20-F 1 ednform20f_2013.htm FORM 20-F 2013 ednform20f_2013.htm - Generated by SEC Publisher for SEC Filing  

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013 Commission File number: 001-33422

Empresa Distribuidora y Comercializadora Norte S.A.
(Exact name of registrant as specified in its charter)

Distribution and Marketing Company of the North S.A.

Argentine Republic

(Translation of registrant’s name into English)

(Jurisdiction of incorporation or organization)

Avenida Del Libertador 6363

Ciudad de Buenos Aires, C1428ARG

Buenos Aires, Argentina
(Address of principal executive offices)

Leandro Montero

Tel.: +54 11 4346 5511 / Fax: +54 11 4346 5325 Avenida Del Libertador 6363 (C1428ARG)
Buenos Aires, Argentina

Chief Financial Officer

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class:

Name of each exchange on which registered

Class B Common Shares

New York Stock Exchange, Inc.*

American Depositary Shares, or ADSs, evidenced by American Depositary Receipts, each representing 20 Class B Common Shares

New York Stock Exchange, Inc.

*    Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

__________

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: N/A

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 462,292,111 Class A Common Shares, 442,210,385 Class B Common Shares and 1,952,604 Class C Common Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes No þ 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934.  Yes No þ 

Note:  Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer Accelerated filer þ  Non-accelerated filer

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:  U.S. GAAP
International Financial Reporting Standards as issued by the International Accounting Standards Board
þ  Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17 Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes No þ 

 

[BUENOSAIRES 51606_4]


 
 

 

NOTE:  NOT A MACPAC TOC!  Use F9 to update, NOT the “TOC” button.

 

Item 1.  Identity of Directors, Senior Management and Advisors  1
Item 2.  Offer Statistics and Expected Timetable  1
Item 3.  Key Information  1
Item 4.  Information on the Company  30
Item 4A.  Unresolved Staff Comments  62
Item 5.  Operating and Financial Review and Prospects  62
Item 6.  Directors, Senior Management and Employees  104
Item 7.  Major Shareholders and Related Party Transactions  114
Item 8.  Financial Information  117
Item 9.  The Offer and Listing  123
Item 10.  Additional Information  126
Item 11.  Quantitative and Qualitative Disclosures about Market Risk  151
Item 12.  Description of Securities Other than Equity Securities  153
Item 13.  Defaults, Dividend Arrearages and Delinquencies  154
Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds  154
Item 15.  Controls and Procedures  154
Item 16A.  Audit Committee Financial Expert  155
Item 16B.  Code of Ethics  155
Item 16C.  Principal Accountant Fees and Services  156
Item 16D.  Exemptions from the Listing Standards for Audit Committees  156
Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers  156
Item 16F.  Change in Registrant’s Certifying Accountant  156
Item 16G.  Corporate Governance  156
Item 16H.  Mine Safety Disclosures  160
Item 17.  Financial Statements  161
Item 18.  Financial Statements  161
Item 19.  Exhibits  161
Index to Financial Statements  F-1

 

 

[BUENOSAIRES 51606_4]


 
 

 

PART I

Item 1.         Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2.         Offer Statistics and Expected Timetable

Not applicable.

Item 3.         Key Information

In this annual report, except as otherwise specified, references to “we”, “us”, “our” and “the Company” are references to (i) Empresa Distribuidora y Comercializadora Norte S.A., or “Edenor”, on a standalone basis prior  to  March 1, 2011, (ii) Edenor, Empresa Distribuidora Eléctrica Regional S.A. (“Emdersa”)  and Aeseba S.A. (“Aeseba”) ,between March 1, 2011 and March 31, 2013, (iii) Edenor and Emdersa”, between March 1, 2011 and September 30, 2013, and (iv) Edenor on a standalone basis, from October 1, 2013 through the date of filing of this annual report. References to Edenor, Emdersa and/or Aeseba on standalone basis are made by naming each company as the case may be.  For more information, see “Item 4—Information on the Company—History and Development of the Company.”

FORWARD‑LOOKING STATEMENTS

This annual report includes forward‑looking statements, principally under the captions “Item 3. Key Information—Risk factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” We have based these forward‑looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business.  Forward‑looking statements may also be identified by words such as “believes,” “expects,” “anticipates,” “projects,” “intends,” “should,” “seeks,” “estimates,” “future” or similar expressions.  Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ materially from those expressed or implied in our forward‑looking statements, including, among other things:

·         the outcome and timing of the integral tariff revision process (Revisión Tarifaria Integral or “RTI”) and, more generally, uncertainties relating to future government approvals to increase or adjust our tariffs;

·         general political, economic, social, demographic and business conditions in the Republic of Argentina, or Argentina”  and particularly in the geographic market we serve;

·         the impact of regulatory reform and changes in the regulatory environment in which we operate;

·         electricity shortages;

·         potential disruption or interruption of our service;

·         restrictions on the ability to exchange Pesos into foreign currencies or to transfer funds abroad;

·         the revocation or amendment of our concession by the granting authority;

·         our ability to implement our capital expenditure plan, including our ability to arrange financing when required and on reasonable terms;

·         fluctuations in exchange rates, including a devaluation of the Peso;

·         the impact of high rates of inflation on our costs;

·         our ability to access to financing under reasonable terms, and

·         additional matters identified in “Risk factors”.

 

 

 

1

 


 

Table of Contents

 

 

 

                                                   

Forward‑looking statements speak only as of the date they were made, and we undertake no obligation to update publicly or to revise any forward‑looking statements after we file this annual report because of new information, future events or other factors.  In light of these limitations, undue reliance should not be placed on forward‑looking statements contained in this annual report.

SELECTED FINANCIAL DATA

The following tables present our summary financial data for the years ended December 31, 2013, 2012 and 2011. This information should be read in conjunction with our audited consolidated financial statements as of December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013, 2012 and 2011 (the Consolidated Financial Statementsˮ), the related notes thereto and the information under “Item 5. Operating and Financial Review and Prospectsˮ included elsewhere in this annual report. The financial data as of December 31, 2013, has been derived from our Consolidated Financial Statements.

Our 2013 consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB, and these have been approved by resolution of the Board of Directors’ meeting held on March 7, 2014.

The selected Consolidated Statement of Comprehensive Income (Loss) data for the years ended December 31, 2013 and 2012, and the selected consolidated  Statement of Financial Position data as of December 31, 2013 and 2012 have been prepared in accordance with International Financing Reporting Standards (“IFRSˮ), as issued by the International Accounting Standards  Board (IASBˮ) and have been derived from our Consolidated Financial Statements, which were audited by Price Waterhouse & Co. S.R.L. (“PwC”), member firm of PricewaterhouseCoopers network, whose report is dated March 7, 2014 and is included elsewhere herein.  See “Item 18 – Financial Statements”.

We have prepared our annual financial statements for the fiscal year ended December 31, 2013 included herein, assuming that we will continue as a going concern. Our independent auditors, PwC, issued a report dated March 7, 2014 on our financial statements as of and for the years ended December 31, 2013 and 2012, which contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern.  As discussed in Note 1 to the Consolidated Financial Statements, the delay in obtaining tariff increases, the cost adjustment recognition as requested by us in accordance with the terms of the Adjustment Agreement (as defined below) and the continuous increase in operating expenses that are necessary to maintain the level of service have significantly affected our economic and financial position and have raised substantial doubt with respect to our ability to continue as a going concern.  Management's plans in response to these matters are also described in Note 1. However, our Consolidated Financial Statements as of December 31, 2013 and for the years ended December 31, 2013, 2012 and 2011 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty.  See “Item 3: Key Information—Risk Factors—Risks Relating to Our Business—Failure or delay to negotiate further improvements to our tariff structure, including increases in our distribution margin, and/or to have our tariffs adjusted to reflect increases in our distribution costs in a timely manner or at all, has affected our capacity to perform our commercial obligations and could also have a material adverse effect on our capacity to perform our financial obligations. As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern.” As a result, there is substantial doubt with respect to our ability to continue as a going concern.” See “Item 18: Financial Statements.” 

Our Consolidated Financial Statements are included on pages F-1 through F-87 of this annual report.

In accordance with the decision of the Board of Directors to divest and sell the subsidiary Aeseba as of March 31, 2013 and the subsidiaries Emdersa Holding S.A. (Emdersa Holdingˮ or “EHSA”), including Emdersa and its subsidiaries, Empresa Distribuidora de San Luis S.A. (“Edesal”), Empresa Distribuidora de La Rioja S.A. (“Edelar”), Empresa Distribuidora de Salta S.A. (“Edesa”) and Emdersa Generación Salta S.A. (“EGSSA”), as of December 31, 2011, we have classified the corresponding assets and liabilities associated to these subsidiaries in the Consolidated Financial Statements as of December 31, 2013, 2012 and 2011 as “Assets of disposal groups classified as held for sale” and “Liabilities of disposal groups classified as held for sale”. As of October 11, 2011, October 25, 2011 and May 10, 2012 the Company sold its direct and indirect stake in EGSSA (subject to a condition precedent related to Emdersa’s spin-off), Edesal and Edesa, respectively. The corresponding charges to results have been included within “Loss (profit) from discontinued operations” line item in our consolidated statements of comprehensive loss for the years ended December 31, 2012 and 2011. As of April 5, 2013, the Company sold its stake in Aeseba. The corresponding charges to results have been included within “Loss from Discontinued operations” line item in our consolidated statements of comprehensive loss for the year ended December 31, 2013.

2

 


 

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In this annual report, except as otherwise specified, references to “$”, “U.S.$” and “Dollars” are to U.S. Dollars, and references to “Ps.” and “Pesos” are to Argentine Pesos.  Solely for the convenience of the reader, Peso amounts as of and for the year ended December 31, 2013 have been translated into U.S. Dollars at the selling exchange rate for U.S. Dollars quoted by Banco de la Nación Argentina (the “Banco Nación”) on December 31, 2013, which was  Ps. 6.521 to U.S. $1.00, unless otherwise indicated. The U.S. Dollar equivalent information should not be construed to imply that the Peso amounts represent, or could have been or could be converted into, U.S. Dollars at such rates or any other rate.  In January 2014, the Peso lost approximately 23% of its value with respect to the Dollar.  On April 23, 2014, the exchange rate was Ps. 8.00 to U.S.$1.00. As a result of fluctuations in the Dollar/Argentine Peso exchange rate, the exchange rate at such date may not be indicative of current or future exchange rates. See “Item 3. Key Information—Exchange Rates” and “Item 3.  Key Information—Risk Factors—Risks Relating to Argentina—Fluctuations in the value of the Argentine Peso could adversely affect the Argentine economy, which could, in turn adversely affect our results of operations.”

 

 

3

 


 

Table of Contents

 

 

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, any discrepancies between the totals and the sums of amounts are due to rounding.

Consolidated Statement of Comprehensive Income (Loss)*

   

 

 

 

 

 

       

 

   

2013

 

2013

 

2012

 

2011

 

     

(Figures in millions)

 

 

Continuing Operations

     

 

 

 

 

 

Revenue from sales (1)

 

U.S.$ 527.6

 

Ps. 3,440.7

 

Ps. 2,976.2

 

Ps. 2,302.0

Electric power purchases

 

(314.4)

 

(2,050.3)

 

(1,740.2)

 

(1,130.9)

Subtotal

 

213.3

 

1,390.4

 

1,236.0

 

1,171.1

Transmission and distribution expenses

 

(315.2)

 

(2,055.3)

 

(1,344.1)

 

(970.5)

Gross (loss) profit

 

(102.0)

 

(664.9)

 

(108.1)

 

200.6

       

 

 

 

 

 

Selling expenses

 

(84.1)

 

(548.3)

 

(352.9)

 

(261.9)

Administrative expenses

 

(49.8)

 

(324.8)

 

(249.4)

 

(196.6)

Other operating income

 

9.4

 

61.6

 

32.3

 

22.5

Other opertaing expense

 

(21.9)

 

(142.8)

 

(150.2)

 

(93.8)

Gain from interest in joint ventures

 

-

 

-

 

-

 

-

Gain from acquisition of companies

 

-

 

-

 

-

 

435.0

Revenue from customers contributions exempt from devolutions

 

0.1

 

0.7

 

-

 

-

Operating (loss) profit before Resolution SE 250/13 and Note 6852/13

 

(248.2)

 

(1,618.5)

 

(828.4)

 

105.8

Higher costs recognition - Resolution SE 250/13

 

449.8

 

2,933.1

 

-

 

-

Operating profit (loss)

 

201.6

 

1,314.6

 

(828.4)

 

105.8

Financial income (2)

 

44.0

 

287.1

 

75.5

 

53.5

Financial expenses (3)

 

(77.4)

 

(504.9)

 

(226.0)

 

(150.6)

Other financial expense

 

(41.9)

 

(273.1)

 

(168.1)

 

(93.5)

Net financial expense

 

(75.3)

 

(490.9)

 

(318.6)

 

(190.6)

Profit (Loss) before taxes

 

126.3

 

823.7

 

(1,147.0)

 

(84.8)

Income tax

 

6.8

 

44.1

 

116.7

 

(82.2)

Profit (Loss) for the year from continuing operations

 

133.1

 

867.8

 

(1,030.3)

 

(167.0)

(Loss) Profit from discontinued operations

 

(14.6)  

 

(95.1)

 

16.9

 

(124.4)

Profit (Loss) for the year

 

118.5

 

772.7

 

(1,013.4)

 

(291.4)

       

 

 

 

 

 

Profit (Loss) for the year attributable to:

     

 

 

 

 

 

Owners of the parent

 

118.3

 

771.7

 

(1,016.5)

 

(304.1)

Non-controlling interests

 

0.2

 

1.0

 

3.1

 

12.7

Profit (Loss) for the year

 

U.S.$ 118.5

 

Ps. 772.7

 

Ps. (1,013.4)

 

Ps. (291.4)

       

 

 

 

 

 

Profit (Loss) for the year attributable to the owners of the parent:

     

 

 

 

 

 

Continuing operations

 

133.1

 

867.9

 

(1,030.3)

 

(167.0)

Discontinued operations

 

(14.7)

 

(96.1)

 

13.8

 

(137.1)

   

118.4

 

771.8

 

(1,016.5)

 

(304.1)

       

 

 

 

 

 

 

     

 

 

 

 

 

Other comprehensive income

     

 

 

 

 

 

Items that will not be reclassified to profit or loss

     

 

 

 

 

 

       

 

 

 

 

 

       

 

 

 

 

 

Results related to benefit plans

 

(3.2)

 

(21.0)

 

7.9

 

(10.2)

Tax effect of actuarial income (losses) on benefit plans

 

1.1

 

7.3

 

(2.8)

 

3.6

Total other comprehensive loss from discontinued operations

 

-

 

-

 

(2.1)

 

(5.7)

Total other comprehensive (loss) income

 

(2.1)

 

(13.6)

 

3.0

 

(12.3)

Comprehensive income for the year attributable to:

     

 

 

 

 

 

       

 

 

 

 

 

Owners of the parent

 

116.3

 

758.1

 

(1,013.2)

 

(315.4)

4

 


 

Table of Contents

 

 

Non-controlling interest

 

0.2

 

1.0

 

2.8

 

11.7

Comprehensive income (loss) for the year

 

116.4

 

759.1

 

(1,010.4)

 

(303.7)

       

 

 

 

 

 

Comprehensive income (loss) for the year attributable to owner of the parent

     

 

 

 

 

 

Continuing operations

 

116.1

 

757.1

 

(1,025.1)

 

(173.6)

Discontinued operations

 

0.2

 

1.0

 

11.9

 

(141.8)

   

U.S.$ 116.3

 

Ps. 758.1

 

Ps. (1,013.2)

 

Ps. (315.4)

Basic and diluted earnings (loss) per share attributable to the owners of the parent:

     

 

 

 

 

 

Basic and diluted earnings (loss) per share from continuing operations

 

0.154

 

1.004

 

(1.149)

 

(0.186)

Basic and diluted (loss) earnings per share from discontinued operations

 

(0.017)

 

(0.111)

 

0.015

 

(0.153)

Basic and diluted earnings (loss) per ADS attributable to the owners of the parent: (4)

     

 

 

 

 

 

Basic and diluted earnings (loss) per ADS from continuing operations

 

3.080

 

20.086

 

(22.971)

 

(3.723)

Basic and diluted (loss) earnings per ADS from discontinued operations

 

(0.341)

 

(2.225)

 

0.308

 

(3.057)

(*)      Certain amounts of the presented financial data for comparative purposes (2012 and 2011) have been reclassified (with regard to the consolidated financial statements as of such dates) following the disclosure criteria used for the consolidated financial statements as of December 31, 2013, mainly due to discontinued operations.

