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 fourth 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 company. 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 afternoon, everyone, and welcome to Evelor's Ehrling Conference Call for the fourth quarter 2020. I truly hope that you and your family are safe and healthy during this strange time, and we really expect the vaccination process will be successful. 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 response of the period or any doubts you might have. I'd like to first acknowledge the extraordinary efforts our staff has made during this special 2020 to continue giving service to users while maintaining high quality and security standards, given the unique circumstances we face and we are still facing with the COVID-19 outbreak. With that said, we will focus on the relevant events that have taken place lately. First, on December 28, last year, the controlling company Pampa Energía, holder of 100% of Edenor's Class A shares representing 51% of its capital stock, acting as a seller, entered into a share purchase agreement with Empresa de Energía del Cono Sur. The grid-priced price consists of almost 22 million classic shares of Edenor, a pricing cash of $95 million, and a consistent payment for 50% of the generated gain in case of change of controlling the value of Edenor during the first year after the closing of the transaction, or as long as the price balance is pending settlement. The closing date is subject to the fulfillment of the present conditions, which are the sales approval by Pampa Energía and the regulatory agency, the AMRE, and the payment of the second installment of $15 million. In this respect, on February 17th this year, Pampa Energía's shareholders meeting approved the transaction. And as of today, the approval procedure by the regulatory agency is still in progress. Furthermore, at EDENOR, Pardon me, ladies and gentlemen.

There seems to be a problem with the speaker line at the speaker's end. We'll be rejoining them very shortly. Thank you.

and to offer a restructuring of the depth that allows, at the same time, to extend the maturity time.

Okay, thank you very much.

