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Edited Transcript of EDN.BA earnings conference call or presentation 11-Nov-19 3:00pm GMT

Q3 2019 Empresa Distribuidora y Comercializadora Norte SA Earnings Call

Buenos Aires Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Empresa Distribuidora y Comercializadora Norte SA earnings conference call or presentation Monday, November 11, 2019 at 3:00:00pm 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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Conference Call Participants

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* Frank J. McGann

BofA Merrill Lynch, Research Division - MD

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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 Third 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 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 third quarter 2018 (sic) [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, on September 19, this year, a tariff schemes maintenance agreement was executed with the federal government, which provides keeping, in effect, unchanged tariff schemes effective as of August 1, 2019 for all tariff categories. Therefore, postponing to January 1, 2020, the 19% increase for the application of the own distribution cost adjustment corresponding to the first semester of 2019. This means that the increased seasonal prices of energy applicable for last year's users will be passed through to tariff as from January 1, 2020 as well. The difference accumulated in the 5-month period til the year end between the distribution cost and seasonal price is effectively applied, and thus that should have been considered in an adjusted tariff scheme, will be recoverable on an updated basis in 7 monthly and consecutive installments payable as from 1 January 2020.

Under this agreement, the company committed to keep service quality levels and meet the quality parameters as stipulated in the Concession Agreement. Meanwhile, the payment of penalties was postponed until March 1, 2020, at the original values plus the applicable update at the time of payment. Furthermore, on October 22, Resolution #38 was issued by the Secretary of Renewal Resources and Electricity Market, providing for the continued application of power capacity and energy reference prices in the wholesale electric market as established in Resolution #14, dated April 2019. This implies that the prices applicable since August 2019 will remain unchanged for the November 2019-April 2020 period.

Moreover, another agreement was executed with the federal government for the expansion of the Framework Agreement providing: first, an extension of the new Framework Agreement entered into on October 6, 2003, effective as from the beginning of the year and until May 31, 2019; second, the commitment by the federal government to pay the amounts corresponding to the economic contribution for the supply of electricity to low-income neighborhoods after discontinuing the electricity as stated with the tariff -- discounting the electricity associated with the social tariff; and third, the onerous assignments by the company to Edesur of the receivables acknowledged in its favor under this extension in order to allow its collection.

As of September 30, 2019, we have accounted a total amount of ARS 735 million in revenues from the sale of electricity under the Framework Agreement, corresponding to the federal government participating -- participation until May 31, 2019, including 2019 recognition agreed in May this year with the Liabilities Regularization Agreement. It's important to highlight that the amount corresponding to the province of Buenos Aires is still pending and amounts to September 30, 2019, a total figure of ARS 1.2 billion approximately.

Moving on to the other matters with regards to the projects acquired in November 2015, the later contractual termination due to breach by Ribera Desarrollos in August 2018, and the legal proceedings respectively brought against the seller and insurance company on September 30 this year, Edenor executed an agreement, whereby it would receive from the insurance company as total, final and conclusive compensation, the amount of $15 million and the assignment in favor of Edenor of the insurance company's rights to subrogate to the right of the insured party for the amount paid against the policy holder, Ribera Desarrollos.

As of the date hereof, Edenor has received the amount of $14 million, while the remaining amount will be paid in 6 quarterly consecutive installments payable as from April 2020. Furthermore, the arbitration complaint against Ribera Desarrollos brought before the Buenos Aires Stock Exchange Arbitration Court, seeking the refund of the price paid for the undelivered real estate was suspended to be able to prove claims at Ribera Desarrollos bankruptcy proceedings.

Finally, regarding our ratings in September 2019, Moody's Latin America issued a report downgrading Edenor's local corporate rating from Aa3 to Baa3 as well as global ratings from B1 to Caa1, placing its credit rating under review for a possible downgrade. This action results from a downgrade in the Argentine Government's senior and secured ratings from B2 to Caa2 and its placing under review for a possible downgrade and reflects the strong credit link and the company's exposure to Argentine regulations and operating environment.

In turn, Moody's downgraded shares rating to category 2. However, the downgrade in Argentine regulated companies' rating to Caa1, a step above the sovereign debt rating, shows relatively strong credit indicators under sufficient liquidity and leverage, combined with comfortable debt profile.

Likewise, Standard & Poor's Global Ratings also downgraded Edenor's local rating from A to BBB and withdrew it from special review with negative implications, where it has been placed on August this year and the outlook is negative. This downgrade also reflects more challenging macroeconomic, financial and business context for the corporate sector after the downgrade in Argentina's global ratings to CCC- on August 30 this year.

Now moving on to our results in the third quarter of 2019. Revenue from sales increased by 1.7% to ARS 24.1 billion in the third quarter of this year against ARS 23.7 billion in the same period last year. This ARS 407 million increase is mainly due to higher billings for electricity power purchases measured in pesos in the amount of ARS 1.8 billion. Furthermore, during this quarter, unlike the same period last year, revenues from tariff deferral installments for the August 2018 period, February 2019 period for ARS 999 million and higher collections from social tariff cap recoveries for ARS 488 million were recognized.

