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Edited Transcript of EDN.BA earnings conference call or presentation 12-Aug-19 2:00pm GMT

Q2 2019 Empresa Distribuidora y Comercializadora Norte SA Earnings Call

Buenos Aires Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Empresa Distribuidora y Comercializadora Norte SA earnings conference call or presentation Monday, August 12, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Leandro Carlos Montero

Empresa Distribuidora y Comercializadora Norte Sociedad Anónima - CFO

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Edenor's Second 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 company. 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.

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Leandro Carlos Montero, Empresa Distribuidora y Comercializadora Norte Sociedad Anónima - CFO [2]

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Thank you very much. Good morning, everyone, and thanks for joining our second quarter 2019 earnings conference call. First, we will talk to some of the main events that recently took place and then briefly review the results of the quarter. As you know, you can always call our Investor Relations team for more details on the results of the period or any doubts you might have.

First and as we disclosed in our last conference call, on May 10, 2018, we executed an agreement for the implementation of the transfer of jurisdiction of the electricity distribution utility service from the Federal Government to the Province of Buenos Aires and the Autonomous City of Buenos Aires as well as a Liabilities Regularization Agreement with the Secretary of Energy, asking on behalf of the National Government, thus terminating the pending reciprocal claims originated in the 2006-2016 transition period. Thus, we voluntarily dismissed the complaint for the breach of the obligation under the Contractual Renegotiation Memorandum of Understanding, or assessment agreement, as we usually refer to it, agreed to settle debts for works and loans originating in the transition period and committed ourselves to pay users certain penalties and compensation corresponding to such period.

Lastly, we undertook to execute investments additional to those committed under the Integral Tariff Review to have improved the reliability and security of the distribution utility service. This agreement involves disbursement for an approximate total amount of ARS 7.6 billion, including the payment of the generated income tax. In consideration, the Federal Government partially recognizes our claim by fully offsetting outstanding liabilities within the wholesale electricity market for the electricity purchases made during the transition period as well as the partial settlement of investment loans granted by CAMMESA from the cancellation of payment collectible by the National Treasury. All of this for an approximate amount of ARS 6.6 million -- sorry, ARS 6.9 billion. And in addition, the implementation of this agreement implies for the only time in this quarter an additional ARS 6.2 billion profit adjustment after replicating the same conditions authorized to other distributors in the sectors to validate their liabilities, including the agreement.

Most effect of this agreement are disclosed in the financial statement as of June 30, 2019, in the Liabilities Regularization Agreement line of the income statement. Within this framework, in June 10, the shareholders' extraordinary General Meeting of the company continued to rectify the actions taken by the Board of Directors in the relocations and timing of the implementation agreement for the transfer of jurisdiction and the Liability Regularization Agreement as well as to approve the withdrawal of rights, actions and claims against the national state, which closed in the transition tariff period and the withdrawal of the lawsuits filed against the national state initiative in 2013. It is worth noting that this agreement marks the completion of the normalization under the Federal Government and entails a new beginning to focus on the specific problems and opportunities of the business.

Moving to our ratings. On July 16, Moody's Latin America issued their report affirming Edenor's corporate rating at B1 and its domestic rating at Aa3. In turn, it changed the ratings outlook from stable to negative. This valuation mainly reflects the negative outlook of the -- on the sovereign debt rating since the company is subject to the domestic operating environment and regulations.

Finally, on June 12, our Board of Directors resolved to early terminate the share buyback program adopted in its meeting held on April 8, 2019, due to cash restraint effect, the sharp decrease in our demand half. Under this program, 1.9 million own shares were acquired for a total amount of ARS 74 million at an average price of $17 per ADR. Thus, as of today, the company holds, say, 1.6 million own portfolio share, representing 3.5% of the capital stock.

Now moving on to our results in the second quarter of 2019. Net sales increased by 21% to ARS 18.2 billion in the second quarter this year against ARS 15.1 billion in the same period last year. This ARS 3.2 billion increase is mainly due to higher billings as a result of the increase in the electricity seasonal price with a ARS 1.5 billion impact and the application of the distribution fee -- or distribution value-added adjustment in the amount of ARS 1 billion.

Furthermore, during the quarter, revenues from the Federal Government were recognized for consumptions by (inaudible) under the framework agreement and the recovery from the application of caps on certain user's categories benefiting from the social tariffs, which receivables were recognized under the Liabilities Regularization Agreement for a total amount of ARS 1.4 billion.