 

(1)       Revenue from operations is recognized on an accrual basis and derives mainly from electricity distribution. Such revenue includes electricity supplied, whether billed or unbilled, at the end of each year, and has been valued on the basis of applicable tariffs and the charges determined by the Resolution 347/12

(2)       Includes interest on cash equivalents at December 31, 2013 and 2012 for Ps. 2.9 million and Ps. 32.6 million, respectively, and net interest for Ps.197.5 million relating to the CMM and the PUREE.

(3)       Net of interest capitalized at December 31, 2013, 2012 and 2011 for Ps. 24.5 million ,Ps. 25.4 million and Ps. 16.1 million respectively.

 

(4)       Each ADS represents 20 Class B common shares.

 

Consolidated Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

2013

 

2012

 

2011

 

 

 

(Figures in millions)

 

 

ASSETS

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

Property, plant and equipment

795.8

 

5,189.3

 

4,344.6

 

3,995.3

Intangible assets

-

 

-

 

845.8

 

793.0

Interest in joint ventures

0.1

 

0.4

 

0.4

 

0.4

Trade receivables

-

 

-

 

2.0

 

45.7

Other receivables

30.6

 

199.4

 

195.0

 

50.3

Total non-current assets

U.S.$ 826.5

 

Ps. 5,389.1

 

Ps. 5,387.8

 

Ps. 4,884.70

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Assets under construction

-

 

-

 

84.5

 

45.5

Inventories

12.9

 

83.9

 

85.0

 

45.3

Trade receivables

123.2

 

803.1

 

889.4

 

534.7

Derivative financial instruments

-

 

-

 

-

 

1.3

Other receivables

80.1

 

522.1

 

127.2

 

76.3

Financial assets at fair value through profit or loss

33.2

 

216.4

 

3.4

 

2.1

Cash and cash equivalents

37.3

 

243.5

 

71.1

 

130.5

Total current assets

U.S.$ 286.6

 

Ps. 1,869.0

 

Ps. 1,260.6

 

Ps. 835.7

Assets of disposal group classified as held for sale

-  

 

-

 

223.4

 

1,291.1

TOTAL ASSETS

U.S.$ 1,113.1

 

Ps. 7,258.1

 

Ps. 6,871.8

 

Ps. 7,011.5

 

 

 

 

 

 

 

 

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Table of Contents

 

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and reserves attributable to the owners

 

 

 

 

 

 

 

Share capital

U.S.$ 137.6

 

Ps. 897.0

 

Ps. 897.0

 

897.0

Adjustment to share capital

61.0

 

397.7

 

397.7

 

986.1

Additional paid-in capital

0.5

 

3.5

 

3.5

 

21.8

Treasury stock

1.4

 

9.4

 

9.4

 

9.4

Adjustment to treasury stock

1.6

 

10.3

 

10.3

 

10.3

Other comprehensive loss

(4.3)

 

(28.3)

 

(14.7)

 

64.0

Retained earnings/Accumulated deficit

(17.4)

 

(113.4)

 

(885.1)

 

(557.3)

Equity attributable to the owners

180.4

 

1,176.2

 

418.1

 

1,431.4

Non-controlling interest

0.0

 

-

 

71.1

 

415.8

TOTAL EQUITY

180.4

 

1,176.2

 

489.2

 

1,847.2

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

Trade payables

33.9

 

220.8

 

155.3

 

87.7

Deferred revenue

5.2

 

33.7

 

264.4

 

174.8

Other payables (1)

144.9

 

944.7

 

1,894.8

 

1,373.7

Borrowings

200.9

 

1,309.9

 

1,350.7

 

1,189.9

Salaries and social security taxes payable

4.0

 

26.0

 

17.5

 

23.6

Benefit plans

15.7

 

102.7

 

97.4

 

83.5

Provisions

12.7

 

83.1

 

80.0

 

66.1

Tax liabilities

0.7

 

4.4

 

10.0

 

17.7

Deferred tax liability

11.3

 

73.4

 

230.4

 

348.7

Total non-current liabilities

U.S.$ 429.3

 

Ps. 2,798.7

 

Ps. 4,100.5

 

Ps. 3,365.7

Current liabilities

 

 

 

 

 

 

 

Trade payables

380.5

 

2,481.3

 

1,208.7

 

623.7

Borrowings

6.2

 

40.6

 

103.1

 

59.0

Derivative Financial Instruments

-

 

-

 

-

 

-

Salaries and social security taxes payable

64.5

 

420.9

 

383.6

 

275.8

Benefit plans

-

 

-

 

15.0

 

11.3

Tax liabilities

28.0

 

182.5

 

253.6

 

147.7

Other payables

22.6

 

147.2

 

150.4

 

128.6

Provisions

1.6

 

10.7

 

10.5

 

10.3

Total current liabilities

U.S.$ 503.5

 

Ps. 3,283.1

 

Ps. 2,124.9

 

Ps. 1,256.4

Liabilities of disposal group classified as held for sale

0.0

 

-

 

157.3

 

542.2

TOTAL LIABILITIES

U.S.$ 932.8

 

Ps. 6,081.8

 

Ps. 6,382.7

 

Ps. 5,164.3

TOTAL LIABILITIES AND EQUITY

U.S.$ 1,113.2

 

Ps. 7,258.1

 

Ps. 6,871.9

 

Ps. 7,011.5

 

(1)       Includes the amounts collected through the Program for the Rational Use of Electricity Power (PUREE) (net of the Ps. 1,661.1 million compensated pursuant to Resolution 250/2013 and Note 6852/2013, which as of December 31, 2013, 2012 and 2011 amounted to Ps. 108.6 million, Ps. 1,352  million and Ps. 928.7 million, respectively, included under current and non-current liabilities. Edenor is permitted to retain funds from the PUREE that it would otherwise be required to transfer to CAMMESA according to Resolution SS.EE. 1037/07.

 

 

 

6

 


 

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Consolidated Cash Flow

2013

 

2013

 

2012

 

2011

     

(Figures in millions)

   

 

             

Profit (Loss) for the year

U.S.$ 118.5

 

Ps. 772.8

 

Ps. (1,013.4)

 

Ps. (291.3)

Adjustments to reconcile net profit (loss) to net cash flows provided by operating activities:

           

 

Depreciation of property, plant and equipment

32.5

 

212.1

 

192.6

 

184.8

Loss on disposals of property, plant and equipment

0.2

 

1.2

 

1.8

 

1.8

Loss on interest in joint ventures

(0.0)

 

(0.0)

 

(0.0)

 

(0.0)

Net Gain from the repurchase of Corporate Notes

(13.6)

 

(88.9)

 

-

 

(6.5)

Accrued interest, net of interest capitalized

30.1

 

196.6

 

182.6

 

95.3

Exchange differences

56.1

 

365.8

 

192.9

 

100.5

Income tax

(6.8)

 

(44.1)

 

(116.7)

 

82.2

Allowance for the impairment of trade and other receivables, net of recovery

5.2

 

33.7

 

54.4

 

13.2

Provision for contingencies

5.5

 

36.0

 

24.8

 

16.6

Adjustment to present value of other receivables

(0.4)

 

(2.4)

 

2.2

 

(1.2)

Changes in fair value of financial assets

(2.5)

 

(16.1)

 

(39.1)

 

(14.8)

Gain for acquisition of societies

-

 

-

 

-

 

(435.0)

Accrual of benefit plans

3.5

 

22.5

 

20.4

 

9.9

Higher costs recognition - Resolution SE 250/13 and Note SE 685/13

(449.8)

 

(2,933.1)

 

-

 

-

Discontinued operations

25.9

 

168.7

 

287.8

 

349.8

Changes in operating assets and liabilities:

           

 

Net increase in trade receivables

(7.4)

 

(48.5)

 

(306.0)

 

(63.6)

Net increase in other receivables

(17.2)

 

(111.9)

 

(15.3)

 

(44.0)

Increase in inventories

(6.5)

 

(42.7)

 

(18.3)

 

(10.5)

Increase in assets under construction

-

 

-

 

-

 

(8.6)

Increase in trade payables

186.0

 

1,212.7

 

207.7

 

195.6

Increase in salaries and social security taxes payable

14.6

 

95.3

 

88.8

 

63.7

Decrease in benefit plans

(1.2)

 

(7.9)

 

(4.0)

 

(2.7)

(Decrease) / Increase in tax liabilities

(6.9)

 

(44.9)

 

43.4

 

(19.2)

(Decrease) / Increase in deferred revenue

(0.1)

 

(0.7)

 

16.9

 

17.5

Increase in other payables

40.2

 

262.1

 

40.9

 

120.2

Net decrease in provisions

(3.9)

 

(25.3)

 

(12.1)

 

(11.0)

Funds obtained from the program for the rational use of electric power (PUREE) (Res SE No. 1037/07)

75.4

 

491.9

 

410.7

 

338.0

Subtotal before Cammesa financing

77.4

 

505.0

 

242.8

 

680.6

Net Increase for funds obtained - Cammesa financing

165.5

 

1,079.2

 

295.7

 

10.1

Net cash flows provided by operating activities

242.9

 

1,584.2

 

538.5

 

690.7

 

2013

 

2013

 

2012

 

2011

Cash flows from investing activities

           

 

Net (payment for) collection of purchase / sale of financial assets at fair value

(14.9)

 

(97.4)

 

37.8

 

443.5

Acquisitions of property, plant and equipment

(159.5)

 

(1,039.9)

 

(537.9)

 

(434.7)

Payment for adquisition of companies

-

 

-

 

-

 

(442.9)

Payment for adquisition of additional non-controlling interests

-

 

-

 

-

 

(6.4)

Loans granted

   

-

 

(0.5)

 

(39.7)

Collection of financial receivables with related companies

0.3

 

2.1

 

142.4

 

90.6

Collection of receivables from sale of subsidiaries - SIESA

   

2.9  

 

-

 

-

Collection for sales of discontinued operations

   

-  

     

126.7

Incorporation of Cash and Cash equivalents in acquired companies

-

 

-

 

-

 

119.0

Discontinued operations

(19.0)

 

(124.2)

 

(232.1)

 

(610.9)

Net cash flows used in investing activities

(192.7)

 

(1,256.6)

 

(590.4)

 

(754.8)

             

 

Cash flow from financing activities

           

 

Loans taken

-

 

-

 

0.8

 

298.2

Payment of principal and interest on loans

(31.1)

 

(202.5)

 

(165.4)

 

(380.4)

Discontinued operations

3.9

 

25.4

 

136.8

 

55.9

Net cash flows used in financing activities

(27.2)

 

(177.1)

 

(27.8)

 

(26.3)

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Net increase / (decrease) in cash and cash equivalents

23.1

 

150.5

 

(79.7)

 

(90.4)

               

Cash and cash equivalents at beginning of year in the statement of financial position …

U.S.$ 10.9

 

Ps. 71.1

 

Ps. 130.5

 

Ps. 246.0

Cash and cash equivalents at beginning of year included in assets of disposal group classified as held for sale

1.7

 

11.2

 

28.3

 

-

Exchange Differences in cash and cash equivalents

1.6

 

10.7

 

3.2

 

3.3

Net increase / (decrease) in cash and cash equivalents

23.1

 

150.5

 

(79.7)

 

(90.5)

Cash and cash equivalents at year end

U.S.$ 37.3

 

Ps. 243.5

 

Ps. 82.3

 

Ps. 158.8

             

 

Cash and cash equivalents at year end in the statement of financial position

37.3

 

243.5

 

71.1

 

130.5

Cash and cash equivalents at year end included in assets of disposal group classified as held for sale

-

 

-

 

11.2

 

28.3

Cash and cash equivalents at year end

U.S.$ 37.3

 

Ps. 243.5

 

Ps. 82.3

 

Ps. 158.8

             

 

             

 

Supplemental cash flows information

           

 

Non-cash operating, investing and financing activities

           

 

 

(0.5)

 

(3.5)

 

(6.4)

 

4.1

 

(254.7)

 

(1,661.1)

 

-

 

-

 

(176.7)

 

(1,152.3)

 

-

 

-

Decrease in Cammesa payable for purchase of electricity (Res SE 250/13 and Note 6852/13)

(51.3)

 

(334.3)

 

-

 

-

Decrease in financial assets at fair value from subsidiary sale

25.3

 

165.1

 

-

 

-

Increase in financial assets at fair value from repurchase of Corporate Notes

3.2

 

21.0

 

(8.0)

 

10.2

Increase of benefit plans from actuarial losses exposed in other comprehensive income

           

-  

Increase of other debts with related companies from Emdersa Holding S.A. shares purchases

8.1

 

52.8

 

-

 

-

Increase of other receivables for collection of corporate notes with related companies

(6.8)

 

(44.6)

 

-

 

-

Net increase of trade receivables from assets of disposal group classified as held for sale

(7.5)

 

(48.9)

 

-

 

-

Acquisition of property, plant and equipment through increased debt FOTAE

             

Acquired Companies

             

Cash and Cash equivalents

-

 

-

 

-

 

119.0

Property, plant and equipment

-

 

-

 

-

 

1,881.4

Inventories

-

 

-

 

-

 

4.3

Trade receivables

-

 

-

 

-

 

255.3

Other receivables

-

 

-

 

-

 

84.6

Trade payables

-

 

-

 

-

 

(257.8)

Borrowings

-

 

-

 

-

 

(450.0)

Deferred tax liability

-

 

-

 

-

 

(78.8)

Other liabilities

-

 

-

 

-

 

(331.0)

Net Assets

-

 

-

 

-

 

1,227.0

Non-controlling interests

-

 

-

 

-

 

(230.0)

Net assets acquired

-

 

-

 

-

 

997.0

Bargain Purchase

-

 

-

 

-

 

435.0

Cash Paid

-

 

-

 

-

 

(562.0)

Cash and cash equivalents in acquired companies

-

 

-

 

-

 

119.0

Net Cash Flow for acquisition of companies

           

(442.9)  

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Year ended December 31,

 

2013

2012

2011

2010

2009

Operating data

         

Energy sales (in GWh):

21,674

20,760

20,098

19,292

18,220

Residential

9,114

8,662

8,139

7,796

7,344

Small Commercial

1,780

1,688

1,601

1,543

1,470

Medium Commercial

1,828

1,717

1,700

1,634

1,565

Industrial

3,458

3,335

3,442

3,378

3,204

Wheeling System(1)

4,374

4,261

4,156

3,891

3,622

Others:

 

Public Lighting

683

668

656

654

644

Shantytowns

417

409

384

377

351

Others (2)

20

20

20

20

20

Customers (in thousands) (3)

2,773

2,726

2,699

2,662

2,605

Energy Losses (%)

13.0%

13.3%

12.6%

12.5%

11.9%

MWh sold per employee

 6,023.9

7,088.0

7,188.1

7,123.9

6,936.1

Customers per employee

771 

931

965

971

978

 

(1) Wheeling system charges represent our tariffs for large users, which consist of a fixed charge for recognized technical losses and a charge for our distribution margins but exclude charges for electric power purchases, which are undertaken directly between generators and large users.

(2) Represents energy consumed internally by us and our facilities.

(3) We define a customer as one meter. We may supply more than one consumer through a single meter. In particular, because we measure our energy sales to each shantytown collectively using a single meter, each shantytown is counted as a single customer.

 

 

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EXCHANGE RATES

From April 1, 1991 until the end of 2001, the Convertibility Law established a fixed exchange rate under which the Central Bank of Argentina (Banco Central de la República Argentina, the “Central Bank”) was obliged to sell U.S. Dollars at a fixed rate of one Peso per U.S. Dollar (the “Convertibility Regime”).  On January 6, 2002, the Argentine Congress enacted the Public Emergency Law No. 25,561 (the “Public Emergency Law”), formally putting an end to the Convertibility Regime  and abandoning over ten years of U.S. Dollar-Peso parity.  The Public Emergency Law grants the Executive Branch of the Argentine government the power to set the exchange rate between the Peso and foreign currencies and to issue regulations related to the foreign exchange market.  The Public Emergency law has been extended until December 31, 2015.  For a brief period following the end of the Convertibility Regime, the Public Emergency Law established a temporary dual exchange rate system.  Since February 2002, the Peso has been allowed to float freely against other currencies, although the government has the power to intervene by buying and selling foreign currency for its own account, a practice in which it engages on a regular basis.

