Edenor Q3 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 Third Quarter 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 or good afternoon, everyone, and thank you for joining. Welcome to Edenor earnings webcast for the third 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 doubts you may have. First, we will focus on the highlights. Edenor continues to guarantee the electric 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 improving people's quality of life, business and community development, as well as benefitting our employees, bondholders, and shareholders. We are committed to our community, which is why we have adopted the best environmental, social, and governance practices. Revenues from sales were 11% lower than in the third quarter of 2021 in real terms, mainly due to the lack of adjustment of the VAD. The part of the bill that represents the income of the distributors has only seen 2 small tariff increases since 2019: 21% in March 2021 and 8% in May 2022, against an inflation rate of 222% over the same period. The decrease in revenues was partially offset by an increase in the volume of energy sold. Despite the lack of VAD adjustment, Edenor was able to maintain its quality of services for all its clients. The key indicators, SAIDI and SAIFI, represent the duration and frequency of energy cuts for the last 3 months, showing an improvement of 19% and 13% compared to the same period of last year. Both indicators show the best historical record. On October 25, 2022, Edenor completed its cancellation and voluntary exchange of Class 9 negotiable obligations of 9.75% for a total of $98.057 million. The operation includes a debt exchange that was supported by 77.35% of the bondholders, representing $75,855,000. In 2 steps, senior notes Class 1 under New York law were issued for the exchange for a total of $55,244,538, maturing in May 2025. They were listed on CVS as a social green and sustainable panel in BYMA as a social bond. In addition, a senior note Class 2 was issued for $30 million under Argentine law, completed on September 22, 2022, maturing in November 2024. Regarding the regulatory framework, stabilized prices of energy in the wholesale electricity market resolution 627-2022, issued by the Secretary of Energy on August 25, 2022, approved modifications in the stabilized price of energy for the period between September 1 and October 31, 2022, leading to a 20% reduction in subsidies for the Public Health and Educational Bodies. For non-residential Level 1 users with consumption greater than 300 kilowatts, there will be a variation of 41%, while non-residential users will see a variation of 45% and Level 1 residential users will see a variation of 70%. As for ratings, due to the successful exchange process of the debt, credit rating agencies Moody's and Standard & Poor's improved Edenor's ratings. Moody's Investors Services affirmed Edenor's Caa3 corporate family rating and senior unsecured rating and changed the outlook from negative to stable. Standard & Poor's raised Edenor's international rating to CCC+ from CCC-, maintaining a negative outlook. They also raised the local rating of existing notes from CCC+ with special review to BB- with a negative outlook. The gross margin corresponding to the third quarter 2022 was ARS 14,730 million, which represents a fall of 34% compared to the same period of the previous year, mainly due to the lack of VAD adjustments. EBITDA decreased to a loss of ARS 2,703 million mainly due to an 11% decrease in revenues, a 3% increase in operating costs, and a decrease in unrecognized losses of 17.7%. The volume of energy sales increased by 3.2%, reaching 5,979 gigawatts in the third quarter of 2022 compared to 5,795 gigawatts for the same period in 2021. Furthermore, Edenor's customer count rose by 1.5% compared to the previous year, reaching over 3.2 million customers, primarily due to an increase in small commercial and industrial accounts driven by economic recovery. Financial results showed a loss of ARS 20,615 million in the third quarter of 2022, an increase of 130%. This difference is mainly due to higher interest accrued on the debt incurred with CAMMESA. Net results recorded losses of ARS 6,082 million, which is 450% higher compared to the third quarter of 2021, primarily due to the deterioration of operating results and greater financial charges caused by the deferral of payment obligations with CAMMESA, necessary to continue operating, offset by higher positive results from exposures to exchange in the purchase power. Capital expenditures during the first 9 months of 2022 totaled ARS 16,802 million compared to ARS 18,935 million in the same period in 2021, representing an 11% decrease in real terms but still maintaining service quality for clients. At the closing of the first quarter of 2022, SAIDI and SAIFI indicators for the last 3 months were 9 hours and 3.7 outages on average per year per client, showing a 19% and 13% improvement, respectively, compared to the previous year, with both indicators reflecting the best historical record. This recovery in services is primarily due to the investment plan initiated by the company since 2013, along with different improvements implemented in operating processes and the adoption of technology applied to the core operations and management. In the third quarter of 2022, energy losses decreased by 17.7%, compared to 18.8% for the same period of the previous year, attributed to successful measures taken by the company against clandestine customers, alongside the lack of tariff adjustments which discourage theft. This concludes the review on Edenor, and I would like to thank our investors, bondholders, and shareholders for their support and interest in participating today in this call. We are now open to questions through the chat.

We have one question from Christian. Good morning, I'm from Balanz. Thank you for the earnings material and congratulations on maintaining service quality indicators at good levels despite the lack of adequate tariff support. I have 3 questions. According to the 2023 budget law being discussed in the senate, an integral — the entity should perform the internal tariff review from power distributors no later than 90 days following the budget approval. Two sub-questions here. First, does this mean that the internal tariff review should be launched or that the new distribution tariff should be already calculated and implemented? Second, how do you expect the study revision to work — should it be a wrap-based methodology similar to the 2017 ones with a new asset base, a new regulatory WACC, new volume trend, and so forth? Or would it be something simpler and more ad-hoc? My second question.

Wait. Let's answer that.

Okay. Sorry, it’s too large.

For the first question, we don't have an answer yet. We have to wait until the senator approves the budget for 2023. After that, we will start discussing how we will implement this short process of rate in 90 days. We don't have all the indications and the methodology and mechanisms to discuss with the regulatory entity. That's for the first.

Okay. The second one. My second question is related to the agreement with CAMMESA regarding the regularization of the USD 1 million commercial debt. Could you give us a bit more specifics on the calendar of potential payments and the possibilities of seeing dedicated tariff hikes to take care of this debt? This is the second question.

For the second question, what we can say is that this article of the law also specifies that there will be a 6-month grace period and 96 months for repayment installments to regularize the debt with CAMMESA. So we have to wait until that it's approved to have further discussions with CAMMESA.

And the last one is when do you think that the tariff segmentation and the elimination of the sunset of the energy component for the more wealthy consumers could be effectively implemented in household bills, December, January?

This is already implemented. The whole segmentation doesn't affect the value-added distribution of Edenor. It is merely a pass-through mechanism for reducing government subsidies, but it does not affect the value-added distribution of Edenor. Thank you for joining this conference. Have a nice day. Thank you, everybody.

Bye. Thank you.