Edenor(EDN) - 2021 Q4 - Annual Report

PART I Key Information The company faces significant risks from Argentina's hyperinflationary economy and its own operational challenges ARS to USD Exchange Rate Fluctuation | Period | Low (ARS/USD) | High (ARS/USD) | Average (ARS/USD) | Period End (ARS/USD) | | :--- | :--- | :--- | :--- | :--- | | 2018 | 18.41 | 41.25 | 29.26 | 37.70 | | 2019 | 36.90 | 60.40 | 47.82 | 59.89 | | 2020 | 59.82 | 84.15 | 70.87 | 84.15 | | 2021 | 84.15 | 105.20 | 95.13 | 102.72 | - The Argentine Peso depreciated by 22.1% against the U.S. dollar during the year ended December 31, 2021, following depreciations of 40.5% in 2020, 58.9% in 2019, and 102.2% in 2018[19] Risk Factors - The company's Board and management have concluded that there is substantial doubt about the Company's ability to continue as a going concern, a view also expressed by the independent registered public accounting firm[50] - Key risks include the vulnerability of the Argentine economy, government intervention in the electricity sector, high inflation, currency fluctuations, and the company's ability to renegotiate its commercial debt with its main supplier, CAMMESA[25][28][17] - As of July 1, 2018, the Argentine Peso is considered the currency of a hyperinflationary economy, requiring the company to restate its historical financial statements in accordance with IFRS (IAS 29), which could adversely affect its financial results[60][61] Information on the Company This section details the company's history, business operations, and the Argentine electricity industry's regulatory framework History and Development of the Company - On June 30, 2021, a change of control occurred when Pampa Energía transferred its 51% controlling stake (Class A shares) to Empresa de Energía del Cono Sur S.A. ("Edelcos"), following approval from the regulatory body ENRE[295] - The company was incorporated on July 21, 1992, as part of the privatization of the state-owned utility, Servicios Eléctricos del Gran Buenos Aires S.A. (SEGBA)[290] Business Overview - Edenor is the largest electricity distribution company in Argentina, serving approximately 3.2 million users in the northwestern greater Buenos Aires area and northern Buenos Aires city, covering an area of 4,637 square kilometers[301] - The company's concession expires on August 31, 2087, and is divided into management periods, at the end of which the controlling Class A shares are subject to an international public bidding process[304] Edenor's Share of National Electricity Demand | Year | Edenor Demand (GWh) | Total WEM Demand (GWh) | Edenor's Share | | :--- | :--- | :--- | :--- | | 2019 | 24,960 | 128,880 | 19.4% | | 2020 | 25,124 | 127,306 | 19.7% | | 2021 | 26,373 | 133,872 | 19.7% | Energy Loss Breakdown | Loss Type | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Technical losses | 9.4% | 9.1% | 9.6% | | Non-technical losses | 8.2% | 10.5% | 10.3% | | Total losses | 17.6% | 19.6% | 19.9% | The Argentine Electricity Industry - The Argentine electricity sector was largely privatized in 1992 under the Regulatory Framework Law (No. 24,065), which separated generation, transmission, and distribution into distinct businesses to foster competition[487][488] - The industry is regulated by key authorities including the Ministry of Economy (through the Energy Secretariat - SE), the National Electricity Regulatory Entity (ENRE), and CAMMESA, which manages the Wholesale Electricity Market (WEM)[496] - As of December 31, 2021, Argentina's installed power capacity was 42,849 MW, with generation sources being 58.9% thermal, 25.3% hydraulic, 4.1% nuclear, and 11.7% from non-conventional renewable sources[518] Operating and Financial Review and Prospects The company's financial performance is severely impacted by tariff freezes, high inflation, and the COVID-19 pandemic Operating Results - Revenue from sales decreased by 18% in 2021 compared to 2020, primarily due to insufficient tariff increases that did not keep pace with inflation, despite a 5% increase in energy demand[771] - The company recorded an operating loss of ARS 4,397 million in 2021, a significant improvement from the ARS 30,049 million loss in 2020, mainly because the 2020 results included a large impairment charge on property, plant, and equipment[793] - Net finance costs increased significantly to ARS 25,155 million in 2021 from ARS 16,765 million in 2020, driven by higher commercial interest on debt with