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 first quarter 2021 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 session. At that time, further instructions will be given. Should any participant need assistance during the call, please press star zero to reach the operator. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumption of Edinor'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 future results of Edinor 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 Edinor. Mr. Montero, you may begin your conference.

Thank you very much. Good afternoon. Good morning, everyone. and welcome to the Northern Conference call for the first quarter 2021. I truly hope that you and your family are safe and healthy and we really expect the vaccination process to continue to be successful and help us to return to normal life. 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 extraordinary efforts our staff has made to continue giving service to users while maintaining high quality and security standards given the unique circumstances we face and we are still facing in Argentina and in particular in our operating area. with the COVID-19 second wave outbreak. With that said, we will focus on the relevant events taking place lately. First, on March 31st, person 200 resolution number 78, the regulator issued the new tariff schemes effective as from April 1st, based on the wholesale electric markets winter seasonal programming. The new tariff scheme reflects the incorporation of the last increase of 5% with the exception of residential users in August 2019 as provided by resolution number 14 of that year of the Secretary of Renewable Resources and Electricity Market which had not been passed to tariffs and was being burdened by Edenor. In turn, the seasonal price increase for large distribution users is also incorporated, making them equal to the rest of the large wholesale electric market users. These increases reflect changes in the seasonal price of energy that are transferred to the final tariff without affecting Edenor's income from the value added by distribution or VAT. Regarding VAT, on March 30, Edenor filed its presentation in the public hearing addressing the distribution's transitory tariff update. Later, on April 13th, and pursuant to Resolution No. 107, the regulatory entity established a new tariff scheme including a 9% tariff update applicable to users for reasons as from May 1st this year. This partial update involves a 20.9% VAD increase for Eleanor, generating higher estimated revenues in the amount of 5 billion pesos for the May-December period. In other matters, on April 30, 2021, and pursuant to resolution number 371, the Secretariat of Energy moved forward with the regulation of Section 87 of the 2021 Budget. This resolution provides for the application of the Special Liabilities Regularization Regime approved in Resolution No. 40 earlier this year, which sets a limited number of credits to be applied to compensate CAMISA debt according to the following criteria. For the tariff freeze, the maximum amount of one average monthly Camisa bill will be recognized. For policies implemented to benefit the demand during the period March to December 2020, including the effects of Executive Order No. 311, a maximum amount of two Camisa bills. For the investment plan to be submitted, a maximum amount of another one Camisa bill. In turn, CAMESA is instructed to perform all necessary acts to process the information submitted by each distribution agent to draw up and submit to the Secretary of Energy a summary chart establishing the treatment to be given to the debt under the above described criteria. In our case, the average monthly CAMESA bill is around 5 billion pesos, but we have no clue how the authorities will apply these credits. Regarding our corporate bonds ratings, on April 9th, Moody's Local downgraded Edenor's domestic currency ratings from A to BBB+, and foreign currency ratings from A- to BBB, maintaining the negative outlook in both cases. The change reflects the impact of the tariff lag and the uncertainty on the recoverability of costs under current regulatory framework. Finally, regarding the sale of Edenor's controlling stake, as of the date of this conference call the transaction closing is still subject to the approval by the ANRE and the payment of the second installment by the buyers which should be fulfilled after the regulatory approval. Moving on to our results of the first quarter of 2021, revenue from sales decreased by 28% to 21 billion pesos in the first quarter this year, against 29 billion pesos for the same period last year. This 8 billion pesos decrease is mainly due to the tariff freeze in both the BAD and the seasonal price passed on to tariffs. In an inflationary context, which entailed a decrease in revenues in real terms. Deciding to apply the updated mechanism on the BID resulted in lower sales in real terms of approximately 3.5 billion pesos. Lower revenues are also due to lower billing on account of the real-term decrease in the cost of energy purchased measured in pesos for 4.9 billion pesos. On its part, the fiscal volume of electricity sales, excluding consumptions by shantytowns, experienced a slight increase, generating