Edenor(US:EDN)2021-04-26 20:42PART I Key Information This section details the company's primary risks, including Argentina's macroeconomic instability, sector-specific challenges, and risks related to its securities Argentine Peso to U.S. Dollar Exchange Rate (Year-End) | Year Ended Dec 31 | Period End (Pesos per U.S. Dollar) | Depreciation vs. USD | | :--- | :--- | :--- | | 2017 | 18.65 | 17.4% | | 2018 | 37.70 | 102.2% | | 2019 | 59.89 | 58.9% | | 2020 | 84.15 | 40.5% | - The Board of Directors has raised substantial doubt about Edenor's ability to continue as a going concern due to the adverse macroeconomic situation in Argentina and its financial impact on the company37 Risks Related to Argentina The company's performance is highly dependent on Argentina's volatile economy, characterized by negative growth, high inflation, and currency depreciation - Argentina's real GDP decreased by 9.9% in 2020, primarily due to the effects of the COVID-19 pandemic30 - The Consumer Price Index (CPI) variation was 36.1% in 2020 and 53.8% in 2019, indicating persistent high inflation which negatively affects the economy and the company's operations42 - Since July 1, 2018, the Argentine Peso is considered a currency of a hyperinflationary economy under IAS 29, requiring the company to restate its historical financial statements, which can adversely affect its reported results and financial condition4547 - The Argentine government has implemented measures to combat the COVID-19 outbreak, including a prohibition on utility companies like Edenor from discontinuing services to certain users for non-payment, which adversely affects revenue collection79 Risks Relating to the Electricity Distribution Sector The electricity distribution sector faces significant risks from government intervention, including tariff freezes and regulatory changes, impacting financial stability - The Productive Reactivation Law, enacted in December 2019, declared a public emergency in tariff and energy matters, freezing electricity rates. This freeze was extended until March 31, 2021, or until a new transitional tariff system comes into effect100112 - The jurisdiction over Edenor's concession was temporarily transferred to the Province and City of Buenos Aires in 2019 but was suspended by the Productive Reactivation Law, with the national regulator (ENRE) reassuming control. A new tripartite regulatory agency is planned105247 - Sudden increases in electricity demand could exceed distribution capacity, leading to power shortages, customer complaints, and substantial fines for service interruptions122124 Risks Relating to Our Business The company faces significant business risks, including concession revocation, tariff adjustment failures, substantial fines, and high energy losses - The company's concession agreement is critical to its operations, and its revocation or termination would have a material adverse effect on the business125126 - The company has been and may continue to be subject to significant fines and penalties. As of December 31, 2020, accrued fines and penalties totaled Ps. 8,899 million150 Energy Losses (%) | Year | Technical Losses | Non-technical Losses | Total Losses | | :--- | :--- | :--- | :--- | | 2018 | 8.4% | 9.8% | 18.2% | | 2019 | 9.6% | 10.3% | 19.9% | | 2020 | 9.1% | 10.5% | 19.6% | - The Argentine Government holds a pledge over the company's Class A common shares and could foreclose on them under certain circumstances, such as if fines exceed 20% of gross energy sales in a year157 Risks relating to our ADSs and Class B common shares Holders of ADSs and Class B shares face risks from Argentine capital controls, limited shareholder rights, and potential internal control failures - Argentine government restrictions on capital movement and currency conversion may impair the ability of ADS holders to receive dividends and sales proceeds in U.S. Dollars, potentially affecting the market value of the ADSs186 - Shareholder rights under Argentine corporate law may be fewer or less well-defined than in U.S. jurisdictions, and the securities markets are not as highly regulated, potentially disadvantaging holders of Class B common shares and ADSs188 - ADS holders may face practical limitations in exercising their voting rights due to procedural steps involving the depositary, which can cause delays190 Information on the Company This section provides a comprehensive overview of Edenor, covering its history, business operations, regulatory framework, and the Argentine electricity industry - On December 28, 2020, controlling shareholder Pampa Energía S.A. entered into a binding agreement to sell its 51% stake in Edenor to Empresa de Energía del Cono Sur S.A. The transaction is pending approval from the ENRE223489 - Edenor is the largest electricity distribution company in Argentina, serving approximately 3.2 million users in the northwestern greater Buenos Aires area and the northern part of the City of Buenos Aires as of December 31, 2020227 Recent