EDN Empresa Distribuidora Y Comercializadora Norte SA

CONDENSED INTERIM FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2019 AND FOR THE NINE

AND THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2019

PRESENTED IN COMPARATIVE FORM

(Stated in thousands of constant pesos – Note 3)

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Legal Information

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

Legal address: 6363 Av. 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: PESA

Legal address: 1 Maipú Street, CABA

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: 51.79%

(1)      Includes 31,380,871 and 23,111,131 treasury shares as of September 30, 2019 and December 31, 2018, respectively.

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

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edenor

Condensed Interim Statement of Financial Position

as of September 30, 2019 presented in comparative form

(Stated in thousands of constant pesos – Note 3)

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edenor

Condensed Interim Statement of Financial Position

as of September 30, 2019 presented in comparative form (continued)

(Stated in thousands of constant pesos – Note 3)

The accompanying notes are an integral part of the Condensed Interim Financial Statements.

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edenor

Condensed Interim Statement of Comprehensive Income 

for the nine and three-month period ended September 30, 2019

 presented in comparative form

(Stated in thousands of constant pesos – Note 3)

The accompanying notes are an integral part of the Condensed Interim Financial Statements.

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edenor

Condensed Interim Statement of Changes in Equity

for the nine-month period ended September 30, 2019

presented in comparative form

(Stated in thousands of constant pesos – Note 3)

The accompanying notes are an integral part of the Condensed Interim Financial Statements.

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edenor

Condensed Interim Statement of Cash Flows

for the nine-month period ended September 30, 2019

presented in comparative form

(Stated in thousands of constant pesos – Note 3)

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edenor

Condensed Interim Statement of Cash Flows

for the nine-month period ended September 30, 2019

presented in comparative form (continued)

(Stated in thousands of constant pesos – Note 3)

The accompanying notes are an integral part of the Condensed Interim Financial Statements.

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This Resolution provides that the increases of the Stabilized Price of Energy relating to the May-October 2019 six-month period, which had been authorized by Resolution 366/2018 for Residential customers, are to be absorbed by the Federal Government, whereas the increases established for non-residential customers with supplies lower than 300 kW and those relating to customers with supplies higher than 300 kW, GUDI customers, were modified for the May-July and August-October 2019 three-month periods.

With regard to the supplies lower than 300 kW (non-residential customers), and those higher than 300 kW, GUDI Customers, the values of the Stabilized Price of Energy were increased for the May-July 2019 and August-October 2019 three-month periods.

Furthermore, on September 19, 2019, the Company and the Federal Government entered into an Electricity rate schedules maintenance agreement, which provides for the following:

o   To maintain the electricity rate schedules that were in effect prior to August 1, 2019 for all electricity rate categories;

o   To postpone until January 1, 2020 the application of the CPD that was to be applied as from August 1, 2019 (adjustment mechanism set forth in ENRE Resolution No. 63/2017), relating to the January-June 2019 period, which amounted to 19.05%;

o   To update the electricity rate schedules in relation to seasonal energy prices as from January 1, 2020;

o   To regularize the difference of the CPD and the seasonal energy prices generated between those applied as from August 1, 2019 and those to be applied as from January 1, 2020, for the August 1, 2019-December 31, 2019 period, which will be recovered in seven monthly and consecutive installments as from January 1, 2020 and will be adjusted in accordance with the relevant CPD adjustment and the methodology set forth in late payment procedures applied by CAMMESA, respectively;

o   Commitment to maintain the quality of the service and meet the quality parameters set forth in the Concession Agreement;

o   To postpone until March 1, 2020 the payment by the Company of any penalty at its original value plus the relevant adjustments applicable at the time of payment.

Furthermore, on October 22, 2019, SRRyME Resolution No. 38/2019 approved the seasonal scheduling for the November 2019-April 2020 period, and provided as well that the power reference price, the energy reference price for residential users and energy reference prices for both the Distributors’ Large Users and the other non-residential users, effective since August 2019, will remain the same until April 2020.

b)   Change of Jurisdiction and Regularization of Obligations

On February 28, 2019, the Federal Government, the Province of Buenos Aires and the City of Buenos Aires entered into an agreement to initiate the process of transferring the public service of electricity distribution, duly awarded by the Federal Government to the Company under a concession, to the joint jurisdiction of the PBA and the CABA, with the latter two jointly assuming the capacity as Grantor of the concession of the service. In the aforementioned agreement, the PBA and the CABA agreed to set up a new bipartite agency in charge of the regulation and control of the distribution service, and the Federal Government agreed to take the necessary steps and carry out the necessary administrative procedures to provide a solution to the pending claims with both Distribution companies.