higher revenues for 51 million pesos in the quarter compared to the same period of the previous year. If all adjustments, obvious to date, had been implemented, the VAD for the quarter should have increased by 5.5 billion pesos. Taking into consideration our operational results, the volume of energy sales increased by only 0.2%, reaching 5,212 GWh in the first quarter this year, only 9 GWh more than the same period of 2020. It is worth highlighting that this quarter has been affected by the COVID-19 crisis which generated strong changes in energy consumption compared to the same period last year, which was only affected for the last 10 days of the quarter. Electricity consumption by residential customers increased by 3.3%, whereas commercial, small and medium and industrial customers decreased their consumption by 5.2% and 4.5% respectively. The residential demand increased by 72 GWh mainly because people spend more time at home due to the restrictions on movement and implementation of the home office modality despite having an average temperature for the water 1.4 C degrees lower than the previous year. The 45 GWh and 42 GWh decreases for commercial and industrial customers respectively are mainly due to the partial or total closure of stores and industries resulting from the different restrictions applied according to the measures implemented. However, the abrupt decline in activity evidenced at the beginning of the restrictions imposed last year have been decreasing and reversing, and a recovery in the Industrial Production Index can be observed in the quarter compared to the first month of the mandatory isolation, or even if we compare the demand behavior in the month of March in comparison to the previous year. Additionally, the recovery in sales volumes may be partially explained by the tariff lag. Furthermore, Adenauer's customer base rose by 1.4%, mainly on account of the increase in residential customers as a result of the market discipline actions and installation over the last year of more than 33 such as integrated energy meters that were mainly destined to regularize clandestine connections. The electricity power purchases decreased by 30% to 12.7 billion pesos in the first quarter against 18.3 billion pesos for the same period in 2020. This 5.6 billion decreased is mainly due to a 28% decrease in the average purchase price in real terms, which generated lower expenses for 4.8 billion pesos. The purchase price, frozen since August 2019, has had no modifications between the comparison periods. The update established by resolution 78, I mentioned before, applies as from April 2021, so it has no effect in the third quarter. This decrease was not affected by the energy volume net of losses, which only fell by 0.5% and was valued at approximately 58 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 the subsidy reached 64% of the system's average generation cost in the first quarter of 2021. Additionally, the energy loss rate decreased from 18.4% in the first quarter 2021 to 16.6% in the same period last year. Therefore, The decrease in purchases is also explained by the cost associated with energy losses, which decreased by 45% in real terms due to the failure to update the reference seasonal price in an inflationary context, resulting in lower purchases for 682 million pesos. This is worth highlighting. 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 and the increase in operating costs, especially during the last two years, the drop in demand and the increase in energy theft. Besides, the outbreak of the global pandemic has brought several consequences in economic activities worldwide that directly affected the company's activities, generating reduced collections, especially at the beginning of the lockdown. For these reasons, we have seen the need to partially defer payments to CAMESA for the energy acquired in the wholesale electricity market as from maturities taking place in March 2020, accumulating as of March 31st, 2021, a 14.9 billion pesos debt before interest. As regards the treatment of the debt accumulated as of September 30th, 2020, pursuant to Resolution No. 371, the Secretary of Energy moved forward with the regulation of the Special Liabilities Regularization Scheme and requested information to Commission for date determination. As of the date of this report, the company is elaborating all the additional information requested by this resolution. Meanwhile, operating expenses increased by 2%. reaching 9 billion pesos against 8.8 billion pesos in the first quarter last year. This is mainly explained by the 704 million pesos increase in penalties as a result of the recording of recoveries in the first quarter last year of almost 500 million pesos and the increase of the kilowatt-hour price established in Resolution 78 that impacts on the penalties accumulated as of Q1 2021. that are pending to be sanctioned for 203 million pesos. This increase was partially offset by a lower consumption of supplies in the amount of 232 million pesos, lower salaries and social security taxes in the amount of 203 million pesos, and a lower depreciation of property, plants and equipment in the amount of 128 million pesos. Regarding our financial results, we