Earnings Call: Q3 2024

Nov 11, 2024

Summary

Q3 sales rose 30% YoY in constant currency, while 9M EBITDA reached ARS 134.3bn as tariff increases supported results. The 2025–2029 tariff review and a $184m international debt issuance underpin the outlook and financing position.

On behalf of Edenor, we would like to thank everybody for participating in this conference call to discuss the results of the third quarter, ending September 30, 2024. We will also highlight important recent development and advances in our effort to strengthen our position as an an energy leader. If you would like to receive our earning release or presentation, you can download them easily from the investor relations section or our website located at www.edenor.com, or contact investor relation team to request the document. This event is being recorded. After the company remarks are completed, there will be a question and answer session where we will make some new questions through the WebEx chat. Before proceeding, let me mention that forward-looking statement are based on the belief and assumption of Edenor 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 will always affect the future results of Edenor and could cause results to differ materially from those expressed in such forward-looking statement. Now, let me pass the call to Germán Ranftl, our CFO, who will guide us through the presentation. Thank you, Solange. Good morning and welcome to everyone. Your presence here is very important to us, and we hope to provide you with a good understanding of Edenor performance during the third quarter of 2024. Agenda: highlights, regulatory framework, financial results, operating indicators, financial debt, and final remarks. Relevant events. Before moving to the discussions of our financial performance for the third quarter, I would like to share with you the video that we received the award of the Eikon as part of our energy efficiency campaign. The Eikon awards are the first Argentine recognition honoring the work of communicators, communication specialists, public relations professionals, journalists, and other organizers. Additionally, I would like to take a few moments to highlight some important recent developments. Results from the third quarter and the first nine months of the year reflected an impact of the transition tariff increase on operations and financial improvements. EBITDA for the first nine months resulted in a profit of ARS 134.3 billion as part of the result of the tariff recomposition that was implemented in the period. A significant adjustment was received in February, which was being followed with monthly adjustments since August, as part of the government's plans to fully normalize tariffs, 3% in August, 3% in September, 2.7% in October, and 6% in November. These increases have restored the financial equilibrium of the company. The five-year tariff review process has advanced significantly. This will define tariffs for 2025 to 2029 and should further enhance our financial performance and increase our opportunities for growth. New authorities in the Secretary of Energy and ENRE were recently appointed. New authorities remain committed to the process. Some small delays could occur but should not significantly affect the actual process. Two weeks ago, we issued an international $184 million equivalent in Class 7 shares, with a final maturity of six years, with amortization starting in year four, 33.33%, year five, 33.33%, and year six, 33.34%, resulting in a five-year average life as a coupon of 9.75%. Edenor is proud to have been back to the international markets. This follows the issuance of $124 million equivalent in Class 3, 4, 5, and 6 during the previous quarters of 2024. Together with this, we have a substantial improvement in our debt profile. As far as our credit rating agencies concerns for our international debt, Fitch and Standard and Poor's rated the Class 7 shares CCC+ and CCC, respectively. On the domestic side, Moody's Local Argentina raised its rating from BBB+.ar to A.ar, and in case of Standard and Poor's Global Ratings ratifies a rating of raB and raised the outlook from stable to positive. Events at the company and in Argentina are moving forward in a favorable fashion, and we expect this to increase our quality performance and contribute to more favorable financial results going forward. This will also enable us to continue our strong investment program and further improve our service quality. Regulatory framework. The national government continues to move forward on the regulatory front and clear objectives to normalize and deregulate the energy sector. The large 319.2% transition tariff increase that was effective of February 16, 2024, has been followed up by monthly increases, 3% in August and September, 2.7% in October, and 6% in November. The past increases have contributed to the large improvement in EBITDA and operating margin that we have been seeing in the recent quarters. The ongoing adjustments should help us to maintain strong business momentum. The five-year tariff review process 2025 to 2029 is actively moving forward as mentioned. The completion of the process help us to further enhance confidence and regulatory environment. The company has been paying its energy purchase cost to CAMMESA on schedule since April, and it has been paying on schedule the rescheduled payments for the past debt with CAMMESA. Additionally, it is negotiating a payment plan for additional debts that remains with CAMMESA. This is an important discussion that is expected to be included as part of the five-year tariff review process. Now, we look at our financial results. Revenues. As you can see on slide 10, sales rose 30% year-to-year in the third quarter of 2024 in constant currency to ARS 555.8 billion, partially offset by a lower volumes, 1.6% in the third quarter of 2024. Sales growth respectively, primarily the impact of the tariff adjustment, which we just mentioned. As a positive operating result year-to-year has been reported mainly due to improvement in sales and maintaining the operating expenses at same levels as last year. Net result increases 44% compared year-to-year. Energy sales evolution. Edenor's client base reaches 3.3 million clients, 1% higher than the third quarter of 2023, which was mainly due to an increase in residential and industrial clients. Contributing to the increase were continuing efforts to improve market transparency and discipline. In the