Earnings Call Transcript - EDN Q1 2020

Operator, Operator

Good morning and welcome to the Edenor First Quarter 2020 Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Leandro Montero, CFO of Edenor. Please go ahead.

Leandro Montero, CFO

Thank you very much. Good morning, everyone and welcome to Edenor's earnings conference call for the first quarter of 2020. As we usually do, first we will focus on the main events that recently took place, and then briefly review the result of the quarter. As you know, you can always call in a member of our team for more details on the result of the period or any doubts you may have. So given the unique circumstances the world is facing due to the Coronavirus outbreak, I'd like to first acknowledge the extraordinary effort our staff is making to continue giving service to users while maintaining high-quality and security standards. With that said, we will focus through recent events that measures taken by the company, the government and regulatory agencies regarding the COVID-19 pandemic, to later focus on other events. On March 12, the National Executive Branch declared a health emergency due to the risk posed by the COVID-19 outbreak, then implemented a series of measures to decrease the movement of the population, providing for social, preventive, and mandatory isolation consisting of different stages. As of March 20, only movement by persons was allowed as stated with the provision of essential products and services, including Edenor and other companies making up the energy production cycle. Within this public emergency framework, Edenor has focused all its efforts on the actions necessary to protect and care for the health of its employees, suppliers, and customers, while ensuring the continuity of the public service of energy distribution, which is relevant and key to coping with the mandatory social isolation. In this context, the company set up a COVID-19 Crisis Committee, which included specialist counselors on the matter for the creation of a Contingency or Business Continuity Plan attending to the recommendations issued by specialists and official regulations. The implemented measures include the definition of hygiene, safety, and health protocols for each type of activity considered essential, which require keeping on-site operational staff to continue providing maintenance to our grid and deliver energy without interruptions. The adoption of home office modality for more than 1650 collaborators and the reinforcement of digital and telephone channels for the attention of our clients to ensure and promote social distancing norms. The simultaneous operation of the Network Control Center and the company's backup control center began in order to minimize contact among control operators in a key area that is sensitive to our operation. Likewise, we maintain fluid and permanent communication with authorities and all the staff about recommendations and the prevention measures we continue adopting. We also permanently evaluate the situation of contractors and suppliers to guarantee material supply and contractor operational sustainability. Many of these changes have been enabled by digitalization works and technology investments implemented over the last few years and enhanced lately. As regards to the commercial area, commercial offices were closed and their staff's tasks were reassigned; reading activities were temporarily and partially suspended, and estimate parameters were defined in accordance with the current regulations. Efforts were focused on remote customer service, functionality and the promotion of digital channels, the Edenor digital app and website, which allow for comprehensive customer management. In turn, new services were implemented in record time, such as the SOS recharge for the pay-as-you-go meters, or MIDE as we call them, debit card payments at Edenor digital and online appointments. As for collection management, we constantly monitor collection and the impact that the closing of collection points has had on the delinquency levels. Collections have slightly improved due to the recent opening of external collections entities. However, high levels of delinquency are still maintained in the collection of our invoices, and we cannot estimate the impact of the economic crisis on our clients' ability to afford the future electricity payments. On March 21, 2020, and pursuant to Resolution No. 3, the regulator resolved to fully suspend on-site customer service activities and provide for the closing of Edenor's commercial offices during the mandatory isolation, with the implementation of a customer service and client electronic system. In this situation, new forms of collection have been enabled especially for small and medium clients and industry clients through non-contact channels. Additionally, a comprehensive collection contact and management plan has been developed with our clients to offer them different payment alternatives. On March 25, the National Executive Branch issued Executive Order No. 311, which forbids utility companies to suspend their services to vulnerable users due to the lack of payment of three consecutive or alternate bills, effective from March 1, 2020, for a term of 180 days. Customers with a prepaid system will continue to receive the service during this term, even if the applicable recharges are not made. In compliance with the decision of the regulator, we have made SOS