The following table sets forth the annual high, low, average and period-end exchange rates for U.S. Dollars for the periods indicated, expressed in Pesos per U.S. Dollar at the purchasing exchange rate and not adjusted for inflation.  When preparing our financial statements, we utilize the selling exchange rates for U.S. Dollars quoted by the Banco Nación to translate our U.S. Dollar denominated assets and liabilities into Pesos.  The Federal Reserve Bank of New York does not report a noon buying rate for Pesos.

 

Low

High

Average

Period End

 

(Pesos per U.S. Dollar)

Year ended December 31,

 

 

 

 

2009

3.45

3.85

3.73(1)

3.80

2010

3.79

3.99

3.91(1)

3.98

2011

3.97

4.30

4.13(1)

4.30

2012

4.30

4.92

4.55(1)

4.92

2013

4.93

6.52

5.48(1)

6.52

 

 

 

 

 

 

 

 

 

 

 

Month

 

 

 

 

October 2013

5.80(2)

5.91(2)

5.85

5.91

November 2013

5.93(2)

6.14(2)

6.02

6.14

December 2013

6.16(2)

6.52(2)

6.32

6.52

January 2014

6.55(2)

8.02(2)

7.12

8.01

February 2014

7.76(2)

8.01(2)

7.85

7.87

March 2014

7.86(2)

8.01(2)

7.93

8.00

April 2014(3)

8.00(4)

8.00(4)

8.00

8.00

 

 

 

 

 

_____________________

Source: Banco Nación

(1)           Represents the average of the exchange rates on the last day of each month during the period.

(2)           Average of the lowest and highest daily rates in the month

(3)           Represents the corresponding exchange rates from April 1 through April 23, 2014.

(4)           Represents the average of the lowest and highest daily rates from April 1 through April 23, 2014.

 

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RISK FACTORS  

Risks Related to Argentina

Overview

We are a stock corporation (sociedad anónima) incorporated under the laws of the Republic of Argentina and substantially all of our revenues are earned in Argentina and substantially all of our operations, facilities, and customers are located in Argentina.  Accordingly, our financial condition and results of operations depend to a significant extent on macroeconomic, regulatory, political and financial conditions prevailing in Argentina, including growth, inflation rates, currency exchange rates, interest rates, and other local, regional and international events and conditions that may affect Argentina in any manner.  For example, slower economic growth or economic recession could lead to a decreased demand for electricity in our concession area or to a decline in the purchasing power of our customers, which, in turn, could lead to a decrease in collection rates from our customers or increased energy losses due to illegal use of our service.  Actions of the Argentine government concerning the economy, including decisions with respect to inflation, interest rates, price controls, foreign exchange controls and taxes, have had and could continue to have a material adverse effect on private sector entities, including us.  For example, during the Argentine economic crisis of  2001, the Argentine government froze electricity distribution margins and caused the pesification of our tariffs, which had a materially adverse effect on our business and financial condition and led us to suspend payments on our financial debt at the time. We cannot assure you that the Argentine government will not adopt other policies that could adversely affect the Argentine economy or our business, financial condition or results of operations. In addition, we cannot assure you that future economic, regulatory, social and political developments in Argentina will not impair our business, financial condition or results of operations or cause the market value of our ADSs and Class B common shares to decline.

A global financial crisis and unfavorable credit and market conditions may negatively affect our liquidity, customers, business, and results of operations

The effects of a global credit crisis and related turmoil in the global financial system may have a negative impact on our business, financial condition and results of operations, an impact that is likely to be more severe on an emerging market economy, such as Argentina.  The effect of this economic crisis on our customers and on us cannot be predicted.  Weak economic conditions could lead to reduced demand or lower prices for energy, which could have a negative effect on our revenues.  Economic factors such as unemployment, inflation and the availability of credit could also have a material adverse effect on demand for energy and, therefore, on our financial condition and operating results.  The financial and economic situation may also have a negative impact on third parties with whom we do, or may do, business.  In addition, our ability to access credit or capital markets may be restricted at a time when we would need financing, which could have an impact on our flexibility to react to changing economic and business conditions (see “Argentina’s ability to obtain financing from international markets is limited, which may impair its ability to implement reforms and foster economic growth, and consequently, may affect our business, results of operations and prospects for growth”).  For these reasons, any of the foregoing factors or a combination of these factors could have an adverse effect on our results of operations and financial condition and cause the market value of our ADSs and Class B common shares to decline.

The Argentine economy remains vulnerable and any significant decline could adversely affect our financial condition  

Sustainable economic growth in Argentina is dependent on a variety of factors, including international demand for Argentine exports, the stability and competitiveness of the Argentine Peso against foreign currencies, confidence among consumers and foreign and domestic investors and a stable rate of inflation.

The Argentine economy remains vulnerable, as reflected by the following economic conditions:

·         GDP growth has declined and employment is beginning to show some signals of weakness;

·         inflation has accelerated recently and threatens to continue at those levels;

·         investment as a percentage of GDP remains too low to sustain the growth rate of recent years;

·         the availability of long-term credit is scarce, while international financing remains limited;

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·         the regulatory environment continues to be uncertain;

·         in the climate created by the above conditions, demand for  foreign currency has grown, generating a capital flight effect to which the Argentine government has responded with regulations and currency exchange and transfer restrictions, and it is widely reported that in other countries where the Peso is traded, the Peso/U.S. Dollar exchange rate differs substantially from the official exchange rate in Argentina; and

·         previous GDP performance has depended to some extent on high commodity prices which, despite having a favorable long-term trend, are volatile in the short-term and beyond the control of the Argentine government.

As in the recent past, Argentina’s economy may be adversely affected if political and social pressures inhibit the implementation by the Argentine government of policies designed to control inflation, generate growth and enhance consumer and investor confidence, or if policies implemented by the Argentine government that are designed to achieve these goals are not successful. These events could materially adversely affect our financial condition and results of operations, or cause the market value of our ADSs and our Class B common shares to decline.

We cannot assure you that a decline in economic growth, increased economic instability or the expansion of economic policies and measures taken by the Argentine government to control inflation or address other macroeconomic developments that affect private sector enterprises such as us, all developments over which we have no control, would not have an adverse effect on our business, financial condition or results of operations or would not have a negative impact on the market value of our ADSs and our Class B common shares.

The impact of inflation in Argentina on our costs could have a material adverse effect on our results of operations

Inflation has, in the past, materially undermined the Argentine economy and the Argentine government’s ability to create conditions that permit growth. In recent years, Argentina has confronted inflationary pressure, evidenced by significantly higher fuel, energy and food prices, among other factors.  According to data published by the Instituto Nacional de Estadística y Censos (National Statistics and Census Institute or “INDEC”), the rate of inflation reached 9.5% in 2011, 10.8% in 2012 and 10.6% in 2013. The Argentine government has implemented programs to control inflation and monitor prices for essential goods and services, including freezing the prices of supermarket products, and price support arrangements agreed between the Argentine government and private sector companies in several industries and markets.

A high inflation environment would undermine Argentina’s foreign competitiveness by diluting the effects of the Argentine Peso devaluation, negatively impact the level of economic activity and employment and undermine confidence in Argentina’s banking system, which could further limit the availability of domestic and international credit to businesses. In turn, a portion of the Argentine debt is adjusted by the Coeficiente de Estabilización de Referencia (Stabilization Coefficient, or “CER”), a currency index, that is strongly related to inflation. Therefore, any significant increase in inflation would cause an increase in the Argentine external debt and consequently in Argentina’s financial obligations, which could exacerbate the stress on the Argentine economy.  A continuing high inflation environment could undermine our results of operations as a result of a delay in our ability to, or our inability to, adjust our tariffs accordingly; it could adversely affect our ability to finance the working capital needs of our businesses on favorable terms; and it could adversely affect our results of operations and cause the market value of our ADSs and Class B common shares to decline.

The credibility of several Argentine economic indices has been called into question, which may lead to a lack of confidence in the Argentine economy and may in turn limit our ability to access the credit and capital markets

In January 2007, INDEC modified its methodology used to calculate the consumer price index (the “CPI”), which is calculated as the monthly average of a weighted basket of consumer goods and services that reflects the pattern of consumption of Argentine households. Since then, the credibility of the CPI, as well as other indexes published by the INDEC has been affected. As a result of the uncertainty relating to the accuracy of INDEC indices, the inflation rate of Argentina and the other rates calculated by INDEC could be higher than as indicated in official reports.

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On November 23, 2010, the Argentine government began consulting with the IMF for technical assistance in order to prepare a new national consumer price index with the aim of modernizing the current statistical system.  During the first quarter of 2011, a team from the IMF started working in conjunction with the INDEC to create such an index.  Notwithstanding the foregoing, reports published by the IMF state that its staff also uses alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, and such measures have shown inflation rates that are considerably higher than those issued by the INDEC since 2007.  Consequently, the IMF called on Argentina to adopt remedial measures to address the quality of its official data.  In its meeting held on February 1, 2013, the Executive Board of the IMF found that Argentina’s progress in implementing remedial measures since September 2012 had not been sufficient.  As a result, the IMF issued a declaration of censure against Argentina in connection with the breach of its related obligations to the IMF under the Articles of Agreement and called on Argentina to adopt remedial measures to address the inaccuracy of inflation and GDP data without further delay.

In order to address the quality of official data, a new price index was put in place on February 13, 2014. The new price index represents the first national indicator to measure changes in prices of final consumption by households. While the previous price index only measured inflation in the urban sprawl of the City of Buenos Aires, the new price index is calculated by measuring prices on goods across the entire urban population of the 24 provinces of Argentina. Pursuant to these calculations, the new consumer price index rose by 10% during the first quarter of 2014. The IMF has declared that it will review later in 2014 Argentina’s reports on progress in revising its inflation and gross domestic product statistics.

Any further required correction or restatement of the INDEC indices could result in a decrease in confidence in Argentina’s economy, which could, in turn, have an adverse effect on our ability to access international capital markets to finance our operations and growth, and which could, in turn, adversely affect our results of operations and financial condition and cause the market value of our ADSs and Class B common shares to decline.

Argentina’s ability to obtain financing from international markets is limited, which may impair its ability to implement reforms and foster economic growth and, consequently, may affect our business, results of operations and prospects for growth

In 2005, Argentina restructured part of its sovereign debt that had been in default since the end of 2001.  The Argentine government announced that as a result of this restructuring, it had approximately U.S.$129.2 billion in total gross public debt as of December 31, 2005. Holdout creditors that declined to participate in the exchanges commenced numerous lawsuits against Argentina in several countries, including the United States, Italy, Germany, and Japan. These lawsuits generally assert that Argentina has failed to make timely payments of interest and/or principal on their bonds, and seek judgments for the face value of and/or accrued interest on those bonds.  Judgments have been issued in several proceedings but to date judgment creditors have not succeeded in having those judgments enforced. In at least one case, plaintiffs have asserted that allowing Argentina to make payments under its newly issued bonds and remain in default on its pre-2002 bonds violates the pari passu clause in the original bonds and entitles the plaintiffs to enjoin such payments. The U.S. Court of Appeals for the Second Circuit has ruled in that case that the ranking clause in bonds issued by Argentina prevents Argentina from making such payments unless it makes pro rata payments in respect of defaulted debt that ranks pari passu with the performing bonds.  On August 23, 2013, the United States Second Circuit Court of Appeals ruled in favor of the plaintiffs. On November 18, 2013, the Second Circuit Court of Appeals denied Argentina’s petition for rehearing.

On April 30, 2010, Argentina launched a new debt exchange directed to holders of the securities issued in the 2005 debt exchange and to holders of the securities that were eligible to participate in the 2005 debt exchange (other than Brady bonds) to exchange such debt for new securities and, in certain cases, a cash payment. As a result of the 2005 and 2010 exchange offers, Argentina restructured over 91% of the defaulted debt eligible for the 2005 and 2010 exchange offers. The creditors who did not participate in the 2005 or 2010 exchange offers may continue pursuing legal actions against Argentina for the recovery of debt, which could adversely affect Argentina’s access to the international capital markets.

In September 2008, Argentina announced its intention to cancel its external public debt to Paris Club creditor nations using reserves of the Banco Central de la República Argentina ( the Argentine Central Bank, or the “Central Bank”) in an amount equal to approximately U.S. $6.5 billion. Even though preliminary negotiations have taken place close to the date of this annual report, no agreement has been reached in this respect and, as of the date of this annual report, the Argentine government had not yet cancelled such debt. If no agreement with the Paris Club creditor nations is reached, financing from multilateral financial institutions may be limited or unavailable, which could adversely affect economic growth in Argentina and Argentina’s public finances.

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In addition, foreign shareholders of several Argentine companies have filed claims before the International Centre for Settlement of Investment Disputes (the “ICSID”) alleging that certain government measures adopted during the country’s 2001 crisis were inconsistent with the fair and equitable treatment standards set forth in various bilateral investment treaties to which Argentina is a party. Since May 2005, certain plaintiffs have prevailed against Argentina in such proceedings, including most recently, British Gas whose US$ 185 million award was upheld by the United States Supreme Court. In October 2013, the Argentine government entered into settlement agreements with certain claimants worth U.S.$677 million, to be satisfied with the delivery of newly issued sovereign bonds. Argentina’s past default and its failure to completely restructure its remaining sovereign debt and fully negotiate with the holdout creditors may limit Argentina’s ability to reenter the international capital markets.  Litigation initiated by holdout creditors as well as ICSID claims have resulted and may continue to result in judgments and awards against the Argentine government which, if not paid, could prevent Argentina from obtaining credit from multilateral organizations. Judgment creditors have sought and may continue to seek to attach or enjoin assets of Argentina. An example of this is the Libertad Frigate case, in which a commercial court in Accra, Ghana, granted an order (which has been overturned) to detain an Argentine ship which had entered the Accra port on a routine trip.  In addition, various creditors have organized themselves into associations to engage in lobbying and public relations efforts concerning Argentina’s default on its public indebtedness. Over the years, such groups have unsuccessfully urged passage of federal and New York state legislation directed at Argentina’s defaulted debt and aimed at limiting Argentina’s access to the U.S. capital markets. Although neither the United States Congress nor the New York state legislature has adopted such legislation, we can make no assurance that legislation or other political actions designed to limit Argentina’s access to capital markets will not take effect. 

As a result of Argentina’s default and the events that have followed it, the government may not have the financial resources necessary to implement reforms and foster economic growth, which, in turn, could have a material adverse effect on the country’s economy and, consequently, our businesses and results of operations. 

Furthermore, Argentina’s inability to obtain credit in international markets could have a direct impact on our own ability to access international credit markets to finance our operations and growth, which could adversely affect our results of operations and financial condition and cause the market value of our ADSs and our Class B common shares to decline.

Fluctuations in the value of the Argentine Peso could adversely affect the Argentine economy, which could, in turn adversely affect our results of operations

The devaluation of the Argentine Peso could have a negative impact on the financial condition of many Argentine businesses, including us.  Such situation could negatively impact the ability of Argentine businesses to honor their foreign currency-denominated debt, lead to very high inflation, significantly reduce real wages, jeopardize the stability of businesses whose success depends on domestic market demand, including public utilities and the financial industry, and adversely affect the Argentine government’s ability to honor its foreign debt obligations. On January 2014, the peso lost approximately 23% of its value with respect to the US Dollar.  If the Argentine Peso devalues further, the negative effects on the Argentine economy could have adverse consequences to our businesses, our results of operations and the market value of our ADSs, including as measured in U.S. Dollars.

On the other hand, a significant appreciation of the Argentine Peso against the U.S. Dollar also presents risks for the Argentine economy, including the possibility of a reduction in exports (as a consequence of the loss of external competitiveness). Any such increase could also have a negative effect on economic growth and employment, reduce the Argentine public sector’s revenues from tax collection in real terms, and have a material adverse effect on our business, our results of operations and the market value of our ADSs as a result of the weakening of the Argentine economy in general. 

 

 

Certain measures that may be taken by the Argentine government may adversely affect the Argentine economy and, as a result, our business and results of operations

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During recent years, the Argentine government has increased its direct intervention in the economy, including through the implementation of expropriation and nationalization measures, price controls and exchange controls. 