quarter, we installed a total of 4,862 energy meters to help converting informal clients into a full participant in the electric distribution system. Sales volume in the third quarter of 2024 totaled 6,005 gigawatt hours, which has been down 1.6% versus the third quarter of 2023, primarily related to the effect of a small decrease in demand on commercial and industrial segments in the period. As far as collectibility is concerned, it should be highlighted that it remains strong and at healthy levels. Collectibility remains solid. It was 94.97% for the first third quarter. Continuing the improvement in performance of the third quarter have a better collectibility ratio compared to the second quarter, which in turn was better than the first. Distribution margin. The distribution margin for the nine months rose 53% to ARS 608.4 billion, and for the first quarter, we saw a 22% year-to-year raise to ARS 211.1 billion. These large increases are largely a result of the tariff increases mentioned, which were partially offset by the effect of lower sales volume, 4% lower, and a higher purchase energy cost due to the reduction of subsidies in N2 and N3 segments. EBITDA. The third quarter EBITDA was ARS 45.7 billion. Last year, third quarter of 2023 EBITDA included a positive effect due to arrangements of the payment plans that we have with CAMMESA. For the energy cost, absence, this adjustment, the year-to-year EBITDA comparison shows a major improvement. The principal factors driven the third quarter 2024 EBITDA were the positive impact of the tariff increases in February of this year and the monthly adjustment implemented in August and September, 3% each month. As well as the reduction in energy losses to 15% in the third quarter of 2024 versus 15.3% in the third quarter of 2023. Additionally, results were impacted by the increase in energy purchases due to the reduction of subsidies by establishing limits of 250 kilowatts in N3 customers and 350 kilowatts in N2 customers. In the case of residential customers as of September, N2 low-income level clients and N3 middle-income level clients have the consumption cap described below with the subsidies energy prices. N2 low income, up to 350 kilowatts per month, with a 75% reduction of the total real energy prices. N3 middle income segment, up to 250 kilowatts per month, with a 60% reduction of the total real energy prices. Consumption above that limit for N2 and N3 pay ARS 62,838 per megawatt as N1, as explained above. Net financial expenses. Financial results show an important swing from the net expenses in the same period at last year to a positive ARS 36.9 billion in the third quarter of 2024. The improvement was partially a result of lower interest payments related to outstanding amounts owed to CAMMESA, an important reduction in financial expenses of 39% that represents ARS 56 billion of this year. No, sorry, ARS 56 billion, no? ARS 56 billion, sorry. Net results. The net income for the third quarter of ARS 144 billion, compared to the earnings in the prior period of ARS 234 billion, excluded the CAMMESA effect registered in 2023 year-to-year. Results show a major improvement because of the tariff increases that we received in February. CapEx. For the nine-month period ending September 30th, Edenor's capital expenditures were ARS 245.3 billion, which was up 30% with the same period last year. Our investment program spending allocations is made to fulfill our commitment to meet raising demand, further improve service quality, and reduce non-technical losses. Looking at our operating indicators. Energy losses. We achieved an important reduction in energy losses reaching 15.04%, down from 15.3% last year. This underscores our continuous efforts to find solutions to this challenge. Our multidisciplinary teams are constantly focusing on finding innovation ways to combat energy losses. These efforts are complemented with our market discipline initiatives that are aimed at curbing inefficiencies and irregularities. Analytical tools powered by artificial intelligence have improved inspections efficiency, and our market discipline actions continue to detect and rectify irregular connections. It is important to remember that of the 15% total losses, a full 9.66% are losses recognized by the regulatory in our tariff as technical losses. Quality of service. As mentioned earlier, our investment plan is continued to contribute to improve in service quality by reducing the duration and frequency of outages, which have been on downward path since 2014. These levels are and have been comfortable exceeding the levels required by the regulatory entity. At the end of the third quarter of 2024, the SAIDI and SAIFI indicators show a 9.4% hours duration of outages and a 3.8 average outages per client, respectively, in the period. The evolution of these indicators in the third quarter shows a different trend due to both forced service interruptions and scheduled outages. Regarding the latter, the increase is significant because of an important maintenance task in important projects that were carried out in many municipalities, impacting the current values of outages and duration, aimed to improve the quality of services provided by our company. The main investment plan has been focused on implementing improvements in operating process and the adoption of technologies applied to the operations and management of the network. Financial debt. Last October, as we said before, we completed an international issue of $184 million, of which $135 million was new money, with the remaining 49% of an exchange of Class 1 debt. The issuance marked the company's successful return to the international market more than 12 years after its last placement. Edenor improved the credit profile in international markets, allowed this placement to have a 9.75% coupon with a total term of six years and a partial amortization in years four of 33.3%, year five 33.3%, and year six 33.34%. The company proactively seeks to extend its debt profile to 2030 and improve its short-term liquidity position, which was remarked as very positive for a credit perspective for the rating agencies. This follows the issuance of $100 million in Class five and six at very attractive interest rates. Indebtedness. With the improvement in our risk profile due to important changes in the regulatory front, the three rating agencies that cover us, Standard & Poor's, Fitch, and Moody's, each made positive moves related