Empresa Distribuidora y Comercializadora Norte SA (EDN) 2020 Q1 法說會逐字稿

Good morning, and welcome to the Edenor First Quarter 2020 Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Leandro Montero, CFO of Edenor. Please go ahead.

Thank you very much. Good morning, everyone, and welcome to Edenor's earnings conference call for the First 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 may have.

So given the unique circumstances the world is facing due to the coronavirus outbreak, I'd like to first acknowledge the extraordinary effort our staff is making to continue giving service to users while maintaining high-quality of security standards.

With that said, we will first focus through recent events and measures taken by the company, the government and regulatory agencies regarding the COVID-19 pandemic to later focus on other events. On March 12, the National Executive Branch declared health emergency in response to the COVID-19 outbreak, then implemented a series of measures to decrease the movement of population, providing for social, preventive and mandatory isolation consisting of different stages as of March 20, only allowing movement by persons associated with the provision of essential products and services, including Edenor and other companies making up the energy production cycle.

Within the framework of this public emergency, Edenor has focused all its efforts and the actions necessary to protect and care for the health of its employees, suppliers and customers. And with it, the continuity of the public service of energy distribution, so relevant and key to coping with the mandatory social isolation. In this context, the company setup a COVID-19 crisis committee, which included specialist counselors on the matter for the creation of a Contingency and Business Continuity Plan, attending the recommendations issued by specialists and official regulations.

The implemented measures include the definition of hygiene, safety and health protocols for each type of activity considered essential, which require keeping on-site operational staff to continue providing maintenance to our grid to deliver energy without interruptions, the adoption of home office modality for more than 1,650 collaborators and the reinforcements of digital and telephone channels for the attention of our clients to ensure and promote social distancing norms. Simultaneous operation of the Network Control Center and the company's backup control center began in order to minimize contact by control operators in a key area that is sensitive to our operation.

Likewise, we maintained a fluid and permanent communication with authorities and the whole staff on recommendations and the prevention measures we continue adopting. We also permanently evaluate the situation of contractors and suppliers to guarantee material supply and contractors' operational sustainability. Many of these changes have been enabled by the digitalization works and technology investments implemented over the last few years and enhanced lately.

As regards to the commercial area, commercial offices were closed and their staff task were reassigned. Reading activities were temporarily and partially suspended and estimate parameters were defined in accordance with the current regulations. Efforts were focused on remote customer service, functionality and the promotion of digital channels, the edenordigital app and website, which allow for a comprehensive customer management. In turn, new services were implemented in record time such as the SOS recharge for the pay-as-you-go meters or MIDEs, as we call them, debit card payments such as edenordigital and online appointments.

As for collection management, we constantly monitor collection and the impact that the closing of the collection point has had on delinquency levels. Collection has slightly improved due to the recent opening of external collection entities. However, high levels of delinquency are still maintained in the collection of our invoices, and we cannot estimate the impact of the economic crisis will have on our clients' ability to afford the future electricity payments.

On March 21, 2020 and pursuant to resolution No. 3, the regulatory resolved to fully suspend on-site customer service activities and provide for the closing of Edenor's commercial offices during the mandatory isolation with implementation of a customer service and claims electronic system. In this situation, new forms of collection have been enabled, especially for small and medium clients and industrial clients through noncontact channels. In addition, a comprehensive collection contract and management plan has been developed with our clients to bring them different payments alternatives.

On March 25, the National Executive Branch issued an Executive order No. 311, which forbids utility companies to suspend their services to vulnerable users on account of the lack of payment of 3 consecutive or alternate bills, effective as from March 1, 2020, for a term of 180 days. Customers with a prepaid system will receive the service during such term, even if the applicable recharges are not made. In compliance with the decision of the regulator, we have made SOS charges available to our MIDE clients through our edenordigital platform and call center, which represent approximately bare above 4% of the total charges made by MIDE clients, maintaining the remaining 96% the payment of charges by the usual means.

