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Edited Transcript of EDN.BA earnings conference call or presentation 13-May-19 2:00pm GMT

Q1 2019 Empresa Distribuidora y Comercializadora Norte SA Earnings Call

Buenos Aires May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Empresa Distribuidora y Comercializadora Norte SA earnings conference call or presentation Monday, May 13, 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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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 First 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. 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 first quarter 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.

In first place, at last minute last Friday, May 10, [you will] notice that the final approvals have been done by the corresponding authorities regarding the agreement the company entered into for the implementation of the jurisdiction transfer of the public electricity solution service of Edenor from the national government to the province of Buenos Aires and the autonomous city of Buenos Aires. Said agreement stipulates that the province and city of Buenos Aires take over jointly the nature of the granting authority of said service and that the public service rendered by the company will continue to be governed by its concession contract and by all applicable legal national and regulatory principles.

Within this agreement, Edenor entered into as well a liabilities regularization agreement with the secretary of energy on behalf of the national government, thus terminating the pending reciprocal claims originated in the 2006-2016 transition period. In this agreement, the company waived all rights of action that may be applicable against the national government, including the action filed by Edenor in 2013 for failure to comply with obligation resulting from the assessment agreement subscribed in 2006.

At the same time, we undertake to settle pending debt related to the financing of certain CapEx and to partially cancel mutuums originated in the transition period. Finally, we agreed to pay the users certain penalties and compensations corresponding to said period and undertakes the commitment to enforce additional investments to those included in the comprehensive tariff review CapEx plan, aimed at contributing with reliability and safety of the service.

The agreement implies total disbursements of about ARS 7.6 billion in 5 years, including the payment corresponding to the income tax on generated profit for an estimated amount of ARS 2.9 billion. In return, the national government partially acknowledges the previously mentioned claim duly performed by the company by means of total compensation of the pending obligations with the Wholesale Electricity Market for electric energy purchases during the transition period, the partial settlement of mutuums for investment issued by CAMMESA also during said period and the settlement of penalties intended for the national treasury, thus for total amount of ARS 6.9 billion approximately. Since this agreement was signed after the issuance of the financial statement as of March 31, 2019, the effects of such agreement will be reflected in the company's financial statement of the second quarter 2019. It's worth mentioning that this agreement means the final stop to the normalization of the distribution segment under the federal government and implies a new start for -- to focus on the main issues and opportunities the business has.

Regarding the seasonal price of electricity, on April 30, the Secretariat of Renewable Resources and Electricity Market issued Resolution No. 14, which modified the power capacity reference prices and the stabilized prices for energy previously set by Resolution No. 366 for quarterly period between May and October 2019. Pursuant to this resolution, the power capacity price was maintained for all categories. Demands lower than 300 kilowatt hour were categorized as residential or nonresidential. The stabilized price for energy was maintained for residential customers as the government announced before, and increases were established for nonresidential customers and large user. In turn, ENRE Resolution No. 104 approved the values of Edenor tariff scheme as from May 1 this year and incorporated the new power capacity reference price and the stabilized prices for energy set by the Secretariat of Renewable Resources and Electricity Market in Resolution No. 14.

Moving to other matters. After successfully completing the first and second programs for the repurchase of our own shares for 2018, on April 8 this year, our Board of Directors approved a third program for a maximum amount of up to ARS 800 million. Under this new program, the portfolio of our shares may not cumulatively exceed 10% of capital stock, and the maximum price to be paid was set at $1.15 per ordinary share and $23 per ADR. Acquisitions are being made with net realized income, and the term of the program is of 120 calendar days starting on April 10, 2019. As of today, almost 2 million own shares have been purchased under this program for a total amount of around ARS 74 million at an average price of $17 per ADR. Thus, the company holds 29 million own portfolio shares representing 3.5% of the capital stock.

Finally, the first repayment of the loan taken out with ICBC Dubai branch in the amount of $12.5 million was made on April 11 this year. On the same day, $1.5 million were paid at an interest rate of 6.12%. The outstanding debt repayment also in the amount of $12.5 million will mature in October this year and April and October 2020.

Moving on to operational results. The volume of energy sales decreased by 9.6%, reaching 5 terawatt hour in the first quarter of 2019 against 5.5 terawatt hour for the same period of 2018. This increase is mainly explained by an 11.1% reduction in the consumption of residential customers, 10.9% decreases for medium and small commercial customers and 8.6% decreases for large users. The residential demand decreased as a result of the lower average temperatures recorded in January, February and March compared to the previous year as well as the impact of the economic issues and tariff increases. Small and medium commercial customers were adversely affected by 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.

