EDENOR 2007 Annual Report (Form 20-F) Summary
Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR)
Reporting Period: Fiscal year ended December 31, 2007
Business Overview: Edenor is the largest electricity distribution company in Argentina, holding an exclusive concession to distribute electricity in the northwestern zone of the Greater Buenos Aires metropolitan area and the northern portion of the City of Buenos Aires. As of December 31, 2007, the company served approximately 2.49 million customers across 4,637 square kilometers.
Accounting Basis: Financial statements are prepared in accordance with Argentine GAAP. The filing includes reconciliations to U.S. GAAP. The company is not required to restate financial statements for inflation after February 28, 2003.
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | Argentine GAAP (Ps. Millions) | Argentine GAAP (U.S. $ Millions) | U.S. GAAP (U.S. $ Millions) |
|---|---|---|---|
| Net Sales | 1,981.9 | 629.4 | 615.1 |
| Gross Margin | 1,092.0 | 346.8 | 180.9 |
| Net Operating Income | 429.2 | 136.3 | 115.0 |
| Net Income | 122.5 | 38.9 | 68.5 |
| Net Income Per Share (Basic/Diluted) | 0.135 Ps. | 0.043 U.S. $ | 0.238 U.S. $ |
| Net Cash from Operating Activities | 427.2 | 135.7 | N/A |
| Total Assets | 3,847.6 | 1,221.8 | 1,289.0 |
| Total Liabilities | 1,873.0 | 594.8 | 823.1 |
| Shareholders' Equity | 1,974.6 | 627.1 | 465.9 |
Note: U.S. Dollar amounts are translated at the period-end rate of Ps. 3.149 to U.S. $1.00.
Material Changes vs. Prior Period (2006)
- Revenue Growth: Net sales increased 43.8% (Ps. 603.6 million) compared to 2006. This was driven by a 7.5% increase in energy volume sold and significant tariff adjustments, including the application of a 28% increase in distribution margins (VAD) and Cost Monitoring Mechanism (CMM) adjustments retroactive to November 2005.
- Profitability: Net operating income surged from Ps. 35.9 million in 2006 to Ps. 429.2 million in 2007. However, Net Income decreased from Ps. 293.1 million in 2006 to Ps. 122.5 million in 2007. The decline in net income was primarily due to a Ps. 125.0 million income tax charge in 2007 (reversing a Ps. 167.2 million tax gain in 2006) and the absence of a one-time Ps. 179.2 million gain on debt extinguishment recorded in 2006.
- Debt Restructuring: In 2007, the company repurchased and redeemed significant portions of its debt, including U.S. $218 million of Discount Notes due 2014 and U.S. $43.7 million of Fixed Rate Par Notes due 2016. In October 2007, it issued U.S. $220 million of 10.5% Senior Notes due 2017.
- Energy Losses: Total energy losses increased to 11.6% in 2007 from 11.1% in 2006, primarily due to higher technical losses associated with increased demand.
Guidance, Outlook, and Risks
- Tariff Renegotiation (RTI): The company is engaged in an Integral Tariff Revision (RTI) with the National Electricity Regulator (ENRE). The outcome is critical for future profitability. The company estimates its post-tax return on gross asset base was only 3.4% in 2007, significantly lower than the 9.6% average from 1997-2001.
- Dividend Restrictions: The company has not paid dividends since August 2001. Dividend payments are restricted by debt covenants (leverage ratio limits) and the Adjustment Agreement, which requires ENRE approval until the RTI is completed.
- Capital Expenditures: The company plans to invest approximately Ps. 305 million in 2008. Capital expenditure limits are imposed by debt restructuring indentures.
- Key Risks:
- Regulatory Risk: Uncertainty regarding the timing and terms of the RTI and potential challenges to the Adjustment Agreement by consumer groups.
- Macroeconomic Risk: Exposure to Argentine inflation, exchange rate fluctuations (Peso devaluation), and government intervention in the electricity sector.
- Energy Shortages: Potential supply constraints due to lack of new generation capacity and natural gas shortages.
- Legal/Concession Risk: The Argentine government holds a pledge over Class A shares and may foreclose if fines exceed 20% of sales or if the company breaches concession terms.
Investor Verification Checklist
- Tariff Resolution: Verify the status and expected outcome of the Integral Tariff Revision (RTI) with the ENRE, as this is the primary driver of future margins.
- Debt Covenants: Confirm compliance with leverage ratio covenants (currently expected to exceed 2.5 by July 2008) and the impact on dividend eligibility.
- Shantytown Receivables: Review the collectability of receivables from the Province of Buenos Aires regarding the shantytown framework agreement (Ps. 17.9 million outstanding as of Dec 31, 2007).
- Energy Losses: Monitor trends in non-technical losses (theft/fraud), which currently exceed the 10% concession allowance.
- Legal Proceedings: Track the status of the ACIJ lawsuit challenging the Adjustment Agreement and the tax claim regarding allowance for doubtful accounts.