experienced a 55% increase in losses which amounted to 4.3 billion pesos in the first quarter of 2021, against losses for 2.8 billion pesos in the same period in 2020. This difference is mainly due to higher interest accrued on the debt incurred with Gamesa for 2.8 billion pesos. The results were partially offset by the result of the sale of the Rivera desarrollos receivable in the amount of 434 million pesos made in January, a positive change in the value of financial assets in the amount of 344 million pesos, lower losses on accounts of exchange differences for 320 million pesos, resulting from a decrease in foreign currency denominated debt, and lastly, lower financial interest charges in the amount of 148 million pesos. Finally, net results decreased by 1.7 billion pesos, recording losses for 656 million pesos in the quarter. against profits for above 1 billion pesos for the same period in 2020. This difference is mainly attributable to a lower operating income as a result of the tariff freeze in the amount of 3.5 billion pesos and higher financial losses in the amount of 1.5 billion pesos in the first quarter of 2021, compared to the same period of the previous year. These negative results were partially offset by a higher result for exposure to changes in purchasing power, caused in part by higher commercial debt and by a lower income tax charge. Talking about the DENOS adjusted VDA, it showed with 930 million pesos profit, 3.6 billion pesos lower than in the first quarter of 2020, mainly on account of the lower operating income. There have been no EBITDA adjustments between the comparison periods. Regarding average capital expenditures in this quarter, our investment totalized 2.5 billion pesos, compared to 2 billion pesos in the same quarter the previous year, from which half corresponds to network infrastructure and expansion and half to network maintenance. CapEx increased by 29% compared to the same period of the previous year. mainly as a result of the efforts made by the company, despite the reduction in the gross margin on account of the tariff freeze and the restrictions generated by the pandemic throughout the year. These higher investments, compared to the same period of 2020, are mainly due to the recovery in first quarter of the delayed costs in the previous month because of the preventive measures taken by the national and the local governments. The investments highlighted for the quarter were the commissioning of the new Ara San Juan and José Cepa substation of 80 MW each, which became operational in February and March this year. The lack of predictability in the near future and the accumulated drop in demand resisted over the last year may affect the pace of investments in the ambitious plan set by Edenor, 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 this unprecedented circumstance. Regarding quality standards, this are measured based on the duration and frequency of service outages using the CIDI and CIFI indicators. At the closing of the first quarter of 2021, CIDI and CIFI indicators were 11.7 hours and 4.4 outages per year over the last 12 months, evidencing an 18% and 22% improvement respectively compared to the same period of the previous year. These indicators are 27% and 15% better performance, respectively, than those required in the Integral Data Review for the end of 2021. 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 grid's operation and management. Taking into account our energy losses, they reached 16.6% in the first quarter this year, against 18.4% for the same period in 2020. Costs associated with these losses decreased by 45% in real terms, resulting in a 682 million pesos improvement. The works of multidisciplinary teams to develop new solutions to energy losses continue, as well as activities aiming to reduce them. Analytical and artificial intelligence tools were used to enhance effectiveness in the routine of inspections, and market discipline actions continued with the objective of detecting and normalizing irregular connections, probe and energy theft. Over the last year, even despite the pandemic restrictions, Approximately 442,000 inspections of 31 meters were conducted, with a 57% efficiency, and almost 34,000 meters were installed. Regarding the recovery of energy desired by customers put back to normal with medium meters, clandestine customers with conventional meters were also put back to normal. Moreover, a new energy balance system was implemented under development of microbalances, in private neighborhoods, in all cases, a striking rate of residues in fraud has been observed. Finally, as far as financial debt is concerned, the outstanding principal of our dollar-denominated financial debt amounts to 98.2 million pesos, whereas the net cash position of financial debt amounts to 2.1 million pesos. The financial debt consists exclusively of corporate bonds maturing in 2022. Lastly, after the closing of the quarter on May 4th, treasury corporate bonds in the amount of $110,000 were cancelled. So, 98.1 million dollars remain outstanding. 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. Please hold while we pull for questions. Our first question comes from Ezequiel Fernandez with Balanzee. Please go ahead.