It should be noted that the first quarter 2018 comparison period corresponds to a quarter with high activity levels. Furthermore, 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 the installation during 2018 of approximately 100,000 meters that were mostly destined to regularize clandestine connections. By contrast, the number of commercial and industrial customers has experienced a decrease due to the reduction in activities during the second semester of 2018.

Now taking into consideration our results in the first quarter of 2019. Net sales decreased by 9.1%, reaching almost ARS 16 billion against ARS 17.6 billion in the same quarter last year. This ARS 1.6 billion drop is mainly due to the previously mentioned lower sales volumes and the mismatch between the granted VA distribution value and the indexes used to apply the inflation adjustment, which generated decreases for approximately ARS 1.6 billion each. These effects were partially offset by the increase in revenues resulting from the increase in the cost of energy purchases, net of losses for another ARS 1.6 billion.

Furthermore, under the deferred income recoverable in 48 installments and accrued during the February 2017 to January 2018 period, ARS 423 million were disclosed in the first quarter of 2019 and ARS 473 million in the same period last year. The deferrals of the increases of August 2018 for ARS 1 billion and February '19 for ARS 841 million, which were granted in March, were recognized and will be collectible in 5 installments payable as of March 2019. This deferral had a negative impact on the sales of the first quarter this year since, if the full VAD update had been timely recorded, revenues would have increased by ARS 141 million. Finally, between the comparison period, cost adjustments for 2018 and the second semester of 2017 were applied for a total 59.4%, the tariff being fully updated as from March 2019.

Electricity power purchases increased by 19% to ARS 10.5 billion in the first quarter of 2019 against ARS 8.8 billion for the same period in 2018. This ARS 1.7 billion increase is mainly due to the 29.7% increase in the average purchase price, which generated an impact of ARS 2.6 billion as a result of the entry into effect of the new reference seasonal prices as from February and August 2018 and February 2019 set forth by the Secretariat of Renewable Resources and Electricity Market, aiming to reduce subsidies but at the same time affected by the devaluation of the peso. This increase was partially offset by an 8.2% decrease in the energy volume, which was valued at approximately ARS 1.1 billion.

Despite this increase, the reference seasonal price for residential customers is still subsidized by the national government, especially in the case of residential customers where the subsidy reached 35% of the system average generation cost in the first quarter this year. Additionally, the energy loss rate increased from 16.3% in the first quarter 2018 to 17.4% in the same period this year and was mainly generated by an increase in the 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 24.8%, mainly on account of the application of the new average seasonal price for its determination.

Meanwhile, operating expenses increased by 8.9%, reaching ARS 5.2 billion in the first quarter this year against ARS 4.8 billion in the same period last year. This is mainly accounted for 4 reasons: first, by ARS 575 million increase in penalties, which is explained by the change in the criterion applicable to the valorization of penalties in kilowatt hour. These charges are now determined based on the kilowatt hour price effective at the time the penalties is actually sanctioned by the ENRE, the price increase in the cost of non-delivered energy and a more rigorous compliance pathway. Second, a ARS 181 million increase on account of higher material consumptions. These increases were partially offset by ARS 115 million decrease in the cost of salaries and social security charges on account of changes in the first quarter of 2019 being lower than those resulting from adjusting for annual inflation with charges corresponding to the first quarter 2018. And lastly, by ARS 112 million decrease in the allowance for the impairment of trade receivables due to a lower increase in delinquent balances in the first quarter this year compared to the same period last year.

Regarding our financial results, we experienced an 87% increase in losses with a ARS 2.1 billion loss in the first quarter of 2019 against ARS 1.1 billion loss for the same period last year. This is mainly accounted for by higher commercial interest from the debt with CAMMESA due to higher rates in the amount of ARS 358 million and a higher depreciation of the peso against the U.S. dollar during the quarter, which resulted in a total negative impact on account of exchange rate differences of ARS 329 million and an increase in paid interest in the amount of ARS 282 million. These effects were partially offset by higher income from financial interest in the amount of ARS 51 million as a result of interest collected on account of an increase in holdings of own corporate bonds and dollar-denominated bonds.

Finally, net results decreased by ARS 2.7 billion, recording a profit of ARS 131 million in the first quarter of 2019 against profits for ARS 2.9 billion for the same period in 2018. The lower gross margin resulting from lower revenues from sales and higher purchases mainly on account of a drop in the demand for energy, the VAD adjustment mismatches and the higher average purchase price was exacerbated by higher operating and financial expenses. However, this decrease was partially offset by the positive impact of the result from the exposure to changes in the general purchasing power of the currency or inflation.

Talking about Edenor's adjusted EBITDA. It shows ARS 886 million profit in the first quarter of 2019, almost ARS 3.5 million lower than in the same period in 2018. Adjustment corresponds to penalties implemented after the tariff review for other period and commercial interest.

