Edenor(US:EDN)2020-04-27 19:57Part I Key Information This section presents selected financial data, exchange rate volatility, and extensive risk factors for the four-year period ending December 31, 2019 Selected Financial Data The company's 2019 financial statements, restated for hyperinflation, show a significant profit increase to Ps. 12,134.3 million, driven by a one-time gain - The company's financial statements are restated for Argentina's hyperinflationary economy as of July 1, 2018, with all figures presented in constant currency as of December 31, 201914 Statement of Comprehensive Income (Loss) Highlights (in millions of Ps.) | Indicator | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenue | 89,943.8 | 86,039.9 | 60,897.3 | | Gross margin | 16,755.4 | 20,244.2 | 14,662.8 | | Operating profit (loss) | 3,598.2 | 6,060.5 | 3,645.2 | | Agreement on the Regularization of Obligations | 17,094.8 | - | - | | Profit for the year | 12,134.3 | 6,608.2 | 7,812.5 | | Comprehensive income for the year | 12,129.2 | 6,602.1 | 7,835.6 | Statement of Financial Position Highlights (in millions of Ps.) | Indicator | As of Dec 31, 2019 | As of Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | 119,472.6 | 118,388.3 | | Total Liabilities | 60,321.8 | 70,767.4 | | Total Equity | 59,150.8 | 47,620.9 | Operating Data | Indicator | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Energy sales (in GWh) | 19,447 | 21,172 | 21,584 | | Customers (in thousands) | 3,119 | 3,040 | 2,950 | | Energy losses (%) | 19.9% | 18.2% | 17.1% | Exchange Rates The Argentine Peso significantly depreciated against the U.S. dollar, falling by 58.9% in 2019 to Ps. 59.89 per U.S.$1.00 at year-end Argentine Peso to U.S. Dollar Exchange Rate | Period | Depreciation vs USD | Period End Rate (Ps. per U.S.$) | | :--- | :--- | :--- | | Year ended Dec 31, 2019 | 58.9% | 59.89 | | Year ended Dec 31, 2018 | 102.2% | 37.70 | | Year ended Dec 31, 2017 | 17.4% | 18.65 | | Year ended Dec 31, 2016 | 21.9% | 15.89 | Risk Factors The company faces substantial risks from Argentina's volatile macroeconomic and political environment, regulatory uncertainty, and business-specific operational challenges, alongside risks for ADS holders - The company's financial condition and results are significantly dependent on Argentina's macroeconomic, regulatory, and political conditions, including inflation and exchange rates26 - Argentina's economy remains vulnerable, with real GDP decreasing by 1.7% in 2019, high inflation at 53.8% CPI, and the Peso depreciating 58.9% against the U.S. dollar, leading to reinstated foreign exchange controls283035 - The Productive Reactivation Law, enacted in December 2019, declared a public emergency, froze electricity tariffs for 180 days, and empowered the Executive Branch to intervene in regulatory bodies33 - The COVID-19 pandemic and associated government measures, including prohibiting service discontinuations and banning dismissals, are expected to materially impact business operations, earnings, and payment chains5354 - The company's concession agreement can be revoked or terminated under conditions such as insolvency or if annual fines exceed 20% of gross energy sales, materially affecting the business7285 Information on the Company This section details the company's history, business operations, and the Argentine electricity industry, covering privatization, concession, network infrastructure, and regulatory framework Recent Developments in Argentina – Measures Designed to Address the COVID-19 Outbreak The Argentine government implemented extensive COVID-19 measures, including a nation-wide lockdown, economic stimulus, and key policies impacting the company such as utility service and dismissal prohibitions - The Argentine Government implemented a nation-wide mandatory lockdown and various travel and border restrictions to control COVID-19 spread110 - Economic stimulus measures included cash payments, subsidized loans for SMEs, and a capital spending program of approximately Ps. 100 billion112 - Key measures impacting the company include a 180-day prohibition on suspending utility services for non-payment and a 60-day ban on dismissing employees without cause113 History and Development of the Company Edenor was incorporated in 1992 as part of SEGBA's privatization, granted a 95-year concession, with Pampa Energía becoming the controlling company in 2018, and ANSES holding 26.81% of its capital stock - Edenor was incorporated on July 21, 1992, from SEGBA's privatization and granted a 95-year electricity distribution concession117 - Pampa Energía S.A. became Edenor's direct controlling company in August 2018 following a series of corporate mergers121 - The company completed its IPO in April 2007, listing ADSs on the NYSE, with ANSES holding 26.81% of the capital stock as of the report date119120 Business Overview Edenor is Argentina's largest electricity distributor, serving 3.1 million users in a 4,637 sq km concession area under a 95-year exclusive agreement, focusing on network upgrades and energy loss control - Edenor is Argentina's largest electricity distribution company, serving 3.1 million users as of December 31, 2019, and accounting for 19.4% of total national electricity demand124 - The company operates under a 95-year exclusive concession expiring