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 Edinor's third quarter 2020 results conference call. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the presentation. After the company's remarks are completed, there will be a question and answer section. At that time, further instructions will be given. Should any participant need assistance during this call, please press star then 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 company. They involve risk and 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 can cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Leandro Monteiro, CFO of Adenor. Mr. Monteiro, you may begin your conference.

Thank you very much. Good afternoon, everyone, and welcome to Adenor Farming's conference call for the third quarter of 2020. I truly hope that you and your family are safe and healthy during these strange times. 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 might have. I'd like to first 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. As reported in the previous quarter, after performing the readings of all meters for which estimates have been made to resolution number 27 passed on May 5th, the financial impact on revenues from estimates which were lower than actual constructions amounted to 552 million pesos, which should be recoverable in six installments payable from September. According to different subsequent notes, the start of payment was postponed for November and later suspended until further instruction by the . We expect regulators to define the situation as soon as possible in order to reduce the impact in our inflows. In other matters, on October 28, the Chamber of Deputies approved the 2021 budget law project which in Article 87 establishes a regularization regime for the obligation of spending payments with CAMESA and all with the wholesale electricity market for the debts of most of the electric power distributors across the country accumulated as of September 30, either for energy consumption, power, interest, or other penalties under the conditions established by the enforcement authority which may establish a recognition of equivalent credits to five times the average monthly bill for the last year, or 66% of the existing debt. The remaining debt must be regularized through a payment plan with terms of up to 60 monthly installments, up to six months of grade period, and an equivalent interest rate of up to 50% of that enforced in the wholesale electricity market. The enforcement authority may reach regularization agreement in particular with each of the distributors. As of the date of this report, third national budget is still pending approval by the Senate. Regarding our financial debt, on September 28, Adenauer Consult in the market its own bonds that have in possession for a total of $78 million of fake value. As of the date of this report, their standing bonds amount to $98 million at price value. Regarding our credit ratings, on September 16, Moody's Latin America launched its regional platform, Moody's Local, replacing Moody's Investor Service for domestic ratings. As a result of this change, the previous and timely issued domestic ratings were replaced by new ones under the Moody's Local Argentina brand. same date and under the new methodology, Moody's Local Argentina issued its first rating for the company, granting an A and an A- rating, both with negative outlook, for the local and foreign currency debt, respectively, as well as a 1 rating for Edenor shares. On September 29, Moody's Metro service, in line with the changes in the sovereign debt rating, changed the outlook on the global ratings of several companies, including Adenor, from negative to stable. Furthermore, regarding our other rating agency, on September 18th, after the passing of regulations on access to the foreign exchange market by Central Bank, Standard & Poor's Global downgraded the global ratings of several companies, changing Adenor's ratings from triple C to triple C-minus, and keeping the negative outlook. In turn, on September 25th, it also downgraded the company's domestic ratings from B to CCC+, keeping the negative outlook. Both downgrades were driven by the lower financial flexibility of the company for the next month as a result of the tariff freeze and impossibility to file full payments to Commesa. Moving to our results in the first quarter of 2020, revenue from sales decreased by 24%, reaching $23 billion in the third quarter this year, against $30.5 billion in the same period last year. This $7.5 billion decrease is mainly due to the tariff freeze in both the distribution value added and the seasonal price passed on to tariffs in an inflationary context, which entails a decrease in revenues in real terms. The failure to apply the update mechanism on the distribution cost in August 2019 and February and August this year generated the same nominal sales price between quarters, causing a lower sale in real terms of approximately 3.1 billion pesos. Lower revenues are also due to lower billings on account of the real-term decrease in the cost of energy purchases, measured in pesos, for 4.2 billion pesos. Lastly, in contrast to 2020, a one-time income corresponding to the January-May period for the energy distributed to shantytowns and low-income neighborhoods for 282 million pesos was recorded in the South Water last year. Conversely, the higher physical volume of electricity size increased revenues by 177 million pesos. Taking into consideration our operational results, the volume of energy size increased by 1.3 percent this quarter, reaching 5.43 terawatt hour against 5.36 terawatt hour for the same period last year. It is worth highlighting that this quota was still marked by the effects of the COVID-19 crisis and the restrictions to certain activities yet affected by the partial lockdown, generating strong changes in energy consumption. Electricity consumption by residential customers increased by 12.4%. whereas commercial, small and medium, and industrial customers decreased their consumptions by 12.1%. The residential demand increased by 299 GWh, mainly because people spent more time at home due to the restrictions on movement and implementation of the home office modality. The 99 CO2 and 106 CO2 hour decreases for commercial and industrial customers, respectively, were mainly due to the partial or total closure of stores and industries, resulting from the measures implemented under the mandatory lockdown. Nevertheless, despite the mentioned falls, these sectors show slight recovery in the quarter compared to the first month of isolation And additionally, the improvement in size volume may be partially explained by the study's lack. Furthermore, EdeNord's customer base rose by 1.4%, mainly on account of the increase in residential customers, as a result of the implemented market decision actions taking place before the mandatory isolation and installation during the last year of almost 37,000 integrated energy meters that were mostly destined to regularize client-side connections. The electricity power purchases decreased by 26% to 14.3 billion pesos in the quarter, against 19.3 billion pesos for the same period last year. This 5 billion pesos decrease is mainly due to the 26% real-terms decrease in the average purchase price, which generated lower purchases in the amount of 4.5 billion. The last increase was 5% in August 2019, put into Resolution 14 of the Secretariat of Renewable Resources and Electricity Markets. This decrease was partially offset by a 2.5% increase in energy volumes next to losses due to the increase in demand, which was valued at approximately 306 million pesos. In turn, the reference seasonal price for customers is still subsidized by the federal government, especially in the case of residents and customers, where in third quarter this