Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (Edenor)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2013
Accounting Basis: International Financial Reporting Standards (IFRS)
Business Overview: Edenor is the largest electricity distribution company in Argentina, holding an exclusive concession to distribute electricity in the northwestern part of the Greater Buenos Aires metropolitan area and the northern part of the City of Buenos Aires. As of December 31, 2013, the company served approximately 2.77 million customers.
Key Financial Metrics
Financial data is presented in millions of U.S. Dollars (USD) and Argentine Pesos (Ps.), translated at the year-end rate of Ps. 6.521 to USD 1.00.
| Metric | 2013 (USD) | 2013 (Ps.) | 2012 (Ps.) | 2011 (Ps.) |
|---|---|---|---|---|
| Revenue from Sales | 527.6 | 3,440.7 | 2,976.2 | 2,302.0 |
| Operating Profit (Loss) | 201.6 | 1,314.6 | (828.4) | 105.8 |
| Net Profit (Loss) for the Year | 118.5 | 772.7 | (1,013.4) | (291.4) |
| Net Cash Flow from Operating Activities | 242.9 | 1,584.2 | 538.5 | 690.7 |
| Cash and Cash Equivalents (Year End) | 37.3 | 243.5 | 82.3 | 158.8 |
| Total Assets | 1,113.1 | 7,258.1 | 6,871.8 | 7,011.5 |
| Total Liabilities | 932.8 | 6,081.8 | 6,382.7 | 5,164.3 |
| Total Equity | 180.4 | 1,176.2 | 489.2 | 1,847.2 |
Operational Metrics
- Energy Sales: 21,674 GWh (2013) vs. 20,760 GWh (2012).
- Energy Losses: 13.0% (2013) vs. 13.3% (2012). The concession allows recovery of losses up to 10%.
- Customers: 2,772,893 (2013) vs. 2,726,422 (2012).
Material Changes vs. Prior Period
- Turnaround in Profitability: The company reported a net profit of Ps. 772.7 million in 2013, a significant reversal from a net loss of Ps. 1,013.4 million in 2012. This improvement was primarily driven by a one-time accounting recognition of Ps. 2,933.1 million in "Higher costs recognition" pursuant to Resolution SE 250/13 and Note 6852/13, which retroactively recognized Cost Monitoring Mechanism (CMM) adjustments.
- Revenue Growth: Revenue increased 15.6% to Ps. 3,440.7 million, driven by a 4.4% increase in energy volume sold and additional income from Resolution 347/12 (FOCEDE).
- Expense Increases: Transmission and distribution expenses surged 52.9% to Ps. 2,055.3 million, largely due to salary increases (18% in Jan 2013, 5% in June 2013), higher fees for services, and increased ENRE fines and penalties.
- Discontinued Operations: The company sold its stake in Aeseba in April 2013, resulting in a loss from discontinued operations of Ps. 95.1 million, compared to a profit of Ps. 16.9 million in 2012.
- Debt and Liquidity: While operating cash flow improved significantly due to regulatory adjustments, the company maintains a substantial commercial debt of approximately Ps. 1,500.6 million with CAMMESA (the wholesale electricity market administrator), which remains unpaid due to liquidity constraints.
Guidance, Outlook, Risks, and Contingencies
Going Concern Warning
Critical Risk: The independent auditors (PwC) issued a report containing an explanatory paragraph expressing substantial doubt regarding Edenor's ability to continue as a going concern. This is due to the delay in obtaining genuine tariff increases to cover rising operating costs and the continuous increase in expenses necessary to maintain service levels.
Outlook and Management Commentary
- 2014 Forecast: Management estimates negative cash flows and operating losses for 2014 if current conditions persist. The company expects to continue partially canceling obligations with CAMMESA to preserve cash for essential operations.
- Tariff Negotiations: The company is engaged in an Integral Tariff Revision (RTI) with the regulator (ENRE). While Resolution 250/13 provided partial relief by recognizing past CMM adjustments, management states these are insufficient to restore the economic and financial equation of the concession.
- Capital Expenditures: The company invested Ps. 1,092.5 million in 2013, primarily for grid capacity expansion and maintenance, despite financial constraints.
Key Risks
- Regulatory Risk: Failure to negotiate further tariff improvements or delays in cost adjustments could lead to an inability to meet financial obligations.
- Macroeconomic Risk: High inflation in Argentina (officially 10.6% in 2013, though market consensus suggests higher) and the devaluation of the Argentine Peso (which lost ~23% of its value in Jan 2014) significantly impact costs and debt service.
- Energy Shortages: The Argentine electricity market operates near full capacity. Shortages in December 2013 led to blackouts, exposing the company to fines and penalties.
- Legal and Political: Risks include potential foreclosure on Class A shares by the Argentine government if fines exceed 20% of sales (fines were 8.4% of sales in 2013) or if the company fails to meet concession terms.
Investor Verification Checklist
- Going Concern Status: Verify the latest status of the RTI negotiations and whether the company has secured definitive tariff adjustments to cover 2014 operating costs.
- CAMMESA Debt: Confirm the current status of the Ps. 1,500.6 million debt owed to CAMMESA and any new agreements regarding repayment or restructuring.
- Regulatory Resolutions: Monitor the implementation of Resolution SE 250/13 and Note 6852/13 to ensure the recognized CMM adjustments translate into actual cash flow rather than just accounting entries.
- Exchange Rate Exposure: Assess the impact of the widening gap between the official exchange rate and the parallel market rate on the company's ability to service USD-denominated debt.
- Energy Losses: Track the trend of energy losses (currently 13.0% vs. 10% recoverable limit) and the effectiveness of anti-fraud measures.
- Dividend Policy: Note that the company is currently restricted from paying dividends without ENRE approval until the RTI is completed.