Empresa Distribuidora Y Comercializadora Norte S.A. (Edenor) American Depositary Shares

Good morning and welcome to the Ednor First Quarter 2020 Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Leandro Montero, CFO of Ednor. Please go ahead.

Thank you very much. Good morning, everyone, and welcome to Ednor's earnings conference call for the first quarter 2020. As we usually do, first we will focus on the main events that recently took place and then briefly review the results of the quarter. As you know, you can always call any member of our team for more details on the results of the period or any doubts you may have. So, given the unique circumstances the world is facing due to the coronavirus outbreak, I'd like to first acknowledge the extraordinary effort our staff is making to continue giving service to users while maintaining high quality and security standards. With that said, we will far focus through recent events that measures taken by the company, the government and regulatory agencies regarding the COVID-19 pandemic to later focus on other events. On March 12, the National Executive Branch declared health emergency in response to the COVID-19 outbreak, then implemented a series of measures to decrease the movement of population, providing for social preventive and mandatory isolation, consisting of different stages as of March 20. only allowing movement by persons associated with the provision of essential products and services, including Adenor and other companies making up the energy production cycle. Within the framework of this public emergency, Adenor has focused all its efforts on the actions necessary to protect and care for the health of its employees, suppliers and customers. And with it, the continuity of the public service of energy distribution, so relevant and key to coping with the mandatory social isolation. In this context, the company set up a COVID-19 crisis committee, which included especially counsellors on the matter for the creation of a contingency and business contingency plan, attending the recommendations issued by specialists and official regulations. The implemented measures include the definition of hygiene, safety and health protocols for each type of activity considered essential, which require keeping on-site operational staff to continue providing maintenance to our grid to deliver energy without interruptions. the adoption of home office modality for more than 1,650 collaborators and the reinforcement of digital and telephone channels for the attention of our clients to ensure and promote social distancing norms. Simultaneous operation of the network control center and the company's backup control center began in order to minimize contact by control operators in a key area that is sensitive to our operation. Likewise, we maintain a fluid and permanent communication with authorities and the whole staff on recommendations and deprivation measures we continue adopting. We also permanently evaluate the situation of contractors and suppliers to guarantee material supply and contractors' operational sustainability. Many of these changes have been enabled by the digitalization works and technology investments implemented over the last few years and enhanced lately. As regards the commercial area, commercial offices were closed and their staff tasks were reassigned. Reading activities were temporarily and partially suspended and estimate parameters were defined in accordance with the current regulations. Efforts were focused on remote customer service, functionality and the promotion of digital channels, the Adenor digital app and website, which allow for a comprehensive customer management. In turn, new services were implemented in record time. such as the SOS recharge for the pay-as-you-go meters, or MIDES as we call them, debit card payments such as the Nordigital, and online appointments. As for collection management, we constantly monitor collection and the impact that the closing of the collection points has had on the frequency levels. Collection has slightly improved due to the recent opening of external collections entities, However, high levels of delinquency are still maintained in the collection of our invoices, and we cannot estimate the impact of the economic crisis will have on our clients' ability to afford the future electricity payments. On March 21, 2020, and pursuant to resolution number 3, the regulator resolved to fully suspend on-site customer service activities and provide for the closing of numerous commercial offices during the mandatory isolation, with the implementation of a customer service and client electronic system. In this situation, new forms of collection have been enabled, especially for small and medium clients and industrial clients, through non-contact channels. In addition, A comprehensive collection contact and management plan has been developed with our clients to bring them different payment alternatives. On March 25th, the National Executive Branch issued Executive Order No. 311, which forbids utility companies to suspend their services to vulnerable users, on account of the lack of payment of three consecutive alternate bills. effective as from March 1st, 2020, for a term of 180 days. Customers with a prepared system will receive the service during such term, even if the applicable recharges are not made. In compliance with this decision of the regulator, we have made SOS charges available to our MIDE clients through our Edenor Digital