Empresa Distribuidora y Comercializadora Norte SA (EDN) 2019 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Edenor's Fourth Quarter 2019 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 companies. 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 call over to Mr. Leandro Montero, CFO of Edenor. Mr. Montero, you may begin your conference.

Thank you very much. Good morning, everyone, and thanks for joining our fourth quarter 2019 earnings conference call. 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.

First, last December, the National Executive Branch enacted Social Solidarity and Productive Reactivation Law within the framework of the public emergency. Through this, the National Government was vested with the power to maintain electricity and natural gas tariffs, which are under federal jurisdiction, and to begin a process for the renegotiation of the current Tariff Structure Review or an extraordinary review of tariffs for a maximum term of 180 days, with the purpose of reducing the actual tariff burden on households, businesses and industries for 2020. Provinces were invited to adhere to these policies geared at maintaining the tariff schemes and conducting a renegotiation or an extraordinary review of tariffs in their respective jurisdictions.

Additionally, this law enables the National Government to conduct an administrative intervention of the Electricity National Regulatory agency, or ENRE, for a term of 1 year and provided that during the life of the declared emergency, the ENRE would maintain its jurisdiction over Edenor's electricity distribution utility service. As of today, the new controller has not yet been appointed.

In this context, on December 27 last year, the ENRE instructed Edenor to refrain from applying as of January 1 this year the tariff schedules resulting from the Tariff Maintenance Agreement concluded between the company and the National Government dated September 19, 2019, since it has lost its applicability due to the tariff emergency provided in the aforementioned law, maintaining the validity of the tariff schedule approved by ENRE Resolution 104 of April 2019. Edenor has appealed this resolution before the regulation, with no answer as of today.

Regarding our credit ratings, on January 14 this year, Standard & Poor's Global Ratings downgraded Edenor's local ratings from BBB to BB-, keeping a negative outlook. In turn, it downgraded Edenor's global ratings from B- to CCC+, both with a negative outlook. This downgrade reflects a volatile macroeconomic context and the uncertainty regarding tariff updates.

Now moving on to our results in the fourth quarter of 2019. Revenue from sales increased by 10.2%, reaching ARS 18.1 billion against ARS 16.4 billion in the same quarter in 2018, despite the deferral in the August 2019 distribution cost update. This is explained because the ARS 1.7 billion increase is mainly accounted for by higher billings due to the increase in energy cost passed through to tariff measured in pesos in the amount of ARS 951 million. In turn, during the last quarter, revenues not recorded on the fourth quarter 2018 from installments of the tariff deferral for the August 2018-February 2019 period in the amount of ARS 776 million and collections from social tariff cap recoveries for ARS 482 million were recognized.

Additionally, the higher physical volume of electricity sales increased revenues for ARS 307 million. This was partially offset by the lack of application since August 2018 of the inflation adjustment on the distribution cost for ARS 670 million and lower collections under the deferred income recoverable in 48 installments accrued during the February 2017-January 2018 period for ARS 174 million. Finally, between the comparison periods on distribution cost adjustment -- one distribution cost adjustment was applied for a total 32%, corresponding to the second semester of 2018 and the deferral of half of the adjustment of the first semester of 2018, plus the recognition resulting from the deferral of such adjustment.

It is important to note that the Secretariat of Energy Resolution No. 14 established an increase in the seasonal price of 5% for nonresidential demands and 7% for large users in August 2018. As the new tariff scheme was not issued, said increase was not incorporated into the tariff but was included in Edenor's payments to CAMMESA for a total of ARS 295 million in the fourth quarter 2019. Likewise, lack of granting of tariff adjustments in an inflationary context, such as that observed in 2019, had a very negative impact on the company's added value of distribution, combined with the fact that the composition of the formula to update the cost of distribution, which replicates Edenor's cost structure, has a greater weight on the salary index rather than the evolution of the consumer's price index and the wholesale price index.

