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

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Aidenor's second quarter 2020 results conference call. We would like to inform you that this event is being recorded, and all participants will be in listen-only mode during the presentation. After the company's remarks are completed, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Adenor's management and on information currently available to the companies. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Adenor and could cause results to differ materially from those expressed in such forward-looking statements. Now, I'll turn the conference over to Mr. Leandro Montero, CFO of Adenor. Mr. Montero, you may begin your conference.

Thank you very much. Good morning, everyone, and welcome to another funding conference call for the second quarter 2020. As we usually do, first, we will focus on the many 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 might have. But first, I'd like to acknowledge the extraordinary efforts our staff is making to continue giving service to users while maintaining high quality and security standards, given the unique circumstances we are facing with the COVID-19 outbreak. With that said, we will focus on the relevant events taking place lately. First, on May 15th, the regulator issued a note authorizing the reading of Tariff 1 customer's meters, thus regularizing the reading process for all user categories. The note provided instructions on the methodology applicable to the settlement of consumptions between such reading and the last actual reading, depending on whether this difference is for or against the consumer. After performing the readings of all meters for which estimates have been made post-1-2-N resolution number 27 passed on May 5th, the financial impact on revenues from estimates which were lower than the actual consumptions amounted to 530 million pesos, which will be recoverable in six installments payable as of September this year. Additionally, on May 5th, The EMRA resolution number 28 provided for the creation of the electricity distribution panel, which aims to foster an environment for the communication, coordination, and articulation of technical and commercial issues within the framework of the social, preventive, and mandatory lockdown. The first meeting addressed certain matters like the reading and estimate issues mentioned before. Following this line, on May 15th, Error Resolution Number 35 established that Tariff 2, Tariff 3, and wheeling system customers covered by the mandatory lockdown, which have suffered a 50% or a greater reduction in their power capacity demand, may suspend payments or make partial payments on account of the higher power capacity and to the recovery in demand, which is 70%. whereas the obligation to pay all other taxes will remain in effect. Furthermore, customers may opt to terminate the contract or request the tariff recategorization in the light of the new separate binding circumstances. Furthermore, on June 18th, the National Executive Branch issued Effective Order Number 543, which extended the tariff freeze for an additional 180-day term. In turn, it modified the term of our service suspension to vulnerable users in case of default or non-payment of up to six bills due as from March 2010. Users with an ongoing disconnect notice are covered by the executive order. Finally, on August 4th, the Chamber of Deputies gave half approval to a bill to expand the national budget for the year 2020 by almost 1.9 billion pesos to pay for social, productive, and labor plans destined to alleviate the economic crisis as a consequence of the COVID-19 pandemic. Regarding the electricity sector, it includes the recognition of credits equivalent to three times the average monthly bill of the last 12 months of the transactions in the wholesale electricity market of the distribution agent that provided service in a province or granting power that has adhered to the rate maintenance provided in December 2019 under the conditions established by the enforcement authority. The credit recognized will be applied only to distributors that as of October 21, 2020, do not have debt in the wholesale electric market or have adhered to a refinancing plan with CAMESA which should not exceed 60 monthly installments with 12 months of grace a rate of interest on balance equivalent to 50% of that enforced in the wholesale electric market, and comply with the conditions established by the enforcement authorities to guarantee the fulfillment of future monthly payment obligations by the distributors. The approval of the SENEG and its regulation is still pending in order to evaluate the scope and the impact for the company. Regarding our credit rating on July 8th, Standard & Poor's global resources to downgrade the company's corporate bonds maturing in 2022 from WB minus to B in the local scale and from CCC plus to CCC in the global scale, in both cases with a negative outlook. This downgrade is mainly due to the extension of the tariff freeze and the lack of a formal compensation mechanism alternative to that provided under the entire tariff review. Of course, this downgrade was made before the aforementioned bill was treated in the Congress. Now, moving on to our results in the first quarter of 2020, revenue from sales decreased by 31 percent, reaching 18 billion pesos in the second quarter of this year, against 26 billion pesos in the same period last year. This 8 billion pesos decrease is mainly due to the tariff freeze in both the distribution value added and the seasonal price passed through to tariffs, which entailed a decrease in revenues in real time, as well as the co-recognition in the second quarter of 2019 of income always due to the application of caps to clients with personal tariffs in 2018 and not seasonably recognized, and for consumptions of settlements under the framework agreement for almost a total amount of 2 billion pesos. The failure to apply the update mechanism on the on-distribution cost in August 2019 and February 20 has a negative impact in revenues of the quarter in the amount of approximately 3 billion pesos. Lower revenues are also due to lower billings on account of the real-terms decrease in the cost passed on to tariffs. of energy purchases measured in pesos for 2 billion pesos. In turn, lower physical