year, the subsidy reached 58% of the system's actual generation cost. Additionally, the energy loss rate decreased from 23.1% in the third quarter last year to 22.5% this year. But we should take into account the increase in bad debt at the same time. In turn, costs associated with this loss is decreased by 32% in real terms due to the failure to update the seasonal price in an inflationary context, resulting in lower purchases for 834 million pesos. It's worth mentioning that over the past few years, Edenor has suffered a systematic deterioration of its assets and financial position as a result of the tariff lag. increase in operating costs, the drop in demand, and the increase in energy theft. Furthermore, the outbreak of the work 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 mandatory lockdown. For this reason, We have seen the need to partially defer payments to Comesa for the energy acquired in the wholesale electricity market after maturity taking place in March 2020, accumulating as of September 30, 2020, a debt of 14.4 billion pesos before interest. Meanwhile, operating expenses increased by 11%, reaching 8 billion pesos in the quarter against 7.2 billion last year. This is mainly explained by an increase in the allowance for bad debt in the amount of 429 billion pesos as a consequence of the increasing in collectability, rights, and status with the COVID-19 context, which resulted in a substantial increase in the delinquent balance and the number of clients in that category. In turn, higher penalties for 222 million pesos and higher supplies, consumptions for 180 million pesos were recorded. These costs increases were partially offset by lower remuneration expenses in the amount of 265 million pesos as a result of delayed collective bargaining negotiations and fewer extra hours. Regarding our financial results, experienced a 45 percent decrease in losses, with 2.4 billion pesos losses in the quarter against 4.4 billion pesos losses last year. This difference is mainly due to lower exchange rate losses in the amount of 3 billion pesos resulting from a lower devaluation of the peso against the dollar in the quarter compared to the same period last year. as well as higher profits resulting from the purchase of corporate bonds in the amount of 326 million pesos. These effects were partially offset by higher interest accruals on the debt with CAMESA for 1.5 billion pesos this year. Finally, net results decreased by 252 million pesos, recording profits for 101 million pesos. in the quarter against profits for 353 million pesos for the same period last year. This difference is mainly due to lower operating results in the amount of 2.9 billion pesos in the quarter and the positive impact of the liability regularization agreement in the amount of 840 million pesos in the third quarter last year. These effects were partially offset by lower financial losses in the amount of 2 billion pesos, and lower income tax accruals for 1.7 billion pesos. Talking about EDENOR as just the MVDA, it showed a 2.2 billion pesos profit in the third quarter, 2.8 billion pesos lower than in the same period last year. As of this quarter's report, commercial interests are no longer adjusted in the BDA, since they are now disclosed within operating results, as explained in the notes of the financial statement as of September 30th. Regarding Adenauer's capital expenditures, during this quarter, our investment totaled 2.8 billion pesos, compared to 3 billion pesos in the same quarter the previous year, from which 54% corresponds to network infrastructure expansion and 46% to network maintenance. Investments were reduced by 6% compared to the same period of the previous year, mainly in account of the restrictions imposed on certain activities due to the mandatory isolation in which the country found itself since March 20 of this year, and the slowdown in the execution of such activities as of the implementation of the protocols with which they were resumed. We understand that the lower income as a result of the fall in sales volumes and the postponement of the tariff assessment could lead to slowdown in the plan set by Edenor. The plan maintains focus on the efficient use of resources and an investment in improving the service quality, which is reflected in the fulfillment of the quality curves required by the regulatory entity in the entire tariff review. 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 by our personnel. The investment highlights for the quarter were the renovation of the Munro-Malaver high-voltage electrical transmission lines for a total of 4.5 kilometers and the construction of 12 kilometers of Molon-Matenhouse Voltage Electrical Transmission Lines, the latter set for commissioning in October 2020. Regarding quality standards, these are measures based on the duration and frequency of service outages using the CID and CISE indicators. At the closing of the third quarter of 2020, Science indicators were 13.1 hours and 5.1 outages per year over the last 12 months, evidencing a 19 and 17 percent improvement, respectively, compared to the same period of the previous year. In turn, these indicators are 45% and 36% lower than those required in the Integral Tariff Review to this period. This recovery in service levels is mainly due to the ambitious plan devised by the company since the Integral Tariff Review, the various improvements implemented in the operating processes, and the adoption of technology applied to the operation and management of the network. The plan's success is also evidenced by the fact that these indicators exceed the service quality improvement path defined by the regulatory entity, even exceeding the values required for the year 2021. Taking into account our energy losses, they reached 22.5% as reported this year, against 23.1% for the same period in 2019. Costs associated with these losses decreased by 32% in real terms, resulting in an $884 million improvement. The work of multidisciplinary teams to develop new solutions to energy losses continues, as well as activity aiming to reduce them. Analytical and artificial intelligence tools were used to enhance Effectiveness in the routing of inspections and market discipline actions continues with the objective of detecting and normalizing regular connections, prob and energy draft. Furthermore, installation of intrusion meters, or MIDE, for more users was intensified. In addition, the restriction to take any action in case of delinquency prevents our customer from turning into incandescent connections. Over the last year, approximately 520,000 inspections of 31 meters were conducted with a 54% efficiency, and 37,000 meters were installed. Regarding the recovery of energy, besides the customers put back to normal with meters, clandestine customers with conventional meters were also put back to normal in all cases, A striking growth in the citizen rate was observed. Finally, as far as financial debt is concerned, the outstanding principal of our dollar denominated financial debt amounts to $111 million, whereas the net debt shows a positive cash balance of $3 billion. The financial debt consists of $98.3 billion, corresponding to corporate bonds maturing in 2022 and $12.5 million to the bank loan taken out with the Industrial and Commercial Bank of China, Dubai branch. In the third quarter of 2020, all corporate bonds repurchased by the company in the amount of $78 million of face value were canceled, and $98.3 million are outstanding, as I mentioned before. In turn, on October 5th, after the period ends, prior to the passing of the restrictions on payments in foreign currency imposed by the central bank, the last installment of the loan taken out with the ICBC Bank in the amount of $12.5 million was paid. So, this concludes my review on the norm. Now, we are open for questions.