Taking into consideration our operational results, the volume of energy sales increased by 2%, reaching 4,745 gigawatt hour or 4.7 terawatt hour in the fourth quarter last year against [4.6] gigawatt hour for the same period of 2018. This increase was mainly explained by a 3.8% increase in consumptions for essential customers, 1.1% increases for medium and small commercial customers and 0.6% increase for large users. The residential demand increased mainly as a result of higher average temperatures in November and December last year, which were close to 0.5 degrees Celsius higher.

The improvement in small commercial customers reflects the slight recovery in the commercial activity, whereas the increase in the large uses energy consumption is explained by an increase in the industrial activity in the last months of the year, which is reflected in the slow recovery in the industrial production index. Additionally, part of the increases in sales volumes is explained by the tariff lag. Furthermore, Edenor's customer base rose by 2.6%, mainly on account of the increase in residential customers, which have risen to levels above the historical growth as a result of the implemented market discipline actions and installation during the last year of more than 75,000 integrated energy meters that were mostly destined to regularize clandestine connections. By contrast, the number of commercial customers experienced a decrease due to lower activity levels over the last year.

Electricity power purchases increased by 13.3%, reaching ARS 11.9 billion in the fourth quarter 2019 against ARS 10.5 billion in the same period of 2018. This ARS 1.4 billion increase is mainly due to the 9.8% real-term increase in the average purchase price, which generated an impact of ARS 973 million as a result of the entry into effect of the new reference seasonal prices for electricity applicable as from February, May and August 2019. In turn, 2.6% increase was recorded in energy volumes, net of losses due to the increase in demand, which was valued at approximately ARS 274 million. Despite this increase, the reference seasonal price for residential customers is still subsidized by the federal government, especially in the case of residential customers, where in the fourth quarter last year, the subsidy reached 50% of the system's actual generation cost. Additionally, the energy loss rate increased from 17.1% in the fourth quarter 2018 to 19.4% in the same period last year and was mainly generated by an increase in the incentive to fraud as a result of the economic recession and the impact of last year's tariff increases. In turn, the cost associated with these losses increased by 14.6% in real terms, reaching ARS 144 million, mainly on account of the application of the new seasonal price point determination.

Meanwhile, operating expenses decreased by 15.7% or ARS 1.3 billion, reaching ARS 6.9 billion against ARS 8.2 billion in the fourth quarter 2018. This is mainly explained by a decrease in penalties in the amount of ARS 1.6 billion as a result of extraordinary penalties for reading periodicity, the adjustment of penalties resulting from the change in the calculation criterion and the updating of penalties, which were later included in the Liabilities Regularization Agreement recorded in the fourth quarter of 2018 for ARS 672 million, ARS 554 million and ARS 427 million, respectively. In turn, a ARS 134 million decrease in supplies consumptions was posted. These decreases were partially offset by ARS 198 million increase in allowances for the impairment of receivables, mainly due to higher average bills and a ARS 131 million increase in salaries and social security taxes.

Regarding our financial results, we experienced a 51% decrease in losses, recording a ARS 1.8 billion loss in fourth quarter 2019 against ARS 3.6 billion loss for the same period in 2018. This difference is due to the positive variation in other financial results in the amount of ARS 2.9 billion, mainly resulting from the devaluation of the real estate receivable in the fourth quarter of 2018 for ARS 1.7 billion. Other positive impacts in financial results were a ARS 1 billion reduction in the payment of commercial interest on the debt with CAMMESA, resulting from the regularization of liabilities; a reduction of ARS 1 billion in financial interest payments; and the profit generated by the repurchase of corporate funds for ARS 451 million in the fourth quarter 2019. These effects were partially offset by higher exchange rate loss in the amount of ARS 1.8 billion, resulting from the devaluation of the peso against the U.S. dollar in the fourth quarter 2019 versus an appreciation in the same period of 2018 and the actualization of the value of investments agreed in the Liabilities Regularization Agreement for ARS 1.5 billion.