In this regard, later on April 18, pursuant to Resolution 173, the Ministry of Productive Development provided that the utility services may be payable in up to 30 monthly installments, the first one maturing on September 30, 2020. This resolution is limited to a specific group of customers detailed in it. Furthermore, the financing may apply to the purchase of electricity to the wholesale electricity market associated with these consumptions. However, to date, the users reached by these measures have not been identified and informed by the regulator.

Between April 13 and May 5, the ENRE or the regulator through a series of resolution, regulated the estimation of consumptions, while the first meter reading is not available. These resolutions authorized Edenor to apply the methodology for the validation of consumption readings and estimates set by ENRE resolution 209 issued in 2018 with the following exceptions in order to reflect a substantial reduction in consumption at minimum operating values under the mandatory isolation.

For residential category customers, the lowest consumption recorded over the last 3 years prior to the issuance of the bill for the same estimated period should apply. And for the general or T1 general tariff customers, reading estimates according to the estimation methodology will be affected by 20% activity allocation factor.

Furthermore, as of 6, 2020 in May this month, middle and large customers readings have been considered an essential activity by the ENRE, and therefore, it recently started being normalized with due precautions. Additional users with meters allowing for remote meter reading will not be covered. Finally, customers may challenge the reading estimate provided they declare the differences with their actual consumption and request a new billing for the challenged period. We hope to be able to read all of the total amount of our customers in the near future.

Regarding other matters on April 30, 2020, the Energy Secretariat of the Ministry of Productive Development issued Resolution # 70/2020, which made the power capacity reference prices and the stabilized prices for energy previously set by Resolution No. 14 for quarterly period between May and October 2020. This means the cost of energy included in our tariff will remain the same or freezed for the following 6 months.

Finally, on April 8, in line with the change in Argentina's credit risk perspectives, Moody's Investor Service resolved to modify the Company's Corporate Bonds local ratings from Baa3 to Caa1 and global ratings from Caa1 to Caa3 as well as to modify the ratings of the company's shares from category 2 to 3, maintaining a negative outlook, reflecting company's link to the credit quality of the government of Argentina and also the uncertainties on the future consistency of the regulatory framework and the sufficiency of rates going forward.

Now moving on to our results in the first quarter of 2020. Revenue from sales decreased by 13.1%, reaching ARS 20.5 billion in first quarter this year against ARS 23.6 billion in the same period last year. This ARS 3.1 billion decrease is mainly due to the rate freezing of both the VAD or distribution cost and the seasonal price passed through the tariff, which implied drop in income in real terms.

The failure to apply the inflation assessment mechanism over the cost of distribution in August 2019 and February 2020 resulted in a negative impact in revenues for ARS 1.7 billion. Lower revenues are also due to lower billings on account of the real term decrease in the costs passed on to tariff or financing purchases measured in pesos for ARS 2.2 billion. This decreases were partially offset by higher physical volume of electricity sales for ARS 743 million and higher revenues from the continued collection of the tariff deferral installments for the August 2018, February 2019 period for ARS 431 million. Finally, between the comparison periods, a single distribution fee adjustment was applied in March 2019 for a total 32% corresponding to the second semester of 2018 and deferral of half of the adjustment for the first semester of 2018, plus the recognition on account of the deferral of such adjustment.

It is worth highlighting that Resolution 14 provided for a 5% increase in the seasonal price for nonresidential demands and 7% increase for large users for August 2018. As no new tariff schemes were issued, this increase was not passed on to tariff, but it was included in the payments made by Edenor to CAMMESA for a total of ARS 317 million in the first quarter 2020. 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 CPD formula which replicated in our cost structure has a greater weight on the salary index and was below the evolution of the customer's price index and the wholesale price index.

Taking into consideration our operational results, the volume of energy size increased by 3.7% this quarter, which is 5.2 terawatt hour against 5 terawatt hour for the same period last year. This increase was mainly explained by a 5.4% increase in consumptions for residential customers, 3.2% increases for medium and small commercial customers and a similar 3.2% increase for industrial customers.

