Edenor Q2 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, and thank you for joining. At this time, we would like to welcome everyone to Edenor's 2Q 2022 Earnings Conference Call. We would like to inform you that this event is being recorded. After the company's remarks are completed, there will be a question-and-answer section through the webcast chat. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Edenor'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 Edenor and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. German Ranftl, CFO of Edenor. Thank you.

Good morning, everyone, and thank you for joining. Welcome to Edenor earnings webcast for the second quarter 2022. As you know, you can always call any member of our team for more details on the results of the period or any questions you may have. First, we will focus on the highlights. Edenor continues to guarantee the electricity distribution services to all its 3.2 million customers, which represents a population of approximately 11 million people. Our mission is to provide a socially responsible electricity distribution service leading the energy transition that contributes to improve people's quality of life, business and community developments as well as to our employees, bondholders and shareholders. We are committed to our community, which is why we have adopted the best environmental, social and governance practices. Edenor was able to maintain its quality services for all its clients. The key indicators, SAIDI and SAIFI, which represent the duration and frequency of energy cuts for the last 3 months, have shown an improvement of 16% and 8% compared to the same period of the last year. Revenues from sales were 6% lower than the second quarter of 2022 in real terms, mainly due to inflation differences and the tariff that has been frozen. Edenor was able to refinance its financial debt and the new issue of $52 million has been rated as a social bond according to Fitch Argentina. As of June 1, 2022, the company applied updated seasonal prices of energy and instructed Edenor to carry out the corresponding adjustment of the tariff table. The rates had an average increase, resulting in a stable tariff rate of 14% in the residential category and 15% in the general category. There has not been any adjustment for the value-added distribution service. As of June 2022, a subsidy segmentation regime for residential users of electricity and gas public services was implemented with the aim of achieving reasonable energy values that can be applied with criteria of justice and distributive equity. The segmentation system is made up of the following levels: Level 1, higher income; Level 2, lower income; and Level 3, average income. Users in Levels 2 and 3 will not have new increases in bills for the year 2022, while those included in Level 1 segmented will pay the full cost gradually and in monthly thirds. So by the end of the current year, they will be paying the full cost of their energy bills. Ratings. In May 2022, credit rating agencies, Standard & Poor's and Moody's, updated Edenor's ratings. Standard & Poor's Global confirmed the institutional rating of the company as well as the rating of the global program of the corporate bond for up to $750 million and a Class 9 senior notes rated CCC+, changing the credit watch from special review with positive implications to special review with development implications. Moody's local Argentine lowered the classification of Class 9 senior notes to BB+, maintaining the downward review. First quarter results. The gross margin accumulated as of June 30, 2022, was ARS 24,212 million, representing a fall of 16% compared to the same period of the previous year, mainly due to the tariff freeze. The newly established tariff scheme, effective as of March 1, set a VAT increase of 8%. EBITDA decreased to a loss of ARS 5,503 million, primarily due to the increase in operating costs, unrecognized losses, and seasonal prices that did not proportionally reflect the VAT increases. The value of energy sales increased by 8.3%, reaching 5,919 gigawatts in the second quarter of 2022 compared to 500,463 gigawatts for the same period of 2021. Furthermore, Edenor customer base rose by 2.1% compared to the same period of the previous year, reaching more than 3.2 million customers, mainly due to the increase in residential customers and small commercial accounts as a result of market discipline actions and the installation of more than 6,416 integrated energy meters primarily aimed at the regularization of clandestine connections over the last year. Financial results showed a loss of ARS 25,637 million during the first 6 months, an increase of 64%. This difference is mainly due to the higher interest accrued and debt incurred with CAMMESA. As of June 30, the overdue principal balance accumulated is ARS 38,937 million plus interest and penalties. Net results recorded a loss of ARS 6,549 million, a 63% increase compared to losses recorded in the second quarter of 2021. There was a higher loss in operating income and a higher financial charge due to the deferral of the payment of obligations to the wholesale electricity market, offset by a higher positive result for exposures to changes in purchasing power. Capital expenditures. During the first 6 months of 2022, Edenor's capital expenditures totaled ARS 8,655 million compared to ARS 10,131 million in the same period in 2021, reflecting a decrease of 15% in real terms, but still maintaining quality services for all its clients. Investments for the periods were as follows: ARS 674 million in new connections, ARS 1,638 million in grid enhancement, ARS 1,329 million in maintenance, ARS 52 million in legal requirements, ARS 217 million in communication and telecontrol, and ARS 582 million in other investment projects. Services quality standards are measured based on the duration and frequency of service outages using SAIDI and SAIFI indicators. SAIDI refers to the duration of outages and measures the number of outage hours a user experiences per year. SAIFI refers to the frequency of outages and measures the number of times a user experiences an outage during a year. At the closing of the second quarter of 2022, SAIDI and SAIFI indicators for the last 3 months were 10 hours and 4 outages on average per client per year, evidencing a 16% and an 8% improvement, respectively, compared to the same periods of the previous year. This recovery in service levels is mainly due to the investment plan established by the company since 2014. The various improvements implemented in the operating processes and the adoption of technologies applicable to grid operations and management have resulted in the lowest SAIDI and SAIFI indicators in the company's history. Energy losses in the second quarter of 2022 experienced a 17.6% decrease compared to 18.3% for the same period of the previous year. The work of multidisciplinary teams to develop new solutions to energy losses continued, along with market discipline actions aimed at reducing those losses. Analytical and artificial intelligence tools were used to enhance effectiveness in routing inspections, and DIME actions continue with the objective of detecting and normalizing irregular connections, fraud, and energy tapping. In addition, during the 3-month period from April to June 2022, 82,058 inspections of tariff 1 residential and general users were conducted with a 60.6% efficiency. In the same period of the previous year, 148,178 inspections were conducted with a 52.2% efficiency. Moreover, 6,416 integrated energy meters were installed during the first 6 months of 2022. Regarding energy recovery, besides the normalization of customers with mini meters, clandestine customers with conventional meters were also brought back to normal. Furthermore, a new energy balance system was implemented, along with the development of micro balances in private neighborhoods. In other cases, a rate of recidivism and fraud has been observed. Finally, this concludes my review on Edenor. I would like to thank you for the support shown by our investors and bondholders as well as your interest in participating today. We are now open for questions through our chat. Thank you very much.