Developments in Argentina – Measures Designed to Address the COVID-19 Outbreak The Argentine government implemented extensive COVID-19 measures, including lockdowns, economic stimulus, and utility service prohibitions and rate freezes - The Argentine government imposed a nation-wide mandatory lockdown and other restrictive measures starting in March 2020 to control the spread of COVID-19196 - Economic stimulus measures included one-time cash payments to retirees and unemployed individuals, subsidized loans to small and medium-sized companies, and a capital spending program of approximately Ps. 100 billion202204 - Key measures impacting Edenor included a prohibition on suspending electricity services for non-payment for certain users until December 31, 2020, and a freeze on electricity rates until March 31, 2021205207 History and Development of the Company Edenor was incorporated in 1992 from SEGBA's privatization, with Pampa Energía selling its 51% controlling stake in December 2020 - Edenor was incorporated on July 21, 1992, from the privatization of state-owned utility SEGBA211 - On December 28, 2020, Pampa Energía agreed to sell its 51% controlling stake in Edenor to Empresa de Energía del Cono Sur S.A. The transaction is pending ENRE approval and will require the purchaser to conduct a mandatory tender offer for all common shares223224 Business Overview Edenor, Argentina's largest electricity distributor, operates under a 95-year concession, serving 3.2 million users with detailed infrastructure and billing processes Edenor's Share of National Electricity Demand (GWh) | Year | Total Demand (Argentina) | Edenor Demand | Edenor's Share | | :--- | :--- | :--- | :--- | | 2018 | 132,925 | 25,906 | 19.5% | | 2019 | 128,880 | 24,960 | 19.4% | | 2020 | 127,306 | 25,124 | 19.7% | Accrued Fines and Penalties (in millions of Pesos) | Year | Accruals at beginning of year | ENRE Fines and Penalties | Payments of the year | Result from inflation | Accruals at year-end | | :--- | :--- | :--- | :--- | :--- | :--- | | 2018 | 12,902 | 7,706 | (1,098) | (4,996) | 14,514 | | 2019 | 14,514 | 1,530 | (1,220) | (4,861) | 9,963 | | 2020 | 9,963 | 2,629 | (872) | (2,821) | 8,899 | Number of Users by Tariff Category | Category | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | T1R (Residential) | 2,785,165 | 2,757,794 | 2,677,693 | | T1G (Small Commercial) | 327,923 | 322,255 | 322,479 | | T2 (Medium Commercial) | 30,980 | 31,045 | 31,993 | | T3 (Industrial) | 6,881 | 6,888 | 6,876 | | Wheeling system | 687 | 675 | 679 | | Total | 3,152,297 | 3,119,233 | 3,040,339 | The Argentine Electricity Industry This section outlines Argentina's electricity industry structure, regulation, and market functioning, including key bodies and the Wholesale Electricity Market - The Argentine electricity sector is governed by the Regulatory Framework Law (No. 24,065), which privatized the industry in 1992 and separated it into generation, transmission, and distribution segments399 - The principal regulatory authorities are the Secretariat of Energy (SE) for policy-making, the ENRE for enforcement and control, and CAMMESA for managing the Wholesale Electricity Market (WEM)415 - As of December 31, 2020, Argentina's installed power capacity was 41,951 MW, with thermal generation accounting for 61.3%, hydraulic for 21.7%, nuclear for 7.5%, and non-conventional sources for 9.5%437 Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting going concern doubts, operating results, liquidity, capital resources, and debt structure - The company's financial situation has been significantly affected by the freeze on electricity rates since February 2019, exacerbated by the COVID-19 pandemic, leading to negative working capital and partial postponement of payments to its main supplier, CAMMESA507509 - The Board of Directors has raised substantial doubt about Edenor's ability to continue as a going concern, and the financial statements do not include adjustments that might result from this uncertainty511512 Operating Results This sub-section details the company's operational performance, analyzing factors like economic conditions, inflation, and regulatory changes impacting tariffs and profitability Statement of Comprehensive (Loss) Income Summary (in millions of Pesos) | Item | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | 91,316 | 122,437 | 117,120 | | Gross margin | 13,520 | 22,808 | 27,557 | | Operating (loss) profit | (19,917) | 6,465 | 9,479 | | (Loss) Profit for the year | (17,698) | 16,518 | 8,995 | - Revenue from sales decreased by 25% in 2020 compared to 2019, primarily due to the freeze on electricity rates at February 2019 values703 - The company recorded a loss of Ps. 17,698 million in 2020, a significant downturn from a profit of Ps. 16,518 million in 2019. This was mainly due to the tariff freeze and a Ps. 17,396 million impairment charge on property, plant, and equipment723726 Liquidity and Capital Resources This sub-section examines the company's liquidity, capital resources, and debt, highlighting financial strain from frozen tariffs and increased operating cash flow Summary of Cash Flows (in millions of Pesos) | Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 17,336 | 13,830 | 20,137 | | Net cash used in investing activities | (7,219) | (7,019) | (17,432) | | Net cash used in financing activities | (6,152) | (6,905) | (4,389) | | Cash and cash equivalents at year-end | 4,362 | 558 | 58 | - Capital expenditures in 2020 amounted to Ps. 10,039 million, primarily focused on increasing grid capacity, installing telecontrol equipment, and connecting new supplies774 - As of December 31, 2020, the company's outstanding debt under its Senior Notes due 2022 amounted to U.S.