to our debt early this year. Moody's Local Argentina, as well as S&P Global Ratings, made a further adjustment in last week. In the case of Moody's Local Argentina, they have raised the domestic debt rating of Edenor for a notch up from BBB+.ar to A.ar. In the case of S&P Global Ratings, this week, they improved the outlook from stable to positive. As from the international listing, Fitch and S&P Global Ratings rated the Class 7 Notes CCC+ and CCC respectively. We view these changes as a very positive signal. Maturity schedule. In these slides, you can see the maturity schedules of the debt as of September 30. Looking into the pro forma maturity schedule in the next slides. While in the slides you can see the maturity schedule as at the of September and pro forma basis, considering the recent transaction, we issued $184 million in Class 7 Notes. Closing remarks. Final remarks. To close, I would like to reiterate the several key points shown in slide 25 that are the following. We remain focused on future transformation growth and opportunities as we take advantage of opportunities to benefit from the energy transition in our distribution business and potential growth opportunities in other segments like energy generation and critical minerals. We are an industry leader in Argentina with 20% market share in the electricity distribution market. The completion of the five-year tariff review process should continue to result in material improvements in EBITDA and net income, as well to keep making investments to further improve the quality of service as we continue to transform smart grid with technology and innovation. In the short term, we are very excited about our growth opportunities over both the near to medium term, as well as the long-term outlook to share this growth with our shareholders and bondholders. We are continuously focused on ways to further enhance our distribution business to benefit from challenges of energy transition, and also to broaden our scope of business opportunities. This could include investments in renewables and conventional energy generation, storage, and non-regulatory business, such as critical minerals and acquisitions. With this, now, we would like to open the call for questions. To ask your questions, please send written questions to the IR and the NR through the questions and answers menu. Identify yourself, and stating that you have a question. We thank you all for your support, your engagement as a shareholder and bondholder. Hello. The first question came from Gustavo Faria. He asks, "Can you provide additional details on the timing of the full tariff review in the next month? After the postponement of the public hearing, when do you think the government will release the next date? What are the key steps after the public hearing for allocation of the asset base, regulatory EBITDA, and the new tariff? The answer is going to be, we still have the final maturity to have the final report, to present the final report on November 20th. But, as there are new members, as the Secretary of Energy has changed, and they are changing the intervention of the regulatory entity, we expect that there's going to be some small delays, but we don't have the real dates when that's going to happen. But we are expecting to have this closed within the end of this year or beginning of next year at the latest. The follow-up question from Gustavo is, "What was the main reason for the little uptick in the energy losses, 15% in third quarter 2024 versus 14.5% in third quarter 2023, and SAIDI indexes, 9.4 in third quarter 2024 versus 8.7 in second quarter 2024? It was more linked to the weather temperatures. We expect additional compensation for non-technical losses in the new tariff from the full tariff review? The main reason of the changes in energy losses was the price of energy that has increased due to the reduction of subsidies. Just for you to take an example, in the third quarter of 2023, One, two, 17,600- 645. It has been more than six times was the price of the electricity that has been considered in the adjustment compared to last year with this year. We have one more question. It is related on, what are your plans for possible new debt issuance once the five-year tariff review is completed? We expect to outlook for the company to improve tariff process that is completed. Whatever the outcome, it should be provided great visibility of the cash flow and generation of the company and more confident in the regulatory environment. We are always monitoring the market conditions, and should market conditions in the future allow us to issue, we will reopen the last issuance that we did in this October, the $184 million that we have, 144A/Reg S transaction. This could include the reopening of that instrument. We have two further questions. One, it says, the company has total losses of 14.9% versus 9.67% recognized in the current every day. Should we expect the new revision process to bring goals achievable by the company so that you can get to the agreed cost of capital will work? We are requesting in our process that we have with the regulatory entity, we are requesting an additional consideration of the regulatory entity that increases the technical losses. We have a less gap between the total losses and the non-technical losses. Because we consider that part of the losses we have, that are today non-technical, should be technical losses because we cannot improve the quality of service in that specific area. The last question we have is from Guido Bisosse, he says, "Regarding the penalties from the charges in Q3 2024 of ARS 14,478 million, or ARS 62,325 million for the nine months. How much of that charge was already paid? Would you consider adding those charges to the adjusted EBITDA calculation as some years before? No, we haven't done the calculations. We haven't done any adjusted EBITDA. This increase is mainly due to the energy. Sorry, to the reduction of subsidies that the government is implementing. As we said, the kilowatt has grown more than six times since the last quarter of 2023 to the last quarter of this year. The main reason of that increase is the megawatts increase, or the kilowatts increase. There are no more questions, so thanks very much for participating in our conference call. Please do not hesitate to contact our investor relations department for further inquiries that you may have. Good morning to everybody, and have a nice day. Thank you.