Business context and reporting period
Edenor’s Form 20-F, filed April 27, 2020, reports the year ended December 31, 2019—not a standalone fourth quarter. Edenor distributes electricity under an exclusive concession in northern Greater Buenos Aires and part of the City of Buenos Aires, serving approximately 3.1 million users. Financial statements are IFRS and restated for Argentine inflation under IAS 29; peso amounts below are in millions of constant pesos as of December 31, 2019, unless indicated otherwise.
The filing provides annual comparisons, not separate Q4 financial results. Accordingly, Q4-specific revenue, profit and cash flow are not provided clearly in the filing text.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | Ps. 89,943.8m | Ps. 86,039.9m | +4.5% |
| Electric power purchases | Ps. 57,041.8m | Ps. 49,015.2m | +16.4% |
| Gross margin | Ps. 16,755.4m | Ps. 20,244.2m | -17.2% |
| Operating profit | Ps. 3,598.2m | Ps. 6,060.5m | -40.6% |
| Profit for the year | Ps. 12,134.1m | Ps. 6,608.2m | +83.6% |
| Operating cash flow | Ps. 10,158.3m | Ps. 15,225.7m | -33.3% |
| Cash and cash equivalents, year-end | Ps. 409.6m | Ps. 42.5m | Higher |
- Gross margin was approximately 18.6% of revenue, versus 23.5% in 2018; operating margin was approximately 4.0%, versus 7.0%.
- Net income included Ps. 17,094.8m of accounting income from the Agreement on the Regularization of Obligations. The filing states this recognition did not generate a cash inflow. A Ps. 11,191.8m monetary gain also contributed to reported pretax profit.
- Net finance costs were Ps. 9,076.7m, down from Ps. 9,641.8m. Income tax expense rose to Ps. 10,673.8m from Ps. 2,886.9m.
- Investing cash outflow was Ps. 5,156.0m. Cash paid for property, plant and equipment was Ps. 9,370.0m; separately, management reported 2019 capital expenditures of Ps. 8,624.1m in nominal currency.
- Year-end current assets of Ps. 17,876.1m were below current liabilities of Ps. 24,583.0m, implying negative working capital of approximately Ps. 6,706.9m. Management says negative working capital persisted for four years.
- Borrowings totaled Ps. 9,856.7m, compared with Ps. 12,716.7m in 2018. These included U.S.$132.57m of 9.75% Senior Notes due 2022 and an ICBC loan; the company repurchased U.S.$29.08m nominal amount of the notes in 2019. The filing reports a 49.13% gearing ratio, down from 57.91%.
Material changes versus the prior comparable period
- Revenue rose, but power-purchase costs increased faster, largely reflecting higher seasonal energy prices; electricity sales volume fell approximately 8.1% to 19,447 GWh.
- Operating profit and gross margin declined. Management attributed the pressure chiefly to higher power-purchase costs, while transmission and distribution expenses fell 3.8% and selling and administrative expenses also decreased.
- Energy losses increased to 19.9% from 18.2%, above the concession’s average 10% loss factor. Management linked the rise mainly to theft in low-income areas and shantytowns. Year-end past-due receivables increased to Ps. 3,461.4m from Ps. 3,031.0m.
- Operating cash flow decreased despite the higher reported net profit; the regularization agreement’s income recognition was non-cash, while trade receivables increased.
- Service indicators improved: average interruption frequency declined to 6.15 from 6.94 times, and average interruption duration fell to 15.94 from 22.65 hours.
Outlook, risks and unusual items
- Going concern: The board and auditor identified substantial doubt about Edenor’s ability to continue as a going concern. The audited statements assume continued operations and do not include adjustments that might result from the uncertainty. The auditor’s financial-statement and internal-control opinions were otherwise unqualified.
- Tariffs and regulation: Argentina’s December 2019 emergency law froze federal electricity tariffs for 180 days and authorized renegotiation or an extraordinary review of the tariff framework. Edenor was instructed not to implement tariff increases scheduled under its September 2019 rate-maintenance agreement. Recovery of costs and deferred tariff adjustments remains uncertain.
- COVID-19, subsequent to year-end: The filing says the pandemic could weaken collections and non-residential demand, disrupt payments, impede required investment and lead to fines or asset impairment. Government measures included a temporary restriction on discontinuing utility service for certain customers with unpaid bills and installment options for certain bills. The eventual financial impact was not quantifiable at filing.
- Macroeconomic and foreign-exchange exposure: Argentina’s 2019 inflation was 53.77%, and the peso depreciated 58.9% against the U.S. dollar. Foreign-exchange controls may constrain access to currency and payments abroad. Edenor reported an estimated Ps. 801.7m reduction in profit under a hypothetical 10% depreciation; it said it was not then hedging its overall currency exposure.
- Other exposures: Regulatory penalties accrued at Ps. 7,319.0m; provisions for legal contingencies were Ps. 2,276.4m. The company also disclosed uncertainty over tariff jurisdiction and the future framework for shantytown electricity costs. It has not paid dividends since 2001. No formal quantitative earnings guidance was provided.
Important facts for investors to verify
- How much of 2019’s Ps. 12,134.1m profit reflects recurring operations versus the non-cash regularization-agreement recognition, monetary gain and inflation accounting.
- Whether tariffs will be revised, when deferred cost adjustments may be recovered, and whether resulting revenue will cover operating costs and planned investment.
- Liquidity, cash collection, working-capital needs and the company’s ability to meet debt service, supplier obligations and required investments amid the stated going-concern uncertainty.
- Whether energy losses and overdue receivables continue to rise, and the resulting effects on margins and cash generation.
- The status and payment of the remaining U.S.$1m insurance settlement installment for the terminated real-estate project, reported unpaid as of the filing date, and the outcome of the related insolvency claim.
- The subsequent effects of COVID-19, tariff measures, exchange controls and Argentina’s sovereign-debt situation on Edenor’s operations and foreign-currency obligations.