The residential demand increased by 113 gigawatt hour, mainly as a result of a higher average temperature in March this year, which was 3 Celsius degree higher compared to the previous year. The improvement in small and medium commercial customer amounted to 27 gigawatt hour, mainly on account of this comparison against a quarter with a low commercial activity in the previous year, whereas the increase in large users amounted to 28 gigawatt hour as a result of the improvement in industrial activity in the last month of 2018, which is reflected in the recovery in the industrial production index for this period, then interrupted by the COVID-19 outbreak.

Additionally, the improvement in sales volumes may be partly explained by the tariff lag. It is important to point out that due to the declaration of the COVID-19 pandemic and social mandatory isolation measures taken since March 20, a reduction in the total energy demand was experienced during the last days of the quarter. This reduction is verified in commercial and industrial customer and is partially offset by a slight increase in residential demands.

Furthermore, the Edenor's customer base rose by 1.8%, mainly on account of the increase in residential customers as a result of the implemented market discipline actions and installation during the last year of almost 57,000 integrated energy meters that were mostly destined to regularize clandestine connections.

The electricity power purchases decreased by 17.4% to ARS 12.8 billion in the quarter against ARS 15.5 billion for the same period last year. This ARS 2.7 billion decrease is mainly due to the 22% decrease in the average purchase price in real terms, which generated a ARS 3 billion decrease in purchases as a result of the entry into effect of the new reference seasonal prices for electricity applicable as for May and August 2019 pursuant to Resolution 14, as I mentioned before, but that did not reflect the inflation of the period. This decrease was partially offset by a 4.6% increase in energy volumes, net of losses due to the increase in demand, which was valued at approximately ARS 514 million.

In turn, the electricity references on our price for residential customers is still subsidized by the federal government, especially in the case of residential customers, where in the first quarter 2020, the subsidy reached 51% of the system's actual generation cost. Additionally, the energy loss rate increased from 17.4% in the first quarter last year to 18.4% in the first quarter this year, and was mainly generated by an increase in the incentive to fraud as a result of the economic recession. In turn, cost associated with these losses decreased by 14.1% in real terms, resulting in lower purchases for ARS 174 million, despite the increase in gigawatt hour. It is worth mentioning 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 cost, the drop in demand and increase in energy theft. Furthermore, the outbreak of the world pandemic has brought several consequences in the economy, which directly affected Edenor's activities, generating reduced collections and a drop in demand. 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.

Meanwhile, operating expenses decreased by 20.3% reaching ARS 6.2 billion this year against ARS 7.7 billion in the first quarter 2019. This is mainly accounted for by ARS 1.6 billion decrease in penalties as a result of the improvements in service quality levels; and secondly, the update of penalties recorded in the first quarter 2019 in the amount of ARS 485 million, which were later included in the liabilities regularization agreement.

Regarding our financial results, experienced a 47.5% decrease in losses, which reached ARS 1.6 billion in the first quarter against ARS 3 billion for the same period last year. These differences are mainly explained by a ARS 1.2 billion reduction in the accrual of commercial interest on the debt with CAMMESA as a result of the regularization of liabilities and lower foreign exchange losses for ARS 526 million as a result of a lower devaluation of the peso against the U.S. dollar in the first quarter compared to the same period in 2019. These results were partially offset by a negative variation in the reasonable value of financial assets in the amount of ARS 285 million.

Finally, net results increased by ARS 526 million, reaching ARS 720 million in the quarter against ARS 194 million in the same period of 2018. This difference is due to better operating and financial results in the amount of ARS 1.5 billion each added to lower income tax accruals for ARS 739 million. These effects were partially offset by a lower result for exposure to changes in purchasing power in first Q '20 for ARS 3.2 billion.