Finally, net results showed ARS 432 million increase in losses, which reached ARS 1,754 million in the quarter against ARS 1,322 million losses for the same period of 2018. The gross margin experienced a slight increase as a result of higher sales, which was partially offset by higher electric power purchases in pesos and the increase in energy losses. The operating result was also higher due to the lower operating expenses. In this context, increases in operating and financial results were overshadowed by a lower impact of inflation adjustments and higher tax accruals in the fourth quarter 2019.

Talking about Edenor's adjusted EBITDA. It shows ARS 277 million profit in the quarter, ARS 589 million higher than in the same period 2018. Adjustment corresponds to penalties from other periods for deviating from the investment plan and reading periodicity, the application of the new calculation criterion and the updating of penalties and commercial interest.

Regarding Edenor's capital expenditures. During the quarter, our investment totalized ARS 2.6 billion, compared to ARS 5.2 billion in the same quarter the previous year, from which half corresponds to network infrastructure and expansion and half to network maintenance. During 2019, company CapEx reached ARS 9.9 billion, 24.6% lower than the ARS 13.1 billion invested in 2018 in adjusted terms. The reduction in investments in the second semester of 2019 compared to the same period of the previous year is mainly due to the slowdown in the plans set by Edenor for the year as a result of lower revenues due to the fall in sales volumes and the postponement of tariff updates. The plan maintains focus 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 tariff review.

Regarding quality standards, they are measured based on the duration and frequency of service outages using the SAIDI and SAIFI indicators. SAIDI refers to the duration of outages and measures the number of outage hours per year per client. SAIFI refers to the frequency of outages and measures the number of times a user experiences an outage during a year.

At the year -- at the end of the year, SAIDI and SAIFI indicators were 15.9 hours and 6.2 outages per year during the last 12 months, evidencing a 29.6% and 11.3% improvement, respectively, compared to the previous year. In turn, these indicators are almost 40% and almost 27% lower than those required by the last tariff review. This recovery in service levels is mainly due to the fulfillment of the ambitious plan devised by the company since the comprehensive tariff review. Success is also evidenced by the fact that these indicators exceed the service quality improvement path defined by the regulatory entity. We know we still have a big challenge in our path to full normalization of this quality of the service, but we are deeply proud of what we have achieved during the last year.

Considering our energy losses, they reached 19.4% in the fourth quarter last year against 17.1% for the same period in 2018. The drop in the demand in the last year, especially by large users, would have substantially lower energy losses level, adversely affect this indicator in percentage terms. Likewise, the rise in the average energy purchase price also increases the value in pesos of these losses.

Throughout this hot issue, during 2019, multidisciplinary terms -- teams were created to work on new solutions to [address this]. Furthermore, the level of activities aimed at reducing losses continued to increase and analytical and artificial intelligence tools were used to enhance effectiveness in the routing of inspections. Market discipline actions were intensified with the purpose of detecting and normalizing irregular connections, fraud, energy side and installation of inclusion meters increased.

In 2019, approximately 485,000 inspections of tariff 1 meters were conducted with a 52% efficiency, and more than 75,000 MIDE meters were installed. Regarding the recovery of energy, besides the customers put back to normal with MIDE meters, clandestine customers with conventional meters were also put back to normal. In all cases, a striking fraud recidivism rate was observed. Despite these measures, losses continued to grow as a result of a greater number of clandestine connections due to the impact of the economic recession and tariff increases.

Finally, as far as financial debt is concerned, the outstanding principal of our dollar-denominated financial debt amounts to $162 million, whereas the net debt amounts to $111 million. The financial debt consists of $137 million corresponding to corporate bonds maturing in 2022, net of repurchases and $25 million to the bank loans taken out with ICBC Bank, which matures this year. Currently, both liability bear interest at a fixed rate. Lastly, in the fourth quarter 2019, corporate bonds with a total face value of $27 million were repurchased.

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

(Operator Instructions) Showing no 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.

Thank you. Thank you all of you joining our conference call. Have a nice day. Bye.

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