electricity cell volumes resulted in 339 million pesos decrease in revenues. It's worth highlighting that resolution number 14 provided for a 5 percent increase in the seasonal price for non-residential demand and a 7 percent increase for large users from August As no new tariff schemes were issued at that moment, this increase was not passed on to tariffs, but it was included in the payments made by VNO to CAMESA for a total amount of 239 million pesos in the second quarter this year. In turn, the failure to grant the tariff update in an inflationary context as that observed in 2019 and 2020 has a very negative impact on the distribution value added, combined with the fact that the composition of the own distribution cost formula, which replicates the non-cost structure, has a greater weight on the salary index and was below the evolution of the consumer's price index and the wholesale price index. Taking into consideration our operational results, the volume of energy sales decreased by 1.2% this quarter, reaching 4.79 TWh against 4.85 TWh for the same period last year. It's worth mentioning that this quarter has been marked by the outbreak of the COVID-19 crisis. and implementation of the mandatory social isolation which impacted the whole quarter, generating strong changes in energy consumptions. Consumptions by commercial and industrial customers decreased by 17.4% and 18.1% respectively. This decrease was partially offset by an 18.8% increase in the consumption by residential customers in the second quarter of 2020 compared to the previous year. The 135 gigawatt hour and 311 gigawatt hour decreases for commercial and industrial customers were mainly due to the partial or total closure of stores and industries resulting from the measures implemented under the mandatory lockdown. In turn, the residential demand increased by 379 GWh, mainly because people spend more time at home due to the restrictions on movement, which has been enhanced by our lower average temperatures, mainly in May and June, which were almost two Celsius degree lower each month. Additionally, the improvement in sales volumes may be partly explained by the tariff lag. Furthermore, the number of customer rates rose by 1.3%, mainly on account of the increase in residential customers as a result of implemented market discipline actions and installation during the last year of almost 38,000 integrated energy meters that were mostly destined to regularize clandestine connections. The electricity power purchases decreased by 19% to 11.8 billion pesos in the quarter against 14.6 billion pesos for the same period last year. This 2.8 billion pesos decrease is mainly due to the 19% decrease in the average purchase price in real terms, which generated a 2.4 billion pesos decrease in purchases as a result of the entry into effect of the new reference seasonal prices for electricity applicable from May and August 2019 to resolution 14 of the Secretary of Renewable Resources and Electricity Market, but that did not reflect the inflation of the period. This increase was partially offset by a 2.3 percent increase in energy volumes net of losses due to the increase in demand, which was valued at approximately 247 million pesos. In turn, the electricity reference seasonal price for residential customers is subsidized by the federal government, especially in the case of residential customers, when the second quarter's training, the subsidy reached 52 percent average of the system's actual generation cost. Additionally, the energy loss rate decreased from 19.2 in the second quarter last year to 18.7 percent in the same quarter this year. It should be mentioned that energy losses for second quarter this year were estimated since the reading cycles of our tariff one clients could not be completed for a period of two months, given the restrictions on readings in the initial phases of the lockdown. In turn, costs associated with these losses decreased by 36.8% in real terms, resulting in lower purchases for 574 million pesos. It's important to highlight that over the past few years, Ebenor 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 world pandemic has brought several consequences in global economic activities, which directly affected the company's activity, generating reduced collections, especially in the beginning of the lockdown. For this reason, we have seen the need to partially defer payments to Camista for the energy acquired in the wholesale electricity market as from maturities taking place in March 2030. We hope to have our situation regularized in the near future in order to comply with our payment to CAMESA in the short term. Meanwhile, operating expenses have remained stable, reaching 8.32 billion pesos in second quarter against 8.36 billion pesos in the same period last year. This is mainly explained by increasing the allowance for bad debts in the amount of 1.2 billion pesos as a result of the increase in delinquency resulting from the COVID-19 context and the substantial increase in the delinquent balances. This increase in cost was offset by a 428 million pesos decrease in penalties as a result of improvement in service quality levels And secondly, the update of penalties recorded in the second quarter of 2018 in the amount of 300 million pesos, which were later included in the liabilities regularization agreement. Furthermore, lower remuneration expenses in the amount of 229 million pesos were disclosed as a result of pending collective bargaining negotiations for 2020 and less extra hours. Lastly, lower fees and remuneration for services in the amount of 101 million pesos were recorded on account of lower expenses in correcting maintenance and reading as a consequence of the restrictions imposed on certain operating activities due to the lockdown measures, especially in the initial phases. Regarding our financial results, experienced a 56.5% increase in losses which reached $2 billion in the second quarter against $1.3 billion for the same period last year. This difference is mainly due to higher exchange rate losses in the amount of $920 million resulting from a gradient devaluation of the peso against the U.S. dollar in the second quarter this year compared to the same period last year, as well as lower revenues from commercial interest in the amount of $146 million. These effects were partially offset by