EDN Empresa Distribuidora Y Comercializadora Norte SA

CONDENSED INTERIM FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2018 AND FOR THE

NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2018

PRESENTED IN COMPARATIVE FORM

(Stated in thousands of pesos)

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Legal Information

Corporate name: Empresa Distribuidora y Comercializadora Norte S.A.

Legal address: 6363 Del Libertador Ave., City of Buenos Aires

Main business: Distribution and sale of electricity in the area and under the terms of the Concession Agreement by which this public service is regulated.

Date of registration with the Public Registry of Commerce :

-           of the Articles of Incorporation: August 3, 1992

-           of the last amendment to the By-laws: May 28, 2007

Term of the Corporation : August 3, 2087

Registration number with the “Inspección General de Justicia” (the Argentine governmental regulatory agency of corporations) : 1,559,940

Parent company: Pampa

Legal address: 1 Maipú Street, City of Buenos Aires

Main business of the parent company:  Study, exploration and exploitation of hydrocarbon wells, development of mining activities, industrialization, transport and sale of hydrocarbons and their by-products, and the generation, transmission and distribution of electricity. Investment in undertakings and in companies of any nature on its own account or on behalf of third parties or associates of third parties in Argentina or abroad.

Interest held by the parent company in capital stock and votes: 51.73%

(1)      Includes 20,439,747 and 7,794,168 treasury shares as of September 30, 2018 and December 31, 2017, respectively.

(2)      Relates to the Employee Stock Ownership Program Class C shares that have not been transferred.

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CONDENSED INTERIM

FINANCIAL STATEMENTS

CONDENSED INTERIM

FINANCIAL STATEMENTS

Furthermore, on July 31, 2018, the ENRE issued Resolution No. 208/18, whereby it approves, as from August 1, 2018, the CPD relating to the February-August 2018 period, to be applied in two stages: 50% as from August 1, 2018, and 50% in six (6) monthly and consecutive installments as from February 1, 2019.

Moreover, the above-mentioned resolution sets the system of caps for the social tariff as well as the values that the Company shall apply to determine and credit discount amounts onto the power bills of the consumers affected by deficiencies in the quality of the technical product and/or the quality of the technical and commercial service as from the first control day of the September 2018-February 2019 six-month period. Additionally, it is informed that the average electricity rate value amounts to $2.9871/kwh.

As of September 30, 2018, as indicated in the preceding paragraphs, income not recognized by the Company due to the deferral of 50% of the CPD’s increase amounts approximately to $349.3 million; and, as a consequence of the application of the methodology of caps for the social tariff, the Company is no longer recording income for an estimated amount of $ 614.7 million.

b)    Framework Agreement

During the month of July 2018 the Company sent notes to the SE requesting the ratification of the criterion based on which the Company informs CAMMESA of both the purchase of energy for Shantytowns, until the new Framework Agreement is signed, and the receivable amounts generated in favor of the Company by the energy supplied to the Shantytowns of the Framework Agreement since the expiration thereof; and the adoption of measures aimed at making progress in the discussion of and agreements on both the terms and conditions of a new Framework Agreement and the settlement of the receivables generated in favor of the Company.

As of September 30, 2018, revenue from energy sales not recognized for this concept, since the expiration date of the Framework Agreement -September 30, 2017- amounts to $ 608.5 million.

            Furthermore, on July 20, 2018, the Company received a payment of $ 110 million from the Province of Buenos Aires relating to the September 2014-August 2017 period.

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c)    Penalties

On April 23, 2018, the ENRE issued Resolution No. 118/18 pursuant to which the Company is instructed to calculate and pay a compensation to small-demand residential customers (T1R Consumers) for each interruption higher than or equal to 20 hours suffered during the periods indicated in Section 1 of said Resolution. In the ENRE’s opinion there have occurred extraordinary service provision interruptions/problems covered by item 3.3 of Sub-appendix 4 to the Concession Agreement, i.e. the daily sum of customers whose electricity supply was interrupted exceeded 70,000 daily consumers for five consecutive days. The impacts of these compensation amounts were quantified by the Company in $ 87 million and recognized as of September 30, 2018. The effects of the next six-month control periods were also estimated, totaling an amount of $ 127 million as of September 30, 2018. This resolution has been duly challenged by the Company, but the regulatory authority’s decision is still pending.