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In the framework of such agreement, on May 9, 2019, the Federal Government, the CABA and the PBA entered into an agreement, the Agreement on the Implementation of the Transfer of Jurisdiction, pursuant to which the CABA and the PBA jointly assume, as from the date on which the agreement comes into effect with the relevant ratifications, the regulation and control and the capacity as grantor over the distribution service granted to edenor under a concession. Furthermore, it is provided that the Concession Agreement will remain in full force and effect and the national regulations and provisions issued by both the Energy Secretariat and the ENRE until the effective date of the transfer will be the regarded as the applicable regulatory framework; and that the pledge on the class A shares held by PESA, representing 51% of the Company’s share capital, made as security for the strict compliance with the obligations resulting from the Concession Agreement, is assigned by the Federal Government to the CABA and the PBA.

The Company was notified of and consented to the agreement between the Federal Government and the new Grantors of the concession, and agreed both to indemnify them against any claims and to obtain the consent of the majority of its shareholders. This Agreement on the Implementation of the Transfer of Jurisdiction was ratified by the Provincial Executive Power and the City’s Legislative Power by means of Executive Order 1289/2019 (published in the Official Gazette of the Province of Buenos Aires on October 2, 2019) and Legislative Resolution No. 161/19 (published in the Official Gazette of the CABA on July 17, 2019), respectively.

Furthermore, within the framework of the change of jurisdiction and as a condition for the transfer, on May 10, 2019, the Company and the Governmental Secretariat of Energy, on behalf of the Federal Government, entered into an Agreement on the Regularization of Obligations, putting an end to the mutual pending claims originated in the 2006-2016 Transitional Tariff Period.

By virtue of this Agreement, the Company (i) waives any rights to which it may be entitled and abandons any actions against the Federal Government, including the complaint filed by edenor in 2013 for failure to comply with the obligations resulting from the Agreement on the Renegotiation of the Concession Agreement (the "Adjustment Agreement”) entered into on February 13, 2006; (ii) undertakes to pay works and loans for consumption (“mutuums”)-related debts originated in the transition period; (iii) agrees to pay users certain penalty and compensation amounts relating to that period; and (iv) agrees to make investments, in addition to those agreed upon in the RTI, aimed at contributing to improving the reliability and safety of the service.

 In return, the Federal Government partially recognizes the claim duly made by the Company -referred to in caption (i) of the previous paragraph-, by fully offsetting pending obligations with the MEM for electric power purchases made during the transition period, partially cancelling the mutuums for investments granted by CAMMESA also during that period, and cancelling penalties payable to the National Treasury.

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The implementation of this agreement implied, on a one-time-only basis, the partial recognition of the claim made by the Company for an amount of $ 6,906.4 million as compensation for the Federal Government’s failure to comply with obligations for 10 years during the Transitional Tariff Period, which stated in constant values amounts to $ 7,760.7 million, as well as the adjustment of the liabilities recorded at the time of the agreement, replicating the conditions applied to all the sector’s distributors, generating a profit of $ 6,160 million, which stated in constant values amounts to $ 6,922 million. Additionally, $ 306 million from the Federal Government and $ 273 million from the Province of Buenos Aires were recognized, which stated in constant values amount to $ 324 million and $ 288.9 million, respectively. These effects are disclosed in the “Agreement on the Regularization of Obligations” line item of the Condensed Interim Statement of Comprehensive Income, and do not imply any inflow of funds whatsoever for the Company; on the contrary, the Company must comply in the next 5 years with the investment plan stipulated in the above-mentioned agreement, which will be aimed at contributing to the improvement of the reliability and/or safety of the service as a whole, in addition to complying with the Investment Plan duly agreed upon in the tariff structure review (RTI) approved by Resolution 63/2017, which, together with the penalties payable to users, the payment of liabilities for mutuums and works, and the payment of the generated income tax amount, implies an actual disbursement of funds for a total approximate amount of $ 7,600 million, in a 5-year term.

Additionally, it was agreed that the receivable amounts in favor of the Company for the consumption of shantytowns with community meters generated from July 2017 through December 31, 2018 -exclusively with regard to the percentage agreed upon by the Federal Government-, relating to the framework Agreement (Note 2.c.) for $ 470.8 million, and the receivable amount resulting from applying the cap to the bills of users benefited from the Social Tariff for $ 923 million, would be offset against both part of the debt the Company held with CAMMESA for loans received for the carrying out of works, and the debts the Company held with CAMMESA for the investments made in the Costanera – Puerto Nuevo – Malaver 220kV Interconnection works, carried out through the Trust for the Management of Electric Power Transmission Works (FOTAE), and for the carrying out of the Tecnópolis Substation’s works.

In this framework, the Company Extraordinary Shareholders’ Meeting dated June 10, 2019 not only ratified the actions taken by the Board of Directors in the negotiations and signing of the Agreement on the Implementation of the transfer of jurisdiction and the Agreement on the Regularization of obligations, but also approved the waiver of rights, actions and claims against the Federal Government originated in the Transitional Tariff Period, and the abandonment of the lawsuit filed in 2013 against the Federal Government.