In November 2008, the Argentine government enacted Law No. 26,425 which provided for the nationalization of the Administradoras de Fondos de Jubilaciones y Pensiones (the AFJPs”) (see “The nationalization of Argentina’s private pension funds caused an adverse effect in the Argentine capital markets and increased the Argentine government’s interest in certain stock exchange listed companies, such that the Argentine government became a significant shareholder of such companies”). More recently, beginning in April 2012, the Argentine government provided for the nationalization of YPF S.A. and imposed major changes to the system under which oil companies operate, principally through the enactment of Law No. 26,741 and Decree No. 1277/2012.   In February 2014, the Argentine government and Repsol announced that they had reached agreement on the terms of the compensation payable to Repsol for the expropriation of the YPF shares. Such compensation totals US$ 5billion, payable by delivery of Argentine sovereign bonds with various maturities. Additionally, on December 19, 2012, the Argentine government issued Decree No. 2552/2012 which, in its article 2, ordered the expropriation of the “Predio Rural de Palermo”. However, on January 4, 2013, the Federal Civil and Commercial Chamber granted an injunction that has temporarily blocked the application of Decree No. 2,552/2012. We cannot assure you that these or other measures that may be adopted by the Argentine government, such as expropriation, nationalization, forced renegotiation or modification of existing contracts, new taxation policies, changes in laws, regulations and policies affecting foreign trade, investment, etc., will not have a material adverse effect on the Argentine economy and, as a consequence, adversely affect our financial condition, our results of operations and the market value of our shares and ADSs.

Exchange controls and restrictions on capital inflows and outflows may continue to limit the availability of international credit and could threaten the financial system and lead to renewed political and social tensions, adversely affecting the Argentine economy, and, as a result, our business

In 2001 and 2002, Argentina imposed exchange controls and transfer restrictions, substantially limiting the ability of companies to retain foreign currency or make payments abroad. After 2002, these restrictions, including those requiring the Central Bank’s prior authorization for the transfer of funds abroad to pay principal and interest on debt obligations, were substantially eased through 2007. Since the last quarter of 2011, however, new regulation made foreign exchange transactions subject to the prior approval of the Argentine tax authorities.  Through a combination of foreign exchange and tax regulations, the Argentine authorities have significantly curtailed access to foreign exchange by individuals and private-sector entities. 

Since 2011, the Argentine government has adopted exchange controls such as requiring an authorization of tax authorities to access the foreign currency exchange market and introduced  measures that have imposed limits on access to the foreign exchange market to retail transactions. It is widely reported that the peso/U.S. Dollar exchange rate in the unofficial market substantially differs from the official foreign exchange rate. See “Exchange Rates” and “Item 10Exchange Controls.”  In addition to the foreign exchange restrictions, in June 2005 the Argentine government adopted various rules and regulations that established new restrictive controls on capital inflows into the country, including a requirement that, for certain funds remitted into Argentina, an amount equal to 30% of the funds must be deposited into an account with a local financial institution as a U.S. Dollar deposit for a one-year period without any accrual of interest, benefit or other use as collateral for any transaction. 

The Argentine government could impose further exchange controls, transfer restrictions or restrictions on the movement of capital and/or take other measures in response to capital flight or a significant depreciation of the Peso, which could limit our ability to access the international capital markets and impair our ability to make interest or principal payments abroad or payments.  Such measures could lead to renewed political and social tensions and undermine the Argentine government’s public finances, which could adversely affect Argentina’s economy and prospects for economic growth, which, in turn, could adversely affect our business and results of operations and the market value of our shares and ADSs.  In addition, the Argentine government or the Central Bank may reenact certain restrictions on the transfers of funds abroad, impairing our ability to make dividend payments to holders of the ADSs, which may adversely affect the market value of our ADSs.  As of the date of this annual report, however, the transfer of funds abroad to pay dividends is permitted to the extent such dividend payments are made in connection with audited financial statements approved by a shareholders’ meeting. Notwithstanding the foregoing, as of the date of this annual report, in light of applicable regulations the financial situation of the Company does not permit the payment of dividends.

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The nationalization of Argentina’s private pension funds caused an adverse effect in the Argentine capital markets and increased the Argentine government’s interest in certain stock exchange listed companies, such that the Argentine government became a significant shareholder of such companies

Prior to 2009, a significant portion of the local demand for securities of Argentine companies came from Argentine private pension funds. In response to the global economic crisis, in December 2008, by means of Argentine Law No. 26,425, the Argentine Congress unified the Argentine pension and retirement system into a system publicly administered by the Administración Nacional de la Seguridad Social (the National Social Security Agency, or “ANSES”), eliminating the pension and retirement system previously administered by private managers. In accordance with the new law, private pension managers transferred all of the assets administered by them under the pension and retirement system to the ANSES. With the nationalization of Argentina’s private pension funds, the Argentine government became a significant shareholder in many of the country’s public companies. In April 2011, the Argentine government lifted certain restrictions pursuant to which ANSES was prevented from exercising more than 5% of its voting rights in any stock exchange listed company (regardless of the equity interest held by ANSES in such companies). ANSES has publicly stated that it intends to exercise its voting rights in excess of such 5% limit in order to appoint directors in different stock exchange listed companies in which it holds an interest exceeding 5%. ANSES’s interests may differ from those of other investors and, consequently, those investors may understand that ANSES’s actions might have an adverse effect on such companies. As of the date of this annual report, ANSES owns 26.8% of the capital stock of Edenor.

 

The Argentine government has stated its intention to exert a stronger influence on the operation of stock exchange listed companies. We cannot assure you that these or other similar actions taken by the Argentine government will not have an adverse effect on the Argentine economy and consequently on our financial condition and results of operations.

The Argentine economy could be adversely affected by economic developments in other markets and by more general “contagion” effects

Argentine financial and securities markets are influenced, to varying degrees, by economic and financial conditions in other markets and Argentina’s economy is vulnerable to external shocks, including those related or similar to the global economic crisis that began in 2008. For example, the recent challenges faced in 2011 and 2012 by the European Union to stabilize certain of its member economies had international implications affecting the stability of global financial markets, which hindered economies worldwide and negatively affected the Argentine economy, and in turn, our business and results of operations. Although economic conditions can vary from country to country, investors’ perception of the events occurring in other countries have in the past substantially affected, and may continue to substantially affect capital flows to other countries and the value of securities in other countries, including Argentina.  The Argentine economy was adversely impacted by the political and economic events that occurred in several emerging economies in the 1990s, including those in Mexico in 1994, the collapse of several Asian economies between 1997 and 1998, the economic crisis in Russia in 1998 and the Brazilian devaluation of its currency in January 1999.

 

In addition, international investors’ reactions to events occurring in one market sometimes demonstrate a “contagion” effect in which an entire region or class of investment is disfavored by international investors, Argentina could be adversely affected by negative economic or financial developments in other countries, which in turn may have material adverse effect on the Argentine economy and, indirectly, on our business, financial condition and results of operations, and the market value of our ADSs.

Argentina’s economy is vulnerable to external shocks that could be caused by significant economic difficulties of its major regional trading partners

Argentina’s economy is vulnerable to adverse developments affecting its principal trading partners. A significant decline in the economic growth of any of Argentina’s major trading partners, such as Brazil, China or the United States, could have a material adverse impact on Argentina’s balance of trade and adversely affect Argentina’s economic growth. Recent economic slowdowns, especially in Brazil and China, have led to declines in Argentine exports.  Declining demand for Argentine exports, or a decline in the international market prices for those products, could have a material adverse effect on Argentina’s economic growth.

The actions taken by the Argentine government to reduce imports may affect our ability to purchase significant capital goods

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The Argentine government has recently adopted some initiatives designed to limit the import of goods in order to prevent further deterioration of the Argentine balance of trade. The restriction of imports may limit our ability to purchase capital goods that are necessary for our operations, which may, in turn, adversely affect our business, financial condition and results of operations.

 

Recently approved Argentine judicial reforms, as well as challenges thereto, have generated uncertainty with respect to future administrative and judicial proceedings involving the Argentine government

Law No. 26,854, which regulates injunctions in cases in which the Argentine government is a party or has intervened, was promulgated on April 30, 2013 as part of a judicial reform bill approved by the Argentine Congress.  Among the principal changes proposed in the judicial reform bill are a time limitation on injunctions imposed in proceedings brought against the Argentine government and the creation of three new chambers of Casación  (which hear appeals) prior to the intervention of the Supreme Court of Justice of Argentina. In addition, Law No. 26,855, which became effective on May 27, 2013, modified the structure and functions of the Argentine Consejo de la Magistratura (judicial council), which is in charge of appointing judges, of presenting charges against them, and of suspending or deposing them. However, several legal challenges have been brought against these laws, leading to rulings which for the time being have prevented them from entering into full effect.

Although it is not possible to predict the degree to which the reforms, if and when the same become effective, might affect future administrative and/or judicial proceedings, potential future claims by us against the Argentine government could be affected by these new laws.

 

Risks Relating to the Electricity Distribution Sector

The Argentine government has intervened in the electricity sector in the past, and is likely to continue intervening

To address the Argentine economic crisis of 2001 and 2002, the Argentine government adopted the Public Emergency Law and other regulations, which made a number of material changes to the regulatory framework applicable to the electricity sector.  These changes severely affected electricity generation, distribution and transmission companies and included the freezing of distribution nominal margins, the revocation of adjustment and inflation indexation mechanisms for tariffs, a limitation on the ability of electricity distribution companies to pass on to the consumer increases in costs due to regulatory charges and the introduction of a new price-setting mechanism in the wholesale electricity market (the “WEM”) which had a significant impact on electricity generators and caused substantial price differences within the market.  The Argentine government has continued to intervene in this sector by, for example, granting temporary nominal margin increases, proposing a new social tariff regime for residents of poverty-stricken areas, creating specific charges to raise funds that are transferred to government-managed trust funds that finance investments in generation and distribution infrastructure and mandating investments for the construction of new generation plants and the expansion of existing transmission and distribution networks. 

Furthermore, on November 15, 2011, the Secretariat of Energy (“SE”) issued Note 8,752, which provided that any approval by the provincial governments of increases to the electricity tariffs applicable to end-users as of November 1, 2011 will trigger a proportionate decrease in the federal subsidy available to that end-user in connection with the purchase of electricity. Since the issuance of Note 8,752, certain provincial governments have initiated legal proceedings to challenge the jurisdiction of the SE to issue Note 8,752, particularly because of the potential chilling effect that this regulation may have on the ability of the provincial governments to increase electricity tariffs. As of the date of this annual report, at least one unfavorable ruling against the argentine government has been rendered.These proceedings have not been resolved as of the date of this annual report. In addition to the foregoing, several provincial governments have recently enacted new regulations in order to charge electricity end-users amounts corresponding to the cuts in the federal subsidy.

On November 27, 2012, the SE issued Resolution 2016, which approved the seasonal WEM prices – subsidized and not subsidized − for the period from November 2012 through April 2013. The seasonal price format was modified, concluding in a single purchase price without considering any demand nor time segmentation and taking into account the structure of the demand as of October 2012 as the base. Subsequently, in June 2013, the SE adopted Resolution 408/13, which maintains both the single price and the criteria for raising subsidies during the winter season, with a reduction of the single price only for those months and a subsequent reversion of prices in October 2013.  The Argentine government has also announced an analysis of new measures that would change the current regulatory framework of the energy sector. On March 26, 2013, the SE issued Resolution 95, which introduced a new scheme for the remuneration for the electricity generation sector and several modifications to the organization of the WEM, including the suspension of the administration of new contracts, or the renewal of existing contracts, in the term market of the WEM.

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We cannot assure you that these or other measures that may be adopted by the Argentine government will not have a material adverse effect on our business and results of operations or on the market value of our shares and ADSs or that the Argentine government will not adopt emergency legislation similar to the Public Emergency Law or other similar resolutions in the future that may further increase our regulatory obligations, including increased taxes, unfavorable alterations to our tariff structures and other regulatory obligations, compliance with which would increase our costs and have a direct negative impact on our results of operations and cause the market value of our ADSs and Class B common shares to decline.

Electricity distributors were severely affected by the emergency measures adopted during the economic crisis, many of which remain in effect

Distribution tariffs include a regulated margin that is intended to cover the costs of distribution and provide an adequate return over the distributor’s asset base.  Under the Convertibility Regime, distribution tariffs were calculated in U.S. Dollars and distribution margins were adjusted periodically to reflect variations in U.S. inflation indexes.  Pursuant to the Public Emergency Law, in January 2002 the Argentine government froze all distribution margins, revoked all margin adjustment provisions in distribution concessions and converted distribution tariffs into Pesos at a rate of Ps. 1.00 per U.S. $ 1.00. These measures, coupled with the effect of high inflation and the devaluation of the Peso, led to a decline in distribution revenues in real terms and an increase of distribution costs in real terms, which could no longer be recovered through adjustments to the distribution margin.  This situation, in turn, led many public utility companies, including us and other important distribution companies, to suspend payments on their financial debt (which continued to be denominated in U.S. Dollars despite the pesification of revenues), effectively preventing these companies from obtaining further financing in the domestic or international credit markets and making additional investments. Although the Argentine government has granted temporary and partial relief to some distribution companies, including a limited increase in distribution margins, a temporary cost adjustment mechanism which was not fully implemented and the ability to apply certain additional charges, distribution companies are currently involved in discussions with the regulatory and government authorities on additional, permanent measures needed to adapt the current tariff scheme to the post-crisis situation of this sector.  We cannot assure you that these measures will be adopted or implemented or that, if adopted, they will be sufficient to address the structural problems created for us by the economic crisis and its aftermath. Our inability to cover the costs of distribution or to receive an adequate return on our asset base may further adversely affect our financial condition and results of operations..

Electricity demand may be affected by tariff increases, which could lead distribution companies, such as us, to record lower revenues

During the 2001 and 2002 economic crisis, electricity demand in Argentina decreased due to the decline in the overall level of economic activity and the deterioration in the ability of many consumers to pay their electricity bills. In the years following the 2001 and 2002 economic crisis electricity demand experienced significant growth, increasing as an estimated average of approximately 4.8% per annum from 2003 through 2013. This increase in electricity demand since 2003, reflects the relative low cost, in real terms, of electricity to consumers due to the freezing of distribution margins, subsidies in the energy purchase price and the elimination of the inflation adjustment provisions in distribution concessions, coupled with the devaluation of the Peso and inflation.  The Executive Branch of the Argentine government granted temporary increases in transmission and distribution margins, and transmission and distribution companies are currently negotiating further increases and adjustments to their tariff schemes with the Argentine government.  Although the increases in electricity transmission and distribution margins, which increased the cost of electricity to residential customers, have not had a significant negative effect on demand, we cannot make any assurances that these increases or any future increases in the relative cost of electricity will not have a material adverse effect on electricity demand or a decline in collections from customers. Further, in November 2011, the Argentine government announced a cut in subsidies (which had no impact on our value added for distribution (“VAD”)) for electricity granted to certain customers that are presumed to be in a position to afford the cost without such subsidies. In this respect, we cannot assure you that these measures or any future measures (including increases on tariffs for residential users) will not lead electricity companies, like us, to record lower revenues and results of operations than currently anticipated, which may, in turn, have a material adverse effect on the market value of our ADSs.

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If we experience continued energy shortages in the face of growing demand for electricity, our ability to deliver electricity to our customers could be adversely affected, which could result in customer claims, material penalties, government intervention and decreased results of operations

In recent years, the condition of the Argentine electricity market has provided little incentive to generators and distributors to further invest in increasing their generation and distribution capacity, respectively, which would require material long-term financial commitments.  As a result, the Argentine electricity market is currently operating at near full capacity and both generators and distributors may not be able to guarantee the supply of electricity to their customers, which could lead to a decline in growth of such companies. During December 2013, an increase in demand for electricity resulted in energy shortages and blackouts in Buenos Aires and other cities around Argentina.  Under Argentine law, distribution companies, such as us, are responsible to their customers for any disruption in the supply of electricity. As a result, we could face customer claims and fines and penalties for service disruptions caused by energy shortages unless the relevant Argentine authorities determine that energy shortages constitute force majeure.  To date, the Argentine authorities have not been called upon to decide under which conditions energy shortages may constitute force majeure. In the past, however, the Argentine authorities have taken a restrictive view of force majeure and have recognized the existence of force majeure only in limited circumstances, such as internal malfunctions at the customer’s facilities, extraordinary meteorological events (such as major storms) and third-party work in public thoroughfares.  Additionally, disruptions in the supply of electricity could expose us to intervention by the Argentine government, which warned of such possibility during the blackouts of December 2013. Such claims, fines, penalties or government intervention could have a materially adverse effect on our financial condition and results of operations, and cause the market value of our ADSs and Class B common shares to decline.  See also “A potential nationalization or expropriation of 51% of our capital stock, represented by the Class A shares,  may limit the capacity of the Class B common shares to participate in the board of directors.”