Regarding Edenor's capital expenditures, during this quarter, our investment totalized ARS 2.1 billion compared to ARS 1.3 billion in the same quarter last year, from which 63% corresponds to network infrastructure and expansion and the remaining 37% to network maintenance. The increase in investments results from the ambitious plan devised by Edenor for the 2017-2021 period, which focuses on investments for optimizing service quality levels in accordance with the quality curves required in the comprehensive tariff review by the regulatory agency. The total amount invested in 2018 amount to ARS 9.6 billion at March 2019 respective figures, being the highest investment level for the company since its creation.

About quality standards, in the first quarter of 2019, (inaudible) indicators improved with a 19.2% and 15.4% decrease respectively compared to the same period of the previous year. This improvement in service level is mainly due to the fulfillment of the ambitious plan devised by the company since our comprehensive tariff review and implementation of different benchmark practices to make our personnel more productive. Its success is also evident by the fact that these indicators exceeded the service quality improvement path established by the regulatory entity in 21.8 hours per [site] and 6.8 outages per site per year during the last 12 months.

Going to our energy losses. They showed an increase, reaching 17.4% against 16.3% for the same period in 2018. The 2018 and 2019 tariff increases have generated a greater incentive to fraud by certain customers with a 49-gigawatt hour increase in the level of losses in physical units. Additionally, the drop in the demand from large users, which have substantially lower loss level, has a negative impact on the indicator. Likewise, the rise in the average energy purchase price also increases the value in pesos of these losses.

Additionally, in the first quarter 2019, the company created multidisciplinary teams to work on new solutions for energy losses and learn about the successful experiences of other distributors. In turn, the company further increased its activities 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 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 $215 million while net debt amounts to $144 million. Financial debt consists of $165 million from our senior notes 2022 and $50 million from the bank loan taken out with Industrial and Commercial Bank of China Dubai branch. [These] current liabilities bear interest at a fixed rate. And on April 11 after this report's closing date, the first repayment of the loan taken out with ICBC was made in the amount of $12.5 million, as I mentioned before.

So this concludes my review on Edenor. 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) The 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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Just to follow up on the regulatory liabilities regularization agreement to make sure I understand completely. The ARS 7.6 billion is going to be paid out over a 5-year period. The ARS 6.9 billion in forgiveness, I guess, is -- just takes place immediately. So the -- should we assume the net gain would be approximately ARS 700 million that would be included in the second quarter?

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

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Frank, yes, your understanding is quite correct. There's another accounting effect that will impact in our second quarter results. But in general terms, as you mentioned, we will have to pay in the following years the ARS 7.6 billion. Just to be more accurate, ARS 3.1 billion are related to income tax and other expenses related to the trial -- or to the drop of the claim we have to do. Those -- that payment will be, most of it, in next year when we have to pay the income tax of the year of 2019. And then we pay immediately ARS 1.4 billion, which are the -- which is the amount we'll receive. But that's in the compensation we'll receive.

The credits related to the social tariff that the government had with us and the recognition of the framework agreement, that ARS 1.4 billion were not accounted for in our financial statement -- were off balance sheet -- so they will be recognized at the same time. And that credit will be used to pay partially the loans from CAMMESA and partially other debts we have with the government related to certain works or investment the government has financed us. The remaining ARS 3 billion is a commitment we have -- we agreed to make investments during the following 5 years.

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

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Okay. So approximately -- or ARS 1.4 billion this year, ARS 3.1 billion mostly in 2020 and the remainder spread out over the period for investments?

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

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ARS 1.4 billion this year, that is the compensation. ARS 3.1 billion next year, that's mainly through income tax. And ARS 3.0 billion is the investment or the CapEx plan commitment to be made in the following 5 years.

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Operator [6]

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(Operator Instructions) Showing 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 -- pardon, we do have a question, sir, from [Francisco Cercao] with [Pointstate].

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Unidentified Analyst, [7]

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Just a follow-up on Frank McGann's question. The CapEx -- the additional CapEx, which you've said ARS 3.1 billion over the next 5 years, will that go towards that regulatory asset base and, therefore, impact the distribution tariff when the next regulatory review is held?

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Leandro Carlos Montero, Empresa Distribuidora y Comercializadora Norte Sociedad Anónima - CFO [8]

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That's a very accurate question. No. They are not going to be included in the regulatory asset base. And while -- the ARS 3.0 billion CapEx plan committed will not have any impact on the tariff in the future, except for the maintenance costs that usually are related to the new CapEx but not -- will not have impact in the -- or will not be taken into consideration in the regulatory asset base.

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Operator [9]

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This concludes the question-and-answer session. At this time, I'd 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 [10]

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

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Operator [11]

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