Empresa Distribuidora y Comercializadora Norte SA (EDN) 2020 Q2 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 Second 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 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 conference over to Mr. Leandro Montero, CFO of Edenor. Mr. Montero, you may begin your conference.

Thank you very much. Good morning, everyone, and welcome to Edenor earnings 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 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, on May 15, the regulator issued a note authorizing the reading of tariff 1 customer meters, thus regularizing the reading process for all user categories. The note provided instructions on the methodology applicable to the settlement of consumptions 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 pursuant to ENRE Resolution No. 27 passed on May 5, the financial impact on revenues from estimates, which were lower than the actual consumptions, amounted to ARS 530 million, which will be recoverable in 6 installments payable as of September this year. Additionally, on May 5, the ENRE Resolution No. 28 provided for the creation of 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 issues made -- mentioned before.

Following this line, on May 15, ENRE Resolution No. 35 established that tariff 2, tariff 3 and wheeling system customers covered by the mandatory lockdown which have suffered a 50% or greater reduction in their power capacity demand may suspend payments or make partial payments on account of the hired power capacity until the recovery in demand reaches 70%, whereas the obligation to pay all other charges will remain in effect. Furthermore, customers may opt to terminate the contract or request a tariff recategorization in the light of the new supervening circumstances.

Furthermore, on June 18, the National Executive Branch issued Executive Order No. 543, which extended the tariff freeze for an additional 180-day term. In turn, it modified the term for service suspensions to vulnerable users in case of default or nonpayment of up to 6 bills due as from March 2020. User with an ongoing disconnect notice are covered by the executive order.

Finally, on August 4, the Chamber of Deputies gave half approval to a bill to expand the national budget for the year 2020 by almost ARS 1.9 billion to pay for social, productive and labor plans destined to alleviate the economic crisis as a consequence of the COVID-19 pandemic.

Regarding electricity sector, it includes the recognition of credits equivalent to 3x the average monthly bill of the last 12 months of the transactions in the Wholesale Electricity Market of the distribution agents that provided service in a province or granting power that has adhered to the rate maintenance provided in December 2019 under the conditions established by the Enforcement Authority.

The credits recognized will be apply -- applied only to distributors that as of October 21 2020 (sic) [October 31, 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 of grace, a rate of interest on balance equivalent to 50% of that in force in the wholesale electric market and comply with the conditions established by the enforcement authority to guarantee the fulfillment of future monthly payment obligations by the distributors.

The approval of the senate and its regulation is still pending in order to evaluate the scope and the impact for the company.

Regarding our credit rating, on July 8, Standard & Poor's Global resolved to downgrade the company's corporate bonds maturing in 2022 from BB- to B in the local scale and from CCC+ to CCC 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 tariff review. Of course, this downgrade was made before the 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 ARS 18 billion in second quarter this year against ARS 26 billion in the same period last year. This ARS 8 billion decrease is mainly due to the tariff freeze in both the Distribution Value added and the seasonal price passed through to tariffs, which entailed a decrease in revenues in real terms as well as the recognition in the second quarter of 2019 of income owed due to the application of caps to clients with social tariff in 2019 and not seasonably recognized and for consumptions of settlements under the framework agreement for almost a total amount of ARS 2 billion. 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 ARS 3 billion. Lower revenues are also due to lower billings on account of the real-term decrease in the cost passed on to tariffs of energy purchases measured in pesos for ARS 2 billion. In turn, lower physical electricity sales volumes resulted in ARS 339 million decrease in revenues.

It's worth highlighting that Resolution No. 14 provided for a 5% increase in the seasonal price for nonresidential demand and a 7% increase for large users from August 2019. As no new tariff schemes were issued at that moment, this increase was not passed on to tariffs, but it was included in the payments made by Edenor to CAMMESA for a total amount of ARS 239 million in the second quarter this year. In turn, the failure to grant the tariff updates in an inflationary context as that observed in 2019 and 2020 has a very negative impact on the Distribution Value Added, combined with the fact that the composition of the own distribution cost formula, which replicates Edenor's cost structure, has a greater weight on the salary index, and was below the evolution of the consumer's price index and the wholesale price index.

Taking into consideration our operational results, the volume of energy sales 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 have 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 gigawatt hour and 311 gigawatt hour decreases for commercial and industrial customers were mainly due to the partial or total closure of stores and industries resulting from the measures implemented under the mandatory lockdown. In turn, the residential demand increased by 379 gigawatt hour, mainly because people spend more time at home due to the restrictions of movement, which has been enhanced by lower average temperatures, 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 lag.

Furthermore, Edenor customer base rose by 1.3%, mainly on account of the increase in 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 invested to regularize clandestine connections.

The electricity power purchases decreased by 19% to ARS 11.8 billion in the quarter against ARS 14.6 billion for the same period last year. This ARS 2.8 billion decrease is mainly due to the 19% decrease in the average purchase price in real terms, which generated a ARS 2.4 billion decrease in purchases as a result of the entry into effect of the new reference seasonal prices for electricity applicable as from May and August 2019 pursuant to Resolution 14 of the Secretariat of Renewable Resources and Electricity Market, but that did not reflect the inflation of the period. This decrease was partially offset by 2.3% increase in energy volumes net of losses due to increase in demand, which was valued at approximately ARS 247 million. In turn, the electricity reference seasonal price for residential customers is still subsidized by the Federal Government, especially in the case of residential customers, where in the second quarter of 2020, the subsidy reached 52% average of the system's actual generation cost.