charges available to our MIDE client through our Edenor digital platform and call center, which represent approximately 4% of the total charges made by MIDE clients, maintaining the remaining 96% of payment of charges by the usual means. In this regard, later on April 18, pursuant to Resolution No. 173, the Ministry of Productive Development provided that utility services may be payable in up to 30 monthly installments, with the first one maturing on September 30, 2020. This resolution is limited to a specific group of customers detailed need. Furthermore, the financing may apply to the purchase of energy to the electricity market associated with these consumptions. However, to date, the users reached by these measures have not been identified and informed by the regulator. Between April 13 and May 5, the ENRE or the regulator through a series of resolutions regulated the estimation of consumptions when the first meter reading is not available. These resolutions authorized Edenor to apply the methodology for validation of consumption readings estimated by ENRE Resolution 209 issued in 2018, with the following exceptions in order to reflect the substantial reduction in consumption of minimum operating values under the mandatory isolation. For residential category customers, the lowest consumption recorded over the last three years prior to the issuance of the bill for the same activated bill should apply. And for the general or T1 general tariff customers, reading estimates according to the MVLEC will be affected by a 20% activity allocation factor. Furthermore, as of May 6, this month, middle and large customers' readings have been considered an essential activity by the ENRE and therefore, it recently started being normalized with new precautions. Additional users with meters allowing for remote meter reading will not be covered. Finally, customers may challenge the reading estimate provided they declare the differences with their actual consumption and request a new billing for the challenged period. We hope to be able to read all of the total amount of our customers in the near future. Regarding other matters, on April 30, 2020, the Energy Secretariat of the Ministry of Productive Development issued Resolution no. 70/2020, which maintained the power capacity reference prices and stabilized prices for energy previously set by Resolution No. 14 for the quarterly period between May and October 2020. This means the cost of energy included in our tariff will remain the same or fixed for the following six months. Finally, on April 8, in line with a change in Argentina's credit risk perspectives, Moody's Investors Service resolved to modify the company's Corporate Bonds local ratings, from Baa3 to Caa1, and global ratings from Caa1 to Caa3, as well as to modify the ratings of the company shares from category 2 to 3, maintaining a negative outlook reflecting the company's link to the credit quality of the Government of Argentina and also their uncertainties on the future consistency of the regulatory framework and the sufficiency of rate going forward. Now, moving on to our results in the first quarter of 2020, revenue from sales decreased by 13.1% reaching Ps. 20.5 billion in the first quarter this year, against Ps. 23.6 billion in the same period last year. This Ps. 3.1 billion decrease is mainly due to the rate freezing of both the VAD and the seasonal price passed through the tariff, which implied a drop in income in real terms. The failure to apply the inflation adjustment mechanism over the cost of distribution in August 2019 and February 2020 resulted in a negative impact in revenues for Ps. 1.7 billion. Lower revenues are also due to lower billings on account of the real-term decrease in the cost passed on to tariffs of energy purchases measured in pesos for Ps. 2.2 billion. These decreases were partially offset by a higher physical volume of electricity sales for Ps. 743 million and higher revenues from the continued collection of the tariff difference installments for the August 2018 - February 2019 period for Ps. 431 million. Finally, within the comparison period, a single distribution fee adjustment was applied in March 2018, for a total of 32%, corresponding to the second semester of 2018, a deferral of half of the assessment for the first semester of 2018, plus the recognition on account of the deferral of such adjustment. It is worth highlighting that Resolution 14 provided for a 5% increase in the seasonal price for non-residential demands and a 7% increase for large users for August 2018. As no new tariff schemes were issued, this increase was not passed on to tariffs, but it was included in the payments made by Edenor to CAMMESA for a total of Ps. 317 million in the first quarter of 2020. In turn, the failure to grant the tariff updates in an inflationary context observed in 2019 and 2020 has a very negative impact on the distribution value added, combined with the fact that the composition of the CPD formula which replicates in our cost structure has a greater weight on the salary index and was below the evolution of the customers' price index and the wholesale price index. Taking into consideration our operational results, the volume of energy sales increased by 3.7% this quarter, totaling 5.2 terawatt-hour against 5 terawatt-hours for the same period last year. This increase was mainly explained by a 5.4% increase in consumptions for residential