Platform and Call Center, which represent approximately way above 4% of the total charges made by MIDE clients, maintaining the remaining 96% the payment of charges by the usual means. In this regard, later on April 18, pursuant to Resolution 173, the Ministry of Productive Development provided that the utility services may be payable in up to 30 monthly installments, the first one maturing on September 30, 2020. This resolution is limited to the specific group of customers detailed in it. Furthermore, the financing may apply to the purchase of energy to the wholesale electricity market associated with these conceptions. However, to date, the users reached by these measures have not been identified and informed by the regulators. Between April 13th and May 5th, the ENRE of the regulator, through a series of resolutions, regulated the estimation of conceptions, while the first meter reading is not available. These resolutions authorized Adenor to apply the methodology for the validation of consumption readings and estimates set by Variant Resolution 209 issued in 2018, with the following exceptions in order to reflect a substantial reduction in consumption at minimum operating values under the mandatory isolation. For residential category customers, the lowest consumption recorded over the last three years prior to the issuance of the bill for the same estimated period should apply. And for the general or T1 general tariff customers, reading estimates according to the estimation methodology will be affected by a 20% activity allocation factor. Furthermore, as of 6th, 2020, in May this month, middle and large customers' readings have been considered an essential activity by the NRE and therefore it recently started being normalized with due precautions. Additional users with meter allowing for remote meter reading will not be covered. Finally, customers may challenge the reading estimate provided they declare the differences with their actual consumption and request a new billing for the challenge period. We hope to be able to read all of the total amount of our customers in the near future. Regarding other matters, on April 30, 2020, the Energy Secretariat of the Ministry of Productive Development issued Resolution No. 70, 2020, which meant the power capacity reference prices and the stabilized prices for energy previously set by Resolution No. 14 for quarterly periods between May and October 2020. This means the cost of energy included in our tariff will remain the same or freeze for the following six months. Finally, on April 8th, in line with a change in Argentina's credit risk perspectives, Moody's Investor Service resolved to modify the company's corporate bonds' local ratings from BWA3 to CWA1. and global ratings from CWA1 to CWA3, as well as to modify the ratings of the company shares from Category 2 to 3, maintaining a negative outlook, reflecting companies' link to the credit quality of the Government of Argentina and also the uncertainties on the future consistency of the regulatory framework and the sufficiency of rates going forward. Now, Moving on to our results in the first quarter of 2020, revenue from sales decreased by 13.1%, reaching 20.5 billion pesos in first quarter this year, against 23.6 billion pesos in the same period last year. This 3.1 billion pesos decreased is mainly due to the rate freezing of both the BADO distribution costs and the seasonal price passed through the tariff, which implies a drop in income in real terms. The failure to apply the inflation adjustment mechanism over the cost of distribution in August 2019 and February 2020 resulted in a negative impact in revenues for 1.7 billion pesos. Lower revenues are also due to lower billings on account of the real-term decrease in the cost passed on to tariff of energy purchases measured in pesos for 2.2 billion pesos. These decreases were partially offset by a higher physical volume of electricity cells for 743 million pesos and higher revenues from the continued collection of the tariff deferral installments for the August 2018-February 2018 period for 431 million pesos. Finally, between the comparison periods, a single distribution fee adjustment was applied in March 2018 for a total of 32%, corresponding to the second semester of 2018, and the referral of half of the adjustment for the first semester of 2018, plus the recognition on account of the referral of such adjustment. It is worth highlighting that Resolution 14 provided for a 5% increase in the seasonal price for non-residential demands and a 7% increase for large users for August 2018, As no new tariff schemes were issued, this increase was not passed on to tariff, but it was included in the payments made by the Norte Camisa for a total of 317 million pesos in the first quarter 2020. In turn, the failure to grant the tariff updates in an inflationary context, as that observed in 2018 and 2020, has a very negative impact on the distribution value added. combined with the fact that the composition of the CPD formula, which replicated the Norco structure, has a greater weight on the salary index and was below the evolution of the customer's price index and the wholesale's price index. Taking into consideration Our operational results, the volume of energy size increased by 3.7% this quarter, between 5.2 TWh against 5 TWh for the same period last year. This increase was mainly explained by a 5.4% increase in consumption for residential customers, 3.2% increases for medium and small