in 2087, with controlling Class 'A' shares subject to public bidding at the end of each management period124 - In 2019, the company invested in significant network upgrades, including an expanded 800 MVA transformer bank at Rodriguez Substation and a new 300 MVA transformer at Edison Substation152 - Energy losses increased to 19.9% in 2019 from 18.2% in 2018, primarily due to energy theft, with the company implementing self-managed meters to combat these losses182184185 The Argentine Electricity Industry The Argentine electricity industry, restructured and privatized in 1992, is overseen by regulatory bodies like SE and ENRE, with the WEM managed by CAMMESA, and has faced significant government interventions since the 2001 economic crisis - The Argentine electricity sector was restructured and privatized in 1992 under Law No. 24,065, separating generation, transmission, and distribution businesses196 - The principal regulatory authorities are the Secretariat of Energy (SE), the National Electricity Regulatory Entity (ENRE), and CAMMESA, which administers the Wholesale Electricity Market (WEM)210211215 - The WEM consists of a term market and a spot market with hourly prices, and a stabilization fund managed by CAMMESA absorbs price differences between distributors and generators219234 Organizational Structure Edenor is a subsidiary of Pampa Energía, Argentina's largest independent integrated energy company, with significant operations across the energy value chain as of December 31, 2019 - Edenor is a subsidiary of Pampa Energía, Argentina's largest independent integrated energy company242 - As of year-end 2019, Pampa Energía's operations included approximately 4,751 MW of electricity generation capacity and an average oil and gas production of 48.2 thousand boe/day243 Property, Plant and Equipment The company's main assets are transmission lines and distribution networks, with a net book value of Ps. 101,298.4 million as of December 31, 2019, and a terminated real estate agreement resulting in a U.S.$15 million settlement Net Book Value of Property, Plant and Equipment (in millions of Ps.) | Date | Net Book Value | | :--- | :--- | | Dec 31, 2019 | 101,298.4 | | Dec 31, 2018 | 96,067.6 | | Dec 31, 2017 | 87,741.4 | - A 2015 real estate agreement with RDSA was terminated due to default, resulting in a U.S.$15 million settlement from the insurer and a Ps. 2,125.9 million claim in RDSA's insolvency proceeding250 Unresolved Staff Comments There are no unresolved staff comments - None252 Operating and Financial Review and Prospects This section provides management's discussion and analysis of the company's financial condition and operating results, highlighting going concern doubts, key performance drivers, liquidity, and critical accounting policies Going Concern and COVID-19 Management has raised substantial doubt about Edenor's going concern ability due to Argentina's complex economic context, tariff freezes, and the adverse impact of the COVID-19 pandemic - The Board of Directors has raised substantial doubt about Edenor's ability to continue as a going concern, citing negative working capital, rising costs, inflation, recession, and frozen tariffs253255 - The COVID-19 pandemic is expected to adversely affect cash flows and profits due to closed commercial offices, reduced non-residential demand, and potential non-compliance with investment plans256 Operating Results In 2019, revenue increased by 5% to Ps. 89,943.8 million, but operating profit fell 41% to Ps. 3,598.1 million, with a one-time gain leading to a net profit of Ps. 12,134.3 million Comparison of Results: 2019 vs 2018 (in millions of Ps.) | Indicator | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Revenue from sales | 89,943.8 | 86,039.9 | 5% | | Electric power purchases | 57,041.8 | 49,015.2 | 16% | | Gross profit | 16,755.4 | 20,244.2 | -17% | | Operating profit | 3,598.1 | 6,060.5 | -41% | | Profit for the year | 12,134.3 | 6,608.2 | 84% | - The significant 84% increase in profit for 2019 was primarily due to a one-time gain of Ps. 17,094.8 million from the Agreement on the Regularization of Obligations, settling claims with the Federal Government from 2006-2016328 - In 2018, revenue from sales increased by 41% compared to 2017 due to tariff updates, but a 53% increase in electric power purchase costs and higher selling expenses moderated profitability growth345346348 Liquidity and Capital Resources The company has experienced negative working capital for four years due to rising costs and inflation, with Ps. 10,158 million net cash from operations and Ps. 8,624.1 million in capital expenditures in 2019 - The company has experienced negative working capital for the past four years, a situation not reversed by the 2017 tariff review due to rising costs, inflation, and economic recession358 Cash Flow Summary (in millions of Ps.) | Cash Flow Activity | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 10,158.2 | 15,225.8 | 11,172.7 | | Net cash used in investing activities | (5,156.0) | (13,238.2) | (13,083.9) | | Net cash (used in)/from financing activities | (5,071.5) | (3,224.5) | 1,333.9 | | Cash and cash equivalents at year end | 409.6 | 42.5 | 188.1 | - Capital expenditures in 2019 amounted to Ps. 8,624.1 million, primarily allocated to improving HV, MV, and LV network structures and overall network enhancements364 - As of December 31, 2019, outstanding debt included U.S.