Risks Relating to Our Business

Failure or delay to negotiate further improvements to our tariff structure, including increases in our distribution margin, and/or to have our tariffs adjusted to reflect increases in our distribution costs in a timely manner or at all, has affected our capacity to perform our commercial obligations and could also have a material adverse effect on our capacity to perform our financial obligations. As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern

Since execution of the agreement entered into with the Argentine government in February 2006 relating to the adjustment and renegotiation of the terms of our concession (the “Adjustment Agreement”) and as required by them, we have been engaged in an Integral Tariff Revision (Revisión Tarifaria Integral, or “RTI”) with the ENRE.. However, the timeline for completing this process and the favorability to us of the final resolution are both uncertain  

The Adjustment Agreement currently contemplates a cost adjustment mechanism for the transition period during which the RTI is being conducted. This mechanism, known as the Cost Monitoring Mechanism (“CMM”), requires the ENRE to review our actual distribution costs every six months (in May and November of each year) and adjust our distribution margins to reflect variations of 5% or more in our distribution cost base. We may also request that the ENRE apply the CMM at any time that the variation in our distribution cost base is at least 10% or more.  Any adjustments, however, are subject to the ENRE’s assessment of variations in our costs, and we cannot guarantee that the ENRE will approve adjustments that are sufficient to cover our actual incremental costs. In the past, even when the ENRE has approved adjustments to our tariffs, there has been a lag between when we actually experience increases in our distribution costs and when we receive increased revenues following the corresponding adjustments to our distribution margins pursuant to the CMM. In addition, we have estimated that the actual distribution costs have been significantly higher than the ones determined with the CMM adjustments that have been requested. Despite the adjustment we were granted under the CMM in October 2007 and July 2008, we cannot assure you that we will receive similar adjustments in the future. As of the date of this annual report we have requested twelve additional increases under the CMM since May 2008, eleven of which have been recognized by ENRE (they have been applied retroactively to amounts owed to us up to September 2013, pursuant to Resolution 250/13 and subsequent Note 6,852/13), but have not been transferred to the tariff structure as of the date of filing of this annual report. Under the terms of the Adjustment Agreement, these twelve increases should have been approved in May and November of each year from 2008 onwards. 

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During the years ended December 31, 2012 and 2011, we recorded a significant decrease in net income and operating income (we recorded operating loss in 2012), and our working capital and liquidity levels were negatively affected, primarily as a result of the delay in obtaining a tariff increase and in having our tariff adjusted to reflect increases in our distribution costs, coupled with a constant increase in operating costs to maintain adequate service levels all of which has affected our capacity to perform our commercial obligations. In this context and in light of the situation that affects the electricity sector, the ENRE issued Resolution 347/12 in November 2012, which establishes the application of fixed and variable charges that have allowed the Company to obtain additional revenue as from November 2012. However, such additional revenue is insufficient to make up our operating deficit due to the constant increase in operating costs and the estimated salary or third-party costs increases for the year 2014.


                If we are not able to recover all of the incremental costs contemplated by the increase requests pursuant to the CMM and all such future cost increases, and/or if there is a significant lag time between when we incur the incremental costs and when we receive increased revenues, and/or if we are not successful in achieving a satisfactory renegotiation of our tariff structure,  we may be unable to comply with our financial obligations, we may suffer liquidity shortfalls and we may need to restructure our debt to ease our financial condition, any of which, individually or in the aggregate, would have a material adverse effect on our business and results of operations and may cause the value of our ADSs to decline. As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern.

We have prepared our annual financial statements for the fiscal year ended December 31, 2013 included herein, assuming that we will continue as a going concern. Our independent auditors, PwC, issued a report dated March 7, 2014, on our Consolidated Financial Statements as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011, which contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. As discussed in Note 1 to our Consolidated Financial Statements, despite the recognition of the CMM retroactive adjustments set in Resolution 250/13 and Note 6852/13, the steady increase in the operating costs necessary to maintain the level of service and the delay in obtaining genuine tariff increases will continue to affect our operating results and have raised substantial doubt with respect to our ability to continue as a going concern.  In this respect, the recognition of the CMM retroactive adjustments is not enough to restore our economic and financial conditions to the level required by a public service concession such as ours.  Management's plans in response to these matters are also described in Note 1. However, our financial statements as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty. See Item 18—“Financial Statements.”

The goal of the RTI is to achieve a comprehensive revision of our tariff structure, including further increases in our distribution margins and periodic adjustments based on changes in our cost base, to provide us with an adequate return on our asset base.  Although we believe the RTI will result in a new tariff structure, we cannot assure you that the RTI will conclude in a timely manner or at all, or that the new tariff structure will effectively cover all of our costs or provide us with an adequate return on our asset base.  Moreover, the RTI could result in the adoption of an entirely new regulatory framework for our business, with additional terms and restrictions on our operations and the imposition of mandatory investments. We also cannot predict whether a new regulatory framework will be implemented and what terms or restrictions could be imposed on our operations. Our inability to obtain tariff adjustments in line with the actual changes in costs could deepen our inability to meet our trade obligations and could also have a material adverse effect on our ability to meet our financial obligations

                Although Resolution 250/13 and Note 6,852/13 recognized the corresponding CMM adjustments retroactively, these have not been sufficient to support the real variation in costs, principally due to salary adjustments and increased operating expenses above the inflation recorded by the INDEC. Our inability to obtain tariff adjustments in line with the actual change in costs has deepened our inability to meet obligations vis-a-vis CAMMESA, our major supplier, and has had a material adverse effect on our ability to meet our financial obligations as a result of a shortage in liquidity, which may result in the need to restructure our debt and may have a material adverse effect on our business and results of operations and could also adversely impact on our financial condition and the market value of the ADSs.

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Our distribution tariffs may be subject to challenges by Argentine consumer and other groups

Our tariffs have been challenged by Argentine consumer associations, such as the action brought again us in December 2009, by an Argentine consumer association (Unión de Usuarios y Consumidores) seeking to annul certain retroactive tariff increases. In November 2010, the relevant court upheld the claim. We appealed the court’s order and requested that it be stayed pending a decision on the appeal. In December 2010, the court stayed its order pending a decision on the appeal. On June 1, 2011, the Administrative Court of Appeals (Cámara Nacional de Apelaciones en lo Contencioso Administrativo FederalSala V) overturned the judgment of the lower administrative court. The Unión de Usuarios y Consumidores filed a Federal Extraordinary Appeal (“Recurso Extraordinario Federal”) against such decision, which was granted on March 11, 2011. On October 1, 2013, the Supreme Court of Justice decided to dismiss the Federal Extraordinary Appeal that had been filed. A final judgment in our favor has been rendered.
               
              We cannot make assurances that other actions or requests for injunctive relief will not be brought by these or other groups seeking to reverse the adjustments we have obtained or to block any further adjustments to our distribution tariffs. If these legal challenges are successful and prevent us from implementing tariff adjustments granted by the Argentine government, we could face a decline in collections from our customers, and a decline in our results of operations, which may have a material adverse effect in our financial condition and the market value of our ADSs.

We have been, and may continue to be, subject to fines and penalties that could have a material adverse effect on our financial condition and results of operations

We operate in a highly regulated environment and have been, and in the future may continue to be, subject to significant fines and penalties by regulatory authorities, including for reasons outside our control, such as service disruptions attributable to problems at generation facilities or in the transmission network that result in a lack of electricity supply.  After 2001, the amount of fines and penalties imposed on our company has increased significantly, which we believe is mainly due to the economic and political environment in Argentina following the 2001 and 2002 economic crisis.  Although the Argentine government has agreed to forgive a significant portion of our accrued fines and penalties pursuant to the Adjustment Agreement and to allow us to repay the remaining balance over time, this forgiveness and repayment plan is subject to a number of conditions, including compliance with quality-of-service standards, reporting obligations and required capital investments. As of December 31, 2013, December 31, 2012 and December 31, 2011, our consolidated accrued fines and penalties totaled Ps. 923.8 million, Ps. 662.0 million and Ps. 542.2 million, respectively (taking into account our adjustment to fines and penalties following the ratification of the Adjustment Agreement). If we fail to comply with any of these conditions, the Argentine government may seek to obtain payment of these fines and penalties by us.  In addition, we cannot assure you that we will not incur significant fines in the future, which could have a material adverse effect on our financial condition, our results of operations and the market value of our ADSs. See “Item 4. Information on the Company—Our    Business Overview—Fines and Penalties.”

If we are unable to control our energy losses, our results of operations could be adversely affected

Our concession does not allow us to pass through to our customers the cost of additional energy purchased to cover any energy losses that exceed the loss factor contemplated by our concession, which is, on average, 10%.  As a result, if we experience energy losses in excess of those contemplated by our concession, we may record lower operating profits than we anticipate. Prior to the 2001 and 2002 economic crisis, we had been able to reduce the high level of energy losses experienced at the time of the privatization to the levels contemplated (and reimbursed) under our concession. However, during the last couple of years, our level of energy losses, particularly our non-technical losses, started to grow again, in part as a result of the increase in poverty levels and, with it, the number of delinquent accounts and fraud. Although we continue to make investments to reduce energy losses, these losses continue to exceed the 10% average loss factor contemplated by the concession and, based on the current economic turmoil, we do not expect these losses to decrease in the near term. Our energy losses amounted to 13.0% in 2013, 13.3% in 2012 and 12.6% in 2011. We cannot assure you that our energy losses will not increase again in future periods, which may lead us to have lower margins and could adversely affect our financial condition, our results of operations and the market value of our ADSs.

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The Argentine government could foreclose on the pledge of  our Class A common shares under certain circumstances, which could have a material adverse effect on our business and financial condition

Pursuant to our concession and the provisions of the Adjustment Agreement, the Argentine government has the right to foreclose on the pledge of  our Class A common shares and sell these shares to a third party buyer if:

·         the fines and penalties we incur in any given year exceed 20% of our gross energy sales, net of taxes (which corresponds to our energy sales);

·         we repeatedly and materially breach the terms of our concession and do not remedy these breaches upon the request of the ENRE;

·         our controlling shareholder, EASA, creates any lien or encumbrance over our Class A common shares (other than the existing pledge in favor of the Argentine government);

·         we or EASA obstruct the sale of Class A common shares at the end of any management period under our concession;

·         EASA fails to obtain the ENRE’s approval in connection with the disposition of our Class A common shares;

·         our shareholders amend our articles of incorporation or voting rights in a way that modifies the voting rights of the Class A common shares without the ENRE’s approval; or

·         We, or any existing shareholders or former shareholders of EASA who have brought a claim against the Argentine government in the ICSID do not desist from such ICSID claims following completion of the RTI and the approval of a new tariff regime. One of our indirect shareholders is currently engaged in a dispute with a former shareholder of EASA in connection with the suspension and release of such ICSID claims. See “Item 8. Financial Information—Legal and Administrative Proceedings—Legal Proceedings—Other Legal Proceedings.”

 

In 2013, the fines and penalties imposed on Edenor by the ENRE amounted to Ps. 287.5 million, which represented 8.4% of our energy sales.  See “Item 4. Information on the Company—Our Concession—Fines and Penalties.”

If the Argentine government were to foreclose on the pledge of  our Class A common shares, pending the sale of those shares, the Argentine government would also have the right to exercise the voting rights associated with such shares.  In addition, the foreclosure by the Argentine government on  the pledge of  our Class A common shares may be deemed to constitute a change of control under the terms of our Senior Notes due 2017 and due 2022. See —“We may not have the ability to raise the funds necessary to finance a change of control offer as required by the Senior Notes due 2017 and 2022.” If the Argentine government forecloses on the pledge of  our Class A common shares, our results of operations and financial condition could be significantly affected and the market value of our ADSs could also be affected.

Default by the Argentine government could lead to termination of our concession, and have a material adverse effect on our business and financial condition

If the Argentine government breaches its obligations in such a way that we cannot comply with our obligations thereunder or in such a way that our service is materially affected, we can request the termination of our concession, after giving the Argentine government 90 days’ prior notice. Upon termination of our concession, all our assets used to provide electricity distribution service would be transferred to a new state-owned company to be created by the Argentine government, whose shares would be sold in an international public bidding procedure. The amount obtained in such bidding would be paid to us, net of the payment of any debt owed by us to the Argentine government, plus compensation established as a percentage of the bidding price, ranging from 10% to 30%, depending on the management period in which the sale occurs. Any such default could have a material adverse effect on our business and financial condition.

We may be unable to import certain equipment to meet the growing demand for electricity, which could lead to a breach of our concession contract and could have a material adverse effect on the operations and financial position of the Company

                Certain restrictions on imports imposed by Argentine government (see “The actions taken by the Argentine government to reduce imports may affect our ability to purchase significant capital goods”) could limit our ability to purchase capital goods that are necessary for our operations (including carrying out specific projects). Under our concession, we are obligated to satisfy all of the demand for electricity originated in our concession area, maintaining at all times a service quality standard that has been established for our concession. If we are not able to purchase significant capital goods to satisfy all the demand, we could face fines and penalties which may, in turn, adversely affect our activity, financial position and results of operations and/or the market value of your ADSs.

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We employ a largely unionized labor force and could be subject to an organized labor action, including work stoppages that could have a material effect on our business

As of December 31, 2013, approximately 85% of Edenor employees were union members. Although our relations with unions are currently stable and we have had an agreement in place with the two unions representing our employees since 1995, we cannot assure you that we will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business and revenues. We cannot assure you that we will be able to negotiate salary agreements on the same terms as those currently in effect, or that we will not be subject to strikes or work stoppages before or during the negotiation process. If we are unable to negotiate salary agreements or if we are subject to strikes or work stoppages, our results of operations, financial condition and the market value of our ADSs could be materially adversely affected.

We could incur material labor liabilities in connection with our outsourcing that could have an adverse effect on our business and results of operations

We outsource a number of activities related to our business to third-party contractors in order to maintain a flexible cost base.  As of December 31, 2013, Edenor had approximately 2,518 third-party employees under contract.  Although we have very strict policies regarding compliance with labor and social security obligations by our contractors, we are not in a position to ensure that contractors’ employees will not initiate legal actions to seek indemnification from us based upon a number of judicial rulings issued by labor courts in Argentina recognizing joint and several liability between a contractor and the entity to which it is supplying services under certain circumstances. We cannot make any assurances that such proceedings will not be brought against us or that the outcome of such proceedings will be favorable to us. If we were to incur material labor liabilities in connection with our outsourcing, such liability could have an adverse effect on our financial condition, our results of operations and the market value of our ADSs. 

We currently are not able to effectively hedge our currency risk in full and, as a result, a devaluation of the Peso may have a material adverse effect on our results of operations and financial condition

Our revenues are collected in Pesos pursuant to tariffs that are not indexed to the U.S. Dollar, while a significant portion of our existing financial indebtedness is denominated in U.S. Dollars, which exposes us to the risk of loss from devaluation of the Peso. In the past we used to hedge this risk in part by converting a portion of our excess cash denominated in Pesos into U.S. Dollars and investing those funds outside Argentina, as permitted by applicable Central Bank regulations at the time and by entering into currency forward contracts. However, pursuant to new regulations of the Central Bank we can no longer hedge this risk by converting a portion of our excess cash denominated in Pesos into U.S. Dollars and because of that, we continue to have substantial exposure to the U.S. Dollar (see “—Risks related to Argentina—Fluctuations in the value of the Argentine Peso could adversely affect the Argentine Economy, which could, in turn adversely affect our results of operations”). We cannot assure you whether the Argentine government will maintain these exchange regulations or whether it will allow us to access the market to acquire U.S. Dollars in the manner that we have done in the past.  Although we may also seek to enter into hedging transactions to cover all or a part of our exposure, we have not been able to hedge any of our exposure to the U.S. Dollar on terms we consider viable for our company. If we continue to be unable to effectively hedge all or a significant portion of our currency risk exposure, a further devaluation of the Peso may significantly increase our debt service burden, which, in turn, may have a material adverse effect on our financial condition and results of operations.