Talking about Edenor adjusted EBITDA. It showed a ARS 2.9 billion profit in the first quarter, ARS 1.1 billion higher than in the same period of 2019. Adjustment corresponds to the update of penalty for the transition period and commercial interest.

Regarding Edenor's capital expenditures during this quarter, our investment totalized ARS 1.4 billion compared to ARS 3 billion in the same quarter of the previous year, from which 57% corresponds to network infrastructure and expansion and 43% to network maintenance. Investments were reduced by 55% 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 and the deferral of tariff updates. The plan maintained focus on investment for improving the service quality, which have been seen in the fulfillment of the quality curves required by the regulatory agency in the last tariff review.

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 14.3 hours and 5.6 outages per year over the last 12 months, evidencing a 34.4% and 17.2% improvement, respectively, compared to the same period of the previous year. In turn, these indicators are 40.5% and 28.6% lower than those required in the comprehensive tariff review. This recovery in service levels is mainly due to the ambitious plan devised by the company during the last 5 years. The plan success is also evidenced by the fact that these indicators exceed the service quality improvement path defined by the regulatory entity.

Taking into account energy losses, they reached 18.4% in the first quarter this year against 17.4% for the same period in 2019 encouraged by a greater incentive to fraud as a result of the economic recession.

Furthermore, costs associated with these losses decreased by 14.1% in real terms resulting in a ARS 174 million improvement despite the increase in gigawatt hour. It is important to know that as of March 20 this year, after the application of the mandatory installation, there are no real measurements of consumption due to the initial suspension of meter reading activity, and therefore, the values are partially estimated. Over the last year, multidisciplinary teams were created to work on new solutions to energy losses.

Furthermore, activities aimed at reducing losses continued, and analytical and artificial intelligence tools were used to enhance effectiveness in the routing of inspections. Market discipline actions continue with the objective of detecting and normalizing irregular connections, fraud and energy theft, and installation of inclusion meters for more users was intensified.

Over the last year, approximately 536,000 inspections of Tariff 1 meters were conducted with 53% efficiency and more than 57,000 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, and as I mentioned before, loss continued to grow as a result of a greater number of clandestine connections due to the impact of the economic recession.

Finally, as far as financial debt is concerned, the outstanding principal of our dollar-denominated financial debt amounts to $162.1 million, whereas the net debt amounts to $98.9 million. The financial debt consists of $137.1 million corresponding to corporate bonds maturing in 2022, net of repurchases and $25 million to the bank loan taken out with Industrial and Commercial Bank of China, Dubai branch.

Currently, both liabilities bear interest at a fixed rate. After the financial statement closing date on April 15, the third principal installment of the loan with the ICBC in the amount of $12.5 million was repaid upon maturity, together with the applicable interest for the period. In turn, on May 6, repurchases of corporate bonds were made for a total face value of $690,000 at an average price of $59.3.

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

(Operator Instructions) Our first question comes from Gary Lundgren with Interpacific Investors.

Yes. The question I have is, does Edenor plan in the future to repurchase its 9.75% of 2022 bonds in open market purchases at these lower levels because it seems to me there's maybe no better deployment of the company's liquidity than repurchasing this debt to the extent that it can be repurchased at these deep discounts. And I just want to know if there are plans, future plans, to do this with either the company's liquidity or possibly lines of credit or credit that's available from other sources.

Gary, thank you for your question. Well, we don't have any plan. As I mentioned before, we are in a delicate situation because of the lack of tariff increase. And now the COVID-19 outbreak implies a new challenge because of the reduction in collection or the increase in delinquency. And so we are being very careful with our cash flows. Of course, if we have the option in the future to obtain additional credit, it could be a possible option, but it's not in our plans for the moment. And -- but we are open to make such small transaction if there's any opportunity. But we don't have a current plan to repurchase our debt.

(Operator Instructions) At this time, there are no further questions. I would like to turn the call back over to Leandro Montero for any closing remarks.

Okay. Thank you very much. I personally hope that you and your families are doing well and can manage together on this difficult and challenging situation. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.