CAMMESA resulting from tariff arrears[794] Key Financial Metrics | (in millions of constant ARS) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenue | 113,500 | 137,782 | 184,739 | | Gross margin | 14,588 | 20,400 | 34,415 | | Operating (loss) profit | (4,397) | (30,049) | 9,756 | | (Loss) Profit for the year | (21,344) | (26,704) | 24,923 | | (Loss) earnings per share (ARS) | (24.4) | (30.5) | 28.5 | Liquidity and Capital Resources - The company's financial situation is severely affected by the continued tariff freeze, high inflation, and the economic impact of COVID-19, leading to negative working capital and operating losses[800][801] - Due to the deterioration of its economic and financial equation, the company has had to partially postpone payments to its main energy supplier, CAMMESA, accumulating a past due principal balance of ARS 26,259 million plus interest as of December 31, 2021[807] Cash Flow Summary | (in millions of constant ARS) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | 21,348 | 26,149 | | Net cash used in investing activities | (25,544) | (18,241) | | Net cash used in financing activities | (1,438) | (9,284) | | Cash and cash equivalents at year-end | 3,172 | 6,582 | Capital Expenditures | (in millions of constant ARS) | 2021 | 2020 | | :--- | :--- | :--- | | HV Network structure | 2,740 | 5,980 | | MV Network structure | 1,388 | 1,850 | | LV Network structure | 2,664 | 3,083 | | Network improvements | 6,765 | 4,469 | | Buildings, software, etc. | 2,689 | 1,322 | | Total Capital Expenditures | 16,246 | 16,704 | Directors, Senior Management and Employees This section provides details on the company's leadership, workforce composition, and remuneration policies - Following the change of control in 2021, the Board of Directors was reappointed, with Neil Arthur Bleasdale becoming Chairman[849][850] - As of December 31, 2021, the company had 4,688 employees, with approximately 81% being members of one of two labor unions[915][916] - The company utilizes third-party contractors, which employed 5,877 people as of December 31, 2021, to maintain a flexible cost base and respond to changing work and investment plans[922] - The aggregate remuneration in 2021 was ARS 30.1 million for the Board of Directors, ARS 5.2 million for the supervisory committee, and ARS 1,518 million for senior management (nominal currency)[883] Major Shareholders and Related Party Transactions This section details the company's ownership structure and its transactions with related entities - A technical assistance agreement is in place with the new parent company, Edelcos, for which Edenor pays an annual fee; for the second half of 2021, charges for these services totaled ARS 911 million[959][960] - The company has a share buy-back program and a share-based compensation plan for employees; as of December 31, 2021, the company held 31,134,420 treasury shares[939][940] Shareholder Structure | Shareholder | Class | Shares | Percent Ownership | | :--- | :--- | :--- | :--- | | Empresa de Energía del Cono Sur (EDELCOS) | A | 462,292,111 | 51.00% | | ANSES | B | 242,999,553 | 26.81% | | Public | B | 168,076,412 | 18.54% | | Treasury Shares | B | 31,134,420 | 3.43% | | Employee Stock Participation Program | C | 1,952,604 | 0.22% | Financial Information This section covers significant legal proceedings and the company's dividend distribution policy - The company is a party to various legal proceedings, including class actions from consumer associations and disputes with tax authorities (AFIP); as of December 31, 2021, provisions for potential losses from these claims totaled ARS 4,518 million[970] - Edenor has not declared or paid any dividends since August 14, 2001; future dividend payments are restricted by the Argentine Corporations Law, which requires maintaining a legal reserve, and by covenants in its debt agreements[1010] The Offer and Listing This section provides information on the trading of the company's securities on domestic and international exchanges - The company's Class B common shares are listed on the BYMA and its ADSs (each representing 20 Class B shares) are listed on the NYSE, both under the symbol "EDN"[1018] Historical Stock and ADS Prices | Period | BYMA (ARS per Share) | NYSE (USD per ADS) | | :--- | :--- | :--- | | | High | Low | High | Low | | 2020 | 30.55 | 13.40 | 5.99 | 2.83 | | 2021 | 75.55 | 25.15 | 7.61 | 3.35 | Additional Information This section provides supplementary