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, 2010
Business Overview: Edenor is the largest electricity distribution company in Argentina, holding an exclusive 95-year 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, 2010, the company served approximately 2.66 million customers. The company is a subsidiary of Pampa Energía S.A.
Accounting Basis: Financial statements are prepared in accordance with Argentine GAAP. The filing includes a reconciliation to U.S. GAAP. The company is required to adopt International Financial Reporting Standards (IFRS) for fiscal years beginning January 1, 2012.
Key Financial Metrics (Year Ended Dec 31, 2010)
| Metric | Argentine GAAP (USD Millions) | Argentine GAAP (Pesos Millions) | U.S. GAAP (USD Millions) |
|---|---|---|---|
| Net Sales | $546.7 | Ps. 2,173.6 | $566.8 |
| Gross Margin | $277.6 | Ps. 1,103.9 | $113.7 |
| Net Operating Income | $23.8 | Ps. 94.5 | $20.0 |
| Net (Loss) Income | $(18.6) | Ps. (74.0) | $(9.0) |
| Net Income Per Share (Basic/Diluted) | $(0.021) | Ps. (0.082) | $0.010 |
| Total Assets | $1,265.5 | Ps. 5,031.7 | $1,304.0 |
| Total Liabilities | $735.3 | Ps. 2,923.6 | $859.3 |
| Shareholders' Equity | $530.2 | Ps. 2,108.2 | $444.7 |
| Operating Cash Flow | $132.5 | Ps. 526.9 | N/A |
| Capital Expenditures | $(97.8) | Ps. (388.8) | N/A |
Note: USD figures are translated at the year-end rate of Ps. 3.976 to $1.00. Significant differences exist between Argentine GAAP and U.S. GAAP regarding debt restructuring, deferred taxes, and asset retirement obligations.
Material Changes vs. Prior Period (2009)
- Revenue Growth: Net sales increased 4.6% to Ps. 2,173.6 million (from Ps. 2,077.9 million in 2009). This was driven by a 5.9% increase in energy sales volume (19,292 GWh vs. 18,220 GWh) and a 2.2% increase in the customer base.
- Profitability Decline: The company reported a net loss of Ps. 74.0 million in 2010, compared to a net income of Ps. 90.6 million in 2009. Under U.S. GAAP, the loss narrowed to $(9.0) million from a profit of $73.1 million in 2009.
- Expense Increases: Operating expenses rose significantly. Transmission and distribution expenses increased 16.0% (primarily due to salary increases and outsourcing costs). Selling expenses increased 22.2%, and administrative expenses increased 24.2%.
- Energy Losses: Total energy losses increased to 12.5% in 2010 from 11.9% in 2009, primarily due to an increase in non-technical losses (theft/fraud), which rose to 2.7% from 2.1%.
- Financial Results: Financial expenses generated by liabilities decreased to Ps. 165.2 million from Ps. 217.7 million in 2009, largely due to a lower exchange rate difference on liabilities. However, financial income from assets dropped significantly.
- Debt Repurchases: The company continued to reduce its debt burden, repurchasing and cancelling approximately U.S. $7.3 million of Fixed Rate Par Notes due 2016 and U.S. $123.9 million of Senior Notes due 2017 during the year.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
- Tariff Renegotiation (RTI): The company is engaged in an Integral Tariff Revision (RTI) process with the Argentine National Electricity Regulator (ENRE). The outcome is critical for future profitability. As of the filing date, the RTI had not been completed, and the company had submitted seven requests for Cost Monitoring Mechanism (CMM) adjustments totaling a cumulative 47.8% increase, which remained pending approval.
- Acquisitions: In March 2011, Edenor acquired EMDERSA and AESEBA (electricity distributors in other Argentine provinces) for a total purchase price of U.S. $140.0 million. The integration of these businesses is expected to be complex and costly.
- Capital Expenditures: The company expects to invest approximately U.S. $100 million annually over the next five years to maintain network quality and meet demand growth.
Material Risks
- Regulatory and Tariff Risk: The company's financial condition is heavily dependent on the outcome of the RTI and the approval of CMM adjustments. Failure to recover costs through tariffs could materially adversely affect results.
- Macroeconomic Conditions: Operations are subject to Argentine economic conditions, including inflation (10.9% in 2010), exchange rate fluctuations, and potential government intervention in the electricity sector.
- Energy Shortages: The Argentine electricity market faces potential supply shortages due to lack of new generation capacity, which could lead to service disruptions and penalties.
- Energy Losses: Non-technical losses (theft) remain a significant issue. The company cannot recover costs for losses exceeding the 10% factor allowed by its concession.
- Legal Proceedings: The company faces challenges from consumer associations regarding tariff adjustments and potential fines for service interruptions (e.g., a Ps. 22.4 million compensation obligation for a December 2010 heatwave outage).
Unusual Items
- Heatwave Outage: In December 2010, a heatwave caused significant service disruptions. The ENRE imposed fines and required customer compensation totaling approximately Ps. 22.4 million, recorded as a non-current liability.
- Debt Restructuring: The company completed a significant restructuring of its Senior Notes due 2017 in October 2010, exchanging them for Senior Notes due 2022 and repurchasing a portion of the debt.
Key Facts for Investor Verification
- Tariff Approval Status: Verify the current status of the Integral Tariff Revision (RTI) and the approval of the seven pending CMM adjustment requests, as these are critical to future revenue recovery.
- Energy Loss Trends: Monitor the trend of non-technical energy losses (theft), which increased to 2.7% in 2010, as this directly impacts gross margins.
- Acquisition Integration: Assess the progress and financial impact of the March 2011 acquisitions of EMDERSA and AESEBA, including regulatory approvals and integration costs.
- Debt Maturity Profile: Review the maturity schedule of the new Senior Notes due 2022 and the company's ability to service this debt given the peso-denominated revenue base.
- Regulatory Fines: Track the resolution of the Ps. 22.4 million compensation obligation related to the December 2010 heatwave and any potential additional fines from the ENRE.
- IFRS Adoption: Confirm the impact of the mandatory transition to IFRS starting in 2012 on the company's reported financial position and results.