Business Context and Reporting Period
Company: EDENOR (Empresa Distribuidora y Comercializadora Norte S.A.)
Reporting Period: Year ended December 31, 2016
Business: Distribution and sale of electricity in the Greater Buenos Aires area under a 95-year concession.
Regulatory Environment: The company operates under a state of emergency in the Argentine electricity sector. In 2016, the company faced significant regulatory challenges, including court-ordered provisional remedies that suspended tariff increases for a large portion of its customer base. A new Tariff Structure Review (RTI) was concluded in late 2016, with new rates effective February 1, 2017.
Key Financial Metrics (in thousands of Argentine Pesos)
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | 13,079,609 | 3,802,162 |
| Operating Loss | (656,116) | 2,241,687 |
| Net Loss | (1,188,648) | 1,142,443 |
| Net Financial Expense | (1,275,594) | (915,514) |
| Operating Cash Flow | 2,931,315 | 3,002,117 |
| Total Assets | 18,933,530 | 12,980,929 |
| Total Liabilities | 18,571,698 | 11,455,876 |
| Total Equity | 361,832 | 1,525,053 |
| Net Debt | 18,313,136 | 11,326,924 |
| Gearing Ratio | 98.06% | 88.13% |
Material Changes vs. Prior Period
- Profitability Reversal: The company swung from a net profit of 1.14 billion pesos in 2015 to a net loss of 1.19 billion pesos in 2016. This was driven by the expiration of temporary government income recognition (SE Resolution 32/15) and the impact of provisional remedies suspending tariff increases.
- Revenue Surge: Revenue increased by 244% to 13.08 billion pesos. This increase is largely attributable to the recognition of income related to provisional remedies and higher cost adjustments, rather than organic volume growth.
- Financial Expenses: Net financial expenses increased by 39% to 1.28 billion pesos, primarily due to significant exchange differences (417.7 million pesos) resulting from peso devaluation against the US dollar, as a large portion of debt is USD-denominated.
- Equity Erosion: Total equity declined by 76% to 361.8 million pesos. The accumulated losses now exceed 50% of the share capital, triggering a requirement under Argentine law (Section 206) to analyze capital reduction alternatives.
- Working Capital: The company reported negative working capital of approximately 2.9 billion pesos, including a significant payable balance to CAMMESA (wholesale electricity market operator) of 1.8 billion pesos.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management expresses optimism that the new tariff structure (RTI) effective February 1, 2017, will allow the company to cover operating costs, fund investments, and service debt. The Board is analyzing the impact of the new rates to reverse the capital erosion.
- Regulatory Risks:
- Provisional Remedies: Court orders suspended tariff increases for over 30% of sales (including the "Fernández" case affecting 54% of revenue from small-demand customers). While some remedies were revoked or stayed, enforcement of adverse rulings could result in significant additional losses.
- Adjustment Agreement: Unresolved issues remain regarding the settlement of balances with CAMMESA and the treatment of penalties and discounts.
- Financial Risks:
- Currency Risk: The company has a net negative exposure of approximately 2.84 billion pesos to foreign currencies (primarily USD). A 10% devaluation of the peso would decrease operating results by approximately 283.8 million pesos.
- Liquidity: The company suspended payments to CAMMESA from July to November 2016 due to cash flow constraints. A payment plan has been proposed but not yet accepted.
- Legal Contingencies: The company is involved in multiple lawsuits, including claims by consumer associations regarding tariff legality and interest rates. A provision of 429.3 million pesos has been recorded for various contingencies.
Investor Verification Checklist
- Capital Adequacy: Verify the Board's plan to address the Section 206 capital reduction requirement given that accumulated losses exceed 50% of share capital.
- Tariff Implementation: Confirm the full implementation and collection of the new RTI tariffs effective February 2017 and the resolution of pending provisional remedies.
- CAMMESA Settlement: Monitor the status of the proposed payment plan for the 1.8 billion peso debt owed to CAMMESA.
- Currency Hedging: Assess the company's strategy to manage the significant USD-denominated debt exposure in a volatile exchange rate environment.
- Legal Outcomes: Track the resolution of the "Fernández" and "Abarca" cases, as adverse rulings could materially impact future revenue and liabilities.