Hi, good morning, everybody. This is Ezequiel Fernandez from Balanzee. Thank you for the materials and congratulations on the work on lowering losses and the quality of service side. I have two questions. The first one is related to the seasonal price. I know that it does not impact your operational results directly, but it's helpful for us to know about the update in April for the goodies. What was the percentage increase for the overall average seasonal price? And my second question is related to the regularization of the payables with Kamesa. Right now, Eleanor has something of $400 million in pending payables, including different components. Where do you think you should go maybe until the year end, and at what pace, if it's possible to comment a little bit on that? Thank you.

Thank you very much for your work about the quality of service and energy losses we are trying to control. First, regarding the seasonal price, in the case of Adenor, the seasonal price had an impact of 11% average, almost 11% average, on the whole purchase of Adenor, the whole purchase of energy of Adenor to CAMESA. But this increase, as you mentioned before, it will include two components. The first one is for all the demand for consumptions higher than 300 megawatt, sorry, kilowatt, they are impacted by 5%. This increase It's a remaining increase or an increase that had been included to the CAMESA bill in August 2019, but it had not been passed through to tariff. So it was being bartered by Edenor. And the other component of the seasonal price increase is increase for goodies, as you mentioned before. And for good, it is almost 100% increase in the cost of energy included in their tariff, okay? Okay, perfect. So I'm going to – can you repeat the second question? Sorry.

Yes. The amount – yeah, the amount of account payables in the L&R balance sheet at the end of March is around $450 million. $450 million. that includes different components. And considering that you will have to start normalizing your payables with CAMESA, we were wondering from these levels to where you could go by year end, if it's possible for you to give us any indication at this moment.

Well, it's not so simple. First of all, I can say that during the first quarter this year, we paid to CAMESA the, on average, 83% of the bill, okay? So we just increased our debt with CAMESA for around 2.4 billion pesos, which is this remaining 17% average. So, That was the first quarter. Now, to make an estimation on how much debt we will have at the year end, we should expect or we should wait which other measures the government will take. By the moment, they approved an increase for the BAD of about 21%. which means that for the period May, December this year, we will collect approximately five billion pesos more. This increase, of course, doesn't cover the full cost of the company. Just to have an idea, according to the internal tarp review, we should have received an increase of almost 137% applicable from May 1st, but instead we received an increase of 21%. So we are still waiting for another 122% increase in BAD, okay? So we know that this will not happen during this year or at least not for the full amount. So we are discussing with the government which will be the following steps. Maybe we are trying to get to an agreement in order to complete the remaining amount of money we need to operate and to complete the CAPEX plan. So, it depends on this agreement we are trying to reach with the government. It depends on another agreement we are trying to reach with the government according to Shantytown's consumption that could mean 1.5 billion pesos in addition to our revenue, or at least to cover the cost of energy we deliver in the shantytowns, that for 2021 is not being paid still by the government. And in addition to that, we should reach an agreement in connection with the debt or the amount owed to CAMESA because of the past. So we have these three different agreements we are discussing with the government, but we have no clue on timing or even the amount that this agreement could involve.

That's great. I would just like to go back to my first questions regarding the goodies. If we go to page seven of your presentation where you have the energy sales breakdown for the first quarter of 2021. On that pie chart in the bottom left, you have 17% marked in purple as industrial clients. Are those the goodies or the goodies make up for more or less than that? No, they are the goodies. Yeah, those are the goodies. Okay, perfect. That's great. That's all from my side. Thank you very much. You're welcome.

This concludes our question and answer session. At this time, I would like to turn the floor back to Mr. Montero for any closing remarks.

Sorry. We have certain, some questions from the web we would like to answer. We are going to read one question we received, or two questions, but they are on the same topic. So we are going to read the questions for everyone.

Hi, good morning, and thank you for taking questions. Could you provide us an update on the changing control of the company? Is there a realistic timeline for when the regulator could approve the construction?

Okay, well, regarding the... the soul of the controlling stake of the company as you mentioned is under the approval of the regulator they have 90 days since the last information is provided to the regulator and they can ask any information they want during the period they want but all the information asked by the regulation till now has have been answered on time. So according to that information, maybe they have more than 60 days from now to approve the sale of the controlling interest in Adenor. But we have no idea or no timeline at least from the regulator in order to know when the the sale could be approved. It could be this week or it could be in two months or three months. We have no more questions, at least from the web page.

We have no more questions from the phone side as well. This concludes our question and answer session. At this time, I would like to turn the floor back to Mr. Montero for any closing remarks.

Thank you very much, and thank you, all of you, for joining this conference call. Please keep safe, you and your family, and healthy as far as you can. Have a good day. Bye-bye.

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