Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR)
Reporting Period: Second Quarter (Q2) and Six Months ended June 30, 2009
Filing Date: August 13, 2009
Business Overview: Argentina's largest electricity distributor, serving the northwestern zone of the Greater Buenos Aires metropolitan area and the northern part of Buenos Aires City. The company operates under a 95-year concession agreement.
Key Financial Metrics
Note: All figures are in millions of Argentine Pesos (Ps.) unless otherwise noted. USD conversions are based on the June 30, 2009 rate of Ps. 3.797/USD.
Income Statement Highlights (Q2 2009 vs. Q2 2008)
| Metric | Q2 2009 | Q2 2008 | % Change |
|---|---|---|---|
| Net Sales | 508.3 | 456.8 | +11.3% |
| Electric Power Purchases | (251.6) | (225.5) | +11.6% |
| Gross Margin | 256.6 | 231.3 | +10.9% |
| Net Operating Income | 44.3 | 47.5 | -6.7% |
| Net Income | 46.9 | 38.6 | +21.3% |
Balance Sheet & Liquidity (as of June 30, 2009)
- Total Assets: Ps. 4,327.2 million (USD 1,139.6 million)
- Total Liabilities: Ps. 2,158.7 million (USD 568.5 million)
- Shareholders' Equity: Ps. 2,168.5 million (USD 571.1 million)
- Cash and Cash Equivalents: Ps. 232.6 million (USD 61.2 million)
- Outstanding Debt (USD): Ps. 898.8 million principal (approx. USD 236.7 million), consisting of Senior Notes due 2017, Par Notes due 2016/2019, and Floating Rate Notes due 2013.
Cash Flow (Six Months Ended June 30, 2009)
- Net Cash Provided by Operating Activities: Ps. 274.0 million (USD 72.2 million)
- Net Cash Used in Investing Activities: Ps. (186.4) million (USD (49.1) million)
- Net Cash Provided by Financing Activities: Ps. 18.6 million (USD 4.9 million)
- Capital Expenditures: Ps. 188.2 million (USD 49.6 million)
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11.3% in Q2 2009, driven by the recognition of the Cost Monitoring Mechanism (CMM) adjustment approved in August 2008 (applied retroactively) and higher energy purchase prices passed to certain customers. This offset a 5.0% decrease in energy volume sold (4,414 GWh vs. 4,645 GWh), caused by a 7.3% drop in average consumption per customer.
- Operating Income Decline: Despite higher gross margins, Net Operating Income fell 6.7% due to an 18.4% increase in transmission and distribution expenses (primarily salaries and outsourcing) and a 26.1% rise in administrative expenses.
- Net Income Surge: Net income rose 21.3% primarily due to non-operating gains: a Ps. 21.2 million recovery of allowance for doubtful accounts (linked to the Framework Agreement ratification) and a Ps. 23.4 million recovery of tax contingencies (linked to the tax regularization plan).
- Debt Management: The company repurchased approximately USD 4.5 million of Senior Notes due 2017 and USD 1.3 million of Fixed Rate Par Notes due 2016 during Q2 2009.
Guidance, Outlook, and Risks
- Tariff Uncertainty: The Revision of the Company Tariff Structure (RTI), expected to take effect in February 2009, had not been implemented as of the filing date. The National Ombudsman filed a challenge against the October 2008 rate hike, resulting in a preliminary injunction prohibiting power cuts for non-payment of bills issued with the rate hike until a final ruling.
- Regulatory Framework: The Framework Agreement with the Argentine National Government and the Province of Buenos Aires was ratified in May 2009, extending the agreement for four years from January 1, 2007. This ratification allowed for the recovery of doubtful account allowances.
- Tax Regularization: The company registered in the tax regularization plan (Law No. 26,476) in April 2009, waiving fines and penalties on contested tax deductions for fiscal years 1996-1998.
- Derivatives: On July 27, 2009, the company entered into new derivative contracts (USD 10 million) to hedge against USD/ARS exchange rate fluctuations.
- Operational Risks: Approximately 78% of employees are union members. While relations are currently stable, the collective bargaining agreements expired in 2007, and future strikes or labor disruptions remain a risk.
Investor Verification Checklist
- Tariff Implementation Status: Verify the current status of the RTI resolution and the outcome of the National Ombudsman's legal challenge regarding the October 2008 rate hike.
- Debt Covenants: Confirm compliance with negative covenants regarding indebtedness levels (Level of Indebtedness must be <= 2.5) and the impact of the recent debt repurchases on leverage ratios.
- Regulatory Receivables: Assess the collectibility of the Ps. 60.3 million receivable from the Argentine Federal Government and Province of Buenos Aires related to the Framework Agreement.
- Exchange Rate Exposure: Monitor the impact of the Argentine Peso devaluation on the company's USD-denominated debt service costs, given that the majority of liabilities are in USD while assets are largely in Pesos.
- Capital Expenditure Plan: Review the execution of the Ps. 188.2 million capital expenditure plan, specifically the allocation toward new connections and grid enhancements.