Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (Edenor)
Reporting Period: Fiscal year ended December 31, 2011
Accounting Basis: Argentine GAAP (with U.S. GAAP reconciliations provided)
Key Developments: The 2011 consolidated financial statements include Edenor, Emdersa, and Aeseba (acquired March 1, 2011). The Company is currently engaged in an Integral Tariff Revision (RTI) with the regulator (ENRE) to renegotiate its tariff structure. Management has expressed substantial doubt regarding the Company's ability to continue as a going concern due to delays in tariff adjustments and rising operating costs.
Key Financial Metrics (Argentine GAAP)
| Metric (in millions) | 2011 (USD) | 2011 (ARS) | 2010 (ARS) |
|---|---|---|---|
| Net Sales | 828.3 | 3,565.0 | 2,173.6 |
| Net (Loss) Income | (101.2) | (435.4) | (49.1) |
| Net Cash from Operating Activities | 118.9 | 511.8 | 526.9 |
| Total Assets | 1,334.7 | 5,744.4 | 4,927.3 |
| Total Liabilities | 1,016.0 | 4,373.0 | 3,177.4 |
| Shareholders' Equity | 305.4 | 1,314.5 | 1,749.9 |
| Financial Debt (USD) | 290.2 | N/A | N/A |
Note: USD figures are translated at the year-end rate of Ps. 4.304 to U.S. $1.00. 2011 data is consolidated for Edenor, Emdersa, and Aeseba.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 64.0% to Ps. 3,565.0 million, primarily driven by the consolidation of Emdersa (55% of increase) and Aeseba (37% of increase). Standalone Edenor sales grew 4.9% due to a 4.2% increase in energy volume sold.
- Profitability Decline: The Company recorded a net loss of Ps. 435.4 million in 2011, a significant deterioration from the Ps. 49.1 million loss in 2010. This was driven by a 86.8% increase in transmission and distribution expenses and a 113.7% increase in financial expenses (due to Peso devaluation and interest costs).
- Asset Valuation: A loss of Ps. 75.0 million was recorded in Q4 2011 due to the valuation of investments in Emdersa at their estimated realizable value, which was lower than their equity value.
- Energy Losses: Total energy losses increased slightly to 12.6% in 2011 from 12.5% in 2010, exceeding the 10% loss factor allowed under the concession.
Guidance, Outlook, and Risks
- Going Concern Warning: Independent auditors (PWC) issued a report expressing substantial doubt about the Company's ability to continue as a going concern. This is attributed to delays in obtaining tariff increases, the failure to recognize cost adjustments under the Adjustment Agreement, and continuous increases in operating expenses.
- Tariff Renegotiation (RTI): The Company has submitted eight Cost Monitoring Mechanism (CMM) adjustment requests since May 2008 (cumulative requested increase of ~62%), which remain largely unapproved by the ENRE. The outcome of the RTI is uncertain and critical for future viability.
- Divestiture Strategy: The Company is actively divesting subsidiaries of Emdersa (Edesal, Edelar, Edesa, Egssa) to improve liquidity. Edesal was sold to Rovella Carranza S.A., and agreements are in place for the sale of Edelar and Edesa.
- Regulatory Risks: Significant risks include the Argentine government's intervention in the electricity sector, potential revocation of the concession, exchange controls limiting foreign currency access, and the impact of high inflation on costs.
- Outlook: Management estimates negative cash flows and operating results for 2012 if tariff adjustments are not approved.
Investor Verification Checklist
- Going Concern Status: Verify the specific management plans and financing arrangements intended to address the auditor's "substantial doubt" qualification.
- Tariff Approval Timeline: Confirm the current status of the eight pending CMM adjustment requests and the RTI process with the ENRE.
- Divestiture Progress: Monitor the closing of the Edelar and Edesa sales and the realization of proceeds to assess liquidity improvements.
- Debt Service Capability: Review the Company's ability to service its U.S. Dollar-denominated debt (approx. $290 million) given the Peso devaluation and lack of tariff recovery.
- Energy Loss Trends: Track energy loss percentages to ensure they do not further exceed the 10% concession limit, which would increase unrecoverable costs.