Okay, well, I'll restart from the last point I was talking about. Furthermore, as the North has a stranding market debt, it is from a perspective contemplated change of control clause, which stipulates that each corporate bondholder will be entitled to require the company to repurchase all or any parts of that holder's corporate bonds through the presentation of a change of control offer. This offer must be made within 30 days of the change of control under certain conditions. In this regard, the company has contacted different banks specialized in debt restructuring to evaluate the possible courses of action. This is in addition to any other alternatives that the buyer of the majority share package of the company is evaluating in the event that the transaction is perfected. In other matters, periodically or driven by changing circumstances, the company analyzes the recoverability of its long-lived assets, which is measured as the higher of value in use and fair value less cost of sale at the end of the period, may be inferred. In view of the lack of tariffs, updates and the economic and health situation affecting the country, the company's projections regarding the recoverability of its property plant and equipment have been updated. The value in use is determined on the basis of projected and discounted cash flow using discount rates that reflect the time value of money and the specific risk of the assets under consideration. Given the current uncertainty, several scenarios have been developed with their respective probabilities. After performing the recoverability analysis, The company has accounted for, in its financial statement closing on December 2020, an impairment of property, plants and equipment in the amount of 17.1 billion pesos. Now, moving over to events related to our regulation, on December 16th last year, pursuant to Executive Order No. 1020, the National Executive Branch declared the launch of the Integral Tire Review and Negotiation, which may not exceed two years of negotiations suspending. Until then, the agreement corresponds to the respective current Integral Tariff Review, with the scope to be determined in each case by the regulatory agencies. It is provided that transitory renegotiation agreements may be executed to modify, to a limited extent, the specific condition of the Tariff Review by establishing a transitory tariff regime until reaching a final renegotiation agreement. Furthermore, the administrative intervention provided for by Effective Order 277 last year was postponed until December 31st this year, or until the conclusion of the tariff review renegotiation. In turn, the electricity tariff freeze was extended until March 31st this year, or until the entry into effect of the new transitory tariff schemes resulting from the transitory tariff regime, whichever occurs earlier. Later, on January 19, 2021, the UN passed Resolution No. 16, launching the Transitory Studies Update Procedure, which's objective is to establish a transitional studies regime until the definitive renegotiation agreement is complete. To this effect, the regulatory agency has requested, as a first measure, the submission of certain financial information, as well as information on the 2021-2022 Investment Plan, based on the investment plan established in the 2017 Integral Tariffs Review. In connection with this process, on February 24, through Resolution No. 53, the regulatory agencies determined, in order to inform our clear opinions regarding the transitional tariffs regime for Edenora and El Sur, to call a public hearing for March 30, this year. The hearing will be done virtually. Regarding our debt with CAMESA, on December 11th, 2020, Executive Order Number 990 partially approved the 2021 budget law, which in its section 87 provides for a regime for the regularization of liability outstanding with CAMESA for the debts with electricity distributors accumulated as of September 30th last year, whether on account of energy consumption, power capacity, interest and or penalties, under the conditions to be established by the Secretary of Energy, which make rent receivable for up to five times the monthly average bill, or 66% of existing debt, whereas the balance should be regularized in up to 60 monthly installments, with a grace period of up to six months, and after the wholesale electricity market's current rate reduced by 50%. the Secretary of Energy may enter into a regularization agreement specifically with each of the distributors. In line with this, on January 21st, the Secretary of Energy passed Resolution 40, which established the Special Liability Regularization Regime for deaths held with Kamesa, validating the previously mentioned items. Under this resolution, the company filed on March 3rd all the information required. As of today, the company is evaluating the scope and implication of this regime. As for our regulating authority determination, on January 19, this year, the company expressed its conformity with agreement on the joint exercise of regulation and control of the electricity distribution public utility entered into by the federal government, the province and the city of Buenos Aires, which acknowledges that the title and capacity of the electricity distribution public utilities Granting authority in the company's concession area will remain best vested in the federal government, agreeing to overrule a series of instruments associated with the transfer of said utility to the local jurisdictions and committing to create a tripartite body for the regulation and control of the activity. Regarding the collection of energy consumptions of shantytowns, on December 16th, we entered into an agreement for the development of a preventive and corrective work plan for the electrical distribution grid of the metropolitan area of Buenos Aires, to guarantee electricity supply to low-income neighborhoods in the metropolitan area of Buenos Aires. As of December 31st, the cumulative debt for Shantytown Constructions in the construction area of Edenor was 2.7 billion pesos, corresponding to the electricity supply during the October 17-December 20 period. to shantytowns and low-income neighborhoods, except for the portion paid by the federal government until May 2019 and the social-tariff discounts contributed by the province of Buenos Aires since January 1, 2019, that are both already paid. Under this agreement, debts were recognized for 2.1 billion pesos for consumption until July 2020, amount to be applied to the works plan for the performance of corrective and preventive maintenance works in the grid in charge of distributors and associated with low-income neighborhoods to improve the quality of service provided there. In January 2021, the company received the first disbursement in the amount of 1.5 billion pesos. The second disbursement for 500 million pesos will be in the first quarter of 2021 and the third disbursement, an additional amount of 500 million pesos in the second quarter this year. Lately, the fourth disbursement, for the remainder, must be still validated by the ANRE, a correspondence to the total consumption of Sanctitown between the month of August and December 2020. Moreover, on February 24th, through resolution number 131, the Ministry of Energy determined to modify the stabilized price of energy of the large distribution users to equate its with the large users of the wholesale electricity market, for the period between 1 February and April 30th. In turn, the category Public Health and Education Agency's large user was created and accepted from the increase. Additionally, through this resolution, the new value for the tax for the National Electricity Fund was increased from 80 pesos to 160 pesos per megawatt-hour. Then, through resolution entry number 2. the price change of this tax was postponed for invoices issued as of March 1st this year. Finally, on another note, as informed previously in November 2015, Edenor had completed the acquisition of a real estate asset from contracting company Rivera de Sarrojos, which breached the contract, not even starting construction of the office building. Hence, Edenor terminated the contract for cost attributable to Rivera de Sarrojos and filed a claim with the insurance company. Later, in 2018, the collection of the insurance bonds in the amount of $15 million was agreed, with Adenor's receivables from Rivera de Sarrochos still being pending. In Rivera de Sarrochos' regularization proceeding, four alternatives were submitted for the recovery of the receivables. Adenor expressed its conformity with one of them, which requires making additional financial contributions. Given the company's complex economic and financial situation and the necessity to focus resources in the investment plan to maintain service quality, added to the uncertainty regarding the recuperability of the credit subject to the evolution of the Rivera de Sarojos bankruptcy, the Board of Directors in its meeting held on January 18th this year accepted the offer for the transfer of stock credit for a total amount of 400 million pesos plus the condition price subject to the execution of the project under certain conditions. It is worth highlighting that the partial recovery of the provision is accounted for in the first quarter of 2021 under current accounting standards. Now, moving on to our results of the fourth quarter of 2020, revenue from sales decreased by 26%, reaching 18.3 billion pesos in the quarter against 24.6 billion in the same period of 2019. This 6.3 billion pesos 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 own distribution costs since March 2018 generates the same quarter-on-quarter nominal trade price resulting in lower sales in real terms for approximately 2.4 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 3.9 billion pesos. Besides, the physical volume of electricity sales, excluding consumption from by shantytowns, explains a slight decrease, generating lower revenues for 16 million in December 2020 compared to the same period of the previous year. Taking into consideration our operational thoughts, the volume of energy sales increased by only 0.1% this quarter, reaching 4.75 TWh. It is worth highlighting that this quarter has been affected by the outbreak of the COVID-19 crisis, which generated strong changes in energy consumption. Electricity consumption by residential customers increased by 8.1%, Whereas commercial and