EDENOR S.A. Form 6-K Summary
Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR)
Reporting Period: Second Quarter and Six Months ended June 30, 2010
Filing Date: August 11, 2010
Business Overview: Argentina's largest electricity distributor, serving the northwestern zone of the greater Buenos Aires metropolitan area and the northern part of the city of Buenos Aires. The company operates under a concession agreement and is regulated by the National Regulatory Authority for the Distribution of Electricity (ENRE).
Currency: Financial statements are prepared in Argentine Pesos (Ps.) in accordance with Argentine GAAP. USD translations are provided at a rate of Ps. 3.931 per USD (as of June 30, 2010).
Key Financial Metrics
| Metric (in millions of Ps.) | 2Q 2010 | 2Q 2009 | 6M 2010 | 6M 2009 |
|---|---|---|---|---|
| Net Sales | 517.4 | 508.3 | 1,090.9 | 1,060.2 |
| Electric Power Purchases | (246.0) | (251.6) | (526.6) | (519.3) |
| Gross Margin | 271.5 | 256.6 | 564.7 | 540.9 |
| Net Operating Income | 39.6 | 61.1 | 92.3 | 135.2 |
| Net Income (Loss) | (6.3) | 46.9 | (1.3) | 77.0 |
| Capital Expenditures | 110.9 | 120.7 | 193.1 | 188.2 |
| Net Cash Flow from Operating Activities | N/A | N/A | 295.1 | 274.0 |
Note: Net Income for the six months ended June 30, 2010, was a loss of Ps. 1.3 million (USD 0.3 million).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 1.8% in 2Q 2010, driven by a 4.5% increase in energy volume sold (4,614 GWh vs. 4,414 GWh). This was partially offset by a decrease in energy purchase prices for certain customers due to a new tariff scheme effective June 1, 2010.
- Profitability Decline: Net Operating Income decreased 35.2% in 2Q 2010. This was primarily caused by significant increases in operating expenses:
- Transmission and distribution expenses rose 11.5% (Ps. 154.8 million) due to higher salaries, supplies, and outsourcing.
- Selling expenses increased 31.0% (Ps. 43.9 million), largely due to a Ps. 4.4 million increase in the allowance for doubtful accounts.
- Administrative expenses jumped 43.1% (Ps. 33.2 million) due to lease costs, salaries, and computer services.
- Net Result: The company reported a net loss of Ps. 6.3 million in 2Q 2010 compared to a net gain of Ps. 46.9 million in 2Q 2009. The six-month period also showed a net loss of Ps. 1.3 million versus a gain of Ps. 77.0 million in the prior year.
- Financial Expenses: Financial expenses decreased by Ps. 16.8 million in 2Q 2010 compared to 2Q 2009, attributed to reduced exchange differences on dollar-denominated liabilities and a better debt structure.
Guidance, Outlook, Risks, and Contingencies
- Tariff and Regulatory Outlook: The company has submitted five Cost Monitoring Mechanism (CMM) adjustment requests to the ENRE covering periods from November 2007 to April 2010. As of the filing date, these adjustments were pending approval. The company is also awaiting the implementation of the Revision of the Company Tariff Structure (RTI), which was expected to take effect in February 2009 but remains pending.
- Debt Management: In July 2010, the company repurchased and cancelled US$ 7.3 million of its Fixed Rate Par Notes due 2016. As of July 31, 2010, outstanding dollar-denominated debt was US$ 169.3 million, and peso-denominated debt was Ps. 69.9 million.
- Government Receivables: The company signed a payment plan agreement with the Province of Buenos Aires in March 2010 regarding amounts owed under the Framework Agreement. The province paid Ps. 1.6 million in cash and Ps. 30.9 million in "Cancellation Bonds" during May and June 2010.
- Legal and Tax Contingencies:
- Tax Regularization: The company adhered to a tax regularization plan (Law No. 26,476) in 2009, recovering Ps. 23.4 million in allowances for tax contingencies in 2Q 2009. No such recovery occurred in 2Q 2010.
- Litigation: The company is involved in various lawsuits, including consumer association complaints regarding tariff resolutions and VAT issues. Management believes these will not have a material adverse effect.
- Environmental: A long-standing case regarding alleged PCB environmental pollution was definitively dismissed by the Supreme Court in May 2010.
- IFRS Adoption: The company is implementing a plan to adopt International Financial Reporting Standards (IFRS), mandatory for fiscal years beginning January 1, 2012.
Key Facts for Investor Verification
- Operating Expense Inflation: Verify the sustainability of the sharp increases in transmission, selling, and administrative expenses, which drove the net loss despite higher sales volume.
- Regulatory Approvals: Monitor the status of the pending CMM adjustment requests and the RTI tariff revision, as these are critical for restoring the company's financial equation.
- Government Receivables: Track the collection status of receivables from the Province of Buenos Aires and the Federal Government, particularly the realization of value from the "Cancellation Bonds."
- Debt Structure: Review the impact of the recent debt repurchases and the mix of fixed vs. floating rate debt on future interest expenses and exchange rate exposure.
- Allowance for Doubtful Accounts: Assess the trend in bad debt provisions, which significantly impacted selling expenses in 2Q 2010 compared to recoveries in 2Q 2009.