Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (Edenor)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2017
Accounting Standard: International Financial Reporting Standards (IFRS)
Functional Currency: Argentine Peso (Ps.)
Edenor is the largest electricity distribution company in Argentina, serving approximately 2.95 million customers in the northwestern part of the Greater Buenos Aires metropolitan area and the northern part of the City of Buenos Aires. The company operates under a 95-year concession. The 2017 reporting period was defined by the completion of the Integral Tariff Revision (RTI) process on February 1, 2017, which established a new five-year tariff schedule aimed at covering operational costs and funding investment plans.
Key Financial Metrics (Year Ended Dec 31, 2017)
| Metric | 2017 (US$ Millions) | 2017 (Ps. Millions) | 2016 (Ps. Millions) |
|---|---|---|---|
| Revenue from Sales | 1,305.2 | 24,340.0 | 13,079.6 |
| Electric Power Purchases | (687.7) | (12,825.6) | (6,060.3) |
| Gross Income | 358.6 | 6,685.5 | 872.1 |
| Operating Profit | 133.8 | 2,494.6 | (656.1) |
| Net Profit (Continuing Ops) | 36.5 | 682.3 | (1,188.7) |
| Net Cash from Operating Activities | 176.0 | 3,283.3 | 2,931.4 |
| Total Assets | 1,356.9 | 25,304.9 | 18,933.5 |
| Total Liabilities | 1,300.1 | 24,243.8 | 18,571.7 |
| Total Equity | 56.8 | 1,061.0 | 361.8 |
| Energy Sales (GWh) | 21,503 (vs. 22,253 in 2016) | ||
| Energy Losses | 17.1% (vs. 17.0% in 2016) |
Material Changes vs. Prior Period
- Revenue Surge: Revenue increased 86.1% year-over-year (from Ps. 13.1 billion to Ps. 24.3 billion). This was primarily driven by the implementation of the new RTI tariff schedule (Resolution No. 63/17), which included an initial 42% increase in the Value-Added for Distribution (VAD) effective February 2017, followed by further adjustments in December 2017.
- Turnaround to Profitability: The company returned to profitability, recording a net profit of Ps. 682.3 million compared to a net loss of Ps. 1.19 billion in 2016. Operating profit swung from a loss of Ps. 656.1 million to a profit of Ps. 2.49 billion.
- Expense Reduction: Transmission and distribution expenses decreased 21.4% to Ps. 4.8 billion. This significant reduction was largely due to a Ps. 2.1 billion decrease in accrued fines and penalties, resulting from new calculation methodologies established by the ENRE in 2017.
- Cost Increases: Electric power purchases increased 111.6% to Ps. 12.8 billion, reflecting higher seasonal prices and tariff adjustments passed through to customers. Selling and administrative expenses also increased due to salary adjustments and higher doubtful account provisions.
- Energy Demand: Total energy sales volume decreased 3.4% to 21,503 GWh, attributed to weather conditions (fewer extreme heat days) and economic factors.
Guidance, Outlook, and Risks
Management Outlook: Management is optimistic that the new tariff framework will allow the company to cover operating costs, fund investment plans, and service debt. The board expects the RTI to establish a sustainable regulatory environment.
Regulatory Contingencies:
- Deferred Income: Approximately Ps. 4.9 billion of deferred income related to the gradual application of tariff increases was not recognized in 2017 financial statements but is expected to be billed in 48 installments starting February 2018.
- Pending Obligations: The definitive treatment of pending obligations under the Adjustment Agreement (including balances with CAMMESA and penalties) remains under negotiation with the Secretariat of Electric Energy (SEE).
Key Risks:
- Macroeconomic Volatility: High inflation (24.8% in 2017) and currency devaluation (Peso lost ~17% vs. USD in 2017) impact costs and debt service, as debt is USD-denominated while revenue is in Pesos.
- Energy Losses: Non-technical losses (theft/fraud) remain high at 8.0%, contributing to total losses of 17.1%, exceeding the 10% recoverable threshold in the concession.
- Regulatory Intervention: Risks related to government intervention, potential changes in tariff structures, and the enforcement of quality standards which could lead to fines.
- Liquidity: The company holds significant commercial debt with CAMMESA (approx. Ps. 4.7 billion) and faces potential liquidity constraints if tariff adjustments lag behind cost increases.
Investor Verification Checklist
- Tariff Implementation: Verify the actual collection of the deferred Ps. 4.9 billion income scheduled for billing starting February 2018.
- CAMMESA Debt Settlement: Monitor the resolution of the outstanding commercial debt with CAMMESA and the treatment of funds received via "mutuums" (loans for consumption).
- Energy Loss Trends: Track the effectiveness of anti-fraud measures and the installation of smart meters (MIDE) in reducing non-technical losses below the 17% level.
- Regulatory Fines: Assess the impact of the new penalty regime (Resolution No. 63/17) on future operating expenses and cash flow.
- Currency Hedging: Review the company's ability to hedge currency risk given the mismatch between USD-denominated debt and Peso-denominated revenue.