industrial customers decreased their consumption by 10.6% and 7.1% respectively. The residential demand increased by 152 GWh mainly because people spend more time at home and the implementation of the home office modality. The 85 GWh and 63 GWh 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 regarding the health protocols. However, despite the above-mentioned decreases, these sectors show a recovery in this quarter compared to the first month of the mandatory isolation. Additionally, the recovery in sales volumes may be partly explained by the sales lag. Furthermore, the North customer base rose by 1.1%, mainly on account of the increase in residential customers as a result of the market discipline actions implemented before the mandatory isolation and the installation over the last year of more than 25,000 integrated energy meters that were mostly destined to regularize clandestine connections. The electricity power purchases decreased by 28% to 11.7 billion pesos in the quarter against 16.1 billion pesos for the same period last year. This 4.4 billion pesos decrease is mainly due to the 24.5% real-time decrease in the average purchase price, which generated lower purchases in the amount of 3.9 billion pesos. The last increase, of which residential customers were expected, was 5% in August 2019, pushed to resolution number 14. of the Secretary of Renewable Resources and Electricity Markets. The decrease was not affected by the energy volumes net of losses, which only increased by 0.3% and was valued at approximately 31 million pesos. In turn, the reference seasonal price for customers is still subsidized by the federal government, especially in the case of residential customers, where between October and November 2020, the subsidy reaches 54% of the system's actual generation costs. Additionally, the energy loss rate decreased from 19.4% in the fourth quarter last year to 18.4% for the same period in 2020, but we should consider the increase in back debt at the same time. In turn, costs associated with these losses decreased by 35% in real terms due to the failure to update the reference seasonal price in an inflationary context, resulting in lower purchases for 537 million pesos. It is worth highlighting that over the past few years, Edener 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 sales. Besides, the outbreak of the global pandemic has brought several consequences in global economic activities, which directly affected the company's activity, generating reduced collections, especially at the beginning of the mandatory lockdown. For these reasons, we have seen the need to partially defer payments to Canista for the energy acquired in the wholesale electricity market as from maturities taking place in March 2020, accumulating as of December 30th, 2020, a 12.4 billion pesos debt before interest. In this sense, the debt accumulated as of September 30, 2020 should be recovered by the special liability regularization regime approved by Resolution No. 46 of the Secretariat of Energy. But, despite the fact that as of the date of this report, the company has omitted all the information that has been required under this resolution, it is still uncertain the scope and implications of this regime. Meanwhile, operating expenses have mostly remained stable, reaching 9.5 billion pesos in the fourth quarter 2020. This is being explained by 332 million pesos increasing fees and remuneration for services and increasing the allowance for the impairment of receivables in the amount of 278 million pesos because of increasing the uncollectible rate associated with the COVID-19 context, which resulted in a substantial increase in the delinquent balance. Finally, salaries and social security taxes have increased by 137 million pesos and communication expenses by 54 million pesos. These increases were partially offset by lower penalties in the amount of 417 million pesos as a result of improvements in server quality levels and lower supply consumption in the amount of 362 million pesos caused by the reduction of certain activities as a consequence of the measures adopted by the regulator because of the pandemic. Regarding our financial resource, we experienced an 11% increase in losses, which amounted to 3.2 billion pesos in the fourth quarter 2020, against losses for 2.9 billion pesos in the same period last year. This difference is mainly due to higher accrued interest on the debt incurred with CAMESA, for 2.2 billion pesos and lower profits in the amount of 625 million pesos from the repurchase of own corporate bonds made in the fourth quarter last year. These results were partially offset by lower financial interest charges for 1.8 billion pesos and a positive change in the value of financial assets for 948 million pesos. Finally, net results decreased by 13.3 billion pesos, recording losses for 15.6 in the fourth quarter 2020 against losses for 2.4 billion pesos for the same period in 2018. This difference is mainly due to the result of the impairment of assets recorded in 2020 for 17.4 billion pesos as a result of the analysis of the recuperability of the assets under the context of tariffs on site 24 in the north and economic and health emergencies for the country. Without considering these effects, operating results would have decreased by 2.2 million pesos billion pesos in the fourth quarter 2020 against the same period of the previous year. These negative results were partially offset by better results from the inflation adjustment and the effects in income tax of the assets impairment accounted for in the quote. Talking about Edenor's adjusted VDA, it showed a 1.4 billion pesos loss in the fourth quarter, 2.1 billion pesos lower than in the same period of 2019. The VDA adjustment in the quarterly comparison periods corresponds to the impairment of assets. Regarding Edenor's capital expenditures during this quarter, our investments totaled 3.2 billion pesos compared to 2.6 billion pesos in the same quarter of the previous year, from which 38% corresponds to network infrastructure expansion and 52% to network maintenance. CAPEX increased by 27% compared to the same period of the previous year, is mainly a result of the company's efforts, although the tariff freeze and the restrictions generated by the pandemic throughout the year. These higher investments compared to the same period of 2019 are due to the recovery in the fourth quarter of the deferments in investments of the previous month as a consequence of the delays caused by the preventive and mandatory social isolation. The lack of predictability in the near future as a consequence of the tariff freeze and the accumulated drop in demand resisted over the last years may affect the pace of investment in the vision plan set by the North. Always making sure this slowdown does not affect compliance with service quality indicators, which have exceeded regulatory requirements. 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 these unprecedented circumstances. The investment highlights for the quarter were the commissioning of the Colegiales Libertad and José C. Pázar stations and the new El Cruce Step Down Transformer Center for 240 MW. Additionally, the two new capacitor banks of 150 MW each were mounted in the Rodriguez service station. Lastly, 19 km of new high voltage transmission lines were constructed where other 4.5 km were renewed. Regarding quality standards, these are measures based on the duration and frequency of service outages using the CID and CIFI indicators. At the closing of the fourth quarter of 2020, Site and safe indicators were 12.2 hours and 4.6 outages per year over the last 12 months, evidencing a 23% and 26% improvement respectively compared to the same figures of the previous year. In turn, we are proud to say that these indicators are 44% and 37% lower than those required in the Integrated Chart Review to this period. This recovery in service levels is mainly due to the ambitious plan devised by the company since 2014, the various improvements implemented in the operating processes, and the adoption of technology applied to the increased operation and management. The success of this plan is also evidenced by the fact that these indicators resisted the service quality improvement path defined by the regulatory agency, even complying with the indexes required for 2021. Taking into account our energy losses, we reached 18.4% in the first quarter of this year, against 19.4% for the same period in 2019. Costs associated with these losses decreased by 35% in real terms, resulting in a P537 million improvement. The work of multiple generation energy teams to develop new solutions to energy losses continues, as well as activities aiming to reduce them. Analytical and artificial intelligence tools were used to enhance effectiveness in the routing of inspections, and market-disciplined actions continued with the objective of detecting and normalizing irregular connections from an energy test. Over the last year, approximately 4,062,000 inspections of 31 meters were conducted, with a 57% efficiency, and 25,000 meters were installed. Regarding the recovery of energy, besides the customer put back to normal with mid-emitter, clandestine customers with conventional emitters were also put back to normal. Moreover, a new energy balance system was implemented and developed of income balance in private neighborhoods and country clubs. In all cases, the striking rate of proceedings in fraud has been observed. Along these lines, 349 preliminary rulings were made 125 criminal complaints were filed, and 71 people were arrested in 42 operations carried out together with the security forces. Finally, as far as financial debt is concerned, the outstanding principal of our dollar denominated financial debt amounts to $98.3 million, whereas the net debt amounts to $21.9 million. The financial debt consists of 98% corresponding to corporate bonds maturing in 2022, as the last repayment of the loan taken out with ICBC in the amount of $12.5 million was made on October 5. Lastly, after the closing of the year on January 24, Treasury corporate bonds in the amount of $114,000 were cancelled, so $98.2 million debt remains outstanding. So, this concludes my review on Adenor. 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. Please hold while we poll for questions. Our first question comes from Frank McGann with Bank of America. Please go ahead.