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In the event of an accident or other event not covered by our insurance, we could face significant losses that could materially adversely affect our business and results of operations

As of December 31, 2013, our physical assets were insured for up to U.S. $1.062,3 million. However, we do not carry insurance coverage for losses caused by our network or business interruption, including loss of our concession. See “Item 4. Information on the Company—Our Business—Insurance.”  Although we believe our insurance coverage is commensurate with standards for the distribution industry, no assurance can be given of the existence or sufficiency of risk coverage for any particular risk or loss. If an accident or other event occurs that is not covered by our current insurance policies, we may experience material losses or have to disburse significant amounts from our own funds, which may have a material adverse effect on our net profits and our overall financial condition and on the market value of our ADSs.

A substantial number of our assets are not subject to attachment or foreclosure and the enforcement of judgments obtained against us by our shareholders may be substantially limited

A substantial number of our assets are essential to the public service we provide. Under Argentine law, as interpreted by the Argentine courts, assets which are essential to the provision of a public service are not subject to attachment or foreclosure, whether as a guarantee for an ongoing legal action or to allow for the enforcement of a legal judgment. Accordingly, the enforcement of judgments obtained against us by our shareholders may be substantially limited to the extent our shareholders seek to attach those assets to obtain payment on their judgment.

If our controlling shareholder fails to meet its debt service obligations, its creditors may take measures that could have a material adverse effect on our results of operations

In July 2006, EASA completed a comprehensive restructuring of all of its outstanding financial indebtedness, which had been in default since 2002. In connection with this restructuring, EASA issued approximately U.S. $85.3 million in U.S. Dollar-denominated notes, in exchange for the cancellation of approximately 99.94% of its outstanding financial debt. Since EASA’s ability to meet its debt service obligations under these notes depends largely on our ability to pay dividends or make distributions or payments to EASA, our failure to do so could result in EASA becoming subject to actions by its creditors, including the attachment of EASA’s assets and petitions for involuntary bankruptcy proceedings. If EASA’s creditors were to attach our Class A common shares held by EASA, the Argentine government would have the right under our concession to foreclose on the pledge of  our Class A common shares held by the Argentine government, which could trigger a repurchase obligation under the terms of our restructured debt and our Senior Notes due 2017 and due 2022, and have a material adverse effect on our results of operations and financial condition.

Our exclusive right to distribute electric energy in our service area may be adversely affected by technological or other changes in the energy distribution industry, which would have a material adverse effect on our business

Although our concession grants us the exclusive right to distribute electric energy within our service area, this exclusivity may be revoked in whole or in part if technological developments make it possible for the energy distribution industry to evolve from its present condition as a natural monopoly into a competitive business. In no case does the complete or partial revocation of our exclusive distribution rights entitle us to claim or to obtain reimbursement or indemnity. Although, to our knowledge, there are no current projects to introduce new technologies in the medium- or long-term which might reasonably modify the composition of the electricity distribution business, we cannot assure you that future developments will not enable  competition in our industry that would adversely affect  the exclusivity right granted by our concession. Any total or partial loss of our exclusive right to distribute electricity within our service area would likely lead to increased competition and result in lower revenues, which could have a material adverse effect on our financial condition, our results of operations and the market value of our ADSs.

A potential nationalization or expropriation of 51% of our capital stock, represented by the Class A shares,  may limit the capacity of the Class B common shares to participate in the board of directors

 As of the date of this annual report, the ANSES owns shares representing 26.8% of our capital stock and appointed five Class B directors in our last Shareholders’ meeting. The remaining directors were appointed by the Class A shares.

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If the Argentine government were to expropriate 51% of our capital stock, represented by our Class A shares, the Argentine government would be the sole holder of the Class A shares and the ANSES would hold the majority of the Class B shares. Certain strategic transactions require the approval of the holders of the Class A shares. Consequently, the Argentine government and the ANSES would be able to determine substantially all matters requiring approval by a majority of our shareholders, including the election of a majority of our directors, and would be able to direct our operations.

If the Argentine government nationalizes or expropriates 51% of our capital stock, represented by our Class A shares, our results of operations and financial condition could be adversely affected and this could cause the market value of our ADSs and Class B common shares to decline.

We may not have the ability to raise the funds necessary to repay our commercial debt with CAMMESA, our major supplier

As of December 31, 2013, we owed approximately Ps.1,500.6 million to CAMMESA. This debt is due and unpaid and we have not secured any waivers from CAMMESA; if CAMMESA requested that we repay such  debt, we may be unable to raise the funds to repay it and, consequently, we could be exposed to a cash attachment, which could in turn result in our filing for a voluntary reorganization proceeding (concurso preventivo), which could cause the market value of our ADSs and Class B common shares to decline (see “—Risks related to Our Business—All of our outstanding financial indebtedness contains bankruptcy, reorganization proceedings and expropriation events of default, and we may be required to repay all of our outstanding debt upon the occurrence of any such events”).

Downgrades in our credit ratings could materially and adversely affect our business, financial condition and results of operations.

A material downgrade of our credit ratings may have various effects including, but not limited to, the following: we may have to accept less favorable terms in our transactions with counterparties, including capital raising activities, or may be unable to enter into certain transactions; existing agreements or transactions may be cancelled; and we may be required to provide additional collateral in connection with derivatives transactions. Any of these or other effects of a downgrade of our credit ratings could have a negative impact on the profitability of our treasury and other operations, and could adversely affect our regulatory capital position, financial condition and results of operations.

We may not have the ability to raise the funds necessary to finance a change of control offer as required by the Senior Notes due 2017 and 2022

 

As of the date of this annual report, approximately U.S.$191.1 million of our financial debt is represented by the Senior Notes due 2017 and 2022. Under the indentures for the Senior Notes due 2017 and 2022, if a change of control occurs, we must offer to buy back any and all such notes that are outstanding at a purchase price equal to100% of the aggregate principal amount of such notes, plus any accrued and unpaid interest thereon and additional amounts, if any, through the purchase date. We may not have sufficient funds available to us to make the required repurchases of the Senior Notes due 2017 and 2022 upon a change of control. If we fail to repurchase such notes in these circumstances that may constitute an event of default under the indentures, which may in turn trigger cross-default provisions in other of our debt instruments then outstanding, which could adversely affect our results of operations and cause the market value of our ADSs and Class B common shares to decline.

 

All of our outstanding financial indebtedness contains bankruptcy, reorganization proceedings and expropriation events of default, and we may be required to repay all of our outstanding debt upon the occurrence of any such events

As of the date of this annual report, approximately U.S.$ 191.1 million of our financial debt is represented by the Senior Notes due 2017 and 2022. Under the indentures for the Senior Notes due 2017 and due 2022, certain expropriation and condemnation events with respect to us may constitute an event of default, which,  if declared,  could trigger acceleration of our obligations under the notes and require us to immediately repay all such accelerated debt. In addition, all of our outstanding financial indebtedness contains certain events of default related to bankruptcy and voluntary reorganization proceedings (concurso preventivo). If we are not able to fulfill certain payment obligations as a result of our current financial situation and if the requirements set forth in the Argentine Bankruptcy Law No. 24,522 are met, any creditor, or even us, could file for our bankruptcy, or we could file for a voluntary reorganization proceeding (concurso preventivo). In addition, all of our outstanding financial indebtedness also contains cross-default provisions and/or cross-acceleration provisions that could cause all of our debt to be accelerated if the debt containing expropriation and/or bankruptcy and/or reorganization proceeding events of default goes into default or is accelerated. In such a case, we would expect to actively pursue formal waivers from the corresponding financial creditors to avoid this potential situation, but in case those waivers are not obtained and immediate repayment will be required, the Company could face short-term liquidity problems, which could adversely affect our results of operations and cause the market value of our ADSs and Class B common shares to decline.

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We may be mandatorily required to conduct a capital stock reduction and we may in the future be required to dissolve and liquidate

In the absence of any tariff adjustment, it is possible that during 2014, our accumulated deficit exceeds our reserves plus 50% of our capital stock, in which case, under current applicable regulations, we will be required to mandatorily reduce our capital stock pursuant to Article 206 of the Argentine Corporations Law. In addition, if our shareholders’ equity becomes negative (that is, if our total liabilities exceed our total assets) at the end of any fiscal year, we will be required to dissolve and liquidate pursuant to Article 94 of the Argentine Corporations Law unless we receive a capital contribution or expect future revenues or results of operations which would result in our assets exceeding our liabilities. A mandatory capital stock reduction could adversely affect our results of operations and financial conditions and cause the market value of our ADSs and Class B common shares to decline.

The New York Stock Exchange and/or the Buenos Aires Stock Exchange may suspend trading and/or delist our ADSs and Class B common shares, upon the occurrence of certain events relating to our financial situation

The New York Stock Exchange (“NYSE”) and the Buenos Aires Stock Exchange (“BASE”) may suspend and/or cancel the listing of our ADSs and Class B common shares, in certain circumstances, including upon the occurrence of certain events relating to our financial situation. For example, the NYSE may decide such suspension or cancellation if our shareholders’ equity becomes negative.

 

The NYSE may in its sole discretion determine on an individual basis the suitability for continued listing of an issue in the light of all pertinent facts.  Some of the factors mentioned in the NYSE Listed Company Manual, which may subject a company to suspension and delisting procedures, include: “unsatisfactory financial conditions and/or operating results,”  “inability to meet current debt obligations or to adequately finance operations,” and “any other event or condition which may exist or occur that makes further dealings or listing of the securities on the NYSE inadvisable or unwarranted in the opinion of NYSE.

 

The BASE may cancel the listing of our Class B common shares if it determines that our shareholders’ equity and our financial and economic situation do not justify our access to the stock market or if the NYSE cancels the listing of our ADSs. 

 

We cannot assure you that the NYSE and/or BASE will not commence any suspension or delisting procedures in light of our current financial situation, including if our shareholders’ equity becomes negative.  A delisting or suspension of trading of our ADSs or Class B common shares by the New York Stock Exchange and/or BASE, respectively, could adversely affect our results of operations and financial conditions and cause the market value of our ADSs and Class B common shares to decline.

 

                Adoption of IFRS affects the presentation of our financial information, which was prepared under Argentine GAAP prior to January 1, 2012

                On January 1, 2012, we began preparing our financial statements in accordance with IFRS. Prior to the year ended December 31, 2012, we prepared our financial statements in accordance with Argentine GAAP. Because IFRS differ in certain significant respects from Argentine GAAP, our financial information prepared and presented in our previous annual reports under (other than the one presented in 2013 with respect to the fiscal year ended December 31, 2012) Argentine GAAP is not directly comparable to our IFRS financial data. The lack of comparability of our recent and our historical financial data may make it difficult to gain a full and accurate understanding of our operations and financial condition.

 

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The designation of veedores  (supervisors), by the CNV or otherwise, could adversely affect the economic and financial situation of the Company

The new Capital Markets Law No. 26,831 provides in Article 20 that the Comisión Nacional de Valores (Argentine National Securities Commission, or “CNV”) may conduct an inspection on persons subject to its control (such as the Company).  If after any inspection the CNV considers that a resolution of the board of directors of such person violated the interests of minority shareholders or any holder of securities that are subject to the Argentine public offering regime, it may appoint a veedor  (supervisor), who will have veto powers.  Additionally, the CNV may suspend the board of directors for a period of up to 180 days, until the CNV rectifies the situation.  This measure may only be appealed before the Ministry of Economy and Finance of Argentina.  If the CNV makes an inspection on the and considers that any right of a minority shareholder or holder of any security has been violated, it may proceed to suspend the board of directors for the up to 180-day period, in which case the economic and financial situation of the Company could be negatively affected.  In addition, a veedor  may be appointed through a judicial request.  In this respect, on April 21, 2014, Molinos Rio de la Plata S.A., an Argentine company whose shares are publicly-traded in Argentina, reported the judicial appointment of a veedor  at the request of ANSES, one of its shareholders, which is also a shareholder of the Company, for a period of six months.  We cannot assure you that ANSES, or any other party, will not attempt to pursue a similar course of action with respect to the Company, which may have a negative effect on the Company.

 

Changes in weather conditions or the occurrence of severe weather (whether or not caused by climate change or natural disasters), could adversely affect our operations and financial performance.

Weather conditions may influence the demand for electricity, our ability to provide it and the costs of providing it.  In particular, severe weather may adversely affect our results of operations by causing significant demand increases, which we may be unable to meet without a significant increase in operating costs. This could strongly impact the continuity of our services and our quality indicators. For example, the exceptional thunderstorms that occurred in April and December of 2013 and a heat wave that occurred in December of 2013 affected the continuity of our services, both in the low voltage and medium voltage networks.  See “Item 4. Information on the Company — Business Overview — Quality Standards – Edenor’s Concession".  Furthermore, any such disruptions in the provision of our services could expose us to fines and orders to compensate those customers affected by any such power cuts, as has occurred in the past (see “Item 4. Information on the Company — Business Overview — Quality Standards – Fines and Penalties”).  Our financial condition, results of operations and cash flows could therefore be negatively affected by changes in weather conditions and severe weather.

A cyber-attack could adversely affect our business, financial condition, results of operations and cash flows.

Information security risks have generally increased in recent years as a result of the proliferation of new technologies and the increased sophistication and activities of cyber-attacks. Through part of our grid and other initiatives, we have increasingly connected equipment and systems related to the distribution of electricity to the Internet. Because of the critical nature of our infrastructure and the increased accessibility enabled through connection to the Internet, we may face a heightened risk of cyber-attack. In the event of such an attack, we could have our business operations disrupted, property damaged and customer information stolen; experience substantial loss of revenues, response costs and other financial loss; and be subject to increased regulation, litigation and damage to our reputation. A cyber-attack could adversely affect our results of operations and financial condition and cause the market value of our ADSs and Class B common shares to decline.

Risks relating to ADSs and our Class B common shares

Restrictions on the movement of capital out of Argentina may impair the ability of holders of ADRs to receive dividends and distributions on, and the proceeds of any sale of, the Class B common shares underlying the ADSs

The Argentine government may impose restrictions on the conversion of Argentine currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Argentina.  Argentine law currently permits the Argentine government to impose these kinds of restrictions temporarily in circumstances where a serious imbalance develops in Argentina’s balance of payments or where there are reasons to foresee such an imbalance.  Beginning in December 2001, the Argentine government implemented an unexpected number of monetary and foreign exchange control measures that included restrictions on the free disposition of funds deposited with banks and on the transfer of funds abroad, including dividends, without prior approval by the Central Bank, some of which are still in effect.  Among the restrictions that are still in effect are those relating to the payment prior to maturity of the principal amount of loans, bonds or other securities owed to non-Argentine residents, the requirement for Central Bank approval prior to acquiring foreign currency for certain types of investments and the requirement that 30% of certain types of capital inflows into Argentina be deposited in a non-interest-bearing account in an Argentine bank for a period of one year. Although the transfer of funds abroad in order to pay dividends no longer requires Central Bank approval to the extent such dividend payments are made in connection with audited financial statements approved by a shareholders’ meeting, restrictions on the movement of capital to and from Argentina such as those that previously existed could, if reinstated, impair or prevent the conversion of dividends, distributions, or the proceeds from any sale of shares, as the case may be, from Pesos into U.S. Dollars and the remittance of such U.S. Dollars abroad.  We cannot assure you that the Argentine government will not take similar measures in the future.  In such a case, the depositary for the ADSs may hold the Pesos it cannot otherwise convert for the account of the ADS holders who have not been paid.  Nonetheless, the adoption by the Argentine government of restrictions on the movement of capital out of Argentina may affect the ability of our foreign shareholders and holders of ADSs to obtain the full value of their shares and ADSs and may adversely affect the market value of our ADSs. 

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Our ability to pay dividends is limited

In accordance with Argentine corporate law, we may only pay dividends in Pesos out of our retained earnings, if any, as set forth in our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB. Our ability to pay dividends, however, is further restricted in accordance with the terms of the Adjustment Agreement, pursuant to which we have agreed not to pay dividends without the ENRE’s prior approval until we complete the RTI. We cannot predict with any certainty when this process will be completed.

Our shareholders’ ability to receive cash dividends may be limited

Our shareholders’ ability to receive cash dividends may be limited by the ability of the depositary to convert cash dividends paid in Pesos into U.S. Dollars. Under the terms of our deposit agreement with the depositary for the ADSs, the depositary will convert any cash dividend or other cash distribution we pay on the common shares underlying the ADSs into U.S. Dollars; if it can do so on a reasonable basis and can transfer the U.S. Dollars to the United States. If this conversion is not possible or if any government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. If the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency, shareholders may lose some or all of the value of the dividend distribution.