In accordance with that which has been previously mentioned, the negative working capital of $ 2,669.5 million as of September 30, 2019 is a reflection of the Company’s still deteriorated economic and financial equation, mainly as a consequence of the constant increase in operating costs.

In this regard, and taking into consideration that the Company operates in a complex economic context, whose main variables have recently seen a high degree of volatility, both nationally and internationally, being aware of circumstances, such as:

o   A year-on-year 2.5% fall of the GDP in the first half of the year;

o   A 37.58% cumulative inflation rate between January 1, 2019 and September 30, 2019;

o   A significant devaluation of the Argentine peso as from the month of August, giving rise to an unexpected withdrawal of US dollar-denominated deposits from the financial system with the consequent fall of the Argentine Central Bank’s reserves and an increase in the reference interest rate above 74%.

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Confronted with this situation, the Federal Government decided to implement certain measures, among which the following can be mentioned:

o   Setting of specific time limits for the inflow and settlement of export proceeds;

o   BCRA’s prior authorization for the purchase of external assets for companies;

o   Deferral of the payment of certain government debt instruments;

o   Fuel price control;

o   Electricity rate schedules maintenance agreement, Note 2.a.

At the date of issuance of these financial statements, this context of volatility and uncertainty continues to exist.

In that regard, the Company’s Board of Directors permanently monitors the development of the variables that affect the Company’s business, in order to define its course of action and identify the potential impacts on its financial and cash position. These condensed interim financial statements should be read taking these circumstances into account.

c)   Framework Agreement and Social Tariff

As a consequence of the transfer of jurisdiction of the public service of electricity distribution, provided for by Law 27,467, from the Federal Government to the Province of Buenos Aires and to the City of Buenos Aires (Note 2.b.), the Company is undertaking a review, with the new Grantors of the Concession, of the treatment to be given to the low-income areas and shantytowns’ consumption of electricity as from January 1, 2019.

In this framework, the Government of the Province of Buenos Aires enacted Law No. 15,078 on General Budget, which provided that the Province of Buenos Aires will pay for the aforementioned consumption the same amount as that paid in 2018, and that any amount in excess of that shall be borne by the Municipalities in whose territories the particular shantytowns are located. Such consumption shall be previously approved by the regulatory agencies or local authorities having jurisdiction in each area.

Furthermore, the Company and the Federal Government entered into an Agreement on the extension of the new framework agreement, which provides for the following:

-        To extend as from January 1, 2019 and until May 31, 2019 the New framework agreement entered into on October 6, 2003;

-        The Federal Government’s commitment to pay the amounts of its economic contribution for the supply of electricity to shantytowns, after the energy associated with the Social Tariff has been discounted;

-        That the receivable amounts recognized by this extension are assigned by the Company to Edesur.

Based on the terms of the Agreement on the Regularization of Obligations (Note 2.b), and the Agreement on the extension of the new framework agreement, as of September 30, 2019, the Company recognized revenue from the sale of electricity under the Framework Agreement for $ 470.8 million, which stated in constant values amounts to $ 529.1 million, and $ 209.7 million, both relating to the Federal Government’s participation until May 31, 2019.

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Additionally, and as previously mentioned, the Extension Agreement provides that the receivable amounts thereby recognized are assigned by the Company to Edesur, and that the Federal Government undertakes to instruct CAMMESA to offset them against the mutuum-related debts Edesur has with the Federal Government. In this regard, the Company and Edesur entered into the relevant assignment of receivables agreement, which provides that, in consideration for the assigned receivables, Edesur will pay Edenor the sole, full and final sum of $ 167.8 million.

With regard to the discounts under the system of caps applicable to customers benefited from the Social Tariff that the Federal Government owed to this Distributor, the Company recorded revenue for $ 923 million, which stated in constant values amounts to $ 1,037.2 million, relating to the December 2017-December 2018 period, as a consequence of the implementation and subsequent cancellation thereof resulting from the Agreement on the Regularization of Obligations (Note 2.b).

Note 3 |    Basis of preparation

These condensed interim financial statements for the nine-month period ended September 30, 2019 have been prepared in accordance with the provisions of IAS 34 “Interim Financial Reporting”, incorporated by the CNV.

This condensed interim financial information is measured in pesos (the legal currency in Argentina) restated in accordance with that mentioned under the following title, which is also the presentation currency, and must be read together with the audited Financial Statements as of December 31, 2018 prepared under IFRS.