commercial customers, and a similar 3.2% increase for industrial customers. The residential demand increased by 113 GWh mainly as a result of a higher average temperature in March this year, which was 3 °C higher compared to the previous year. The improvement in small and medium commercial customers amounted to 27 GWh, mainly on account of this comparison against a quarter with a low commercial activity in the previous year, whereas the increase Enlarged usage amounted to 28 GWh as a result of the improvement in industrial activity in the last month of 2019, which is reflected in the recovery in the Industrial Production Index for this period, then interrupted by the COVID-19 outbreak. Additionally, the improvement in sales volumes may be partly explained by the tariff lag It is important to point out that due to the declaration of the COVID-19 pandemic and social mandatory isolation measures taken since March 20th, a reduction in the total energy demand was experienced during the last days of the quarter. This reduction is verified in commercial and industrial customers and is partially offset by a slight increase in residential demands. Furthermore, the nearest customer base rose by 1.8%, mainly on account of the increase in residential customers as a result of the implemented market discipline action and installation during the last year of almost 57,000 integrated energy meters that were mostly destined to regularize clandestine connections. The electricity power purchases decreased by 17.4% to 12.8 billion pesos in the quarter, against 15.5 billion pesos for the same period last year. This 2.7 billion pesos decrease is mainly due to the 22% decrease in the average purchase price in real terms, which generated a 3 billion pesos decrease in purchases as a result of the entry into effect of the new reference seasonal prices for electricity applicable as from May and August 2019, pursuant to Resolution 14, as I mentioned before. But that did not reflect the inflation of the period. This decrease was partially offset by a 4.6% increase in energy volumes net of losses due to the increase in demand, which was valued at approximately 514 million pesos. In turn, the electricity reference seasonal price for residential customers is still subsidized by the federal government, especially in the case of residential customers, where in the first quarter 2020, the subsidy reached 51% of the system's actual generation cost. Additionally, the energy loss rate increased from 17.4% in the first quarter last year to 18.4% in the first quarter this year. and was mainly generated by an increase in the incentive to fraud as a result of the economic recession. In turn, costs associated with these losses decreased by 14.1% in real terms, resulting in lower purchases for 174 million pesos despite the increase in gigawatt-hour. It is worth mentioning that over the past few years, Adenor has suffered a systematic deterioration of its assets and financial position as a result of the tariff lag, the increase in operating costs, the drop in demand and the increase in energy theft. Furthermore, the outbreak of the war pandemic has brought several consequences in the economy, with directly affected Adenor's activity generating reduced collections and a drop in demand. For this reason, we have seen the need to partially defer payments to CAMESA for the energy acquired in the wholesale electricity market, as for maturities taking place in March 2020. Meanwhile, operating expenses decreased by 20.3%, reaching 6.2 billion pesos this year, against 7.7 billion pesos in the first quarter of 2019. This is mainly accounted for by a 1.6 billion pesos decrease in penalties as a result of the improvement in service quality levels and secondly, the update of penalties recorded in the first quarter of 2018 in the amount of 485 million pesos which were later included in the liabilities regularization agreement. Regarding our financial results, experienced a 47.5% decrease in losses, which reached 1.6 billion pesos in the first quarter against 3 billion pesos for the same period last year. These differences are mainly explained by a 1.2 billion pesos reduction in the actual of commercial interest under debt with CAMESA as a result of the regularization of liabilities and lower foreign exchange losses for 526 million pesos as a result of a lower devaluation of the peso against the US dollar in the first quarter compared to the same period in 2019. These results were partially offset by a negative variation in the reasonable value of financial assets in the amount of 285 million pesos. Finally, net results increased by 526 million pesos, reaching 720 million pesos in the quarter, against 194 million pesos in the same period of 2018. This difference is due to better operating and financial results in the amount of 1.5 billion pesos each added to lower income tax accruals for 739 million pesos. These effects were partially offset by a lower result for exposure to changes in purchasing power in first Q20 for 3.2 billion pesos. Taking about the non-assisted BDA, it showed with 2.9 billion pesos profits in the first quarter 1.1 billion pesos higher than in the same period of 2019. Adjustment corresponds to the update of penalties for the transition period and commercial interest. Regarding Edenor's capital expenditures, during this quarter our investment totalized 1.4 billion pesos compared to 3 billion pesos in the same quarter of the previous year, from which 57% corresponds to