Furthermore, in the second quarter 2019, revenues from the installments under the tariff deferral for the August 2018 - February 2019 period were recognized in the amount of ARS 825 million. These effects were partially offset by the impacts of the lower physical electricity sales volumes in the amount of ARS 1.6 billion and lower collections on account of the 48 installment deferrals of income accrued during the first year after the tariff review implementation for ARS 215 million. These lower collections were caused because the update applied by the regulatory agency did not fully reflect the cost increase and that's why an appeal was filed with the ENRE to resolve this and the impact of the drop in the demand, which will be recovered in the next tariff update.

Finally, within the comparison period, CPD adjustments were applied for a total 42.5%, corresponding to the 2018 cost increases and the tariff being fully updated as from March 2019. Furthermore, a gap is identified between the CPD measurement and its granting, which in an inflationary scenario, has a negative impact on the distribution fee added to the fact that the composition of the CPD formula, which replicates Edenor's cost structure, has a greater weight on the salary index and was below the consumer and wholesale industry evolutions.

Taking into consideration our operating results, the volume of energy sales decreased by 9.3%, reaching 4.8 terrawatt hour in the second quarter this year against 5.3 terrawatt hour for the same period last year. This decline is mainly explained by decreases amounted to 11.7% for residential customers, 10% for medium and small commercial customers and 8.2% for the large users. The residential demand decreased mainly as a result of the higher average temperature, especially in the month of June this year, where the average temperatures were 3.7 Celsius degrees higher than in the same month of 2018 as well as the impact of the economic recession and the tariff increases. The small and medium commercial customers were affected -- adversely affected by the lower commercial activity levels resulting from the economic situation, whereas large users were affected by the lower industrial activity, which is reflected in the fall in the industrial production index.

Moreover, Edenor's customer base rose by 3.6%, 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 100,000 integrated energy meters that were mostly destined to regularize clandestine connections. By contrast, the number of small and medium commercial customers experienced a decrease due to the lower activity levels in the last year.

The electricity power purchases increased in pesos by 19% to ARS 10.2 billion in the second quarter 2019 against ARS 8.6 billion for the same period last year. This ARS 1.6 billion increase is mainly due to the 30% real-term increase in the average purchase price, which generated an impact of ARS 2.5 billion as a result of the entry into effect of the new reference seasonal prices for electricity applicable as from August 2018 and February this year. This increase was partially offset by an 8.4% decrease in energy volumes due to the drop in demand, which was valued at approximately ARS 1 billion. Despite this increase, the electricity reference seasonal price is still subsidized by the National Government especially in the case of residential customers, where the subsidy reaches 40% of the system's actual generation cost in the second quarter this year.

Additionally, the energy loss rate increased from 18.6% in the second quarter last year to 19.2% in the same period this year and was mainly generated by an increase in incentive to fraud as a result of the economic recession and the impact of tariff increases. In turn, costs associated with these losses increased by 11%, considering adjusted figures of 72.5% in nominal terms, mainly on account of the application of the new seasonal price for its determination.

Meanwhile, operating expenses increased by 18%, reaching ARS 5.9 billion in the second quarter against ARS 5 billion in the same period last year. This is mainly accounted for by an increase in depreciation in the amount of ARS 258 million, a ARS 182 million increase in fees and remuneration for services, higher supplies consumptions for ARS 183 million as well as an increase in penalties in the amount of ARS 178 million. This last increase is mainly explained by new penalties for commercial service quality issues for ARS 302 million and was partially offset by lower penalties for technical service quality issues in the amount of ARS 77 million as a result of the impact of investments on service quality improvement and a lower user demand.

Regarding our financial results, we experienced a 67% improvement with almost ARS 900 million losses in the second quarter this year against ARS 2.7 billion losses in the same period last year. The main impact corresponds to the variation in the exchange rate, which reduced exchange differences losses in the amount of ARS 2 billion considering that in the second quarter last year, there was a 43% devaluation of the peso against the U.S. dollar, whereas in the second quarter this year, a slight appreciation of the peso was recorded. This profit in company terms was partially offset by the ARS 161 million higher commercial interest on the debt held with CAMMESA due to higher applicable rates -- interest rates and an increase in interest paid for ARS 114 million and lower changes in the fair value of financial assets for ARS 59 million. It should be noted that the previously mentioned Liabilities Regularization Agreement will discontinue interest charges generated from debt with CAMMESA in the upcoming quarters.