$98 million. A loan from ICBC was fully repaid in October 2020789791 Directors, Senior Management and Employees This section details the company's governance, including Board and senior management, compensation, committee practices, and human resources overview - The Board of Directors consists of twelve members. Ricardo Torres serves as Chairman and CEO, and Gustavo Mariani as Vice Chairman. Seven of the twelve directors are independent812815 Aggregate Remuneration in 2020 (Nominal Currency) | Group | Remuneration (in millions of Pesos) | | :--- | :--- | | Board of Directors | Ps. 24.7 | | Supervisory Committee | Ps. 3.8 | | Senior Management | Ps. 322 | - As of December 31, 2020, Edenor had 4,776 employees, with approximately 81% belonging to one of two labor unions. The company also utilized 5,977 third-party contractor employees868875 Major Shareholders and Related Party Transactions This section details Edenor's ownership structure, including major shareholders and the pending sale of Pampa Energía's stake, and related-party transactions Major Shareholders | Shareholder | Class | Share Count | Percent Ownership | | :--- | :--- | :--- | :--- | | Pampa Energía S.A. | A | 462,292,111 | 51.00% | | ANSES | B | 242,999,553 | 26.81% | | Public | B | 130,271,261 | 14.37% | | Pampa Energía S.A. | B | 37,558,700 | 4.14% | | Treasury Shares | B | 31,380,871 | 3.46% | | Employee Stock Program | C | 1,952,604 | 0.22% | - Pampa Energía has a binding agreement to sell its 51% controlling stake to Empresa de Energía del Cono Sur S.A., pending ENRE approval. This will trigger a mandatory tender offer for all other shares887888 - The company has a technical assistance agreement with its parent, Pampa Energía, for which it pays an annual fee of U.S.$2.5 million. The agreement was extended in 2020 to expire in 2025903907 Financial Information This section covers significant legal proceedings, including class actions and regulatory disputes, and details the company's dividend policy - As of December 31, 2020, the company has established provisions of Ps. 2,789 million to cover potential losses from various legal claims and proceedings922 - The company is a defendant in a class action lawsuit brought by a consumer association concerning VAT calculations and late payment charges, which is still in the evidence stage924928 - Edenor has not declared or paid any dividends since August 14, 2001. Future dividend payments are restricted by legal reserve requirements and covenants in its debt agreements962 The Offer and Listing This section details the trading of Edenor's Class B common shares on BASE and ADSs on NYSE, including historical prices and market overview ADS Price on NYSE (U.S. Dollars per ADS) | Year | High | Low | | :--- | :--- | :--- | | 2018 | 62.55 | 19.60 | | 2019 | 29.60 | 4.25 | | 2020 | 5.99 | 2.83 | Share Price on BASE (Pesos per Share) | Year | High | Low | | :--- | :--- | :--- | | 2018 | 62.10 | 38.60 | | 2019 | 56.50 | 15.20 | | 2020 | 30.55 | 13.40 | - The Argentine securities market is regulated by the Comisión Nacional de Valores (CNV), and the primary exchange is the Bolsas y Mercados Argentinos (BYMA)979984 Additional Information This section provides supplementary details on the company's corporate structure, capital stock, shareholder rights, Argentine exchange controls, and tax implications - The company's capital stock consists of Class A, B, and C shares, with Class A shares required to represent 51% of the total. All Class A shares are pledged to the Argentine Government to secure obligations under the concession10181019 - Argentina has implemented tight exchange controls, requiring prior authorization from the Central Bank (BCRA) for many transactions, including payments for imports and servicing foreign financial debt. These controls restrict access to the official foreign exchange market (MLC)10561061 - Under Argentine tax law, capital gains from the sale of publicly traded shares (like Edenor's) are generally exempt for resident individuals and foreign beneficiaries from non-"non-cooperating jurisdictions." Dividends from earnings accrued since January 1, 2018, are subject to a withholding tax (7% for 2018-2020 profits, 13% thereafter)107010711080 Quantitative and Qualitative