Under Argentine law, shareholder rights may be fewer or less well defined than in other jurisdictions

Our corporate affairs are governed by our by-laws and by Argentine corporate law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the  United States, such as the States of Delaware or New York, or in other jurisdictions outside Argentina. In addition, the rights of holders of the ADSs or the rights of holders of our common shares under Argentine corporate law to protect their interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions.  Although insider trading and price manipulation are illegal under Argentine law, the Argentine securities markets are not as highly regulated or supervised as the U.S. securities markets or markets in some other jurisdictions.  In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests may be less well-defined and enforced in Argentina that in the United States, putting holders of our common shares and ADSs at a potential disadvantage.

Holders of ADSs may be unable to exercise voting rights with respect to the Class B common shares underlying the ADSs at our shareholders’ meetings

Shares underlying the ADSs are held by the depositary in the name of the holder of the ADS.  As such, we will not treat holders of ADSs as shareholders and, therefore, holders of ADSs will not have shareholder rights. The depositary will be the holder of the common shares underlying the ADSs and holders may exercise voting rights with respect to the Class B common shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are no provisions under Argentine law or under our by-laws that limit the exercise by ADS holders of their voting rights through the depositary with respect to the underlying Class B common shares.  However, there are practical limitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. For example, holders of our common shares will receive notice of shareholders’ meetings through publication of a notice in an official gazette in Argentina, an Argentine newspaper of general circulation and the daily bulletin of the Buenos Aires Stock Exchange, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders, by comparison, do not receive notice directly from us.  Instead, in accordance with the deposit agreement, we provide the notice to the depositary. If we ask it to do so, the depositary will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the depositary as to voting the Class B common shares represented by their ADSs. Due to these procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of Class B common shares and Class B common shares represented by ADSs may not be voted as the holders of ADSs desire. Class B common shares represented by ADSs for which the depositary fails to receive timely voting instructions may, if requested by us, be voted at the corresponding meeting either in favor of the proposal of the board of directors or, in the absence of such a proposal, in accordance with the majority.

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Our shareholders may be subject to liability for certain votes of their securities

Because we are a limited liability corporation, our shareholders are not liable for our obligations. Shareholders are generally liable only for the payment of the shares they subscribe to. However, shareholders who have a conflict of interest with us and who do not abstain from voting at the respective shareholders’ meeting may be liable for damages to us, but only if the transaction would not have been approved without such shareholders’ votes. Furthermore, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to the law or our by-laws may be held jointly and severally liable for damages to us or to other third parties, including other shareholders.

Provisions of Argentine securities laws could deter takeover attempts and have an adverse impact on the price of our shares and the ADSs

 

Argentine securities laws contain provisions that may discourage, delay or make more difficult a change in control of Edenor, such as the requirement, upon the acquisition of a certain percentage of our capital stock, to launch a tender offer to acquire a certain percentage of our capital stock, which percentage ranges from 10% to 100% depending on several factors.  These provisions may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interest of our shareholders and may adversely affect the market value of our shares and ADSs.

 

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Item 4.         Information on the Company

History and Development of the Company

Empresa Distribuidora y Comercializadora Norte S.A., or Edenor, is a public service company incorporated as a sociedad anónima (stock corporation) under the laws of Argentina. Our principal executive offices are located at Avenida del Libertador 6363, Ciudad de Buenos Aires, C1428ARG, Argentina, and our general telephone number at this location is +54 11 4346 5000.

We were incorporated on July 21, 1992, under the name Empresa Distribuidora Norte Sociedad Anónima, as part of the privatization of the Argentine state‑owned electricity utility, Servicios Eléctricos del Gran Buenos Aires S.A. (SEGBA).  In anticipation of its privatization, SEGBA was divided into three electricity distribution companies, including our company, and four electricity generation companies, and on May 14, 1992, the Argentine Ministry of Economy and Public Works and Utilities (currently the Ministry of Economy and Public Finance) approved the public sale of all of our company’s Class A common shares, representing 51% of the capital stock of our company.

A group of international investors, which included EDF International S.A. (a wholly owned subsidiary of Électricité de France S.A.), presented a bid for our Class A common shares through Electricidad Argentina S.A. (EASA), an Argentine company.  EASA was awarded the bid and, in August 1992, EASA and the Argentine government entered into a stock purchase agreement relating to the purchase of our Class A common shares.  In addition, on August 5, 1992, the Argentine government granted us a concession to distribute electricity on an exclusive basis within our concession area for a period of 95 years. On September 1, 1992, EASA acquired our Class A common shares and became our controlling shareholder.

In June 1996, our shareholders approved the change of our name to Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR S.A.) to more accurately reflect the description of our core business. The amendment to our by–laws related to our name change was approved by the Argentine Electricity Agency (Ente Nacional Regulador de la Electricidad, the “ENRE”) and registered with the Public Registry of Commerce (Inspección General de Justicia, the “IGJ”) in 1997.

In 2001, EDF International S.A. (EDFI) acquired, in a series of transactions, all of the shares of EASA held by EASA’s other shareholders, ENDESA Internacional, YPF S.A., which was the surviving company of Astra, and SAUR.  As a result, EASA became a wholly–owned subsidiary of EDFI. In addition, EDFI purchased all of our Class B common shares held by these shareholders, increasing its direct and indirect interest in us to 90%.

On January 6, 2002, the Argentine Congress enacted the Public Emergency Law, which authorized the Argentine government to implement certain measures to overcome the country’s economic crisis. Under the Public Emergency Law, the Argentine government altered the terms of our concession and the concessions of other public utility services by renegotiating tariffs, freezing distribution margins and revoking price adjustment mechanisms, among other measures.

In September 2005, Dolphin Energía and IEASA acquired an indirect controlling stake in our company from EDFI. Dolphin Energía and IEASA were at the time of such acquisition controlled by the principals of Grupo Dolphin, an Argentine advisory and consulting firm that carries out private equity activities. On September 28, 2007, Pampa Energía S.A. (“Pampa Energía” or “Pampa”) acquired all the outstanding capital stock of Dolphin Energía and IEASA from the then current shareholders of these companies, in exchange for common stock of Pampa Energía. Pampa Energía, which is managed by Grupo Dolphin’s former principals, owns a 50% interest in the company that co-controls the principal electricity transmission company in Argentina, Compañía de Transporte de Energía Eléctrica en Alta Tensión S.A. (“Transener”). In addition, Pampa Energía has controlling stakes in five generation plants located in the Salta, Mendoza, Neuquén and Buenos Aires provinces (Hidroeléctrica Nihuiles, Hidroeléctrica Diamante, Central Térmica Güemes, Central Térmica Loma de la Lata and Central Piedra Buena).  See “Item 7. Major Shareholders and Related Party Transactions.”

In April 2007, we completed the initial public offering of our Class B common shares, in the form of shares and American depositary shares, or ADSs.  We and certain of our shareholders sold 18,050,097 ADSs, representing 361,001,940 Class B common shares, in an offering in the United States and elsewhere outside Argentina, and our Employee Stock Participation Program sold 81,208,416 Class B common shares in a concurrent offering in Argentina.  Our ADSs are listed in the New York Stock Exchange (“NYSE”) under the symbol “EDN,” and our Class B common shares are listed on the Buenos Aires Stock Exchange (“BASE”) under the same symbol.  We received approximately U.S. $61.4 million in proceeds from the initial public offering, before expenses, which we used to repurchase a part of our then outstanding debt.  Following the initial public offering, EASA continues to hold 51% of our common shares, and approximately 49% are held by the public.  See “Item 7. Major Shareholders and Related Party Transactions.”

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On November 20, 2008, the Argentine Congress passed a law unifying the Argentine pension and retirement system into a system publicly administered by the Argentine Social Security Administration (Administración Nacional de la Seguridad Social, the “ANSES”) and eliminating the retirement savings system previously administered by private pension funds under the supervision of a governmental agency. In accordance with the new law, private pension funds transferred all of the assets administered by them under the retirement savings system to the ANSES. As of the date of this annual report, ANSES held 242,999,553 of our Class B common shares, representing 26.8%of our capital stock.

 

Recent Developments

 

Sale of Emdersa/Edelar

On September 17, 2013, our Board of Directors approved an irrevocable offer to Energía Riojana S.A. (ERSA) and the Government of the Province of La Rioja for the (i) sale of our indirect stake in Emdersa, Edelar’s parent company, and (ii) assignment of certain account receivables that we had against Emdersa and Edelar. On October 4, 2013, ERSA and the Government of the Province of La Rioja in its capacity as controlling shareholder of ERSA accepted the offer. The transaction closed on October 30, 2013. The price agreed upon was Ps. 75.2 million payable in 120 monthly and consecutive installments. The first installment is not due until October 30, 2015, 24 months after the closing date.

Merger process – Emdersa Holding

On December 20, 2013,  the merger of Emdersa Holding into Edenor  was approved by an extraordinary shareholders’ meeting, as well as all documentation and information required by applicable regulation towards that end. As of the date of this annual report, the approval of the merger by the IGJ is pending. The effective reorganization date for all legal, accounting and tax purposes will be retroactive to October 1, 2013.

On October 7, 2013, the Company resolved to initiate the proceedings pursuant to which the Company will absorb Emdersa Holding in order to optimize its resources, simplifying its corporate, administrative and operating structure.

 

Acquisitions and Subsequent Divestitures

 

Acquisition of EMDERSA and AESEBA

 

On March 4, 2011, our Board of Directors approved an offer from its indirect controlling company, Pampa Energía. As a consequence, Edenor was appointed by Pampa as the acquiring party under the Pampa-AEI Agreement. Therefore, on March 4, 2011, we acquired from AEI Utilities, S.L. (“AEIU”): (i) 77.19% of Emdersa’s capital stock and votes (“Emdersa’s Shares”), (ii) 0.01% of Empresa Distribuidora de San Luis S.A.’s (“Edesal”) capital stock and votes, (iii) 0.02% of Emdersa Generación Salta S.A.’s (“EGSSA”) capital stock and votes, (iv) 0.01% of Empresa Distribuidora de Electricidad de la Rioja S.A.’s (“EDELAR”) capital stock and votes, (v) 0.01% of Empresa de Sistemas Eléctricos Abiertos S.A.’s (“ESED”) capital stock and votes (all the shares mentioned in items (ii) through (v) hereinafter referred to as the “Residual Shares”), and (vi) 99.99% of AESEBA’s capital stock and votes (“AESEBA’s Shares”).

 

 

Spin-off Process – Emdersa

 

Emdersa’s shareholders’ meeting held on December 16, 2011, which was resumed on January 13, 2012 after a recess, approved: (i) a spin-off of certain assets and liabilities of Emdersa and the incorporation of three new companies, whose main assets would be the shares owned by Emdersa in each of Edesal, EDESA and EGGSA, respectively, (ii) the special spin-off financial statements for the period ended September 30, 2011 the share exchange relationship, the amount of shares of the three holding companies to be incorporated, which had to be delivered to Emdersa’s shareholders in exchange for the tendering of their shares in Emdersa, and (iii) the spin-off prospectus.

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The spin-off process was approved by the CNV on August 16, 2012 and registered with the Public Registry of Commerce on October 10, 2012, together with the registration of the three new companies, namely, EDESAL Holding S.A. (“EDESALH”), EDESA Holding S.A. (“EDESAH”) and EGSSA Holding S.A. (“EGSSAH”). On November 8, 2012, the new companies were authorized by the CNV to go public and obtained admission to the Buenos Aires Stock Exchange listing.

 

Edesal Sale

 

On September 16, 2011, our Board of Directors approved the offer for the acquisition of Edesal by Rovella Carranza S.A. and transferred 24.80% of Emdersa’s shares and 0.01% of EDESAL’s shares to Rovella Carranza S.A.

As a consequence of this transaction, Edenor held a 0.13% interest in EDESALH.

 

EGSSA sale

 

On October 11, 2011, our Board of Directors approved the offer received from its controlling shareholder Pampa Energía for the acquisition through a conditioned purchase and sale transaction of 78.44% of the shares and votes of an investment company organized to be the holder of 99.99% of the shares and votes of EGSSA together with 0.01% of EGSSA’s capital stock held by Edenor. On November 22, 2012, shares representing 78.44% of the capital stock and votes of EGSSAH were transferred in favor of Pampa Energía.

 

EDESA Sale

On April 23, 2012, our Board of Directors accepted the offer made by Salta Inversiones Eléctricas S.A. (“SIESA”) to Edenor and its subsidiary Emdersa Holding, for the acquisition of shares representing: (i) 78.44% of the capital stock and voting rights of EDESAH and (ii) the remaining 0.01% of ESED.

 

The transaction was carried out on May 10, 2012 at the offered price payable through the delivery of Argentina’s sovereign debt bonds (Boden 2012) for a value equivalent to Ps. 100.5 million.

 

Upon the conclusion of Emdersa’s spin-off process, the shares representing 78.44% of the capital stock and votes of EDESAH, holder of 90% of EDESA’s shares and votes, were issued, and Deutsche Bank, as trustee, transferred to EHSA the totality of Emdersa’s shares that had been transferred by SIESA and EHSA to the trust, resulting in SIESA holding 78.44% of EDESAH’s capital stock and votes. As a consequence of this transaction, Edenor held 0.13% interest in EDESA.

 

EDELAR Offer

 

An offer from Andes Energía Argentina S.A. (“Andes Energía”) was accepted by our Board of Directors on September 16, 2011. Such offer consisted of a proposal to buy a purchase option for a price of U.S. $1.5 million to buy, if Emdersa’s spin-off was completed within a term of two years, 78.44% of the Company’s direct and indirect stake in EDELAR for U.S. $20.29 million, to be paid in two installments. The purchase option was paid by the buyer on September 16, 2011. 

                

On December 31, 2012, Andes Energía’s purchase option expired. On September 17, 2013, the Company approved an irrevocable offer for the sale of its indirect stake in Emdersa, the parent company of EDELAR, to ERSA and the transfer of certain credits held against Emdersa and EDELAR. 

 

The offer was accepted and the transaction closed on October 30, 2013. The total price agreed upon amounts to Ps. 75.2 million and is payable in 120 monthly and consecutive installments, with a grace period of 24 months.

 

 

Offer for the acquisition of EDEN

 

In 2013, the Company received offers from two investment groups for the acquisition of all of the shares of AESEBA, the controlling company of EDEN. On February 27, 2013, our Board of Directors approved the acceptance of the offer by Servicios Eléctricos Norte BA S.L. (the "Purchaser") for the acquisition of AESEBA's shares representing 100% of its capital stock and voting rights. The price offered by the Purchaser is payable through the delivery of Edenor's debt securities for an amount equivalent,  at the closing date of the transaction, to approximately U.S. $80 million of face value of such securities. Such delivery is secured by the Purchaser's contribution to a trust (the "Management Trust") of Ps. 326 million in Argentina's public debt securities, valued at the closing date of the transaction.

                Furthermore, in order to implement this transaction, on March 19, 2013, a Management Trust was set up by and among Purchaser (as settlor), Equity Trust Company (Uruguay) S.A. (as trustee) and Edenor.

                On April 5, 2013, we divested AESEBA which resulted in a loss in our Financial Statements for 2013 of about Ps. 194.3 million (a Ps. 104.9 million loss after income tax effect). As of the date of this annual report, Aeseba’s sale trust purchased in the open market U.S.$ 68.0 million principal amount of our Notes due 2022 and U.S.$ 10.0 million principal amount of our Notes due 2017. These Notes were sent to Edenor and cancelled on March 26, 2013.
 

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Business Overview

We believe we are the largest electricity distribution company in Argentina and one of the largest in Latin America in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2013. We hold a concession to distribute electricity on an exclusive basis to the northwestern part of the greater Buenos Aires metropolitan area and in the northern part of the City of Buenos Aires. As of December 31, 2013, Edenor served 2,772,893 customers. The following table shows the percentage of the electricity produced and sold by generating companies that was purchased by us in the periods indicated:

 

Demand (GWh)

 

Wholesale Electricity Market(1)

Edenor Demand (2)

Edenor Demand as a % of the Wholesale Electricity Market

2013

125,167

24,902

19.9%

2012

121,322

23,933

19.7%

2011

116,418

23,004

19.8%

 

 

Source: Compañía Administradora del Mercado Mayorista Eléctrico, S.A. (CAMMESA) 

(1)     Demand in the Mercado Eléctrico Mayorista Sistema Patagónico (Patagonia wholesale electricity market, or MEMSP).

(2)     Calculated as electricity purchased by us and our wheeling system customers.