Finally, net results increased by ARS 10.5 billion, recording profits for ARS 10.7 billion in the second quarter 2019 against profit for ARS 149 million for the same period in 2018. This increase is mainly due to the implementation of the Liabilities Regularization Agreement that implied for onetime only the partial recognition of the claim made by Edenor for an amount of ARS 6.9 billion in compensation for the breaches of the National State during the 10 years of the tariff transition period, as likewise, the adjustment of the liabilities recorded at the time of the agreement, replicating the conditions applied to all distributors in the sectors, generating a profit of ARS 6.2 billion, totaling an amount of ARS 13.1 billion.

Additionally, the increase is also due to a higher gross margin resulting from the offsetting of revenues from social tariff caps and the framework agreement under the mentioned liabilities settlement. The collection of installments corresponded to the August 2018 and February 2019 tariff deferrals and a higher average sales price. These effects were partially offset by a decrease in sales volumes and a higher average purchase price.

Furthermore, losses from financial results experienced a considerable decrease as a result of its ARS 2 billion improvement on account of exchange rate difference against the same period of the previous year.

Finally, it should be noted that the income tax for the period includes the impact of the Liabilities Regularization Agreement and the provision for the possible application of the inflationary tax adjustment.

Talking about Edenor's adjusted EBITDA. It shows ARS 2.9 billion profits in the second quarter of 2019, ARS 581 million higher than in the same period in 2018. Adjustments correspond to penalties for meter reading frequency and extraordinary service disruptions from previous periods as well as commercial interests.

Regarding Edenor's capital expenditures, during this quarter, our investments totaled ARS 2.2 billion compared to ARS 1.9 billion in the same quarter last year, from which a 44% -- 64% corresponds to network infrastructure and expansion and the remaining 36% in network maintenance. The increase in investment results from the ambitious plan devised by Edenor for the 2017-2021 period, which focuses on investments optimizing service quality levels in accordance with the quality curves required in the Integral Tariff Review by the regulatory agency.

The total amount invested in 2018 amounts to ARS 10.8 billion at June 2019 restated figures, being the highest investment level for the company since its creation.

Regarding quality standards, these 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 is measured by the number of outage hours per year. SAIFI refers to the frequency of outages and measures the number of times a user experiences an outage during a year. In the second quarter of 2019, SAIDI and SAIFI indicators were 18.6 hours and 6.4 outages per year during the last 12 months, evidencing a 30% and 21% decrease, respectively, compared to the same period of the previous year. This improvement in service levels is mainly due to the fulfillment of the ambitious plan devised by the company since the Integral Tariff Review is in effect. Its 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 losses, they reached 19.2% in the second quarter this year against 18.6% for the same period in 2018. The drop in the demand by large users, which have substantially lower loss levels, adversely affect this indicator in percentage terms. However, the level of losses in physical units remains constant. Likewise, the rise in the average energy purchase price also increases the value in pesos of these losses.

Furthermore, the company has implemented the creation of multidisciplinary teams to work on new solutions to energy losses and leverage learnings from successful experiences from other distributors.

In turn, the company further increased its activity to reduce energy losses on 2 fronts. On the one hand, market discipline actions were intensified, aiming to detect and normalize irregular connections and electricity theft and frauds. And on the other hand, there was an increase in the installation of Inclusion Meters to foster consumption self-management and the integration of users not having a regular income, at the same time, encouraging consumption reduction and the prevention of irregular connections having an impact on the safety of customers. The company expects to intensify these actions until reaching expected levels with the purpose of meeting the outlined loss reduction goals.

Finally, as far as financial debt is concerned, the outstanding principal of our dollar-denominated financial debt amounts to $201 million, while net debt amounts to $127 million. Financial debt consists of $164 million from our senior notes 2022 and $38 million from the bank loan taken out with the ICBC Dubai branch. Currently, both liabilities bear interest at a fixed rate.

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

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Operator [3]

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(Operator Instructions) Showing no questions, 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.

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Leandro Carlos Montero, Empresa Distribuidora y Comercializadora Norte Sociedad Anónima - CFO [4]

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Well, thank you very much for joining this conference call, and have a nice day. Bye-bye.

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Operator [5]

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