Thank you, the floor is now open for questions, if you have a question, please press star then one on your touch tone phone. At this time, or at any time, if at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received, we do ask that you pose your questions that you pick up your handset to provide optimum sound quality, please hold while we pull for questions. Again, if you have a question, please press star, then 1. And our first question will come from Matthias Cassiagnino with BCP Securities. Please go ahead.

Yes, thank you guys for the call. I have one question regarding the regularization. Is the credit that is going to be given because of the lack of increases in the past year and a half or might be the case where you don't have an increase next year because they are going to say that they are giving those credits?

Hi, Matias, I couldn't catch your name.

Can you hear me?

Yeah, Matias?

Yep.

Yes, can you repeat the question? Sorry, we couldn't catch you well here.

So the question is regarding the regularization of the debt with CAMESA. So that credit that they are going to give, is that because they didn't grant any tariff increase in the past year and a half? Or is it going to be the case where you are not going to have an increase next year because they are going to give those credits?

OK, thank you. Well, first of all, we don't have any clue yet about how the government will apply those credits. But assuming that the law says that those credits will be applied to compensate the debts accumulated by the distribution companies as of September 30 this year, September 30, 2020, we think that those credits will be to apply to the lack of tariff in the past. But since the law enables the authority, in this case the Secretariat of Energy, to adjust or to reach to any agreement with all the different distributors, we think they will have, but we don't know yet, they will have the possibility to apply those credits for the future. But as we can see, the law, as it was approved now, it seems that those credits are applied to compensate the tariff freeze during 2019-2020.

Okay, thank you, Landro.

You're welcome. Again, if you have a question, please press star, then 1. This concludes the question and answer section. At this time, I would like to turn the floor back to Mr. Montero for any closing remarks. Please go ahead.

Thank you very much. Thank you for joining this conference call. Please keep you and your family safe and healthy as far as you can and have a nice afternoon. Thank you very much.

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