Business Context and Reporting Period
Company: Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR)
Reporting Period: Fiscal year ended December 31, 2008
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, 2008, the company served approximately 2.54 million customers.
Accounting Basis: Financial statements are prepared in accordance with Argentine GAAP. The filing includes a reconciliation to U.S. GAAP.
Key Financial Metrics (Year Ended Dec 31, 2008)
| Metric | Argentine GAAP (U.S. $ Millions) | Argentine GAAP (Ps. Millions) | U.S. GAAP (U.S. $ Millions) |
|---|---|---|---|
| Net Sales | 579.3 | 2,000.2 | 596.3 |
| Net Operating Income | 87.7 | 302.9 | 72.6 |
| Net Income | 35.8 | 123.1 | 76.6 |
| Net Income Per Share (Basic/Diluted) | $0.039 | Ps. 0.137 | $0.085 |
| Total Assets | 1,197.4 | 4,134.6 | 1,233.1 |
| Total Liabilities | 591.7 | 2,043.1 | 732.4 |
| Shareholders' Equity | 605.7 | 2,091.6 | 500.7 |
| Operating Cash Flow | 158.6 | 547.5 | N/A |
| Capital Expenditures | N/A | 335.7 | N/A |
Note: U.S. Dollar amounts are translated at the period-end rate of Ps. 3.453 to U.S. $1.00. The filing does not provide a clear U.S. GAAP cash flow statement, only Argentine GAAP.
Material Changes vs. Prior Period (2007)
- Revenue: Net sales increased slightly by 0.9% (Ps. 18.3 million) to Ps. 2,000.2 million. This modest increase occurred despite a 4.2% rise in energy volume sold, largely because 2007 included a one-time recognition of Ps. 218.6 million from a retroactive tariff increase that was not present in 2008.
- Profitability: Net operating income decreased significantly from Ps. 429.2 million in 2007 to Ps. 302.9 million in 2008. Excluding the 2007 retroactive tariff adjustment, operating income actually increased by 43.8% year-over-year.
- Financial Expenses: Financial expenses generated by liabilities increased by Ps. 72.4 million (57.7%) to Ps. 197.9 million. This was driven by a Ps. 62.8 million increase in exchange losses due to a 9.6% devaluation of the Argentine Peso and higher interest rates on debt.
- Energy Losses: Total energy losses improved, decreasing from 11.6% in 2007 to 10.8% in 2008, approaching the 10% loss factor allowed by the company's concession.
- Debt Repurchases: The company recorded a net gain of Ps. 84.6 million from the repurchase and redemption of notes in 2008, compared to a net loss of Ps. 18.8 million in 2007.
Guidance, Outlook, Risks, and Contingencies
- Tariff Renegotiation (RTI): The company is engaged in an Integral Tariff Revision (RTI) with the Argentine National Electricity Regulator (ENRE). The outcome is highly uncertain. Management estimates a post-tax return on gross asset base of only 3.4% in 2008, significantly lower than the 9.6% average from 1997-2001. A new tariff structure was expected to take effect in February 2009 but had not been approved as of the filing date.
- Regulatory Risks: The company faces risks from potential government intervention, including the freezing of margins, changes in the regulatory framework, and challenges to tariff adjustments by consumer groups. A preliminary injunction by the Public Ombudsman in January 2009 temporarily prevented the company from cutting power to customers challenging the October 2008 tariff increase.
- Macroeconomic Risks: Significant exposure to Argentine economic conditions, including inflation (7.2% in 2008), currency devaluation, and the global financial crisis. The company has substantial U.S. Dollar-denominated debt while revenues are in Pesos, creating currency mismatch risk.
- Dividend Restrictions: The company has not paid dividends since August 2001. Dividend payments are restricted by debt covenants (based on leverage ratios) and require prior approval from the ENRE during the RTI process.
- Legal Proceedings: Accruals for litigation totaled Ps. 97.8 million as of December 31, 2008. Significant tax claims and environmental claims (PCB contamination) are ongoing, though recent court decisions have been favorable to the company regarding the PCB charges.
Key Facts for Investor Verification
- Tariff Approval Status: Verify the current status of the Integral Tariff Revision (RTI) and whether the new tariff structure has been approved by the ENRE, as this is critical for future revenue recovery.
- Currency Exposure: Assess the company's ability to hedge its U.S. Dollar-denominated debt against the Argentine Peso, given the history of devaluation and exchange controls.
- Debt Covenants: Review the company's leverage ratio to determine if it meets the thresholds required to pay dividends or incur new debt under its restructuring indentures.
- Energy Losses: Monitor the trend of energy losses (technical and non-technical) to ensure they remain near or below the 10% concession limit, as excess losses directly impact margins.
- Regulatory Litigation: Track the resolution of the Public Ombudsman's injunction and other consumer group challenges to tariff increases, which could block revenue collection.