Disclosures about Market Risk This section outlines the company's exposure to financial market risks, primarily foreign currency risk from U.S. dollar debt and managed interest rate risk - The company is exposed to significant foreign currency risk. A hypothetical 10% adverse change in exchange rates as of December 31, 2020, would result in a potential loss of approximately Ps. 819 million, primarily due to its U.S. dollar-denominated debt1161 - The company manages interest rate risk by holding most of its debt at fixed rates. As of December 31, 2020, 100% of its loans were at fixed interest rates, following the cancellation of a floating-rate loan in October 20201165 Description of Securities Other than Equity Securities This section details the fees and expenses associated with the company's American Depositary Shares (ADSs), including issuance, distribution, and annual service fees 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 | - The depositary may deduct any owed taxes from payments to ADS holders and may sell deposited securities to cover these tax obligations if necessary1172 PART II Defaults, Dividend Arrearages and Delinquencies This section recounts the company's default on financial debt post-2001-2002 Argentine crisis and its successful debt restructuring completed in 2006 - Following the 2001-2002 Argentine economic crisis, the company suspended principal payments on its financial debt in September 2002 due to the Peso's depreciation and a freeze on its distribution margins1175 - The company successfully completed a voluntary exchange offer on April 24, 2006, restructuring all of its then-outstanding financial debt. All notes issued in this restructuring have since been fully repaid1176 Material Modifications to the Rights of Security Holders and Use of Proceeds This section addresses the use of U.S.$57.7 million net proceeds from the company's 2007 IPO for debt repurchase and capital expenditures - The company received U.S.$57.7 million in net proceeds from its initial public offering on April 30, 20071177 - The IPO proceeds were used to repurchase outstanding debt (Fixed Rate Par Notes and Discount Notes) and to fund capital expenditures1177 Controls and Procedures This section details management's assessment of the company's effective disclosure controls and internal control over financial reporting as of December 31, 2020 - Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 202011781179 - Based on the COSO framework, management assessed the company's internal control over financial reporting and concluded it was effective as of December 31, 20201184 - No material changes were made to the internal control over financial reporting during 20201186 Other Disclosures This section covers governance and compliance disclosures, including the Audit Committee Financial Expert, Code of Ethics, audit fees, and corporate governance differences - The Board of Directors has determined that Carlos Perez Bello is an "audit committee financial expert"1187 - The company has adopted a Code of Ethics, which was last updated in 2020 and applies to all employees1188 Principal Accountant Fees (in millions of Pesos, constant currency) | Service | 2020 | 2019 | | :--- | :--- | :--- | | Audit fees | 22 | 24 | | Total | 22 | 24 | - A key corporate governance difference is that Argentine law does not require a majority of the Board to be independent, unlike NYSE standards. However, as of the report date, 7 of Edenor's 12 directors were independent1199 PART III Financial Statements This section presents audited financial statements, noting the auditor's substantial doubt about going concern and identifying impairment and going concern as critical audit matters - The independent auditor's report expresses substantial doubt about the company's ability to continue as a going concern, citing its current economic and financial situation. The financial statements do not include any adjustments that might result from this uncertainty1231 - The audit identified two Critical Audit Matters: 1) Impairment of Property, Plant and Equipment, due to the significant management judgment involved in estimating recoverable value through discounted cash flows, and 2) the Company's Going Concern Assessment, due to the uncertainty in forecasting operating results amid tariff freezes and economic instability12361239 Key Financial Position Data (in millions of Pesos) | Item | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | 148,796 | 162,633 | | Property, plant and equipment | 124,914 | 137,894 | | Total Liabilities | 85,898 | 82,113 | | Total Equity | 62,898 | 80,520 | Exhibits This section lists documents filed as exhibits, including corporate bylaws, ADS Deposit Agreement, note indentures, and Sarbanes-Oxley certifications - Exhibits filed with the report include key corporate documents such as bylaws, the ADS Deposit Agreement, and indentures for notes issued in 2007 and 201012211223 - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits1224