Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: Edenor is the largest electricity distribution company in Argentina, operating an exclusive concession 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, 2009, the company served approximately 2.6 million customers.
Accounting Basis: Financial statements are prepared in accordance with Argentine GAAP. The filing includes reconciliations to U.S. GAAP.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | Argentine GAAP (Ps. Millions) | Argentine GAAP (U.S. $ Millions) | U.S. GAAP (U.S. $ Millions) |
|---|---|---|---|
| Net Sales | 2,077.9 | 546.8 | 569.3 |
| Net Operating Income | 190.4 | 50.1 | 54.9 |
| Net Income | 90.6 | 23.7 | 19.2 |
| Net Income per ADS (Basic/Diluted) | N/A | $0.54 | $0.43 |
| Total Assets | 4,370.7 | 1,150.2 | 1,188.4 |
| Total Liabilities | 2,188.5 | 575.9 | 714.4 |
| Shareholders' Equity | 2,182.2 | 574.3 | 474.1 |
| Operating Cash Flow | 668.0 | 175.8 | N/A |
| Capital Expenditures | 404.3 | 106.4 | N/A |
Note: U.S. Dollar amounts are translated at the year-end rate of Ps. 3.80 to U.S. $1.00.
Material Changes vs. Prior Period (2008)
- Revenue: Net sales increased 3.9% (Ps. 77.7 million) to Ps. 2,077.9 million. This was driven by higher energy purchase prices passed to customers and a 1.6% increase in capacity demand, partially offset by a 2.1% decrease in energy volume sold and higher regulatory fines.
- Profitability: Net operating income decreased significantly by 37.1% (from Ps. 302.9 million to Ps. 190.4 million) due to a 15.9% increase in operating expenses. Net income declined 26.4% to Ps. 90.6 million.
- Expenses: Operating expenses rose due to increased salaries and social security taxes, higher outsourcing costs, and increased administrative expenses related to computer services and financial transaction taxes.
- Financial Results: The company recorded a gain of Ps. 81.4 million from the repurchase of debt notes, which partially offset higher financial expenses and exchange losses.
- Energy Losses: Total energy losses increased to 11.9% in 2009 from 10.8% in 2008, exceeding the 10% concession limit, primarily due to non-technical losses (fraud/theft).
Guidance, Outlook, Risks, and Contingencies
Outlook and Management Commentary
- Tariff Renegotiation (RTI): The company is engaged in an Integral Tariff Revision (RTI) with the regulator (ENRE). A proposal was submitted in November 2009. Management estimates a post-tax return on gross asset base of only 2.2% in 2009, significantly below historical levels, necessitating tariff adjustments.
- Cost Monitoring Mechanism (CMM): The company has submitted three requests for CMM adjustments (totaling ~15.8% requested) to cover cost increases since 2008. As of the filing date, the ENRE had not responded to these requests.
- Capital Expenditures: The company plans to invest approximately Ps. 400 million in 2010 to maintain network quality and meet service standards.
Key Risks and Contingencies
- Regulatory and Tariff Risk: The outcome of the RTI is uncertain. Failure to secure adequate tariff increases could materially adversely affect financial results. The company faces legal challenges from consumer groups regarding tariff adjustments.
- Macroeconomic Risk: Operations are heavily dependent on the Argentine economy. Risks include inflation, exchange rate fluctuations (Peso devaluation), and potential restrictions on foreign currency transfers.
- Energy Shortages: The national grid faces capacity constraints. Shortages could lead to service interruptions, customer claims, and regulatory penalties.
- Legal Proceedings:
- Ombudsman Injunction: A preliminary injunction prevents the company from cutting power to customers challenging the October 2008 tariff increase, adversely affecting collections.
- Tax Claims: A federal tax claim regarding bad debt deductions (approx. Ps. 10.6 million remaining) is being settled under a regularization plan.
- Environmental: An appeal regarding PCB contamination charges is pending before the Argentine Supreme Court, though lower courts have acquitted the company.
- Dividend Restrictions: The company has not paid dividends since 2001. Dividend payments are restricted by debt covenants (leverage ratio limits) and require ENRE approval during the RTI process.
Important Facts for Investor Verification
- Tariff Approval Status: Verify the status of the Integral Tariff Revision (RTI) and the approval of pending Cost Monitoring Mechanism (CMM) adjustments, as these are critical to future profitability.
- Energy Loss Trends: Monitor the trend of non-technical energy losses (currently 2.1% of total losses), as losses exceeding the 10% concession limit directly reduce margins.
- Debt Repurchase Activity: Confirm the impact of ongoing debt repurchases on the company's leverage ratio and compliance with debt covenants.
- Regulatory Fines: Assess the level of accrued fines and penalties (Ps. 377.5 million as of Dec 31, 2009) and the likelihood of forgiveness under the Adjustment Agreement.
- Foreign Exchange Exposure: Evaluate the company's ability to hedge currency risk given that revenues are in Pesos while a significant portion of debt is in U.S. Dollars.