Additionally, the energy loss 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 1 clients could not be completed for a period of 2 months given the restrictions on readings in the initial phases of the lockdown. In turn, costs associated with these losses decreased by 36.8% in real terms, resulting in lower purchases for ARS 574 million.

It's important to highlight 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 activity, generating reduced collections, especially in the beginning of the 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. We hope to have our situation regularized in the near future in order to comply with our payment to CAMMESA in the short term.

Meanwhile, operating expenses have remained stable, reaching ARS 8.32 billion in second quarter against ARS 836 billion -- ARS 8.36 billion in the same period last year. This is mainly explained by an increase in the allowance for bad debt in the amount of ARS 1.2 billion as a result of the increase in delinquency resulting from the COVID-19 context and the substantial increase in the delinquent balance sheet. This increase in cost was offset by a ARS 428 million decrease in penalties as a result of improvement in service quality levels and, secondly, the update of penalties recorded in the second quarter 2019 in the amount of ARS 300 million, which were later included in the liabilities regularization agreement. Furthermore, lower remuneration expenses in the amount of ARS 229 million were disclosed as a result of pending collective bargaining negotiations for 2020 and less extra hours. Lastly, lower fees and remuneration for services in the amount of ARS 101 million were recorded on account of lower expenses in corrective 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 ARS 2 billion in the second quarter against ARS 1.3 billion for the same period last year. This difference is mainly due to higher exchange rate losses in the amount of ARS 920 million resulting from a greater devaluation of the peso against the U.S. dollar in the second quarter this year compared to the same period last year, as well as low revenues from commercial interest in the amount of ARS 146 million. These effects were partially offset by lower commercial interest accruals on the debt with CAMMESA for ARS 426 million as a result of the regularization of liabilities recorded in the second quarter of 2019.

Finally, net results decreased by ARS 17.8 billion, recording losses for ARS 2.6 billion in second quarter 2020 against profit for ARS 15.3 billion for the same period in 2019. This difference is mainly due to a ARS 5.3 billion decrease in the gross margin and the ARS 14.2 billion impact, net of income tax, of the Regulatory Liabilities Agreement. Furthermore, an increase in financial losses and lower inflation results were recorded in the amount of ARS 725 million and ARS 1.7 billion, respectively, which were more than offset by lower income tax accrual for ARS 8 billion, including the before-mentioned agreement income tax effects. The results of the period represent a fall of ARS 3.6 billion compared to the same period of the previous year, if we consider the result of the second quarter 2019 without taking into effect the impact of the adjustment of liabilities, net of its income tax, which could -- would have yield a gain of ARS 1 billion last year.

Talking about Edenor's adjusted EBITDA. It showed ARS 2.4 billion loss in the second quarter, ARS 4.7 billion lower in the same period of 2019. Adjustments correspond to the update of penalties for the transition period and commercial interest.

Regarding Edenor's capital expenditures, during the quarter, our investment totalized ARS 2.5 billion compared to ARS 3.2 billion in the same quarter the previous year, from which 60% corresponds to network infrastructure and expansion and 40% in network maintenance.

Investments were reduced by 21% compared to the same period of the previous year, mainly on account of the slowdown in the plan set by Edenor as a result of lower revenues due to the fall in sales volumes, the deferral 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 and 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, as this -- 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 activation of the -- activation of the transformation bank in General Rodriguez transformation station, the expansion of the capacity of the Colegiales Substation by 40 megavolts and the renovation of Munro-Malaver high voltage electroducts for a total of 4.5 kilometers, the latter with commissioning in September 2020.

Regarding quality standards, these are measured based on the duration and frequency of service outages using the SAIDI and SAIFI indicators. At the closing of the first quarter of 2020, SAIDI and SAIFI 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 period of the previous year. In turn, these indicators are 44% and 33% lower than those required in the internal tariff review. This recovery in service levels is mainly due to the ambitious plan devised by the company since internal tariff review. The plan's success is also evidenced by the fact that these indicators exceed the service quality improvement path defined by the regulatory entity.

Taking into account our energy net losses, they reached 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 -- because reading cycles could not be completed to obtain the real data after estimating the consumption of our tariff 1 clients for the period of 2 months due to restrictions on the reading activity in the initial phases of the lockdown. Costs associated with these losses decreased by 36% in real terms, resulting in ARS 574 million improvement.

Over the last year, multidisciplinary teams were created to work on new solutions to energy losses. Furthermore, activities aimed to reducing losses continue, and analytical and artificial intelligence tools were used to enhance effectiveness in the routing of inspections. Market discipline actions continued with the objective of detecting and normalizing irregular connections, fraud and energy theft, and installation of inclusion meters for more users were -- was intensified.

Over the last year, approximately 557,000 inspections of tariff 1 meters were conducted with a 54% efficiency and more than 37,000 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.

Finally, as far as financial debt is concerned, the outstanding principal 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 loan taken out with the Industrial and Commercial Bank of China, ICBC, Dubai branch. Currently, both liabilities bear interest at a fixed rate. Finally, after the financial statement closing day, repurchase of corporate bonds were made for a total face value of $22.1 million.

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

(Operator Instructions) Showing no questions, this concludes the question-and-answer section. At this time, I would like to turn the floor back over to Mr. Montero for any closing remarks.

Thank you very much for joining us in this conference call. Please keep safe because of this situation. 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.