Empresa Distribuidora y Comercializadora Norte SA (EDN) 2020 Q3 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 Third 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 and 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 can 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.

Thank you very much. Good afternoon, everyone, and welcome to Edenor's earnings conference call for third quarter 2020. I truly hope that you and your family are safe and healthy during these strange times. 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 may have.

I'd like to first acknowledge the extraordinary efforts our staff is making to continue giving service to users, while maintaining high quality and security standards given 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, as reported in the previous quarter, after performing the readings of all meters for which estimates have been made pursuant to ENRE Resolution No. 27 passed on May 5, the financial impact on revenues from estimates, which were lower than actual consumptions amounted to ARS 552 million, which should be recoverable in 6 installments payable as from September. Pursuant to different subsequent notes, the start of payment was postponed for November and later suspended until further instruction by the ENRE. We expect the regulator to define the situation as soon as possible in order to reduce the impact in our inflows.

In other matters, on October 28, the Chamber of Deputies approved the 2021 Budget Law Project, which in Article 87 establishes a regularization regime for the obligations pending payment with CAMMESA and/or with the wholesale electricity market for the debts of most of the electric power distributors across the country accumulated as of September 30, either for energy consumption, power, interest and/or other penalties, under the conditions established by the enforcement authority, which may establish a recognition of equivalent credits up to 5x the average monthly bill for the last year or 66% of the existing debt.

The remaining debt must be regularized through a payment plan with term of up to 60 monthly installments, up to 6 months of grace period and an equivalent interest rate of up to 50% of that in force in the wholesale electricity market. The enforcement authority may reach regularization agreement, in particular, with each of the distributors. As of the date of this report, said national budget is still pending approval by the Senate.

Regarding our financial debt, on September 28, Edenor canceled in the market its own bonds that it had in possession for a total of $78 million of face value. As of the date of this report, the outstanding bonds amount to $98 million at face value.

Regarding our credit ratings, on September 16, Moody's Latin America launched its regional platform, Moody's Local, replacing Moody's Investors Service for domestic ratings. As a result of this change, the previous and timely issued domestic ratings were replaced by new ones under the Moody's Local Argentina brand. On this same day and under the new methodology, Moody's Local Argentina issued its first rating for the company, granting an A and an A- rating, both with negative outlook, for the local and foreign currency debt, respectively, as well as a 1 rating for Edenor's share.

On September 29, Moody's Investors Service, in line with the changes in the sovereign debt rating, changed the outlook on the global ratings of several companies, including Edenor, from negative to stable.

Furthermore, regarding our other rating agency, on September 18, after the passing of regulations on access to the foreign exchange market by the Central Bank, the Standard & Poor's Global downgraded the global ratings of several companies, changing Edenor's ratings from CCC to CCC- and keeping the negative outlook. In turn, on September 25, it also downgraded the company's domestic ratings from B to CCC+, keeping the negative outlook. Both downgrades were driven by the lower financial flexibility of the company for the next months, as a result of the tariff freeze and the impossibility to face full payments to CAMMESA.

Now moving to our results in the first quarter of 2020, revenue from sales decreased by 24%, reaching ARS 23 billion in the third quarter this year against ARS 30.5 billion in the same period last year. This ARS 7.5 billion decrease is mainly due to the tariff freeze in both the distribution value-added 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 update mechanism on the distribution cost in August 2019 and February and August this year generated the same nominal sales price between quarters, causing a lower sale in real terms of approximately ARS 3.1 billion.

Lower revenues are also due to lower billings on account of the real-term decrease in the cost of energy purchases measured in pesos for ARS 4.2 billion. Lastly, in contrast to 2020, a onetime income corresponding to the January-May period for the energy distributed to shantytowns and low-income neighborhoods for ARS 282 million was recorded in the third quarter last year. Conversely, the higher physical volume of electricity sales increased revenues by ARS 177 million.

Taking into consideration our operational results, the volume of energy sales increased by 1.3% this quarter, reaching 5.43 terawatt hour against 5.36 terawatt hour for the same period last year. It is worth highlighting that this quarter was still marked by the effects of the COVID-19 crisis and the restrictions to certain activities get affected by the partial lockdown, generating strong changes in energy consumption.