$161.6 million under Senior Notes due 2022 and a loan from ICBC with an outstanding balance of Ps. 1,515.8 million366387 Critical Accounting Policies and Estimates Management's critical accounting policies involve significant judgment and estimates, particularly for impairment of long-lived assets, revenue recognition, doubtful accounts, income tax, employee benefits, and legal contingencies - Impairment of long-lived assets is assessed using three probability-weighted scenarios based on future tariff increases, costs, and macroeconomic variables, with no impairment recorded as of December 31, 2019370371 - Revenue is recognized on an accrual basis and includes estimated amounts for unbilled electricity delivered to users at year-end372 - Allowances for doubtful accounts are based on historical uncollectibility rates for each user category, applied to delinquent balances373 - Provisions for ENRE penalties and legal contingencies are based on management's best estimate of the expenditure required to settle obligations, with input from legal advisors377378 Directors, Senior Management and Employees This section details the company's governance, including the twelve-member Board of Directors, committee roles, aggregate compensation, and employee headcount of 4,777 as of December 31, 2019 - The Board of Directors is composed of twelve directors, with Class A shareholders electing seven and Class B and C shareholders jointly electing five391 - The Audit Committee is composed of three independent directors responsible for monitoring internal controls, risk management, and supervising external audits405406 Aggregate Compensation in 2019 (in millions of Ps.) | Group | Compensation | | :--- | :--- | | Board of Directors (members & alternates) | 252.1 | | Supervisory Committee (members & alternates) | 3.6 | | Senior Management | 441.4 | Employee Headcount | As of Dec 31 | Number of Employees | | :--- | :--- | | 2019 | 4,777 | | 2018 | 4,922 | | 2017 | 4,789 | Major Shareholders and Related Party Transactions This section details the company's ownership structure, with Pampa Energía holding 54.37% and ANSES 26.81%, and outlines key related-party transactions including a technical assistance agreement with Pampa Energía Share Ownership Structure | Shareholder | Class | Percent Ownership | | :--- | :--- | :--- | | Pampa Energía S.A. | A | 54.37% | | ANSES | B | 26.81% | | Public | B | 15.14% | | Treasury Shares | B | 3.46% | | Employee Stock Program | C | 0.22% | - The company has a share repurchase program, with treasury stock amounting to 31,380,871 Class B shares as of December 31, 2019428 - Key related party transactions include a technical assistance agreement with Pampa Energía for an annual fee of U.S.$2.5 million, and operational agreements with joint venture SACME434438 Financial Information This section covers legal proceedings, including class-action lawsuits and Ps. 2,276.4 million in provisions as of December 31, 2019, and details the company's dividend policy, with no dividends paid since 2001 - The company is party to several legal proceedings, including class-action lawsuits from consumer associations challenging tariff components like VAT and late payment interest rates448449 - As of December 31, 2019, the company had established provisions of Ps. 2,276.4 million to cover potential losses from claims and legal proceedings446 - Edenor has not declared or paid any dividends since August 14, 2001, with future payments restricted by legal reserve requirements and debt covenants462463 The Offer and Listing This section provides information on the trading of the company's securities, including Class B common shares on BASE and ADSs on NYSE under 'EDN', historical market prices, and the structure and regulation of the Argentine securities market - The company's ADSs, each representing 20 Class B common shares, are listed on the NYSE under 'EDN', while its Class B common shares are listed on the BASE under the same symbol465 Market Price Range in 2019 | Security | High Price | Low Price | | :--- | :--- | :--- | | ADSs on NYSE (U.S.$) | 29.60 | 4.25 | | Shares on BASE (Ps.) | 56.50 | 15.20 | - The Argentine securities market is primarily regulated by the National Securities Commission (CNV), with trading conducted on authorized markets like Bolsas y Mercados Argentinos (BYMA)473476 Additional Information This section details the company's corporate structure, material regulations, and tax considerations, including by-laws, Argentina's reinstated exchange controls, and principal Argentine and U.S. federal income tax consequences for shareholders - The company's capital stock consists of Class A (51% controlling), Class B, and Class C shares, each with one vote, with Class A shares pledged to the Argentine Government and requiring ENRE approval for transfer490 - Argentina reinstated foreign exchange controls in September 2019, obligating exporters to repatriate proceeds and restricting access to the foreign exchange market for purchasing foreign currency, paying dividends, and servicing foreign debt516520 - Access to the foreign exchange market for dividend payments to non-resident shareholders is restricted, with transfers capped at 30% of