EDENOR current report, Q4 FY2018

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EDENOR 4Q 2018 Earnings Summary

Business Context and Reporting Period

Company: Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2018
Business: Argentina's largest electricity distributor by customer count and energy sales, serving the northwestern zone of Greater Buenos Aires and the northern part of the City of Buenos Aires.
Accounting Basis: Figures are presented in Argentine Pesos (ARS) under IFRS. Due to hyperinflation (IAS 29), financial statements have been restated to reflect changes in the general purchasing power of the functional currency. The filing provides both historical values and inflation-adjusted figures.

Key Financial Metrics

Revenue (12 Months): ARS 45,454.2 million (Historical) / ARS 55,953.7 million (Inflation-Adjusted).
Net Income (12 Months): Loss of ARS 128.2 million (Historical) / Profit of ARS 4,297.5 million (Inflation-Adjusted).
Net Income (4Q 2018): Loss of ARS 2,228.9 million (Historical).
Adjusted EBITDA (4Q 2018): Loss of ARS 110.0 million.
Capital Expenditures (4Q 2018): ARS 3,150.3 million.
Debt: USD 216.2 million outstanding principal (USD-denominated); Net debt of USD 96.6 million as of December 31, 2018.
Liquidity: Cash and cash equivalents totaled ARS 27.6 million (inflation-adjusted) as of December 31, 2018.

Material Changes vs. Prior Period

  • Revenue Growth: Full-year revenue increased 86.7% (historical) and 41.3% (inflation-adjusted) compared to 2017, driven primarily by tariff updates and energy purchase cost increases.
  • Volume Decline: Energy sales volume decreased 8.1% in 4Q 2018 and 1.9% for the full year, attributed to lower temperatures, economic recession, and tariff impacts on residential and commercial demand.
  • Operating Expenses: Increased 90.6% in 4Q 2018 (historical), largely due to new regulatory penalties (ARS 506 million) and changes in penalty calculation methodologies (ARS 308.1 million).
  • Financial Results: Net financial losses surged 382.9% in 4Q 2018 due to higher commercial interest on debt with CAMMESA and impairment charges related to a real estate asset.
  • Energy Losses: Loss rates increased from 16.4% in 4Q 2017 to 17.1% in 4Q 2018, driven by increased fraud incentives and lower demand from large industrial users.

Outlook, Risks, and Unusual Items

  • Regulatory Jurisdiction Transfer: Effective March 1, 2019, jurisdiction over Edenor transfers from the Federal Government to the Province and City of Buenos Aires. A new bipartite regulatory entity is being created. The Federal Government agreed to resolve pending claims regarding social tariffs and transition periods.
  • Tariff Updates: A 32.0% Value Added of Distribution (VAD) increase was approved, effective March 1, 2019. Some VAD updates for the first semester of 2018 were deferred.
  • Share Repurchase: The Board approved a second share repurchase program (up to ARS 800 million). As of the filing date, 10.9 million shares were repurchased for ARS 421.1 million.
  • Legal Contingencies:
    • Real Estate Dispute: Edenor is pursuing arbitration against Ribera Desarrollos S.A. (RDSA) for ARS 2,972.4 million. RDSA filed for reorganization in February 2019. Edenor has partially provisioned the claim, leaving a net balance of ARS 765.6 million.
    • Regulatory Penalties: New penalties under Resolution No. 91/2018 regarding billing breaches were recognized in 4Q 2018. Edenor has appealed these decisions.
  • Investment Plan: Total 2018 investments reached ARS 7,610.8 million, the highest level in the company's history, focused on grid enhancements and service quality.

Investor Verification Checklist

  • Verify the timeline and operational impact of the transfer of regulatory jurisdiction to the Province and City of Buenos Aires.
  • Confirm the recovery status of the ARS 2,972.4 million claim against RDSA given the counterparty's reorganization filing.
  • Monitor the implementation of the new bipartite regulatory entity and its potential impact on future tariff adjustments.
  • Assess the effectiveness of market discipline actions (DIME) in reversing the trend of increasing energy loss rates (17.1%).
  • Review the status of appeals regarding ENRE Resolution No. 91/2018 penalties and their potential reversal.