EDENOR current report, Q4 FY2017

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EDENOR Form 6-K Summary: Fourth Quarter 2017 Results

Business Context and Reporting Period

This Form 6-K, filed on March 13, 2018, reports the financial results for Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR) for the fourth quarter and full year ended December 31, 2017. EDENOR is Argentina's largest electricity distributor by customer count and GWh distributed, serving the northwestern zone of Greater Buenos Aires and the northern part of the City of Buenos Aires. All figures are presented in Argentine Pesos (ARS) in accordance with IFRS.

Key Financial Metrics

Fourth Quarter 2017 Performance (vs. Q4 2016):

  • Revenue from Sales: ARS 6,763.6 million (up 70.7%).
  • Gross Margin: ARS 3,175.8 million (up 19.0%).
  • Net Operating Income: ARS 646.2 million (down 49.5% from ARS 1,280.5 million).
  • Net Income: ARS 22.2 million (down 96.6% from ARS 653.6 million).
  • Adjusted EBITDA: ARS 793.6 million (down from ARS 1,465.5 million).
  • Capital Expenditures (Q4): ARS 1,292.2 million (up from ARS 694.3 million).

Full Year 2017 Performance (vs. 2016):

  • Revenue from Sales: ARS 24,340.0 million (up 86.1%).
  • Net Income: ARS 682.2 million (turnaround from a loss of ARS 1,188.6 million).
  • Operating Cash Flow: ARS 3,363.0 million (up from ARS 2,931.3 million).
  • Capital Expenditures (Full Year): ARS 4,136.8 million (up from ARS 2,703.2 million).

Balance Sheet (as of Dec 31, 2017):

  • Total Assets: ARS 25,304.9 million (USD 1,356.9 million).
  • Total Liabilities: ARS 24,244.0 million (USD 1,300.0 million).
  • Total Equity: ARS 1,060.9 million (USD 56.9 million).
  • Cash and Cash Equivalents: ARS 82.9 million (USD 4.4 million).
  • Financial Debt (USD-denominated): USD 226.4 million outstanding principal.

Material Changes vs. Prior Period

Revenue Growth: The 70.7% increase in Q4 revenue was driven primarily by tariff increases under the RTI (Tariff Rationalization Plan) and inflation adjustments. Specifically, Resolution No. 603/2017 implemented a new tariff scheme effective December 1, 2017, including retroactive adjustments for August through November 2017. This was partially offset by a 1.5% decrease in energy sales volume (5,064 GWh vs. 5,139 GWh), attributed to milder weather conditions reducing residential demand.

Profitability Decline: Despite revenue growth, Net Operating Income and Net Income declined significantly compared to Q4 2016. This was largely due to the absence of extraordinary income recognized in Q4 2016 related to provisional remedies and energy purchase compensations (ARS 1,125.9 million). Additionally, energy purchase costs rose 177.2% due to new seasonal pricing, and financial results worsened by ARS 144.9 million due to currency depreciation and higher interest charges on USD-denominated debt.

Cost Structure: Operating expenses remained relatively flat (down 1.2%), aided by a significant reduction in ENRE penalties (down 80%), which offset increases in salaries and service fees.

Guidance, Outlook, and Risks

Tariff and Regulatory Environment:

  • Resolution No. 33/2018: Effective February 1, 2018, a new tariff scheme was established, incorporating the final 18% tranche of the RTI and an 11.9% inflation adjustment for the second semester of 2017. This includes a deferred income recovery of ARS 6,343.4 million to be billed in 48 installments.
  • Deferred Income: Approximately ARS 4,917.2 million of deferred income from VAD adjustments (Feb-Dec 2017) will be incorporated into distribution costs starting February 2018.

Corporate Actions:

  • Merger: The controlling company, Pampa Energía (PESA), is merging with subsidiaries CTLL, IEASA, and EASA. The merger was approved by shareholders in January 2018, with procedures ongoing for final registration.
  • Rating Upgrade: Moody's Latin America upgraded EDENOR's local rating to Aa3.ar and global rating to B1 (stable outlook) in December 2017, citing improved financial indicators and the implementation of tariff updates.

Risks and Contingencies:

  • Currency Risk: Significant exposure to USD-denominated debt (USD 226.4 million) creates volatility in financial results due to ARS depreciation.
  • Energy Losses: Losses increased slightly to 16.4% in Q4 2017 (from 16.2% in Q4 2016) due to higher prices, despite lower demand. The company is intensifying anti-theft measures (DIME) and installing smart meters (MIDE) to reduce losses.
  • Investment Plan: The 2017-2021 investment plan was adversely affected by the deferral of tariff increases. The company has adjusted its investment plan to align with the new regulatory scenario.

Key Facts for Investor Verification

  • Deferred Revenue Recognition: Verify the impact of the ARS 6,343.4 million deferred income recovery (Resolution 33/2018) and the ARS 4,917.2 million VAD adjustment on future cash flows and revenue recognition over the next 48 months.
  • Debt Service Capacity: Assess the ability to service USD 226.4 million in debt given the volatility of the Argentine Peso and the company's reliance on tariff adjustments for margin recovery.
  • Merger Integration: Monitor the completion of the Pampa Energía merger and its impact on corporate governance and capital structure.
  • Energy Loss Reduction: Track the effectiveness of DIME and MIDE initiatives in reducing the 16.4% energy loss rate, which directly impacts gross margin.
  • Regulatory Compliance: Confirm the timely implementation of future tariff adjustments and inflation indexations as stipulated by ENRE resolutions.