EDENOR Form 6-K Summary: Q1 2018
Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR)
Reporting Period: Three months ended March 31, 2018
Business: Distribution and sale of electricity in the Greater Buenos Aires area under a concession agreement.
Currency: Argentine Pesos (ARS), stated in thousands.
Regulatory Status: Subject to regulation by the National Regulatory Authority for the Distribution of Electricity (ENRE). The filing includes reviewed (not audited) condensed interim financial statements prepared under IFRS.
Key Financial Metrics
| Metric (in thousands ARS) | Q1 2018 | Q1 2017 | YoY Change |
|---|---|---|---|
| Revenue | 11,011,358 | 5,366,635 | +105.2% |
| Operating Profit | 2,589,693 | 816,636 | +217.1% |
| Net Profit | 1,450,818 | 421,383 | +244.3% |
| EPS (Basic & Diluted) | 1.61 | 0.47 | +242.6% |
| Operating Cash Flow | 2,688,977 | 139,931 | +1,821.9% |
| Total Assets | 30,687,831 | 25,304,907 (Dec 2017) | N/A |
| Total Liabilities | 28,228,601 | 24,244,043 (Dec 2017) | N/A |
| Cash & Equivalents | 144,983 | 82,860 (Dec 2017) | +75.0% |
Material Changes vs. Prior Period
- Revenue Surge: Revenue more than doubled compared to Q1 2017, driven primarily by tariff adjustments approved by ENRE (Resolution No. 33/18) effective February 1, 2018, which set the average rate at $2.4627/kWh.
- Profitability Expansion: Net profit increased by 244% year-over-year. Operating margins improved significantly due to the tariff increase outpacing cost inflation.
- Cash Flow Improvement: Operating cash flow jumped from 139.9 million ARS in Q1 2017 to 2.69 billion ARS in Q1 2018. This was largely due to higher collections and working capital management, despite a significant increase in trade receivables.
- Financial Expenses: Net financial expense increased to 530.4 million ARS (from 160.1 million ARS in Q1 2017), primarily due to exchange differences of 262.4 million ARS and higher interest costs.
- Accounting Standard Change: The company adopted IFRS 9 (Financial Instruments) on January 1, 2018. This resulted in a one-time adjustment to retained earnings of 60.2 million ARS (net of tax) due to the new expected credit loss model for trade receivables.
Guidance, Risks, and Contingencies
- Regulatory Penalties: On April 23, 2018, ENRE issued Resolution No. 118 requiring the company to pay compensation to residential customers for service interruptions exceeding 20 hours. The company quantified this impact at 87 million ARS and recognized it as of March 31, 2018. Management is analyzing the possibility of challenging this resolution.
- Framework Agreement: As of the filing date, a new Addendum to the Framework Agreement (effective Oct 1, 2017) had not yet been approved by the Federal and Provincial Governments. Consequently, revenue of 93.5 million ARS related to this agreement has not been recognized.
- Currency Risk: The company holds significant foreign currency assets (USD 94.6 million) and liabilities (USD 243.5 million). While most debt is fixed-rate, a loan from ICBC Bank carries a variable rate (LIBOR + spread), which the company hedged in April 2018.
- Capital Expenditure: Capital expenditures for the quarter were 999.2 million ARS, with 101.4 million ARS of financial costs capitalized.
Investor Verification Checklist
- Tariff Sustainability: Verify the long-term stability of the new tariff rates ($2.4627/kWh) and the timeline for future adjustments.
- Regulatory Resolution Challenge: Monitor the outcome of the company's potential legal challenge against ENRE Resolution No. 118 regarding the 87 million ARS penalty.
- Framework Agreement Status: Track the approval status of the Framework Agreement Addendum to determine when the 93.5 million ARS in deferred revenue will be recognized.
- Receivables Quality: Review the allowance for impairment of trade receivables (633.9 million ARS) in light of the new IFRS 9 expected credit loss methodology.
- Foreign Exchange Exposure: Assess the impact of Argentine peso volatility on the company's net financial expense, given the mismatch between foreign currency assets and liabilities.