Furthermore, on May 31, 2018, by ENRE Resolution No. 170/18, the penalty system for deviations from the Annual and Five-year Investment Plan is approved. The amounts resulting from the application of these penalties, which as of September 30, 2018 were estimated at $ 105 million, will be allocated to the consumers.

On July 17, 2018, the ENRE, by Resolution No. 198/18, provides that, as from September 2018, the Company will be required to assess service provision interruptions affecting consumers that belong to the same feeder, and whether said consumers and their feeders exceed the limits set when comparing them with the international indicators (SAIDI and SAIFI) admitted in Resolution 63/17 of the district to which they belong. The Company has filed a direct appeal to the Appellate Court, which, at the date of these financial statements, is pending resolution.

d)     Adjustment Agreement

In relation to the effects generated by the non-compliance with the Adjustment Agreement (Note 1 to the Financial Statements as of December 31, 2017), on July 30, 2018, the MINEM agreed to implement the necessary administrative actions to regularize the pending obligations of the Transition Period.

On September 15, 2018, the SE, by Note 2018-45662399, extended the term for the regularization of the pending obligations in relation to the Agreement on the Renegotiation of the Concession Agreement (“the Adjustment Agreement”) signed until the electricity rate schedules resulting from the RTI come into effect.

Furthermore, on September 28, 2018, the Electric Power Undersecretariat requested that the Company update the information duly submitted by virtue of the regularization process of the mutual obligations that arose during the Transition Period.

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Note 3 |        Basis of preparation

The CNV, in Title IV “Periodic Reporting Requirements” – Chapter III “Rules concerning the form of presentation and valuation criteria of the financial statements” – Section 1 of its regulations, has provided for the application of RT Nº 26 of the FACPCE, as amended, which adopts IFRS issued by the IASB, for certain entities included in the public offering system of Law Nº 26,831, whether on account of their shares or their corporates notes, or that have requested authorization to be included in said system.

Moreover, Section 3 of the above-mentioned CNV’s regulations provides that “The entities subject to the control of the Commission may not apply the method of restatement of financial statements to reflect the effects of inflation”.

These condensed interim financial statements for the nine-month period ended September 30, 2018 have been prepared in accordance with the provisions of IAS 34 “Interim Financial Reporting” and are stated in thousands of Argentine pesos, unless specifically indicated otherwise. These financial statements do not include all the information required for a complete set of annual financial statements; therefore, it is recommended that they be read together with the Financial Statements as of December 31, 2017, which have been prepared in accordance with IFRS.

Due to that which has been mentioned in the preceding paragraphs, these condensed interim financial statements have been prepared in accordance with the CNV’s accounting framework, which is based on the application of IFRS, particularly of IAS 34, except for the application of IAS 29 (according to which the restatement of financial statements is mandatory as detailed in the title “Restatement of financial information” in this Note), excluded by the CNV from its accounting framework. 

These condensed interim financial statements for the nine-month period ended September 30, 2018 have not been audited. T he Company’s Management estimates that they include all the necessary adjustments to fairly present the results of operations for each period in accordance with the CNV’s accounting framework. The results of operations for the nine-month period ended September 30, 2018 do not necessarily reflect the Company’s results in proportion to the full fiscal year.

Comparative information

The balances as of December 31, 2017 and for the nine-month period ended September 30, 2017, disclosed in these condensed interim financial statements for comparative purposes, arise from the respective financial statements as of those dates.

In this respect, in the future Financial Statements to be issued by the Company as of December 31, 2018, as a consequence of the restatement of the financial information described in the subsequent title, the comparative balances may show certain modifications.

Restatement of financial information

IAS 29 “Financial reporting in hyperinflationary economies” requires the financial statements of an entity whose functional currency is that of a highly inflationary economy to be stated in terms of the measuring unit current at the closing date of the reporting period, regardless of whether they are based on the historic cost method or the current cost method. For such purpose, in general terms, inflation that has occurred from the date of acquisition or from the revaluation date, as appropriate, is to be computed in non-monetary items. In this case, the regulation establishes that the adjustment will resume from the last date in which it was made, February 2003.Those requirements also apply to the comparative information included in the financial statements.

