Business Context and Reporting Period
Company: EDENOR (Empresa Distribuidora y Comercializadora Norte S.A.)
Reporting Period: First Quarter ended March 31, 2017
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.
Currency: Figures reported in Argentine Pesos (AR$) and translated to U.S. Dollars (US$) at a rate of AR$ 15.39 per US$.
Key Financial Metrics
| Metric (in millions) | Q1 2017 (AR$) | Q1 2016 (AR$) | Q1 2017 (US$) |
|---|---|---|---|
| Revenue from Sales | 5,366.6 | 2,990.1 | 348.7 |
| Net Operating Income | 816.6 | 238.3 | 53.1 |
| Net Income | 421.4 | (125.0) | 27.4 |
| Adjusted EBITDA | 611.1 | 674.0 | 39.7 |
| Capital Expenditures | 760.4 | 628.8 | 49.4 |
| Cash and Cash Equivalents (End of Period) | 68.7 | 171.3 | 4.5 |
| Outstanding Dollar Debt | N/A | N/A | 176.4 |
Note: Adjusted EBITDA decreased slightly year-over-year despite higher operating income, primarily due to penalty adjustments and the absence of specific resolution recognitions present in the prior year.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 79.5% to AR$ 5,366.6 million, driven by a 42% tariff increase effective February 1, 2017, following the Integral Tariff Review (RTI).
- Profitability Turnaround: The company returned to profitability with a net income of AR$ 421.4 million, compared to a net loss of AR$ 125.0 million in Q1 2016. This was aided by a reduction in financial losses (exchange rate differences) and improved operating margins.
- Volume Decline: Energy sales volume decreased 2.5% to 5,527 GWh, attributed to drops in small commercial (-4.0%) and industrial/wheeling (-2.0%) demand.
- Cost Increases: Electricity power purchase costs rose 92.3% due to an 184% increase in average purchase prices. Salaries and social security taxes increased 46% due to employee compensation adjustments.
- Energy Losses: Energy losses increased to 16.2% from 14.5% in the prior year.
Guidance, Outlook, and Material Events
Regulatory and Legal Developments
- Capital Stock Reduction: The company previously faced a mandatory capital stock reduction due to negative retained earnings exceeding reserves. However, as of March 31, 2017, negative retained earnings decreased sufficiently to avoid this mandatory reduction. Shareholders previously voted not to approve the reduction in April 2017, but the Board may reconsider if the situation persists in Q2 2017.
- ICSID Arbitration: On March 28, 2017, the arbitration initiated by EDF International and EASA against the Argentine Government was discontinued, fulfilling a condition of the Memorandum of Agreement regarding the tariff renegotiation.
- Corporate Merger: A merger by absorption between CTLL, EASA, and IEASA was approved on March 29, 2017, and is ongoing.
- Regulatory Fines: A new methodology for calculating fines (ENRE Note 125,248) resulted in a positive adjustment to provisions of AR$ 413.7 million.
Risks and Contingencies
- Liquidity: Cash and cash equivalents decreased significantly from AR$ 258.6 million (Dec 31, 2016) to AR$ 68.7 million (Mar 31, 2017).
- Debt: Outstanding dollar-denominated debt remains at US$ 176.4 million (Senior Notes due 2022).
- Forward-Looking Statements: Management estimates future revenues will allow the company to revert its negative equity situation, but this is subject to economic and regulatory uncertainties.
Investor Verification Checklist
- Capital Adequacy: Verify the sustainability of the reversal in negative retained earnings to confirm the avoidance of mandatory capital stock reduction in subsequent quarters.
- Liquidity Position: Assess the impact of the sharp decline in cash reserves (from AR$ 258.6m to AR$ 68.7m) on short-term operational solvency.
- Tariff Sustainability: Confirm the long-term stability of the new tariff regime (Resolution No. 63/17) and its ability to cover the 184% increase in power purchase costs.
- Energy Losses: Investigate the drivers behind the increase in energy losses from 14.5% to 16.2% and management's mitigation plans.
- Merger Progress: Monitor the regulatory approval status of the CTLL, EASA, and IEASA merger.