customers, a 3.2% increase for medium and small commercial customers and a similar 3.2% increase for industrial customers. The residential demand increased by 113 GWh mainly as a result of a higher average temperature in March this year, which was 3 Celsius degrees higher compared to the previous year. The improvement in small and medium commercial customer amounted to 27 GWh mainly on account of this comparison against a quarter with low commercial activity in the previous year, whereas the increase in large users amounted to 28 GWh as a result of improvement in industrial activity in the last months of 2019, which is reflected in the recovery in the industrial production index for this period then interrupted by the COVID-19 outbreak. Additionally, the improvement in sales volumes may be partly explained by the tariff lag. It is important to point out that due to the declaration of the COVID-19 pandemic and social mandatory isolation measures taken since March 20, a reduction in the total energy demand was experienced during the last days of the quarter. This reduction is verified in commercial and industrial customer and it's partially offset by a slight increase in residential demands. Furthermore, Edenor's customer base rose by 1.8%, mainly due to the increase in residential customers as a result of implemented market discipline action and installation during the last year of almost 57,000 integrated energy meters that were mostly destined to regularize clandestine connections. The electricity power purchases decreased by 17.4% to Ps. 12.8 billion in the quarter against Ps. 15.5 billion for the same period last year, this Ps. 2.7 billion decrease is mainly due to the 22% decrease in the average purchase price in real terms. We generated a Ps. 3 billion decrease in purchases as a result of the entry into effect of the new references in our prices for electricity applicable as from May and August 2019 pursuant to Resolution 14, as I mentioned before, but that did not reflect the inflation of the period. This decrease was partially offset by a 4.6% increase in energy volumes net of losses due to the increase in demand, which was valued at approximately Ps. 514 million. In turn, the electricity references seasonal price for residential customers is still subsidized by the Federal Government, especially in the case of residential customers, while in the first quarter of 2020, the subsidy reached 51% of the system's average generation costs. Additionally, the energy loss rate increased from 17.4 in the first quarter of last year to 18.4 in the first quarter of this year, which was mainly generated by increasing the incentive to fraud as a result of economic recession. In turn, costs associated with these losses decreased by 14.1% in real terms, resulting in lower purchases for Ps. 174 million despite the increase in GWh. It is worth mentioning that over the past few years, Edenor has suffered a systematic deterioration of its assets on financial position as a result of the tariff lag, the increase in operating costs, the drop in demand, and an increase in energy theft. Furthermore, the outbreak of the world pandemic has brought several consequences in the economy which directly affected Edenor's activities, generating reduced collections and a drop in demand. For this reason, we have seen the need to partially defer payments to CAMMESA for the energy acquired in the Wholesale Electricity Market, as from maturities taking place in March 2020. Meanwhile, operating expenses decreased by 20.3% reaching Ps. 6.2 billion this year against Ps. 7.7 billion in the first quarter of 2019. This is mainly accounted for by Ps. 1.6 billion decreasing penalties as a result of the improvements in service quality levels. And secondly, the update of penalties recorded in the first quarter of 2019 in the amount of Ps. 485 million, which were later included in the liabilities regularization agreement. Regarding our financial results, we experienced a 47.5% decrease in losses, which reached Ps. 1.6 million in the first quarter against Ps. 3 billion for the same period last year. These differences are mainly explained by Ps. 1.2 billion reduction in the accrual of commercial interest on the debt with CAMMESA as a result of regularization of liabilities and lower foreign exchange losses for Ps. 526 million as a result of a lower devaluation of the Peso against the U.S. dollar in the first quarter compared to the same period in 2019. These results were partially offset by a negative variation in the reasonable value of financial assets in the amount of Ps. 280.5 million. Finally, the net result increased by Ps. 526 million reaching Ps. 720 million in the quarter against Ps. 194 million in the same period 2019. This difference is due to better operating and financial results in the amount of Ps. 1.5 billion each, added to lower income tax accruals for Ps. 739 million. These effects were partially offset by a lower result for exposure to changes in purchasing power in the first quarter of 2020 for Ps. 3.2 billion. Talking about Edenor's adjusted EBITDA, it showed Ps. 2.9 billion profits in the first quarter, which is Ps. 1.1 billion higher than the same period of 2019, with adjustments corresponding to the update of penalties for the transition period and commercial interest. Regarding Edenor's capital expenditures, during this quarter our investment totaled Ps. 1.4 billion compared to Ps. 