new capital contributions made since January 17, 2020537 - For foreign beneficiaries, capital gains from publicly traded shares are generally exempt from Argentine income tax if not in a 'non-cooperating jurisdiction', while dividends from 2018 onwards are subject to a withholding tax (7% for 2018-2019 profits, 13% thereafter)550552 Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to foreign currency and interest rate risks, with a 10% adverse exchange rate change potentially resulting in a Ps. 801.6 million loss, and 85% of its debt at fixed rates - The company faces significant foreign currency risk due to Peso revenues and U.S. Dollar debt; a hypothetical 10% adverse exchange rate change would result in an approximate Ps. 801.6 million loss as of December 31, 2019595 - The company is exposed to interest rate risk on its floating-rate debt, with 85% of loans at fixed rates as of December 31, 2019; a 1% increase in floating rates would decrease profit by Ps. 3.2 million595 Description of American Depositary Shares This section describes the terms of American Depositary Shares (ADSs), issued by The Bank of New York Mellon, detailing their representation of 20 Class B common shares, dividend procedures, voting rights, and associated fees - Each American Depositary Share (ADS) represents 20 Class B common shares and is issued by The Bank of New York Mellon as depositary573 - ADS holders may instruct the depositary on how to vote their underlying shares, with the depositary potentially voting in favor of board proposals if no instructions are received579 Fees Payable by ADS Holders | Fee | For | | :--- | :--- | | Up to $5.00 per 100 ADSs | Issuance or cancellation of ADSs | | Up to $0.02 per ADS | Any cash distribution | | Up to $0.02 per ADS per year | Depositary services | Part II Defaults, Dividend Arrearages and Delinquencies Following the 2001-2002 Argentine economic crisis, the company suspended debt payments in 2002 and 2005, resolving the default through a 2006 exchange offer, with all restructuring notes now fully repaid - The company suspended principal payments on its financial debt on September 15, 2002, and interest payments on September 26, 2005, due to the Argentine economic crisis602 - The default was cured on April 24, 2006, through a voluntary exchange offer where all outstanding debt was exchanged for new restructuring notes, which have since been fully repaid602 Material Modifications to the Rights of Security Holders and Use of Proceeds The company's April 30, 2007, IPO generated U.S.$57.7 million in net proceeds, used to repurchase outstanding debt and fund capital expenditures - The company received U.S.$57.7 million in net proceeds from its April 2007 initial public offering603 - The proceeds were used to repurchase outstanding debt and to fund capital expenditures603 Controls and Procedures As of December 31, 2019, management concluded that the company's disclosure controls and internal control over financial reporting were effective, a conclusion confirmed by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019604 - Management assessed the company's internal control over financial reporting as effective as of December 31, 2019, based on the COSO 2013 framework, an assessment audited and confirmed by the independent public accounting firm606 Corporate Governance and Other Disclosures This section covers corporate governance and disclosures, including the identification of an audit committee financial expert, the Code of Ethics, principal accountant fees of Ps. 17.7 million in 2019, share repurchase activities, and differences from NYSE governance standards - The Board of Directors has determined that Gustavo Capatti qualifies as an 'audit committee financial expert'607 - The company has adopted a Code of Ethics, last updated in 2019, which applies to all employees608 Principal Accountant Fees (in Pesos) | Service Category | 2019 | 2018 | | :--- | :--- | :--- | | Audit fees | 17,706,164 | 16,295,419 | | All other fees | - | - | | Total | 17,706,164 | 16,295,419 | - The company has a share repurchase program, with the Board authorizing a new plan in April 2019 to invest up to Ps. 800 million in its shares615 - Edenor's corporate governance practices differ from NYSE standards, as Argentine law does not require a majority of independent directors or separate nominating or compensation committees618622 Part III Financial Statements This section contains the company's audited financial statements for 2017-2019, prepared under IFRS, with the auditor's report highlighting 'Substantial Doubt About the Company's Ability to Continue as a Going Concern' - This section includes the audited financial statements as of December 31, 2019 and 2018, and for the three years in the period ended December 31, 2019630 - The independent auditor's report includes a paragraph expressing 'Substantial Doubt About the Company's Ability to Continue as a Going Concern' due to the company's current economic and financial situation639 Exhibits This section lists documents filed as exhibits to the annual report, including by-laws, ADS deposit agreement, debt indentures, and Sarbanes-Oxley certifications - Exhibits filed with the report include corporate by-laws, the ADS deposit agreement, debt indentures, and Sarbanes-Oxley certifications631632