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In order to conclude whether an economy is categorized as highly inflationary under IAS 29, the standard details a series of factors to be considered, among which the existence of a cumulative inflation rate over three years that approaches or exceeds 100% is included. The cumulative inflation rate over three years exceeds that figure. It is for this reason that, according to IAS 29, the Argentine economy should be regarded as highly inflationary as from July 1, 2018. Moreover, on July 24, 2018, the FACPCE issued a communication confirming that which has been previously mentioned. However, it should be taken into account that at the time these financial statements are issued Executive Order Nº 664/03 of the PEN, which does not allow for the filing with the CNV of inflation-adjusted financial statements, is still in effect. Therefore, due to both this Executive Order and the CNV’s regulatory framework, the Company’s Management has not applied IAS 29 in the preparation of these financial statements.

In a period of inflation, any entity that holds an excess of monetary assets over monetary liabilities will lose purchasing power, and any entity that holds an excess of monetary liabilities over monetary assets will gain purchasing power, provided that such items are not subject to an adjustment mechanism.

In summary, the restatement mechanism of IAS 29 provides that monetary assets and liabilities will not be restated because they are already expressed in terms of the measuring unit current at the end of the reporting period. The assets and liabilities subject to adjustments under specific agreements will be adjusted based on such agreements. Non-monetary items carried at their current values at the end of the reporting period, such as the net realizable value or other values, need not be restated. All other non-monetary assets and liabilities will be restated by applying a general price index. The gain or loss on the net monetary position will be included in the net profit or loss for the reporting period, and separately disclosed.

Note 4 |        Accounting policies

The accounting policies adopted for these condensed interim financial statements are consistent with those used in the preparation of the Financial Statements for the last financial year, which ended on December 31, 2017, except for those mentioned below.

These condensed interim financial statements must be read together with the audited Financial Statements as of December 31, 2017 prepared under IFRS.

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Note 4.1 |       New accounting standards, amendments and interpretations issued by the IASB

IAS 19 “Employee benefits”: It introduces amendments to post-employment defined benefit plans in the case of a plan amendment, curtailment or settlement. The net defined benefit liability (asset) is remeasured using the current fair value of plan assets and current actuarial assumptions (including current market interest rates and other current market prices), that reflect: a) the benefits offered under the plan and the plan assets before the plan amendment, curtailment or settlement; and b) the benefits offered under the plan and the plan assets after the plan amendment, curtailment or settlement. The current period service cost for the period subsequent to the plan amendment, curtailment or settlement is calculated using the actuarial assumptions used to remeasure the defined benefit liability (asset) (rather than the actuarial assumptions determined at the beginning). The net interest after the plan amendment, curtailment or settlement is determined using the net defined benefit liability (asset) and the discount rate used to remeasure the liability (asset). The standard applies to plan amendments, curtailments or settlements that occur as from January 1, 2019, with earlier adoption permitted. As a result of the preliminary analysis carried out by the Company concerning the impact of the adoption of IAS 19, it has been determined that the application thereof will not significantly affect the Company’s results of operations or its financial position.

There are no new IFRS or IFRIC applicable as from this period that have a material impact on the Company’s condensed interim financial statements.

Note 4.2 |       Trade receivables

The receivables arising from services billed to customers but not collected as well as those arising from services rendered but unbilled at the closing date of the year are recognized at fair value and subsequently measured at amortized cost using the effective interest rate method. 

The amounts thus determined are net of an allowance for the impairment of receivables. The future expected loss impairment rate is determined per customer category, based on the historical comparison of collections made and delinquent balances of each customer group, and applied to the total of the Company’s receivables. This change from the criterion used in the Financial Statements as of December 31, 2017, relates to the implementation of IFRS 9 as from January 1, 2018; see impact in Note 6.

 Any amount that remains unpaid 7 working days after the first due date of the bill for electricity consumption of small-demand (T1), medium-demand (T2) and large-demand (T3) customers is considered a delinquent balance.

 Additionally, and faced with temporary and/or exceptional situations, the Company’s Management may redefine the amount of the allowance, providing and supporting the criteria used in all the cases.

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