Electricity consumption by residential customers increased by 12.4% whereas commercial, smaller, medium, and industrial customers decreased their consumptions by 12.1%. The residential demand increased by 299 gigawatt hour, mainly because people spend more time at home due to the restrictions on movement and implementation of the home office modality. The 99 gigawatt and 106 gigawatt hour decreases for commercial and industrial customers, respectively, were mainly due to the partial or total closure of stores and industries, resulting from the measures implemented under the mandatory lockdown. Nevertheless, despite the mentioned falls, these sectors show a slight recovery in the quarter compared to the first months of the isolation. And additionally, the improvement in sales volume may be partially explained by the tariff lag.

Furthermore, Edenor's customers base rose by 1.4%, mainly on account of the increase in residential customers as a result of the implemented market discipline actions taken place before the mandatory isolation and installation during the last year of almost 37,000 integrated energy meters that were mostly destined to regularize clandestine connections.

The electricity power purchases decreased by 26% to ARS 14.3 billion in the quarter against ARS 19.3 billion for the same period last year. This ARS 5 billion decrease is mainly due to the 26% real-term decrease in the average purchase price, which generated lower purchases in the amount of ARS 4.5 billion. The last increase was 5%, residential customer were excepted, in August 2019, pursuant to Resolution 14 of the Secretariat of Renewable Resources and Electricity Market. This decrease was partially offset by a 2.5% increase in energy volumes, net of losses due to the increase in demand, which was valued at approximately ARS 306 million. In turn, the reference seasonal price for customers is still subsidized by the Federal Government, especially in the case of residential customers, where in third quarter this year, the subsidy reached 58% of the system's actual generation cost.

Additionally, the energy loss rate decreased from 23.1% in the third quarter last year to 22.5% this year. But we should take into account the increase in bad debt at the same time. In turn, costs associated with these losses decreased by 32% in real terms due to the failure to update the seasonal price in an inflationary context, resulting in lower purchases for ARS 834 million.

It's 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, the increase in operating costs, the drop in demand and the increase in energy theft. Furthermore, the outbreak of the world pandemic has brought several consequences in global economic activities, which directly affected the company's activities, generating reduced collections, especially in the beginning of the mandatory lockdown. For this reason, 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 September 30, 2020, a debt of ARS 14.4 billion before interest.

Meanwhile, operating expenses increased by 11%, reaching ARS 8 billion in the quarter against ARS 7.2 billion last year. This is mainly explained by increase in the allowance for bad debt in the amount of ARS 429 million as a consequence of increase in the uncollectibility rate associated with the COVID-19 context, which resulted in a substantial increase in the delinquent balance and the number of clients in that category. In turn, higher penalties for ARS 222 million and higher supplies consumption for ARS 180 million were recorded. These cost increases were partially offset by lower remuneration expenses in the amount of ARS 265 million as a result of delayed collective bargaining negotiations and fewer extra hours.

Regarding our financial results, result experienced a 45% decrease in losses with ARS 2.4 billion losses in the quarter against ARS 4.4 billion losses last year. This difference is mainly due to lower exchange rate losses in the amount of ARS 3 billion, resulting from a lower devaluation of the peso against the dollar in the quarter compared to the same period last year, as well as higher profits resulting from the repurchase of corporate bonds in the amount of ARS 326 million. These effects were partially offset by higher interest accrual on the debt with CAMMESA for ARS 1.5 billion this year.

Finally, net result decreased by ARS 252 million, recording profits for ARS 101 million in the quarter, again profit for ARS 353 million for the same period last year. This difference is mainly due to lower operational results in the amount of ARS 2.9 billion in the quarter and a positive impact of the Liabilities Regularization Agreement in the amount of ARS 840 million in the third quarter last year. These effects were partially offset by lower financial losses in the amount of ARS 2 billion and lower income tax accruals for ARS 1.7 billion.

Talking about Edenor's adjusted EBITDA, it showed a ARS 2.2 billion profit in the third quarter, ARS 2.8 billion lower than in the same period last year. As of this quarter's report, commercial interests are no longer adjusted in the EBITDA since they are now disclosed within operating results as explained in the notes of the Financial Statement as of September 30.

Regarding Edenor's capital expenditures, during this quarter, our investment totalized ARS 2.8 billion compared to ARS 3 billion in the same quarter of the previous year, from which 54% corresponds to network infrastructure expansion and 46% to network maintenance. Investments were reduced by 6% compared to the same period of the previous year, mainly on account of the restrictions imposed on certain activities due to the mandatory isolation in which the country found itself since March 20 of this year and the slowdown in the execution of such activities as of the implementation of the protocols with which they were resumed.