The condensed interim financial statements for the nine-month period ended September 30, 2019 have not been audited; they have been reviewed by the Independent Accountant in accordance with ISRE 2,410, whose scope is substantially less than that of an audit performed in accordance with IFRS. The Company’s Management estimates that they include all the necessary adjustments to fairly present the results of operations for each period. The result of operations for the nine and three-month period ended September 30, 2019 does not necessarily reflect the Company’s results in proportion to the full fiscal year. They were approved for issue by the Company’s Board of Directors on November 7, 2019.

Restatement of financial information

 The financial statements are stated in terms of the measuring unit current at September 30, 2019, in accordance with IAS 29 “Financial reporting in hyperinflationary economies”, using the indexes established by the FACPCE, based on the price indexes published by the INDEC, or an estimate thereof considering the REM when, at the time of preparing the information, they were not available.  

Taking into consideration the indexes established by the CNV, the inflation rate in the period between January 1, 2019 and September 30, 2019 amounted to 37.58%.

Comparative information

The balances as of December 31, 2018 and for the nine and three-month period ended September 30, 2018, disclosed in these condensed interim financial statements for comparative purposes, arise as a result of restating the financial statements as of those dates to the purchasing power of the currency at September 30, 2019, as a consequence of the restatement of the financial information described in the preceding paragraph.

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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, 2018.

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, except for that mentioned below:

Impacts of adoption of IFRS 16

The Company has elected to apply IFRS 16 retrospectively using the simplified approach, in relation to the lease contracts identified as such under IAS 17, recognizing the cumulative effect of the application as an adjustment to the opening balance of retained earnings as from January 1, 2019, without restating the comparative information.

Management has reviewed the lease contracts that are in full force and effect and has recognized a right-of-use asset relating to the lease liability amount (which is equivalent to the present value of the remaining lease payments). All the other identified lease commitments relate to contracts that either expire within 12 months from the adoption of this standard or refer to short-term leases, which continue to be recognized by the Company on a straight-line basis over the lease term.

The Company maintained, at the adoption date, the carrying amount of the right-of-use assets and lease liabilities that were classified as finance leases under IAS 17.

Finally, no transition adjustments have been made for leases in which edenor acts as lessor.

Consequently, the Company has not recognized any adjustment to the opening balance of unappropriated retained earnings on account of the initial application of IFRS 16.

Note 5 |    Financial risk management

The Company’s activities and the market in which it operates expose the Company to a series of financial risks: market risk (including currency risk, cash flows interest rate risk, fair value interest rate risk and price risk), credit risk and liquidity risk.

            There have been no significant changes in risk management policies since the last fiscal year end. 

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a.           Market risks

                         i.            Currency risk

As of September 30, 2019 and December 31, 2018, the Company’s balances in foreign currency are as follow:

(1)       The exchange rates used are the BNA exchange rates in effect as of September 30, 2019 for US Dollars (USD), Euros (EUR), Swiss Francs (CHF) and Norwegian Krones (NOK).

                        ii.            Fair value estimate

The Company classifies the measurements of financial instruments at fair value using a fair value hierarchy that reflects the relevance of the variables used to carry out such measurements. The fair value hierarchy has the following levels:

· Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

· Level 2: inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. prices) or indirectly (i.e. derived from the prices).

· Level 3: inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).

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Interest rate risk is the risk of fluctuation in the fair value or cash flows of an instrument due to changes in market interest rates. The Company’s exposure to interest rate risk is mainly related to its long-term debt obligations.

Indebtedness at floating rates exposes the Company to interest rate risk on its cash flows. Indebtedness at fixed rates exposes the Company to interest rate risk on the fair value of its liabilities.

As of September 30, 2019 and December 31, 2018 -except for the financial loan granted by ICBC Bank in October 2017, in respect of which on April 12, 2018 the Company entered into a hedge transaction with Citibank London-, 100% of the loans were obtained at fixed interest rates.

The Company’s policy is to keep the largest percentage of its indebtedness in instruments that accrue interest at fixed rates.

Note 6 |    Critical accounting estimates and judgments

The preparation of the condensed interim financial statements requires the Company’s Management to make estimates and assessments concerning the future, exercise critical judgments and make assumptions that affect the application of the accounting policies and the reported amounts of assets and liabilities and revenues and expenses. 

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These estimates and judgments are evaluated and are based upon past experience and other factors that are reasonable under the existing circumstances. Future actual results may differ from the estimates and assessments made at the date of preparation of these condensed interim financial statements and the variations may be significant.

In the preparation of these condensed interim financial statements, there were no changes in either the critical judgments made by the Company when applying its accounting policies or the information sources of estimation uncertainty with respect to those applied in the Financial Statements for the year ended December 31, 2018.

Note 7 |    Contingencies and lawsuits

At the date of issuance of these condensed interim financial statements, there are no significant changes with respect to the situation reported by the Company in the Financial Statements as of December 31, 2018, except for the increase recorded in both interest rates and the United States dollar exchange rate, as a consequence of a combination of external factors and the local macroeconomic context.

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