These effects were partially offset by lower collections on account of the 48 installment deferral of the income accrued during the first year after tariff review implementation for ARS 346 million as well as the impact of lower physical electric power sales volumes in the amount of ARS 1.1 billion, and the application of the below-inflation adjustment on the CPD for ARS 268 million.

Finally, between the comparison periods, all distribution cost adjustments were applied for a total of 42.5%, corresponding to the 2018 cost increases, while the assessment corresponds to the first semester of 2019 for 19.1%, increase was deferred to January 2020, as I mentioned before.

Furthermore, a gap is identified between the CPD measurement and its granting, which in an inflationary scenario has a negative impact on the distribution income added to the fact that the composition of the CPD formula, which replies -- which replicates Edenor's cost structure has a greater weight on the salary index, which was below the consumer and wholesale industry evolutions.

Taking into consideration our operational results, the volume of energy sales decreased by 4.7%, reaching 5.4 terawatt hour in the third quarter of this year against 5.6 terawatt hour for the same period last year. This decline is mainly explained by decreases amounted to 4.7% for residential customers, 6.3% for medium and small commercial customers and 4.6% for larger use -- for large users.

The residential demand decreased mainly as a result of higher average temperatures compared with the previous year in the colder month as well as the impact of the economic recession and the tariff increases. Small and medium commercial customers were adversely affected by the lower commercial activity levels resulting from the economic situation where 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 2.9%, mainly on account of increasing residential customers, which have risen to levels above their historical growth as a result of 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 customer experienced a decrease due to the lower activity levels in the last year. The electricity power purchases increased in pesos by 14.7% to ARS 16 billion in the third quarter 2019 against ARS 14 billion for the same period last year. This ARS 2 billion increase is mainly due to the 12 -- sorry, 18.1% 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, February and May 2019. This increase was partially offset by a 4.5% decrease in energy volumes, net of losses due to the drop in demand, which was valued at approximately ARS 668 million. 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 reached 50% of the system's actual current generation cost in the third quarter this year. Additionally, the energy loss rate increased from 20.4% in the third quarter last year to 23.1% 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 12 -- 16.2% considering adjusted figures are 79.6% in nominal terms, mainly on account of the application of the new seasonal price for its determination. Meanwhile, operating expenses decreased by 25.4%, reaching ARS 5.2 billion in the third quarter against ARS 7 billion in the same period last year. This is mainly explained by 2 reasons: firstly, as a result of the decrease in penalties in the amount of ARS 1 billion as a consequence of extraordinary penalties for deviating from the investment plan and updating of penalty, which were later included in the Liabilities Regularization Agreement, recorded in the third quarter last year for ARS 177 million and ARS 460 million, respectively.

In turn, a decrease in penalties was posted in the third quarter this year compared to the same period of the previous year as a result of the impact of investment on the improvement of service quality levels and a lower user demand.

Secondly, due to a ARS 359 million decrease in constant currency in salaries and social security taxes payable as salary adjustments were below inflation levels considered to update comparative figures.

Regarding our financial results, we experienced a 200% increase in losses with near ARS 3 billion losses in the third quarter of this year against ARS 1 billion loss in the third quarter last year. This difference is mainly due to the variation in the other financial results in the amount of ARS 3.2 billion, resulting from the onetime revaluation of the real estate asset in the third quarter of 2018 for ARS 2.5 billion and the impact of a lower increase in the reasonable value of financial assets for ARS 506 million in the third quarter 2019.

These higher negative results were partially offset by ARS 1.4 billion decrease in the payment of commercial interest on the debt with CAMMESA as a result of regularization of liabilities, lower foreign exchange losses for ARS 329 million as a result of a lower devaluation of the peso against the U.S. dollar over the quarter and lower interest payment for ARS 257 million.

Finally, net results decreased by ARS 3.2 billion, recording profits for ARS 258 million in the third quarter this year against profits for ARS 3.4 billion for the same period in 2018.

Operating results remained constant since the lower gross margin resulting from the increase in electric power purchases in pesos and increase in losses was offset by lower operating expenses. In this context, the decrease in net results, mainly due to the better financial results posted on a one-off basis in the third quarter last year as a result of the revaluation of the real estate receivable.

Talking about Edenor's adjusted EBITDA, it shows a ARS 3.5 billion profit in the third quarter of 2019, ARS 351 million higher (sic) [lower] than in the same period last year. Adjustment corresponds to penalties from other periods for deviating from investment plan, reading periodicity, extraordinary service disruption, the updating of penalties and commercial interest.

Regarding Edenor's capital expenditures. During this quarter, our investment totalized ARS 2.2 billion compared to ARS 3.4 billion in the same quarter last year, from which a 64% corresponds to network infrastructure and expansion and the remaining 36% to network maintenance.