Likewise, we understand that the lower income as a result of the fall in sales volumes and the postponement of the tariff adjustment could lead to slowdown in the plan set by Edenor. The plan maintains focus on the efficient use of resources and on investments improving the service quality, which is reflected in the fulfillment of the quality curves required by the regulatory entity in the Integral Tariff Review, 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 by our personnel.

The investment highlights for the quarter were the renovation of the Munro-Malaver high-voltage electrical transmission lines for a total of 4.5 kilometers and the construction of 12 kilometers of Morón-Matheu high-voltage electrical transmission lines, the latter set for commissioning in October 2020.

Regarding quality standards, these are measures based on the duration and frequency of service outages using the SAIDI and SAIFI indicators. At the closing of the third quarter of 2020, SAIDI and SAIFI indicators were 13.1 hours and 5.1 outages per year over the last 12 months, evidencing a 19% and 17% improvement, respectively, compared to the same period of the previous year. In turn, these indicators are 45% and 36% lower than those required in the Integral Tariff Review to this period. This recovery in service levels is mainly due to the ambitious plan devised by the company since the Integral Tariff Review, the various improvements implemented in the operating processes and the adoption of technology applied to the operation and management of the network. The plan's success is also evidenced by the fact that these indicators exceed the service quality improvement path defined by the regulatory entity, even exceeding the values required for the year 2021.

Taking into account our energy losses, there is a 22.5% reported this year against 23.1% for the same period in 2019. Costs associated with these losses decreased by 32% in real terms, resulting in a ARS 834 million improvement. The works of multidisciplinary teams to develop new solutions to energy losses continues 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 continued with the objective of detecting and normalizing irregular connections, fraud and energy theft. Furthermore, installation of inclusion meters, or MIDE, for more users was intensified.

In addition, the decision to take any action in case of delinquency prevents our customer from turning into inclandestine connections.

Over the last year, approximately 520,000 inspections of Tariff 1 meters were conducted with a 54% efficiency and 37,000 MIDE meters were installed. Regarding the recovery of energy, besides the customers put back 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.

Finally, as far as financial debt is concerned, the outstanding principal of our dollar-denominated financial debt amounts to $111 million, whereas the net debt shows a positive cash balance of $3 million. The financial debt consists of $98.3 million, corresponding to corporate bonds maturing in 2022 and $12.5 million to the bank loan taken out with the Industrial and Commercial Bank of China, Dubai branch.

In the third quarter of 2020, all corporate bonds repurchased by the company in the amount of $78 million of face value were canceled and $98.3 million are outstanding, as I mentioned before. In turn, on October 5, after the period end, prior to the passing of the restrictions on payments in foreign currency imposed by the Central Bank, the last installment of the loan taken out with the ICBC Bank in the amount of $12.5 million was paid.

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

(Operator Instructions) And our first question will come from Matias Castagnino with BCP Securities.

I have one question regarding the regularization. Is the credit that is going to be given because of the lack of increases in the past 1.5 years or might be the case where you don't have an increase next year because they are going to say, but they are giving those credits?

Yes, Matias? I couldn't catch your name.

Can you hear me?

Yes. Matias?

Yes.

Yes. Can you repeat the question? Sorry, we couldn't catch you well here.

So the question is because -- regarding the regularization of the debt with CAMMESA. So that credit that they are going to give, is that because they didn't grant any tariff increase in the past 1.5 years? Or is it going to be the case where you are not going to have an increase next year because they are going to give those credits?

Okay. Thank you. Well, first of all, we don't have any clue yet about how the government will apply that -- those credits. But assuming that the law says that those credits will be applied to compensate the debt accumulated by the distribution companies as of September 30 this year, September 30, 2020, we think that those credits will be to apply to the lack of tariff in the past. But since the law enables the authority, in this case, the Secretariat of Energy, to [shut] or to reach to any agreement with all the different distributors, we think they will have, but we don't know it yet. They will have the possibility to apply those credits for the future. But as we can see, the law as it was approved now, it seems that those credits are applied to compensate the tariff freeze during 2019, 2020.

(Operator Instructions) 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. Please go ahead.

Thank you very much. Thank you for joining this conference call. Please keep you and your family safe and healthy as far as you can, and have a nice afternoon. Thank you very much.

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