Raymond James Argentina
Edenor – Market Perform 3;
Companies Mentioned – EDN, EDN.AR
EDN: A First Look at the New Tariff Scheme, Not a Game Changer for Edenor
Bottom-Line: On February 1, 2016, the National Electricity Regulatory Entity (ENRE) announced the final new tariff scheme for energy distributors in Resolution 1/2016. According to our math, the new scheme is mostly in-line with our base case, as it should compensate the companies for the discontinuation of Resolution 32/2015 (which gave Edenor a tariff increase of close to 2x fully paid by the government), and the PUREE (penalties paid by consumers for increasing consumption), plus adjusting the value added for distribution (VAD) for inflation. As was the case with the previous announcements, the final scheme is mostly related to subsidy cuts, which should translate into significant increases in consumer bills, but with no material impact on Edenor’s profits.
* Details about ENRE’s Resolution 1/2016: This resolution is the last in a series of announcements related to the electricity market, which began last week. It sets the Transition Tariff Scheme, stating the final tariff that Edenor and Edesur will charge their customers, including the increase in: 1) the price to be paid in the Wholesale Market; and 2) the VAD. It should be noted that this is a transition scheme, as a full Integral Tariff Revision should be introduced by the end of 2016. In addition, the new resolution updated the charge that customers will pay for infrastructure and maintenance investments, which should increase by 100%-150%. On the tariff side, Resolution 1 states that, beginning in March, electricity bills will be paid for on a monthly basis (versus bi-monthly at present), and tariff revisions will be made every six months taking any change in costs into consideration. Lastly, this resolution puts the tariff scheme in place related to the government’s Stimulus Plan and Social Tariff.
* Previous Announcements: Before the new final scheme was announced, the government introduced two other resolutions (Resolution 6/2016 and Resolution 7/2016) last week. The first introduced a ‘Unique National and Seasonal Summer Price’ in the wholesale electricity market (WEM). Although the bill paid by consumers will increase materially, the new price will still be below the real cost of generation. Prior to these changes, this difference between the generation cost and end-user prices was carried by the government, by means of direct subsidies to consumers. The second resolution introduced several changes to the value added for distribution and other charges for electricity distributors. This Resolution eliminated: 1) the so-called PUREE charge (penalties paid by consumers for increasing consumption); and 2) Resolution 32/2015, which gave Edenor a tariff increase of close to 2x (fully paid by the government during 2015). Despite this, the final tariff announced yesterday in Resolution 1 was still pending. For more details on this Resolutions please read our report ‘Shedding Some Light on the Recent Tariff Announcements‘ published on January 29, 2016.
* What does it mean for Edenor? The latest Resolution is mostly in-line with our base case, as it should compensate the company for the elimination of the subsidies under Resolution 32, and the discontinuation of the PUREE, while still recognizing an inflation-related increase. For Edenor, this means that the charges that were accounted for under the ‘other operating income’ line (due to the PUREE and Resolution 32), will move to the revenue line, as they should be recognized as VAD. In addition, the price that Edenor pays for energy purchases will go up, but this is a pass-through cost, so it should have no impact on profits. All in all, the amount that Edenor collects (including what the customer pays, plus the subsidies coming from Resolution 32) from an average small residential consumer, which represent ~85% of the client base, should go up close to 30%. For more information please see Exhibit 1.
* What does it mean for Edenor Residential Customers? On the customer side, these announcements will translate into a material increase in electricity bills. This will be mainly driven by: 1) the higher cost paid for electricity in the WEM; 2) the elimination of Resolution 32/2015; and 3) an increase in VAD. All in all, the average bill for residential customers should increase by between 3x to 7x. For more information please see Exhibit 1.