network infrastructure and expansion, and 43% to network maintenance. Investments were reduced by 55% compared to the same period of the previous year, mainly on account of the slowdown in the plans set by Adenour as a result of lower revenues due to the fall in sales volumes and the deferral of tariff updates. The plan maintains focus on investments improving the service quality, which has been seen in the fulfillment of the quality curves required by the regulatory entity in the last tariff review. Regarding quality standards, these are measured based on the duration and frequency of service outages using the SAIDI and SAIF indicators. At the closing of the first quarter of 2020, SAIDI and SAIF indicators were 14.3 hours and 5.6 outages per year over the last 12 months, evidencing a 34.4% and 17.2% improvement, respectively, compared to the same period of the previous year. In turn, these indicators are 40.5% and 28.6% lower than those required in the comprehensive tier review. This recovery in service levels is mainly due to the ambitious plan devised by the company during the last five years. The plan's success is also evidenced by the fact that these indicators exceed the service quality improvement path defined by the regulatory entity. Taking into account energy losses, they reached 18.4% in the first quarter this year, against 17.4% for the same period in 2019, encouraged by a greater incentive to fraud as a result of the economic recession. Furthermore, costs associated with these losses decreased by 14.1% in real terms, resulting in a 174 million pesos improvement despite their increase in Shibata hour. It is important to know that as of March 20th this year, after the application of the mandatory isolation, there are no real measurements of consumption due to the initial suspension of mutual reading activity, and therefore the values are partially estimated. Over the last year, multidisciplinary teams were created to work on new solutions to energy losses. Furthermore, activities aimed at reducing losses continued in analytical and artificial intelligence tools were used to enhance effectiveness in the routing of inspections. Market-disciplined actions continued with the objective of detecting and normalizing irregular connections, fraud and energy theft, and installation of inclusion meters for more users was intensified. Over the last year, approximately 536,000 inspections of tariff 1 meters were conducted with a 50% 3% efficiency and more than 57,000 mm were installed. Regarding the recovery of energy, besides the customers put back to normal with mm, clandestine customers with conventional meters were also put back to normal. In all cases, striking-fraud-resisting rate was observed. Despite these measures, and as I mentioned before, losses continued to grow as a result of a greater number of clandestine connections due to the impact of the economic recession. Finally, as far as financial debt is concerned, the outstanding principal of our dollar-denominated financial debt amounts to $162.1 billion, whereas the net debt amounts to $98.9 million. The financial debt consists of $137.1 million corresponding to corporate bonds maturing in 2022, net of repurchases and $25 million to the bank loan taken out with the Industrial and Commercial Bank of China. Dubai branch. Currently, both liabilities bear interest at a fixed rate. After the financial statement closing date on April 15, the third principal installment of the loan with the ICBC in the amount of $12.5 million was repaid upon maturity, together with the applicable interest for the period. In turn, on May 6, repurchases of corporate bonds were made for a total face value of of $690,000 at an average price of $59.3. So, this concludes my review on Adenor. Now, we are open for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Gary Lundgren with Interpacific Investors. Please go ahead.

Yes. The question I have is, Does Edenor plan in the future to repurchase its nine and three quarters of 2022 bonds in open market purchases at these lower levels? Because it seems to me there's maybe no better deployment of the company's liquidity than repurchasing this debt to the extent that it can be repurchased at these deep discounts. And I just want to know if there are plans, future plans, to do this with either the company's liquidity or possibly lines of credit or credit that's available from other sources. That's all.

Hi, Gary. Thank you for your question. Well, we don't have any plan. As I mentioned before, we are in a delicate situation because of the lack of tariff increase. And now the COVID-19 outbreak has implies a new challenge because of the reduction in collection or increasing in delinquency. And so we are being very careful with our cash flows. Of course, if we have the option in the future to obtain additional credit, it could be a possible option, but it's not in our plans by the moment. But we are open to make just a small transaction if there's any opportunity. But we don't have a current plan to repurchase our debt.

Okay, thank you.

Welcome. Again, if you would like to ask a question, please press star, then one. At this time, there are no further questions. I would like to turn the call back over to Leandro Montero for any closing remarks.

Okay. Thank you very much. I personally hope that you and your families are doing well. and can manage to get around this difficult and challenging situation. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.