Edenor's goal for 2019 is to reach a total investment amount similar to peak 2018. The reduction in investment of the third quarter compared to the same period last year is mainly due to the different timing in the execution of the plan, and to a lesser extent in the deceleration of the CapEx plan set at the beginning of the year as a result of lower revenues due to the fall in sales volumes and lower energy demand at the same time. The plan maintains focus on the investments that improved the quality of service, what can be seen in the fulfillment of the quality curves required by the regulator in the integral tariff review.

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 per client. SAIFI refers to the frequency of outages and measures the number of times a user experiences an outage during the year.

In the third quarter of 2019, SAIDI and SAIFI indicators were 16.3 hours and 6.1 outages per year during the last 12 months, evidencing a 39% and 21% improvement, respectively, compared to the same period of the previous year.

This recovery in service levels is mainly due to the fulfillment of ambitious CapEx plan devised by the company since 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.

Talking about Edenor's energy losses. They reached 23.1% in the third quarter this year against 20.4% for the same period in 2018. The drop in the demand by large users, which have substantially lower loss levels, adversely affects this indicator in percentage terms. Likewise, the rise in the average energy purchase price also increases the value in pesos of these losses. To address this issue, during 2019 multidisciplinary teams were created to work on new solutions to energy losses. Furthermore, the level of activities aimed at reducing losses continue to increase. Market discipline actions were intensified with the objective of detecting and normalizing irregular connections, fraud and energy theft and installation of inclusion meters were increased. Despite this, 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 $201 million while net debt amounts to $154 million. Financial debt consists of $164 million through our senior notes 2022 and $38 million from the bank loan. Currently, both liabilities bear interest at a fixed rate. After the financial statements' closing date, the second principal installment of the loan in the amount of $13 million together with applicable interest for the period was repaid upon maturity on October 15. In turn to the rate of this report, corporate bonds maturing in 2022 for a total face value of $2 million were repurchased. So this concludes my review of Edenor third quarter results.

Now we are open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Frank McGann with Bank of America.

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Frank J. McGann, BofA Merrill Lynch, Research Division - MD [2]

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And I apologize if perhaps you discussed this because I had a phone problem. But in terms of your -- the losses have gone up. But I was just wondering what you're seeing in terms of the speed of payment of bills by consumers, either industrial, commercial or residential, if is that has changed, has deteriorated. And similarly, just in terms of the overall -- your ability to pay for generation as generation prices have continued to rise and overall conditions have deteriorated. I was just wondering if you saw any risk there.

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Leandro Carlos Montero, Empresa Distribuidora y Comercializadora Norte Sociedad Anónima - CFO [3]

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Sorry, Frank, can you repeat the second part of your question? I couldn't catch it.

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Frank J. McGann, BofA Merrill Lynch, Research Division - MD [4]

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Yes. Just in terms of -- I know in different times in the past, it's been difficult with tariffs that have not necessarily kept pace with inflation and other factors to make the full payment for generation prices or for generation debt -- purchase generation. I was just wondering if you have had any difficulties in that regard so far. Or looking forward, if you saw that as a risk?

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Leandro Carlos Montero, Empresa Distribuidora y Comercializadora Norte Sociedad Anónima - CFO [5]

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Okay. Well, so going to the first question you made regarding energy losses. The first thing to say is that when we see the energy losses or when we analyze the energy losses in terms of percentages, as we estimate that the main part or the big amount of energy losses are generated in the residential -- by the residential users. So when the whole demand, especially the demand related to large users, industrial and commercial users decreased a lot as it happened this year in comparison to the year before. In terms of percentages, energy losses increased because the quantity of gigawatt remains almost the same, not exactly the same, but almost the same, but it should be supported by a lower total demand. That's why, usually, the -- we have an increase in the figure measured in percentages. But we see an increase in the energy losses, measures in terms of gigawatt hour as well. That's because we think, especially the theft in the residential demand. So we are making a lot of efforts in order to fight against those thefts. But it's quite a difficult task.

Going to the second part of the question about the possibility not to pay for the electricity we buy to the market. If the Concession Agreement or the concession contract is applied in full even with delay, we should be able to pay our energy bill. Of course, as I mentioned in this call, in August, we should have had applied a 19% increase, which was deferred till January 1, 2020. So we think that this increase should be applied since January. And another increase of 27% -- estimated 27% should be applied in February regarding the second semester inflation of 2019. So if this adjustment are applied, for sure, we will have no problem with our cash in order to comply with all of our payments. Of course, if the tariff is frozen and taking into account that we have a 55 or estimated inflation for 2019, it will be -- it's impossible to afford our cost and CapEx if the tariff is frozen. And because of this level of inflation, it will be -- the problem will come up very soon.

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Operator [6]

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As we have no further 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.

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Leandro Carlos Montero, Empresa Distribuidora y Comercializadora Norte Sociedad Anónima - CFO [7]

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

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Operator [8]

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