Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (Edenor)
Reporting Period: Fiscal year ended December 31, 2016
Business Overview: Edenor is the largest electricity distribution company in Argentina, holding an exclusive concession to distribute electricity in the northwestern part of the Greater Buenos Aires metropolitan area and the northern part of the City of Buenos Aires. As of December 31, 2016, the company served approximately 2.87 million customers.
Regulatory Environment: The company operates under a highly regulated framework. The 2016 fiscal year was marked by the implementation of a new tariff scheme (Resolution No. 1/16) in February 2016, which was temporarily suspended in certain districts due to court injunctions. The Integral Tariff Revision (RTI) process was completed in February 2017, establishing a new five-year tariff regime.
Key Financial Metrics (Year Ended Dec 31, 2016)
| Metric | 2016 (US$ Millions) | 2016 (Ps. Millions) | 2015 (Ps. Millions) |
|---|---|---|---|
| Revenue from Sales | 823.1 | 13,079.6 | 3,802.2 |
| Electric Power Purchases | (381.4) | (6,060.3) | (2,022.0) |
| Gross Income (Loss) | 54.9 | 872.1 | (1,373.5) |
| Operating (Loss) Profit | (41.3) | (656.1) | 2,241.7 |
| Net Financial Expense | (80.3) | (1,275.6) | (915.5) |
| (Loss) Profit for the Year | (74.8) | (1,188.7) | 1,142.4 |
| Cash and Cash Equivalents (End of Year) | 16.3 | 258.6 | 129.0 |
| Total Debt (Financial) | 176.4 | 2,769.6 | 2,461.0 |
| Commercial Debt with CAMMESA | N/A | 5,469.5 | N/A |
Note: US$ figures are translated at the year-end rate of Ps. 15.89 to US$ 1.00. Financial debt is primarily denominated in US Dollars.
Material Changes vs. Prior Period
- Revenue Surge: Revenue increased by 244% (Ps. 9.3 billion) compared to 2015. This was driven primarily by the implementation of significant tariff increases via Resolution No. 1/16 in February 2016 and the recognition of income compensating for the economic impact of provisional remedies (injunctions) that temporarily suspended tariff hikes in certain districts.
- Profitability Reversal: The company swung from a net profit of Ps. 1,142.4 million in 2015 to a net loss of Ps. 1,188.7 million in 2016. This deterioration was caused by the expiration of temporary income recognition from Resolution No. 32/15 (which boosted 2015 results) and a sharp increase in operating expenses.
- Expense Inflation:
- Fines and Penalties: Transmission and distribution expenses included a Ps. 2.1 billion increase in ENRE fines and penalties due to a new valuation methodology (Note No. 120,151) that adjusted penalties based on current tariff values and accrued interest.
- Energy Losses: Total energy losses increased to 17.0% in 2016 from 14.9% in 2015, driven largely by a rise in non-technical losses (theft/fraud) to 7.4%.
- Debt Obligations: Commercial debt owed to CAMMESA (the wholesale market administrator) stood at approximately Ps. 5.47 billion as of year-end. Negotiations for a repayment plan were ongoing.
Guidance, Outlook, and Risks
Management Outlook: Management expressed optimism that the new tariff scheme established by Resolution No. 63/17 (effective February 1, 2017) would provide a sustainable regulatory framework. The new scheme includes a phased Value-Added for Distribution (VAD) increase of up to 42% initially, with further adjustments in 2017 and 2018, and a non-automatic adjustment mechanism linked to inflation indicators.
Key Risks and Contingencies:
- Regulatory and Tariff Risk: The company remains exposed to delays in tariff adjustments and potential government intervention. The treatment of outstanding obligations under the Adjustment Agreement (including fines and CAMMESA debt) remains partially unsettled.
- Energy Losses: Non-technical losses (theft) are a critical issue, exceeding the 10% loss factor allowed for reimbursement under the concession. The company anticipates these losses may increase further following the new tariff structure.
- Liquidity and Debt: The company faces significant liquidity pressure due to the large commercial debt with CAMMESA and the inability to fully hedge currency risk. A further devaluation of the Argentine Peso would increase the burden of its US Dollar-denominated financial debt.
- Legal and Foreclosure Risk: Under the Adjustment Agreement, the Argentine government may foreclose on the pledge of Class A shares if fines exceed 20% of gross sales or if other material breaches occur. In 2016, fines remained below this threshold.
- Capital Stock Reduction: Due to accumulated losses exceeding 50% of capital stock, the company is legally required to consider a mandatory capital stock reduction, though shareholders decided in April 2017 not to approve it immediately pending the impact of the new tariff regime.
Investor Verification Checklist
- Tariff Implementation: Verify the actual collection rates and customer acceptance of the new tariff scheme (Resolution No. 63/17) implemented in early 2017.
- CAMMESA Debt Resolution: Monitor the status of negotiations regarding the repayment schedule for the Ps. 5.47 billion commercial debt owed to CAMMESA.
- Energy Loss Trends: Track the evolution of non-technical energy losses to determine if they remain above the 10% reimbursement threshold, which directly impacts gross margins.
- Regulatory Settlements: Confirm the final treatment of outstanding obligations from the Adjustment Agreement, specifically regarding the offsetting of fines and the settlement of past regulatory liabilities.
- Currency Exposure: Assess the company's ability to service its US Dollar-denominated debt (Senior Notes due 2022) in the event of further Argentine Peso devaluation.