 

 

                 

                Edenor Concession

By a concession dated August 5, 1992, the Argentine government granted us the exclusive right to distribute electricity within our concession area for a period of 95 years. Our concession will expire on August 31, 2087 and can be extended for one additional 10-year period if we request the extension at least 15 months before expiration. The Argentine government may choose, however, to grant us the extension on a non-exclusive basis.  The concession period was initially divided into an initial management period of 15 years expiring on August 31, 2007, followed by eight 10-year periods. However, pursuant to the terms of the concession we could request, at our option, the extension of the initial management period for an additional 5-year period from the entry into force of the new tariff structure to be adopted under the Integral Tariff Revision (Revisión Tarifaria Integral, or “RTI”) process, subject to the ENRE’s approval. We presented requests for such extension in May  2007and on July 5, 2007, and the ENRE, pursuant to its Resolution No. 467/2007, agreed to extend the initial management period for an additional period of five years from the date when the new tariff structure is adopted under the RTI.  The remaining 10-year periods will run from the expiration of the extension of the initial management period.

On January 6, 2002, the Argentine Congress enacted the Public Emergency Law, which empowered the Argentine government to implement, among other things, monetary, financial and foreign exchange measures to overcome the economic crisis. These measures, combined with the devaluation of the Peso and high rates of inflation, have had a severe effect on public utility companies in Argentina, including us. Under the Public Emergency Law, the Argentine government converted public utility tariffs from their original U.S. Dollar values to Pesos at an exchange rate of Ps. 1.00 per U.S. $1.00, froze all regulated distribution margins relating to the provision of public utility services (including electricity distribution services), revoked all price adjustment provisions and inflation indexation mechanisms in public utility concessions (including our concession) and empowered the Executive Branch to conduct a renegotiation of public utility contracts (including our concession) and the tariffs set therein (including our tariffs).

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In September 2005 we and the Argentine government entered into the Adjustment Agreement, which was ratified by the Argentine Executive Branch in January 2007. Because a new Argentine Minister of Economy took office thereafter, we formally re-executed the Adjustment Agreement with the Argentine government on February 13, 2007 under the same terms and conditions originally agreed.

Pursuant to the Adjustment Agreement, the Argentine government granted us an increase of 28% in our distribution margin as a result of the implementation of a Temporary Tariff Structure (RTT), which is effective retroactively as from November 1, 2005. The Adjustment Agreement is intended to apply transitionally until we complete the RTI with the ENRE in accordance with the terms of the Adjustment Agreement. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Tariffs.”  In addition, the ENRE applied a cost adjustment mechanism for the transition period during which the RTI  process is being conducted. This mechanism is known as the Cost Monitoring Mechanism (“CMM”) and requires the ENRE to review our actual distribution costs every six months (in May and November of each year).  If the variation between our actual distribution costs and our recognized distribution costs (as initially contemplated in the Adjustment Agreement or, if adjusted by any subsequent CMM, the most recent distribution cost base established by a CMM) is 5% or more, the ENRE is required to adjust our distribution margin to reflect our actual distribution cost base. The ENRE’s review is based on our distribution costs during the six-month period ending two months prior to the date on which the ENRE is required to apply the CMM.  We may also request that the ENRE apply the CMM at any time that the variation in our distribution cost base is at least 10% or more. Because the Adjustment Agreement is effective retroactively as of November 1, 2005,in May 2006, the ENRE determined that our distribution cost base increased by 8.032% (compared to the distribution cost base recognized in the Adjustment Agreement), and, accordingly, approved an equivalent increase in our distribution margin effective May 1, 2006. This increase, when compounded with the 28% VAD increase granted under the Adjustment Agreement, resulted in an overall 38.3% increase in our distribution margins charged to our non-residential customers. Also, on February 13, 2007, the ENRE authorized us to bill our customers (excluding residentialcustomers) the retroactive portion of the 38.3% increase (corresponding to the period from November 2005 to January 2007), which amounted to Ps. 218.6 million and has been invoiced in 55 monthly installments since February 2007. 

In October 2007, the Argentine Secretariat of Energy (“SE”) issued Resolution No. 1037/2007, which granted us an increase of 9.63% in our distribution margins to reflect an increase in our distribution cost base for the period from May 1, 2006 to April 30, 2007, compared to the recognized distribution cost base as adjusted by the May 2006 CMM. However, this increase was not incorporated into our tariff structure until 2008, and, instead, we were allowed to retain the funds that we are required to collect and transfer to the fund established by the Program for the Rational Use of Electricity Power (Programa de Uso Racional de la Energía Eléctrica, or “PUREE ”), a program established by the Argentine government in 2003 in an attempt to curb increases in energy demand, to cover such CMM increase and future CMM increases.

In July 2008, we obtained an increase of approximately 17.9% in our distribution margin, which we incorporated into our tariff structure. This increase represented the 9.63% CMM increase corresponding to the period from May 2006 to April 2007 and the 7.56% CMM increase corresponding to the period from May 2007 to October 2007. These CMM adjustments were included in our tariff structure as of July 1, 2008 and resulted in an average increase of 10% for customers in the small commercial, medium commercial, industrial and wheeling system categories and in an average increase of 21% for residential customers with bi-monthly consumption levels over 650 kWh. In addition, by Note No. 83,818, the ENRE authorized us to be reimbursed from the PUREE funds for the retroactive portion of the 7.56% CMM increase amounting to Ps. 45.5 million for the period between November 2007 and June 2008.  

Furthermore, we requested an additional increase in our distribution margins under the CMM to account for fluctuations in the distribution cost base for the period from November 2007 to April 2008, in comparison to the distribution cost base recognized by the CMM in November 2007. In 2008, the ENRE adopted Note No. 81,399, which authorized a 5.791% increase under the CMM for the November 2007 – April 2008 period.

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As of the date of this annual report, we have requested twelve additional increases under the CMM since May 2008, eleven of which have been recognized by ENRE pursuant to Resolution 250/13 and Note No. 6,852/13 of the SE with retroactive effect as of May 2008 until September 2013. However, these increases have not yet been incorporated into our tariff structure. Under the terms of the Adjustment Agreement, these twelve increases should have been incorporated into our tariff structure in May and November of each year from 2008 onwards.

 

As of December 31, 2013, we had submitted to the ENRE twelve requests for CMM adjustments as described in the table below

 

Period

Application Date

CMM Adjustment Requested

Status

November 2007 - April 2008

May-08

5.79%

Granted but not incorporated into tariffs

May 2008 - October 2008

Nov-08

5.68%

Granted but not incorporated into tariffs

November 2008 - April 2009

May-09

5.00%

Granted but not incorporated into tariffs

May 2009 - October 2009

Nov-09

5.03%

Granted but not incorporated into tariffs

November 2009 - April 2010

May-10

6.83%

Granted but not incorporated into tariffs

May 2010 - October 2010

Nov-10

7.48%

Granted but not incorporated into tariffs

November 2010 -April 2011

May-11

6.12%

Granted but not incorporated into tariffs

May 2011 - October 2011

Nov-11

7.69%

Granted but not incorporated into tariffs

November 2011 -April 2012

May-12

8.54%

Granted but not incorporated into tariffs

May 2012 - October 2012

Nov-12

6.98%

Granted but not incorporated into tariffs

November 2012 - April 2013

May-13

6.88%

Granted but not incorporated into tariffs

May 2013 -October 2013

Nov-13

7.90%

Neither granted nor incorporated into tariffs

Cummulative

 

116.65%

 

 


                 
As of December 31, 2013 and 2012 the amounts collected by Edenor through the PUREE (net of the effects of Resolution 250/13 and Note No. 6852/13 of the SE in the year 2013), amounted to Ps. 108.6 million and Ps. 1,277.8 million, respectively, and have been disclosed under other non-current liabilities.

 

The following are the key provisions of the Adjustment Agreement, which are described elsewhere in this annual report:

·         a cost adjustment mechanism (CMM), pursuant to which our distribution costs are reviewed semiannually (or, under certain circumstances, more often) and adjusted if deemed appropriate by the ENRE to cover increases in our distribution costs;

·         an obligation to make capital expenditures of approximately Ps. 204 million for specific projects in 2006, which we complied with although we were not required to given that the Adjustment Agreement was not ratified in 2006;

·         our obligation to meet specified more stringent service quality standards than as originally contemplated in our concession;

·         a restriction on our ability to pay dividends without prior ENRE approval during the period in which we are conducting the RTI;

·         forgiveness of approximately one-third of our accrued and unpaid fines, subject to meeting certain conditions relating to capital expenditures obligations and service quality standards, and a 7-year payment plan for the balance, commencing 180 days after the date on which the RTI comes into effect;

·         our obligation to apply a social tariff regime for low-income customers, which regime will be defined in the context of the RTI; and

·         our obligation to extend our network to provide service to certain rural areas.

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Furthermore, the necessary steps to regularize the situation and restore the economic and financial equation of our business are being implemented, taking into consideration the increases recorded in operating costs. At the same time, administrative and judicial actions have been brought aimed at obtaining both CMM recognition and that the overall electricity rate review stipulated in the Adjustment Agreement be carried out by the ENRE. We cannot predict when or how the RTI will be implemented.

On November 23, 2012, the ENRE issued Resolution No. 347/2012, pursuant to which it established fixed and variable charges differentiated by category of customers.Distribution companies will collect such charges on account of the CMM adjustments stipulated in clause 4.2 of the Adjustment Agreement and will use exclusively to finance infrastructure and corrective maintenance of their facilities. Such charges, which will be clearly identified in the bills sent to customers, will be deposited in a special account to be managed by the trustee.

On December 28, 2012, the Company filed a judicial remedy (acción de amparo) against ENRE seeking to protect the Company’s constitutional rights relating to the provision of a secure and continuing public service of distribution of energy.  To file the acción de amparo the Company considered that the ENRE’s omission to implement the necessary measures to guarantee the provision of the public service of distribution of energy, such as failure to recognize the CMM adjustments that the Company has requested and the delay to implement the new tariff structure under the RTI, have led to an unstable situation which threatens the regular provision of the public service. As a consequence, the Company is seeking to obtain the necessary funds to provide the public service of distribution of energy as contemplated in its concession agreement. On February 19, 2013, the National Court of First Instance in Federal Administrative Claims Tribunal No. 12 (Juzgado Nacional de Primera Instancia en lo Contencioso Administrativo Federal No 12) served summons to ENRE and at the same time denied the preliminary injunction requested by the Company. This resolution was timely appealed by the Company. With the publication of the Resolution 250/13 and Note 6,852/13, we believe that the SE has put an end to the administrative proceeding. On June 29, 2013, the Company brought an action to prevent the legal actions to avoid claims related to compliance with the Adjustment Agreement and compensation for damages from being time barred.

 

Secretary of Energy – Note 8,752

The ability of Edenor to increase its tariffs may also be affected by Note No. 8,752 of the SE, which is being challenged in various provinces of Argentina. See “Item 3. Key Information—Risk factors—Risks Relating to the Electricity Distribution Sector—The Argentine government has intervened in the electricity sector in the past, and is likely to continue intervening.”

Geographic Exclusivity

Our concession gives us the exclusive right to distribute electricity within our concession area during the term of our concession. Under our concession, neither the national nor the provincial or local governments may grant further concessions to operate electricity distribution services within our concession area. In that respect, we are obligated to satisfy all of the demand for electricity originated in our concession area, maintaining at all times a service quality standard that has been established in our concession. This geographic exclusivity may be terminated in whole or in part by the Executive Branch if technological changes make it possible for the energy distribution industry to evolve from its present condition as a natural monopoly into a competitive business. However, the National or the Provincial government may only exercise its right to alter or suppress our geographical exclusivity at the end of each management period under our concession, by prior written notice at least six months before the expiration of the then current management period.

Edenor’s  concession area is divided into the following operating territories:

Operating territory

 

Districts

Morón

Morón, Ituzaingó, Hurlingham, Merlo, Marcos Paz, Las Heras and La Matanza

Norte

Ciudad de Buenos Aires, San Martín and Tres de Febrero

Olivos

Vicente López, San Isidro, San Fernando, Tigre and Escobar

Pilar

Moreno, Gral. Rodríguez, Pilar, Malvinas Argentinas, J.C. Paz and San Miguel

 

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The table below sets forth certain information relating to operating territories of Edenor as of and for the year ended December 31, 2013:

Operating territory

Area

Customers

% of Sales

(km2)

(in thousands)

   

 

Morón

1,761

882.7

31.8%

27.6%

Norte

164

862.4

31.1%

27.5%

Olivos

1,624

514.9

18.6%

22.8%

Pilar

1,088

512.9

18.5%

22.2%

Total

4,637

2,772.9

100.0%

100.0%

 

Our Obligations

We are obligated to supply electricity upon request by the owner or occupant of any premises in our concession area.  We are entitled to charge for the electricity supplied at rates that are established by tariffs set with the prior approval of the ENRE under applicable regulations.  Pursuant to our concession, we must also meet specified service quality standards relating to:

·         the time required to connect new users;

·         voltage fluctuations;

·         interruptions or reductions in service; and

·         the supply of electricity for public lighting and to certain municipalities.

Our concession requires us to make the necessary investments to establish and maintain quality of service standards and to comply with stringent minimum public safety standards as specified in our concession. We are also required to furnish the ENRE with all information requested by it and must obtain the ENRE’s prior consent for the disposition of assets that are assigned to the provision of our electricity distribution services. The ENRE also requires us to compile and submit various types of reports regarding the quality of our service and other technical and commercial data, which we must periodically report to the ENRE.

Under our concession, we may also be required to continue rendering services after the termination of the concession term upon the request of the Argentine government, but for a period not to exceed 12 months.

We are obligated to allow certain third parties (namely, other agents and large users) to access any available transportation capacity within our distribution system upon payment of a wheeling fee. Consequently, we must render the distribution service on an uninterrupted basis to satisfy any reasonable demand. We are prohibited from engaging in practices that limit competition or result in monopolistic abuses.

In addition, the Adjustment Agreement requires us and our shareholders and former shareholders to suspend all claims and legal proceedings (including arbitration actions) in administrative, state or federal courts located in Argentina or abroad, that are related to measures adopted since the Public Emergency Law was enacted.  After the completion of the RTI, we and our shareholders and former shareholders must completely waive and desist from all of the above mentioned claims and legal proceedings. If our shareholders or former shareholders do not desist from these claims, the Argentine government will have the right to foreclose on the pledge of  our Class A common shares and sell these shares to a third party buyer. If the company or any shareholder or former shareholder re-establishes or initiates a new claim, we must hold harmless the Argentine government in respect of amounts it is required to pay pursuant to such claims. EDFI and EASA have suspended all such claims against the Argentine government as part of the Adjustment Agreement and, in connection with its sale of its controlling stake in Edenor, EDFI has agreed to withdraw its claims against the Argentine government before the ICSID at the request of Dolphin Energía S.A.

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In accordance with our concession, our controlling shareholder, EASA, has pledged its 51% stake in our company to the Argentine government to secure obligations under our concession. The Adjustment Agreement requires that the pledge be extended to secure our obligations under such agreement.

Quality Standards – Edenor´s Concession

Pursuant to Edenor’s concession, we are required to meet specified quality standards with respect to the quality of the product (electricity) and the delivery of the product. The quality standards relating to the product quality refer to the electricity’s voltage levels.  A disturbance occurs when there is a change in the voltage level.  Edenor’s concession requires that the voltage level that we deliver must be 3x380/220 V; 13.2 kV; 33kV; 132 kV; 220 kV. Edenor’s concession provides that disturbances in the voltage level may not exceed the following (in accordance with international standards):

High voltage

‑5.0% to +5.0%

Overhead network (medium or low voltage)

‑8.0% to +8.0%

Buried network (medium or low voltage)

‑5.0% to +5.0%

Rural

‑10.0% to +10.0%

A fine is imposed under Edenor’s concession for disturbances that exceed the above‑mentioned limits for 3.0% or more of the total amount of time that electricity is provided. The amount of the fine depends on the magnitude of the disturbance. As the disturbance’s percentage increases (or decreases) from the contracted tension level, the rate of the fine per kWh increases. These fines are credited to the affected user’s next bill.

The standards for delivery of the product set forth in Edenor’s concession refer to the frequency and duration of the interruptions. The following table sets forth the standards set forth in our concession with respect to the frequency and duration of interruptions per customer during the current management period:

Category of user

 

Frequency of
interruptions
(maximum number of
interruptions per
semester)

Duration of interruption
(maximum amount of time
per interruption)(1)

High voltage

3

2 hours

Medium voltage

4

3 hours