EDENOR First Quarter 2010 Financial Summary
Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR)
Reporting Period: Three months ended March 31, 2010
Filing Date: May 7, 2010
Business Overview: Argentina's largest electricity distributor, serving the northwestern zone of the Greater Buenos Aires metropolitan area and the northern part of Buenos Aires City. The company operates under a concession agreement and is regulated by the National Regulatory Authority for the Distribution of Electricity (ENRE).
Currency: All figures are in Argentine Pesos (Ps.) unless otherwise noted. USD conversions use a rate of Ps. 3.878.
Key Financial Metrics
| Metric (in millions of Ps.) | Q1 2010 | Q1 2009 | % Change |
|---|---|---|---|
| Net Sales | 573.5 | 551.9 | +3.9% |
| Gross Margin | 293.2 | 284.3 | +3.1% |
| Net Operating Income | 52.7 | 74.1 | -28.9% |
| Net Income | 5.0 | 30.1 | -83.5% |
| Operating Cash Flow | 211.9 | 128.8 | +64.5% |
| Capital Expenditures | 82.3 | 67.5 | +21.9% |
Operational Highlights:
- Volume Sold: Increased 5.7% to 4,813 GWh (driven by 3.1% higher consumption per customer and 2.5% more customers).
- Energy Losses: Increased to 10.5% from 9.5% in the prior year.
- Debt Position: Total outstanding principal debt was Ps. 785.7 million (including US$176.6 million in dollar-denominated debt), down from Ps. 877.7 million in Q1 2009.
Material Changes vs. Prior Period
Profitability Decline: Despite a 3.9% increase in net sales and a 3.1% increase in gross margin, Net Operating Income fell 28.9% and Net Income plummeted 83.5%.
- Expense Increases: Operating expenses rose significantly. Transmission and distribution expenses increased 16.4% (Ps. 146.5 million) due to salary hikes and outsourcing costs. Administrative expenses rose 16.1% and selling expenses increased 7.4%.
- Financial Results: Financial expenses decreased by Ps. 47.5 million primarily due to reduced exchange losses on dollar-denominated debt (Ps. 21.5 million vs. Ps. 66.3 million in 2009). However, financial income from assets dropped by Ps. 9.7 million due to losses on hedging contracts.
- One-Time Items: Q1 2009 included significant gains from debt repurchases which were not present in Q1 2010.
Outlook, Risks, and Contingencies
Regulatory and Tariff Environment:
- Tariff Revision (RTI): The Revision of the Company Tariff Structure (RTI), expected to take effect in February 2009, remains pending. The company submitted revenue requirement proposals to the ENRE in November 2009.
- Cost Monitoring Mechanism (MMC): Adjustments for periods through October 2009 have been submitted to the ENRE but approval is pending. These adjustments are critical to restoring the company's financial equation.
- Government Receivables: In March 2010, a payment plan was signed with the Province of Buenos Aires for Ps. 32.8 million owed under the Framework Agreement, to be paid via "Cancellation Bonds." Total government receivables stood at Ps. 55.3 million as of March 31, 2010.
Legal and Operational Risks:
- Litigation: The company is involved in various lawsuits, including a complaint by consumer associations challenging recent tariff resolutions and a claim by the Province of Buenos Aires Board of Electric Power regarding tax collection (which the company believes is meritless based on prior court rulings).
- Union Relations: Approximately 83% of employees are union members. Collective bargaining agreements expired in 2007, and negotiations for renewal are ongoing, posing a risk of work disruptions.
- Derivatives: The company utilizes forward and futures contracts to hedge exchange rate risks, which resulted in losses of Ps. 13.5 million in the period.
Investor Verification Checklist
- Tariff Approval Status: Verify the timeline for the ENRE's approval of the pending Cost Monitoring Mechanism (MMC) adjustments and the Revision of the Tariff Structure (RTI), as these are critical for margin recovery.
- Government Receivables Collection: Monitor the collection status of the Ps. 55.3 million owed by the Argentine Federal and Provincial governments, specifically the issuance of "Cancellation Bonds."
- Operating Expense Trajectory: Assess the sustainability of the 14.4% increase in operating costs (salaries and outsourcing) relative to future tariff adjustments.
- Energy Losses: Investigate the drivers behind the increase in energy losses from 9.5% to 10.5% and the company's mitigation plans.
- Debt Maturity Profile: Review the amortization schedule for the US$176.6 million in dollar-denominated debt to assess refinancing risks in a volatile currency environment.