3 billion in the same quarter of the previous year, from which 57% corresponds to network infrastructure and expansion and 43% to network maintenance. Investments were reduced by 55% compared to the same period in the previous year, mainly because of the slowdown in the plans set by Edenor as a result of lower revenues due to the fall in service volumes and the deferral of tariff updates. The plan maintains focus on investment improving service quality, which can be seen in the fulfillment of the quality curves required by the regulatory agency in the last tariff review. Regarding quality standards, these are measures based on the duration and frequency of service outages using the SAIDI and SAFI indicators. At the closing of the first quarter of 2020, SAIDI and SAFI indicators were 14.3 hours and 5.6 outages per year for the last 12 months, evidencing 34.4% and 17.2% improvement respectively, compared to the same period of the previous year. In turn, these indicators are 40.5% and 28.6% lower than those required in the comprehensive tariff review. This recovery in service levels is mainly due to the ambitious plan devised by the company during the last five years, and the plan's success is also evidenced by the fact that these indicators exceed the service quality improvement part defined by the regulatory entity. Taking into account energy losses, they reached 18.4% in the first quarter of this year against 17.4% for the same period in 2019, encouraged by a greater incentive to fraud as a result of the economic recession. Furthermore, costs associated with these losses decreased by 14.1% of real terms, resulting in a business improvement of 174 million despite the increase in GWh. It is important to know that as of March 20 this year, after the application of the mandatory installation, there are no real measurements of consumption due to the initial suspension of meter reading activity, and therefore the values are partially estimated. Over the last year, multidisciplinary teams were created to work on new solutions to energy losses. Furthermore, activities aimed at reducing losses continued, and analytical artificial intelligence tools were used in effectiveness cases in the routing of inspections. Market Disciplined Actions continue with the objective of detecting and normalizing irregular connections, fraud, and energy theft, and installation of Inclusion Meters for more users was intensified. Over the last year, approximately 536,000 inspections of Tariff 1 meters were conducted with 53% efficiency; more than 57,000 MIDE meters were installed. Regarding the recovery of energy, besides the customers put back to normal with MIDE meters, clandestine customers with conventional meters were also put back to normal. In those cases, striking for the residents' rights was observed. Despite these measures, and as I mentioned before, losses continued to grow as a result of a greater number of clandestine connections due to the impact of the economic recession. Finally, as far as financial debt is concerned, the outstanding principle of our dollar-denominated financial debt amounts to $162.1 million, whereas the net debt amounts to $98.9 billion. The financial debt consists of $137.1 million corresponding to corporate bonds maturing in 2022, net of repurchases, and $25 million to the bank loan taken out with Industrial and Commercial Bank of China, Dubai Branch. Currently, both liabilities bear interest at a fixed rate. After the financial statement closing date on April 15, the third principal installment of the loan with the ICBC in the amount of $12.5 million was repaid upon maturity, together with the applicable interest for the period. On May 6, repurchases of corporate bonds were made for a total face value of $690,000 at an average price of $59.3. So, this concludes my review of Edenor. Now we are open for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Gary Lundgren with Inter Pacific Investors. Please go ahead.

Gary Lundgren, Analyst

Yes, I would like to know if Edenor intends to repurchase its nine and three quarters of 2022 bonds in the open market at these lower levels in the future. It seems to me that repurchasing this debt at such deep discounts would be one of the best uses of the company's liquidity. Are there any plans to do this using the company's liquidity, lines of credit, or possibly credit from other sources? That's all.

Leandro Montero, CFO

Hi, Gary. Thank you for your question. Well, we don't have any plan, as I mentioned before, we are in a delicate situation because of the lack of tariff increase. And now the COVID-19 outbreak implies a new challenge because of the reduction in connection or increasing in delinquency. And so we are being very careful with our cash flows. Of course, if we have the option in the future to obtain additional credit, it could be a possible option but it's not in our plans at the moment. But, we are open to making a small transaction if there's any opportunity, but we don't have a current plan to repurchase our debt.

Operator, Operator

At this time, there are no further questions. I would like to turn the call back over to Leandro Montero for any closing remarks.

Leandro Montero, CFO

Okay. Thank you very much. I personally hope that you and your families are doing well and can get around this difficult and challenging situation. Have a good day.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.