Yes, thank you. Just a question on... the tariff review process. First of all, there are a lot of press reports about what could happen in terms of an increase over the near term. I was wondering if you have any indications yet as to what could be proposed for that and what the net effect could be for yourselves. And then secondly, in terms of the the two-year process or up to two years to do a full tariff review. How do you expect that to move forward and what, you know, how will the basis for that review be different, say, than what has been done in the past?

Thank you, Frank. Good morning. Well, regarding the first questions, We don't have any clue about how much increase will be for the next month or the short term. Of course, we are making our requirement according to the regulations. So we don't know exactly how much the regulator will approve. But what we think that finally it could be, what we don't know exactly if it could be a mixture between subsidy and tariff increase that will allow to put the company in an income level that allows it to pay for the OPEX and the CAPEX, at least during this transitory period. And at the same time, we have this special regime set by the Secretariat of Finance in order to compensate the debt we had with Camisa, making a recognition about the past income that we didn't collect from our client because of the target price. And regarding the second questions, I don't know exactly how it will be developed, the new comprehensive target review. It's very, very soon to talk about it. We think that finally we will be working during this two year period in a new tariff review that will allow us to reach in two years a new tariff scheme. But it's very soon to know how that tariff review or definite tariff review will result.

Okay, thank you very much.

Again, if you have a question, please press star, then 1. Please stand by while we poll for questions. Showing no further questions, this concludes the question and answer session. At this time, I would like to turn the floor back to Mr. Montero for any closing remarks.

Well, thank you for joining the conference call. Please keep you and your family safe and healthy as far as you can, and have a nice afternoon. Bye-bye.

Thank you.

This concludes today's presentation.

You may disconnect your line at this time and have a nice day.