.

[Ezequiel Fernandez, Balanz]

That’s right. I would just like to go back to my first questions regarding the goodies. If we go to page 7 of your presentation where you have the energy sales breakdown for the first quarter of 2021. On that pie chart in the bottom left you have 17% marked in purple as industrial clients. Are those the goodies or the goodies make up for more or less than that?

[Leandro Montero, Chief Financial Officer]

They are the goodies.

[Ezequiel Fernandez, Balanz]

Yeah, those are the goodies? Okay, perfect. That’s it. That’s all from my side. Thank you very much.

[Leandro Montero, Chief Financial Officer]

You're welcome.

[Operator]

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

[Leandro Montero, Chief Financial Officer]

Sorry we have certain -- some questions from the web, we would like to answer. We are going to read one question we received -- or two questions, but they are on the same topic. So we are going to read the questions for everyone.

[Unidentified Company Representative]

Hi, everyone. Hi. Good morning. And thank you for questions. Could you provide us an update on the change in control of the company is there a realistic time line for when the regulator could approve the transaction?

[Leandro Montero, Chief Financial Officer]

Okay. Well regarding the sale of the controlling stake of the company as you mentioned is under the approval of the regulator they have 90 days since the last information is provided to the regulator and they can ask any information they want during the period they want.

But all the information asked by the regulation till now has have been answered on time. So according to that information maybe they have more than 60 days from now to approve the sale of the controlling interest in Edenor. But we have no idea or no time line at least from the regulator in order to know when the sale could be approved. It could be this week or it could be in two months or three months.

[Unidentified Company Representative]

So we have no more questions.

[Leandro Montero, Chief Financial Officer]

At least from the web page.

[Operator]

We have no more questions from the phone side as well. This concludes our question-and-answer session. At this time, I would like to turn the floor back to Mr. Montero for any closing remarks.

[Leandro Montero, Chief Financial Officer]

Okay. Thank you very much and thank you all of you for joining this conference call. Please keep safe you and your family and healthy as far as you can. Have a good day. Bye-bye.

[Operator]

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