lower commercial interest accruals on the debt with CAMESA for 426 million pesos as a result of the regularization of liabilities recorded in the second quarter of 2019. Finally, net results decreased by 17.8 billion pesos, recording losses for 2.6 billion pesos in second quarter against profit for 15.3 billion pesos for the same period in 2019. This difference is mainly due to a 5.3 billion pesos decrease in the gross margin and the 14.2 billion pesos impact net of income tax of the regulatory liability agreement. Furthermore, increasing financial losses and lower inflation results were recorded in the amount of 725 million pesos and 1.7 billion pesos, respectively, which were more than offset by lower income tax accrual for 8 billion pesos, including the aforementioned agreement income tax effect. The result of the period would present a fall of 3.6 billion pesos compared to the same period of the previous year, if we consider the result of the second quarter, 2019, without taking into effect the impact of the adjustment of liabilities net of income tax, which would have yielded a gain of 1 billion pesos last year. Talking about EDENOS adjusted to the BDA, it showed a 2.2 4 billion pesos lost in the second quarter, 4.7 billion pesos lowered in the same period of 2019, adjustment corresponds to the update of penalties for the transition period and commercial interest. Regarding Evernote's capital expenditures, during the quarter our investment totalized 2.5 billion pesos compared to 3.2 billion pesos in the same quarter the previous year, from which 60% corresponds to network infrastructure and expansion and 40% stream network maintenance. Investment was reduced just by 21% compared to the same period of the previous year, mainly on account of the slowdown in the plan set by Renault as a result of labor revenues due to the fall in sex volumes, the referral of tariff updates, and the restrictions imposed in carrying out certain activities due to the mandatory isolation measures taken in the country since March 20th this year. The plan maintains focus on the efficient use of resources and on investments improving the service quality, which can be seen in the fulfillment of the quality curves required by the regulatory entity in the comprehensive care review. All this with the due care of our employees, contractors, and customers, and the application of strict health, safety, and hygiene protocols in each of the activities conducted under this unprecedented circumstance. The investments highlighted for the quarter were the activation of the Transformation Bank in General Rodríguez Transformation Station, the expansion of the capacity of the Colegial Establishment Station by 40 megawatts and the renovation of Munro-Malabar High Voltage Electroducts for a total of 4.5 kilometers. the latter with commissioning in September 2020. Regarding quality standards, these are measures based on the duration and frequency of service outages using the site and site indicators. At the closing of the first quarter of 2020, site and site indicators were 13.4 hours and 5.3 outages per year per client over the last 12 months. evidencing a 28% and 17% improvement, respectively, compared to the same period of the previous year. In turn, these indicators are 44% and 33% lower than those required in the Integrated Travel Review. This recovery in service levels is mainly due to the ambitious plan devised by the company since the Integrated Travel Review. 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 our energy losses, they reached 18.7 percent in the second quarter against 19.2 percent for the same quarter last year. As I mentioned before, losses for the second quarter were estimated because reading cycles could not be completed to obtain the real data after estimating the consumption of our Tariff One clients for the period of two months due to restrictions on the reading activity in the initial phases of the lockdown. Costs associated with these losses decreased by 36 percent in real terms, resulting in in a 574 million pesos improvement. Over the last year, multidisciplinary teams were created to work on new solutions to energy losses. Furthermore, activities aimed to reducing losses continue, and analytical and artificial intelligence tools were used to enhance effectiveness in the routine of inspectors. Market discipline actions continue with the objective of detecting and normalizing irregular connections. and energy fed, and installation of inclusion meters for more users was intensified. Over the last year, approximately 557,000 inspections of 31 meters were conducted with a 54 percent efficiency, and more than 37,000 millimeters were installed. Regarding the recovery of energy, it says the customers put back to normal with mid emitters. Constant customers with conventional emitters were also put back to normal. In all cases, extracted fraud receivables rate was observed. Finally, as far as financial debt is concerned, the outstanding principal of our dollar denominated financial debt amounts to $148 million. whereas the net debt amounts to $69.8 million. The financial debt consists of $135.5 million corresponding to corporate bonds maturing in 2022, net of repurchases, and $12.5 million to the bank loan taking out with the Industrial and Commercial Bank of China, ICBC, Dubai branch, currently both liabilities bear interest at a fixed rate. Finally, after the financial statement closing date, repurchases of corporate bonds were made for a total face value of $22.1 billion. So, this concludes my review on Edenor. Now, we are open for questions.

Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touchtone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Questions will be taken in the order they are received. We do ask that when you pose your question that you pick up your handset to provide optimum sound quality. Again, it is star 1 to ask a question. Please hold while we poll for questions. Once again, if you have a question, please press star 1. Showing no questions, this concludes the question and answer section. At this time, I would like to turn the floor back over to Mr. Montero for any closing remarks.

Thank you very much for joining us in this conference call. Please keep safe because of this situation. Have a nice day. Bye.

Thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice day.