corporate details, including bylaws, exchange controls, and tax considerations - Argentina has significant exchange controls that restrict access to the Mercado Libre de Cambios (MLC) for payments of imports, servicing foreign financial debt, and paying dividends, requiring prior Central Bank approval in many cases[1098][82] - The company's capital stock consists of Class A (51%), Class B, and Class C shares; holders of Class A shares are entitled to elect seven of the twelve directors[1062][848] - For foreign beneficiaries, capital gains from the sale of shares are generally exempt from Argentine income tax, provided the shares are publicly traded and the beneficiary does not reside in a "non-cooperating jurisdiction"; dividends paid are subject to a 7% withholding tax[1128][1138] Quantitative and Qualitative Disclosures about Market Risk This section details the company's exposure to foreign currency and interest rate risks - The company is exposed to significant foreign currency risk as its revenues are in Argentine Pesos while a significant portion of its debt is in U.S. Dollars; a hypothetical 10% depreciation of the Peso would result in a potential loss of approximately ARS 646 million as of December 31, 2021[1266][1267] - To manage interest rate risk, the company's policy is to keep the highest percentage of its indebtedness at fixed rates; as of December 31, 2021, 100% of the company's loans were at fixed interest rates[1269] Description of Securities Other than Equity Securities This section outlines the fees and expenses associated with the company's American Depositary Shares (ADSs) ADS Holder Fees | Fee | For | | :--- | :--- | | U.S.$5.00 (or less) per 100 ADSs | Issuance or cancellation of ADSs | | U.S.$0.02 (or less) per ADS | Any cash distribution | | U.S.$0.02 (or less) per ADS per year | Depositary services | PART II Defaults, Dividend Arrearages and Delinquencies This section recounts the company's historical financial distress and subsequent debt restructuring - Following the 2001-2002 Argentine economic crisis, the company suspended principal payments on its financial debt in September 2002 and interest payments in September 2005[1278] - In April 2006, the company completed a voluntary exchange offer, restructuring all of its outstanding financial debt; all restructuring notes issued at that time have since been fully repaid[1279] Controls and Procedures This section addresses the effectiveness of the company's internal controls over financial reporting and disclosure - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[1283] - Based on the COSO framework, management concluded that the company maintained effective internal control over financial reporting as of December 31, 2021[1285] Other Information This section covers various governance topics, including the audit committee, ethics code, and auditor fees - The Board of Directors has determined that Esteban Gabriel Macek is an "audit committee financial expert"[1288] - The company has adopted a Code of Ethics, which was last updated in 2020 and applies to all employees[1289] - Significant corporate governance differences from NYSE standards exist, notably that Argentine law does not require a majority of independent directors on the board, nor does it mandate nominating or compensation committees[1298][1303] Principal Accountant Fees | (in millions of constant ARS) | 2021 | 2020 | | :--- | :--- | :--- | | Audit fees | 34.6 | 32.9 | | Audit-related fees | - | - | | Tax fees | - | - | | All other fees | - | - | | Total | 34.6 | 32.9 | PART III Financial Statements This section contains the company's audited financial statements and the independent auditor's report - The financial statements have been prepared assuming the company will continue as a going concern, but the independent auditor's report includes a "Material Uncertainty Related to Going Concern" paragraph, citing the company's current economic and financial situation[1330] - The financial statements are presented in constant Argentine Pesos, restated to reflect the effects of hyperinflation in accordance with IAS 29; the inflation rate applied for the 2021 fiscal year was 50.9%[1443][1444] - The auditor identified two Critical Audit Matters: the Impairment Assessment of Property, Plant and Equipment, and the Company's Going Concern Assessment, both of which involved significant management judgment and complex auditor evaluation[1335][1336][1340]